Germany/Austria Property Portfolio

The Germany/Austria Property Portfolio ("the Portfolio") was acquired in stages, commencing in December 2004 and completing in June 2005, to provide investors with an opportunity to benefit from the attractive yields offered by investment in commercial property in Austria and Germany.

The following acquisitions were made:

• 15 December 2004 - 6 GWB shopping centres in Germany ("GWB");


• 25 January 2005 - 15 Netto Marken Discount retail supermarkets in Germany ("Netto");


• 23 June 2005 - 30% of the equity in Nadiv Investments SA, which acquired a portfolio of 19 Auto Teiler Unger properties in Germany ("ATU Germany");


• 23 June 2005 - 30% of the equity in Peter Unger GmbH Co. KG, which acquired a portfolio of 9 Auto Teiler Unger properties in Austria ("ATU Austria");

The equity invested was allocated between these four investments in the ratio of 40% GWB, 30% Netto, 20% ATU Germany and 10% ATU Austria.

The GWB and Netto components of the portfolio were sold in August 2007 generating a 17% IRR to investors on the combined sale. The price per share was adjusted from €1 to 34c to reflect the capital repaid in August 2007 as a result of the sale of GWB and Netto. The current NAV of the investment as at 30 April 2009 is €0.30.

The investment in ATU Austria & ATU Germany was revalued internally at a yield of 8% to reflect the downturn in the market at April 2009. As the rents have increased slightly and the debt has been amortised the Net Asset Value has not changed since our last report.

We do not believe that this is an opportune time to exit the market. The investment has not been effected by the current credit crisis as funding is in place for at least three years. The tenants are still on the lease and continue to pay rent. We will continue to hold the asset and distribute the cashflow.

Distributions

A distribution of €124,000 was declared for the period ended April 2009. This was made up of a dividend of €71,000 for the period ended April 2009 from ATU Austria and a repayment of loan capital of €53,000 from ATU Germany.

Market commentary

The slowdown in the Germany economy continued in the second quarter of 2008 and moved into recession in the third quarter of 2008. It is expected to contract further in 2009. In January 2009, German Chancellor Angela Merkel unveiled an economic stimulus package worth approximately €50 billion to kick-start the economy.

According to figures currently compiled by Jones Lang Lasalle, the commercial property transaction volume registered in Germany in 2008 amounted to approximately €19.7 billion. This represents a 64% slump in comparison with 2007. This drop is due to events in the international financial markets where fewer large portfolio transactions were carried out and to the small number of financially strong investors, as well as the weakening of lease markets during the fourth quarter of 2008. The mood of property professionals and within Germany’s real estate industry has noticeably cooled off, and while Germany’s real estate economy has not been hit as hard as other markets and countries, the mood is sceptical among experts.

According to King Sturge, the Real Estate Economy Index, while the mood with the real estate industry was still positive in June 2008 showing a Real Estate Climate of 101 index points, expectations dropped steadily over the second half of 2008 and hit 40.7 points in December 2008. Compared to the previous month, this represents a decline of 16%. In addition, the Investment Climate also declined with 18% to 29 points.

With climate index values pointing downwards, 2009 is off to an ominous start. The scenario for Germany’s property sector is sound however, largely because of its economic development, demand and rising rental prices. Properties situated in the right location are also proving to be solid investments and will continue to do so; prices for these objects will remain stable because of the sound demand, above all from German institutional and high net worth investors, who will be able to make interesting investments, whilst a correction in German property values will be experienced, it would appear that the expectation indicators are significantly more positive for German property than the UK market.

Tenant

ATU is Germany’s largest auto spare parts and servicing business. It operates 460 stores throughout Germany and 9 in Austria. As Germany’s leading specialist non-affiliated car Parts’ stockist, with registered vehicle services centres, ATU’s core business is the retail sale of car parts and accessories for all common cars and models and immediate fitting of those parts in its own workshops. The company sells a range of approximately 45,000 products and employs over 12,000 people.

ATU was established by Peter Unger in 1985. In 2001, Mr Unger sold the majority shareholding in the company to Doughty Hanson & Co, a large US fund manager. Doughty Hanson sold their shareholding to Kohlberg Kravis Roberts (KKR) on 30 June 2004 in a deal valued at U$1.75bn. Doughty Hanson remained as a minority shareholder. Due to December 2007 EBITDA underperforming expectations, a financial restructuring exercise took place in which KKR/ Doughty Hanson injected €140m by way of equity.

The company reported EBITDA loss of €6.9 million in the first half of 2008.

Despite the difficulties reported in the press ATU continues to pay the rent. It is felt that the current economic climate is good for ATU as people in a recession are inclined to keep older cars and spend on changing tyres rather than buy a new car.

Current Report

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Germany/Austria Property Portfolio Properties

Important Notice

The investment is suitable for those investors who understand the risks involved and who are able and willing to withstand loss of investment. Investors are referred to the summary of risks listed in the Private Placement Memorandum before making an investment.

Investors should not invest in the shares unless they have carefully considered whether or not such investment is suitable depending upon their circumstances and they should take advice before investing.