Pirelli RE - 2005 Annual Report

MESSAGE FROM THE CEO

Dear Shareholders,

Despite the less dynamic state of the real estate market in 2005 than in the past, Pirelli RE has continued to report significant progress in its results. Its business model has proved itself capable of adapting to market fluctuations and increasingly suited to the company's development.

After the progress of recent years, Italy's real estate sector now features not only opportunistic capital, aware that there are still sectors (like non performing loans and tourism) capable of generating large returns, but also core investments in more traditional sectors like offices. The progress in Italy over this period has not however narrowed the gap on more advanced nations, making our country ripe for further development, which will benefit companies like ours, able to manage the change.
The European market is Pirelli RE's natural area for expansion, where the principal areas of interest are those countries where, despite having an established market, real estate values still need to rise considerably to reach European averages (like in the case of Germany) or those countries in which the economic and political developments in progress, like the East European countries that recently joined the European Union, where market conditions are particularly favourable.
The positive results achieved by Pirelli RE, whose operating result including income from investments in associated companies has grown by over 80% in the three years 2003/2005 (CAGR +22%), have confirmed the strategy in the three-year plan just completed with:

an increase in real estate assets managed to around ?13 billion (market value);
a repositioning of the real estate portfolio, with a core component that was previously missing now representing around 38% of the total, and a consequent decrease in the opportunistic portfolio;
a change in the mix of the opportunistic portfolio with a reduction in the proportion of residential and commercial properties and, within the latter, a shift out of offices into other segments, and the creation of a non performing loans portfolio, representing 16% of total assets managed
the creation of a Fund Management business, which in the space of just two years is market leader with a total value of around ?5 billion generated by managed core funds, and the Bank of Italy's recent approval for the first fund management company specializing in opportunistic funds, thereby taking another step towards a more regulated market capable of attracting the interest of new investors;
a major growth in fees from Asset Management and Services, which have climbed from 24% to 44% of operating result including income from investments in associated companies; of particular note is the 138% growth in fees from services (CAGR +35%) and the start-up of the franchising business which has proved to be a case history in success: the Pirelli RE network has signed over 1,000 affiliation agreements, achieving the original growth targets. Not only is this the fastest growing franchising network in Europe, this year it also managed to beat the break-even point.

The company's growth is also reflected in the share price which outperformed both the Mibtel and Midex; furthermore, the company's inclusion at the end of 2005 in AXIA's Corporate responsibility index (the only real estate company with an A++ rating) recognizes our attention to sustainable growth.

These results have been possible thanks to the commitment and quality of management, the key success factor for any service company. The professionalism and specialist expertise of our personnel represent the cornerstones of our competitive advantage in the Continental European market, which is likely to become gradually more efficient and competitive in coming years.

Our company's future is full of new challenges which we are confident of being well-equipped to face: with energy, commitment and creativity through the application of our specific business model.

Carlo Alessandro Puri Negri