Deutsche EuroShop AG Group Management Report
Deutsche EuroShop’s consolidated financial statements were prepared for the first time using the International Financial Reporting Standards (IFRSs).

Macroeconomic Environment

With growth in real gross domestic product (GDP) of 1.7%, the upswing in Germany’s economy was muted in 2004, especially since it needs adjusting downwards by 0.5 percentage points: a number of statutory holidays fell on weekends in the past year resulting in an above-average number of workdays. In 2005, a slight economic upturn, an increase in investments and a recovery in private consumer spending are anticipated.

Germany lags behind global trend
On the whole, the German economy was weak. Whereas global economic stimuli still had a positive effect on the economy and were able to more than compensate for subdued domestic demand in the first six months of the year, this international growth faded somewhat in the second half of the year. Another factor was a strong increase in imports. This demand was lost to the domestic economy. Germany remained decoupled from the upswing in the global economy, with growth lagging behind the average for the pre-expansion EU member states.

Real GDP in Germany
Seasonally and woking-day adjusted

Moderate inflation
Interest rates remained at historical lows in 2004, although the cost of living rose markedly. The main reasons for this were the sharp rise in energy costs, the substantial increases in the price of healthcare services due to the healthcare reform and two hikes in tobacco tax. Although the inflation rate was still around 1% in December 2003, it had risen to 1.8% by the end of 2004.

Situation on the labour market unchanged
The slight upturn in the economy did not yet affect the labour market. In Germany the number of registered unemployed remained nearly unchanged at 4.38 million on average in 2004. Germany’s jobless rate therefore stagnated at the previous year’s level of 10.5% (annual average) according to calculations by the Bundesagentur für Arbeit (Germany’s Federal Labour Agency).

Private consumer spending down contrary to expectations
In contrast to the expectations of economic experts, who had anticipated an upturn in consumption of 1.3% in 2004, private consumer spending continued to decline. At -0.4% the decline was even sharper than in the previous year. The key determining factor here is said to be consumer insecurity caused by the discussion of labour market reforms (known as Hartz IV) that ultimately was not offset by the positive effect of the early implementation of the next phase of the government’s tax reforms.

Euro area more positive on the whole
The downward pressures on economic performance in the euro area were comparable to those in Germany, although the effects were less negative. For instance, the inflation rate for the euro area as a whole was 1.9%, while the unemployment rate remained constant compared to 2003 at 9%. Spending by private households trended tentatively upward. In addition, real gross domestic product grew by 1.8% and therefore slightly more than in Germany.

Retail Sector

Retail sales down
In 2004 as a whole, German retailers sold 1.7% less in price-adjusted real terms than in the previous year. As a result, revenue declined for the third year in a row.

Successful retail concepts flout the downturn
Contrary to the general trend, the revenue generated by retailers with a clear profile was again positive in 2004; they were able to attract new customers with new concepts. In this context, vertically structured clothing suppliers, and youth fashion, women’s outerwear and shoe brand labels, as well as speciality suppliers, were successful. Book shop chains serving the lower-priced segment also experienced strong expansion while home accessories sellers also reported very high rates of growth. High-street chemists also continued to expand at a fast rate and were able to secure first-rate properties in the best locations. A focus on expansion was also evident among coffee retailers, while the luxury segment also did well with demand rising for space on both the German and international markets.

Mobile purchasing power
The issue of vacancies has become a hot topic for German retailers. The “Rat der Immobilienweisen” (Council of Real Estate Experts) has established that although retail space continues to increase – especially due to expansion by discounters – vacancy rates are rising as well. However, there is generally no surplus of retail space; instead the problem is a lack of retail space that meets market requirements. Shops that fail to meet these requirements stand empty because consumers prefer stores with more space to display goods and those that provide greater service. Increasing mobility is loosening the ties to local retailers in favour of shops with good transport connections or ample parking facilities (mobile purchasing power). This trend favours retailers in shopping centers.

Shopping centers increase market share
Experts from GfK Prisma, the market leader in site and real estate research in Germany, expect that shopping centers – particularly large, well-managed shopping centers such as those operated by Deutsche EuroShop – will continue to be able to generate higher revenue in the future than the retail sector overall. GfK Prisma believes that shopping centers are doing well across Europe. Shopping centers in Germany, especially those in city-centre locations, are also reporting growing sales and market shares.

Property market

Investors focus on retail properties
As in previous years, real estate was a popular investment alternative in 2004. The demand for shopping centers and retail properties in particular grew across Europe. According to the December 2004 “Stimmungsbarometer offene Immobilienfonds”, a sentiment barometer for open-ended property funds calculated by Dr. Lübke GmbH and Dr. ZitelmannPB. GmbH, 86% (December 2003: 84%) of open-ended property funds were planning to increase their investments in retail properties in the future.

Reliable income and low volatility
The ability of retail properties to produce reliable income is primarily due to stable long-term rents coupled with high leasing rates. Compared to the market for office space, the retail property market has to date only been exposed to minor cyclical fluctuations. In addition, shopping centers situated in city-centre locations have considerable appreciation potential in the long term due to the uniqueness of their locations.

Prime locations preferred
Kemper’s, a real estate management company which specialises in retail properties, forecasts that demand in Germany will be concentrated in high-traffic prime locations in 2005, regardless of the size of the city concerned. Whereas vacancies were not an issue in first-rate locations, the situation in less popular locations continued to be strained.

Shopping center space grows by just under 3%
Surveys by EuroHandelsinstitut (EHI), an international retail research institute, indicate that Germany had 363 shopping centers with floor space of at least 10,000 m² at the end of 2004. These centers have total floor space of more than 11 million m². According to estimates by industry experts, Germany boasts a total of 108.5 million m² of shop space, which means that the share of total retail space accounted for by shopping centers is around 10%. In 2004, 11 new shopping centers opened in Germany with total floor space of approximately 290,000 m²; the increase in retail space thus amounted to a total of about 1 million m².









Muted economic growth





































High demand for
premium space





Consumers have
clear wishes













Considerable appreciation