INVESTMENT OBJECTIVE AND STRATEGY

The investment objective of the Company is to achieve capital growth and income via investments principally in residential property in Berlin and in other cities in the former German Democratic Republic (“DDR”). The Directors believe the residential market to be attractive in Germany, partly because of high yields relative to other countries, which can match or exceed funding costs, and partly because it is possible to buy property at a discount to replacement cost. Owner occupation in the DDR remains low, but is now rising, while a developing buy-to-let market has emerged.

SOURCING, PROPERTY MANAGEMENT
AND LOCAL INFRASTRUCTURE

The Directors believe that the Investment Adviser possesses the local knowledge necessary to analyse regional market trends and to source property in Berlin, Potsdam and other towns of the DDR which represent value for the Company. The Directors intend to continue to acquire properties from a variety of sources including banks, which continue to be large owners and sellers of real estate in the market, agents and private vendors as well as buying properties out of administration.

INVESTMENT RATIONALE

Residential property prices in the major German cities now stand at significant discounts to other European centres. According to HSBC Bank plc, in the period from 1995 to 2005 German residential property prices were static, while prices for residential property in East Germany actually fell several percentage points. In the same period residential property prices approximately doubled in the United States, rose by approximately 250 per cent. in the Netherlands and trebled in Spain and the United Kingdom (Source: HSBC, German Resi Call, May 2007). The Directors believe that this protracted period of under-performance is giving way to more buoyant conditions as the German economy recovers growth and momentum.

Berlin, in turn, offers further substantial discounts to cities such as Munich and Frankfurt. Rental rates for residential properties in Germany are, again, significantly lower than in other European countries, with Berlin standing at a large discount to other German and European cities. The Directors believe that these pricing anomalies in Berlin offer an interesting investment opportunity as the wider German economy expands.

The Directors believe that these economic and demographic factors, combined with increased interest in German property from international investors, present investment opportunities for the property market in Berlin, as well as other east German towns and cities. The Directors also believe that the low level of home ownership in Berlin is likely to grow over time given the relative attraction of owning versus renting in the current environment. Home ownership in Germany is lower than anywhere else in the G7 group, at 43 per cent. (compared with 57 per cent. in France, 70 per cent. in the UK, 73 per cent. in Italy and 87 per cent. in Spain), but in Berlin it is only 13 per cent. The Directors believe that the Berlin property market presents value as it continues to strengthen.

The Directors believe that property prices in Berlin will rise over the coming years. Prices currently reflect a discount to new build costs and assign no value to land. Rental yields offer a premium to the cost of funds. Rental rates, though regulated, can be increased under existing legislation and the Directors believe that legislation may have to be further liberalised given the lack of commercial incentives to build new property. Indications are that residential property prices have reached their low in Berlin and are attracting significant foreign interest. Finally, the Directors believe that institutional ownership of property in Berlin should grow, given its current low level.