Pirelli RE - 2005 Annual Report

Commercial

I. Description

The Fund Management business involves promoting, setting up and managing real estate investment funds, giving the Group the chance to manage opportunistic and core investments.

More specifically, the Fund Management business, run by Pirelli RE SGR and now also by Pirelli RE Opportunities SGR, was started up in 2004 with the placement of the listed private contribution funds Tecla Fondo Uffici and Olinda Fondo Shops on the market and two other funds reserved for accredited investors called Cloe Fondo Uffici and Clarice Light Industrial.

As better described in the section on main events, the business continued successfully in 2005 with the establishment of Berenice Fondo Uffici, the third listed private contribution real estate fund, in the wake of Tecla Fondo Uffici and Olinda Fondo Shops, and Pirelli RE Fund Raissa Fondo Comune di Investimento Immobiliare di tipo chiuso (an opportunity fund, specializing in commercial properties, destined for accredited investors).

In addition to the above-mentioned funds, Pirelli RE SGR also manages real estate portfolios and portions thereof for third parties worth a total of ?1.4 billion. Of this total, properties worth ?1.2 billion are managed for Investire Immobiliare SGR and refer to part of the real estate portfolio of the reserved real estate investment fund called "FIP - Fondo Immobili pubblici", set up by the same.

During 2005 Pirelli RE SGR was joined by Pirelli RE Opportunities SGR, the first asset management company specializing in opportunity funds in the real estate sector. With Pirelli RE Opportunities SGR, the Pirelli RE Group plans to develop the first business model involving the use of vehicle companies to purchase and manage opportunistic portfolios with a time horizon of 3-5 years. The establishment of Pirelli RE Opportunities SGR is therefore a step in the direction of offering accredited investors, differentiated investment opportunities according to the property's different stages in the industrial cycle, from initial acquisition on an opportunistic basis to enhancement of the asset acquired, involving refurbishment and maintenance work, until subsequent reorganization according to the property's characteristics and lastly its sale, until subsequent reorganization according to the property's characteristics and lastly its sale, with access to different investors in terms of risk profile and expected returns. Pirelli RE Opportunities SGR set up its first opportunity fund called Spazio Industriale at the end of December 2005.

The Commercial Asset Management business identifies and co-ordinates investment opportunities in non-residential property sectors.

This business involves not only enhancement of the value of properties with a view to their subsequent repositioning on the market, but also the development of new commercial complexes. This business unit is organized into specialized teams according to the nature of the asset involved: offices, retail & entertainment, industry, tourism and public utility (health care, universities and research).

II. Main events

On January 19th, 2005 Spazio Industriale, a joint venture between Pirelli RE (25%) and Soros Real Estate Investors (75%), concluded the purchase of 7 industrial buildings from the Prada Group for ?77 million.
On May 6th, 2005 the joint venture between Pirelli RE and Deutsche Bank Real Estate Global Opportunities, together with the Borletti family and Investitori Associati, concluded its first deal by buying Rinascente S.p.A. from Eurofind Textile for the sum of ?888 million after receiving the formal go-ahead from the Antitrust Authority. The Pirelli RE - DB Real Estate joint venture took a 50% stake in the deal while the remaining interest was split between Investitori Associati and the Borletti family. At December 31st, 2005 Pirelli RE held 20% of Rinascente Upim and Tamerice Immobiliare, the companies to which the retailing and real estate activities of Rinascente S.p.A. were respectively transferred.
On March 31st, 2005 Orione Immobiliare Prima purchased from Spinoffer Real Estate several predominantly commercial units located in various Italian cities for a figure of ?127.9 million. Orione Immobiliare Prima bought another ?25.8 million in predominantly commercial properties from Spinoffer Real Estate on December 5th, 2005.
On April 29th, 2005 the joint venture between Pirelli RE and Morgan Stanley Real Estate Funds (MSREF) signed a binding agreement with Glenbrook Operae to purchase properties mainly for office use for a figure of ?255 million. At December 31st, 2005 a total of 124 properties worth around ?252 million had been purchased.
On July 14th, 2005 the global offer of units in the Berenice Fondo Uffici was closed, well ahead of its planned end date of July 26th; this is the third listed fund promoted by Pirelli RE SGR and specializes in properties for commercial-office use or which are suitable for conversion to such use. Total applications received came to around 140% of the units offered with the offer price being set at ?505 per unit.
On July 28th, 2005 Pirelli RE purchased building land covering approximately 1.5 million square metres in Portogruaro in the province of Venice, due to house an integrated industrial park. On December 30th, 2005 the site was transferred to Spazio Industriale, the new short-term opportunity fund. Construction work is expected to start early in 2006 with an estimated investment of around ?150 million in the next 4 years.
On October 17th, 2005 Teodora, a mixed contribution and cash fund destined for accredited investors, was set up with a ten-year term. The Teodora fund consists of 10 properties mainly for office use, transferred by Roev Italy, Adar Holding and Schiavonetti, for a total value of approximately ?152 million. The properties are mostly located in Central Italy, with a high concentration in the city of Rome. The fund's units were all placed with accredited investors, mostly from abroad.
On November 3rd, 2005, under the agreement signed on July 29th, 2005, Pirelli RE purchased from each of the current shareholders Banca Intesa, the Ifil Group and the Marcegaglia Group, an interest of 8.3% in Turismo&Immobiliare, a company that owns 49% of Italia Turismo. As a result of this deal, which received the go-ahead from the Antitrust Authority on October 28th, 2005, Pirelli RE now owns 25% of Turismo&Immobiliare in exchange for an outlay of ?3.4 million.
On November 16th, 2005 the subsidiary Riva dei Ronchi purchased land and a building in the city of Massa for ?42 million. This site is destined for hotel and tourism development.
On November 25th, 2005 the company Botticino spent ?3.8 million on buying a property for hotel use comprising a site and related building located in Trezzo sull'Adda (Milan).
On December 13rd, 2005 Iniziative Immobiliari 3 bought a property in Milan at a cost of ?17.2 million.
On December 23rd, 2005 Pirelli RE signed a binding agreement with Valtur to purchase 4 tourist villages located in Marilleva, Pila and Nicotera for a total figure of ?103 million. The plan is to invest around ?12 million over the space of the next two years to increase the value of these properties.
On December 28th, 2005 561 properties forming part of the real estate portfolio of the Telecom Italia Group worth about ?486 million were contributed to Pirelli RE Fund Raissa Fondo Comune di Investimento Immobiliare di tipo chiuso, held by the joint venture controlled 65% by Morgan Stanley Real Estate Funds and 35% by Pirelli RE. The plan is for the Telecom Italia Group to contribute a total of 900 properties worth around ?790 million to this newly formed fund.
On December 28th, 2005 Pirelli RE Opportunities SGR obtained the Bank of Italy's authorization to carry out collective asset management services. The first fund set up and managed by Pirelli RE Opportunities SGR is Spazio Industriale Fondo Comune di Investimento Immobiliare speculativo di tipo chiuso, held by the joint venture 65% controlled by Cypres Grove International LP and 35% by Pirelli RE. At December 31st, 2005 the newly formed fund's real estate assets consisted of 246 properties mostly in North Italy, of which ?177 million contributed by Olivetti Multiservices (Telecom Italia Group) and a site of around 1.5 million sqm in the province of Venice destined to accommodate Eastgate Park, the largest integrated industrial-logistics park in North-East Italy. The properties forming part of the fund's assets at December 31st, 2005 represent the first tranche of the overall transfer from the Telecom Italia Group planned to involve over 400 properties worth approximately ?300 million.
On December 29th, 2005 Spazio Industriale, the short-term speculative real estate fund, entered into an agreement to buy a property complex mostly used for logistics and related warehouses in Pavia for a price of ?19.5 million. The final sale agreement was concluded on January 31st, 2006.

III. Results

Theaggregate revenuesof the commercial Asset Management business came to ?1,944.7 million in 2005, an increase of 40% on the figure of ?1,390.3 million in 2004.

Operating result including net profit share from investments in associated companieswas ?100.7 million in 2005, having improved by 30% on the figure of ?77.2 million reported in 2004.

Real estate sales amounted to ?1,511.2 million in 2005 (?822.8 million in 2004), while contributions to funds came to ?750 million (?2,386.8 million in 2004), generating ?446.2 million in gross capital gainscompared with ?400.5 million in 2004. The margin on sales taken on their own was higher, going from 19% in 2004 to 26% in 2005.

Real estate purchasescame to ?2,260.4 million in 2005 compared with ?602.3 million in 2004.