Annual Reports

To our shareholders

Fiscal year 2007 was very positive indeed. We achieved a large number of milestones since launching our operating business in the second half of the year. Being the second listed REIT in Germany we are now looking to the future with optimism.

Annual Year 2007:

To date we are the only listed real estate company in Germany, based on two business segments with access to the German closed-end real estate fund market. As a result, we were able to gain more than 2,000 investors in the third quarter of 2007, who exchanged their partcipations in closed-end real estate funds at the fair value of their fund units for shares of Fair Value. Both sides benefited equally from this transaction: This gives fund investors the opportunity to participate in a significantly more diversified portfolio in the future, while at the same time they also benefit from the fact that shares can be traded daily on the stock market. 

 

In turn, Fair Value REIT-AG holds a significant participation in the closed-end funds, allowing it to influence their strategic orientation and thus realize potential for future earnings and increases in value.

 

In addition to our participations, our direct real estate investments generate constant and attractive cash flows. Our first direct investment was a portfolio of 32 primarily commercial premises in Schleswig-Holstein. The properties have a total rental area of 43,108 m² and are primarily used by Sparkasse Südholstein as bank branches. They have long-term rental agreements. Another direct investment is an office building with a rental area of 4,671 m² in direct proximity to the Duesseldorf Airport; it will complement our portfolio on completion in the summer of 2008.

 

We have been able to establish a highly diversified portfolio of properties with a proportionate fair market value of € 276 million as of December 31, 2007 in just a few months. A total of 81 properties with a rental area of around 465,000 m² and a fair market value of € 608 million in direct and indirect ownership are split in office, retail, logistics and other types of use. Long-term rental agreements have been concluded and the economic occupancy rate is in excess of 96% – this underscores the sustained value and good locations of our properties. By diversification in terms of use and location in various regions in Germany, Fair Value offers shareholders long-term stability and a high degree of forecasting certainty of rental income. On balance, the properties‘ fair market values increased year-on-year compared to their initial carrying amounts by 2.4 % from a proportionate amount of € 269 million to € 276 million (see pages 100-103).

 

Under the lead of WestLB AG we achieved a further milestone as basis for our continued growth on November 16, 2007 – the listing on Frankfurt Stock Exchange‘s regulated market (Prime Standard). This listing gives us the opportunity to obtain additional capital via the stock market so that we can further increase Fair Value‘s assets and income in future by making further investments. In addition, our listing was the key for transformation of our company into a real estate investment trust (REIT). As a result, our company has been known as Fair Value REIT-AG since December 6, 2007.

Forecasts for 2008 and 2009:

REITs had been established in other countries for many years, and this legal form was introduced in Germany retroactively as of January 1, 2007, which offers us a wide range of opportunities. The implementation of REITs means that Germany as the world‘s third largest economy has now created access to the domestic real estate market via the stock exchange market in line with the needs of international capital markets.

 

The primary characteristic of a REIT is its tax transparency, i.e., Fair Value REIT-AG itself is not subject to corporation or trade tax. Only dividends, which must total at least 90 % of the net income (HGB) for a fiscal year, have to be taxed by the shareholders.

 

In addition, REITs benefit from the so-called exit tax privilege. Until the end of 2009, companies that sell a property they have owned for more than five years to a pre-REIT or a REIT only have to tax 50 % of their book profits under certain additional conditions.

 

As a result, the exit tax regulation offers G-REITs a significant purchasing advantage, which will become increasingly notable the closer this regulation is to expiring. As one of the first REITs on the German capital market we want to specifically use this competitive advantage to further expand our portfolio.

 

The German real estate market is enjoying an upswing, hand in hand with its positive economic growth. Demand for space, in particular for office and logistics premises, is continuing to increase with the result that vacancies are falling, rents in individual locations are remarkably increasing and new real estate developments are being driven ahead. However, this positive trend is accompanied by a global financial crisis which is causing banks to be increasingly restrictive in their lending practices for high-volume transactions in particular. As a result, many speculative investors have exited the German investment market. As a result, the partly overheated yield compression eased up again in the second half of 2007. In turn, this means more favorable purchasing prices for Fair Value REIT-AG and thus more attractive initial returns. In parallel, we can enjoy comparatively good financing conditions when borrowing in view of the high equity ratio of at least 45 % of immovable assets prescribed by law.

 

Prospects:

In the first year of our business activities we were already able to record consolidated net income (IFRS) of € 1.7 million. However these earnings are not representative for the year as a whole, as Fair Value has only participated in its participations since October 1, 2007 and the portfolio in Schleswig-Holstein has only recorded rental income since December 21, 2007. In addition, start-up costs for establishing the REIT (approx. € 1.4 million) and one-off listing costs of around € 1.8 million had to be carried.

 

According to German accounting standards (HGB) Fair Value REIT-AG‘s non-consolidated financial statements include a net loss of € 1.9 million for the year as a result of extraordinary expenses in connection with

setting up the REIT and the listing as well as capital procurement costs. In view of this, no dividend for the first fiscal year 2007 may be paid. However, the net loss will be balanced out by a withdrawal from the share premium, with the result that future net income will not be burdened by loss carry forwards from previous years.

 

We hope that the transparency of this annual report will convince you of our overall portfolio‘s sustained value. This sustained value is expressed in our net asset value (NAV), which totaled € 10.06 per share as of December 31, 2007. We would like to thank you for the trust you have already shown in our company!

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A REIT – Higher Return for Investors

REIT stands for Real Estate Investment Trust. The assets of these listed companies in Germany consist mainly of real estate and investments in other real estate companies.

 

At the international level, REITs have been established for many years. On 1 January 2007, they were introduced in Germany as well.

 

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