Viterra has successfully continued to focus on its real estate business. This is the right road for our company.

Our company can look back on a successful business year both from the operational and economic aspects. Sales and profit fully met expectations. The restructuring of the company was virtually completed. In 2004, we will continue to systematically expand our trading strategy.

ECONOMIC ENVIRONMENT

German economy stagnates for third year in succession in 2003

This business climate pushed up unemployment still further. In the manufacturing and construction industries, several hundred thousand jobs were lost which could no longer be offset by growth in the services industry. This normally recession-proof sector also cut jobs.

High unemployment, low pay rises, a tendency to save rather than spend and falling consumer confidence were the major reasons for stagnating private consumption.

Exports were also not able to play their usual role as the engine of the German economy. The Iraq war, the steady rise in the value of the euro and the sluggish development of the economies of Germany's main trading partners together led to a sharp downswing in the first half of the year which the improvement in the second six months could not make up for.

As in previous years, the construction industry again had a negative impact on the German economy in 2003: The generally weak demand on the residential and commercial real estate markets coupled with the financial difficulties of local governments caused building investment to fall by 3.4 % in 2003. The construction market is only expected to stabilise again in 2004.

Prospects for growth in 2004

On the other hand, the situation on the labour market will hardly improve. The unemployment rate is forecast to stay well above 10 %.

Threat of subsidy cuts boosts housing construction segment

The multi-family segment was unaffected by the political debate and the related rush to buy a property before tax laws changed. The downward trend persisted, only slowing a little, in western Germany with the number of building permits for rented accommodation falling disproportionately by 5 %. By contrast, the owner-occupied apartment segment remained stable.

Greater interest in used housing

In western Germany, nearly two thirds of the total building volume in the residential sector (new and used buildings) is for the repair and modernisation of existing residential properties – and the trend is rising.

The markets for used owner-occupied apartments and houses with rented accommodation are showing similar developments. For example, in North Rhine-Westphalia more used owner-occupied apartments were sold in the last few years although the number of newly built owner-occupied apartments fell. Following a slump in 2000, overall annual sales run at around € 6 billion. The idea of purchasing a used property is becoming more popular and gaining importance as a way of acquiring assets and providing for retirement - not least because the number of new properties being built is decreasing sharply.

Whilst the market for newly built rented accommodation is still declining sharply, the market for older multi-family houses with rented accommodation is stable. The number of houses sold is steady according to current statistics. In North Rhine-Westphalia alone, multi-family houses worth € 3 to 4 billion change hands every year despite the difficult tax situation. Obviously the multi-family house is still considered to be attractive for people with a moderate sum to invest.

Great regional differences in the development of rents

At the moment weak demand makes it almost impossible to raise rents despite the small amount of new accommodation being built. On an annual average, rents for existing housing stock rose by a mere 1 %. In the German states with growth regions such as Hesse and Bavaria, they developed slightly better, increasing by approx. 1.5 %.

Despite the weak phase, some high-price regions are showing an above-average development of rents. In Hamburg, for example, the latest list of representative rents, which is particularly significant for contracts with existing tenants, shows an increase of over 5 %. Rents in Frankfurt and Munich are also climbing steadily: Since the end of the 1990s, they have risen by up to 4 % a year according to the rent indices. However, in the Ruhr area there is little movement: In cities like Essen and Gelsenkirchen, rents have only risen by 1 %.

By contrast, rents for new leases, which are very sensitive to the economic barometer, more or less stagnated in 2003. In some cities, above all in the Ruhr area, they even fell. In Munich, rents for new leases also stabilised but at a very high level.

Announced reforms cause uncertainty on the real estate market

Same subsidies for buyers of newly built and used houses

However, particularly in regions with low to medium prices, the restructuring of subsidies for home-buyers may mean that existing accommodation will become more attractive to buy than new properties. In the past, the difference in prices between new and older properties was largely offset by the higher subsidies granted on new properties.

The picture is different for the new housing segment in highprice regions like Munich and Frankfurt: Here, the effect of the changes in the subsidies for home-buyers is relatively small as the tax concession is not so significant in relation to the high purchase prices.

Residential real estate will remain an important asset

However, in the statistical studies too little attention is paid to the future reaction of the market players. Particularly in western Germany, property owners have enough time in the next few years to meet these challenges by improving the quality of their residential real estate, selling it or optimising their portfolios.

A residential property in an average to good location will still find a buyer as an asset with a good return and low volatility. Thanks to the broad scatter, earnings are safe from lost rental income. Another significant indication of the attractiveness of German residential real estate is the increasing appearance of foreign investors on the German market.

An important precondition for the renaissance of the apartment as an investment for the small investor is that such an acquisition must receive the same government subsidy as money put into pension funds. Then people will be able to choose how they want to invest their money and decide according to their own preferences.

Office real estate market bottoms out

The demand for office space came mainly from companies who seized the opportunity to rent modern, well-designed offices at a reasonable price. Momentum also came from company mergers and site optimisation measures. Here the new construction segment benefited most.

Despite this trend, the market players have to be prepared for relatively high vacancy rates after the record sales revenues around the turn of the millennium. The amount of office space on offer will continue to rise for the following main reasons:

The offices which companies are now leasing to take advantage of reasonable rents are generally smaller than the office space previously rented. This means the amount of unlet office space will increase.

As many companies are cutting staff and postponing expansion plans, a large amount of lowpriced office space for sub-letting will come on the market. This concealed empty office space will lead to an increase in vacancy rates and exert pressure on rents.

The amount of newly built office space to come on the market has risen sharply in the last two years.

As a result of this development, the amount of unlet office space in the five big German office real estate markets has virtually tripled since hitting its low at the beginning of 2001. The high vacancy rate is naturally having an effect on rents. They fell across the board in 2003 and landlords were increasingly prepared to negotiate special conditions.

However, in contrast to the housing market, here there will soon be a market correction: Old, inefficient locations will disappear from the market. Tenants are virtually impossible to find for these offices, even at dumping prices.

The difficult market situation and investors' growing caution has meant that very few construction projects are currently being started. And those which are, already have a certain percentage of the office space pre-let; speculative developments are now the exception. Therefore, little new office space can be expected to come on the market from 2005.

Note: The Management Report of the Viterra Group is based on the consolidated financial statements drawn up in accordance with the principles of US GAAP.

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