European Convergence Develop. CoPLC Shareholder Update (0439P)

TIDMECDC

RNS Number : 0439P

European Convergence Develop. CoPLC

19 October 2012

19 October 2012

EUROPEAN CONVERGENCE DEVELOPMENT COMPANY PLC

("ECDC" OR "THE COMPANY")

Shareholder Update: 1st July 2012 to 30th September 2012

The Manager presents its latest Shareholder Update report covering the three month period from 1st July 2012 to 30th September 2012. This report is intended to update investors on progress over the last three months and is not intended to deal with the financial statements of the Company.

Economic Overview

Bulgaria

The Gross Domestic Product (GDP) in Bulgaria was 0.5% higher in the second quarter of 2012 compared to the same quarter of the previous year and grew by 0.3% over the previous quarter, according to NSI preliminary data released in early September. Forecast 2012 out-turn GDP growth has been reduced by UniCredit to 0.5% from 1.5% because of the crisis in the Eurozone which takes almost 60% of Bulgaria's exports. However, UniCredit does believe that as the debt crisis fades and the Government raises minimum wages and pensions, Bulgaria's consumption should increase and their 2013 forecast is for GDP to grow by 1.5%.

Consumer Confidence in Bulgaria improved to -38 in July 2012 from -45.8 in April of 2012. This is the highest result since quarter one 2008. Household consumption was up 3.9% year on year whilst retail sales increased by 0.9% in August compared to the previous year but on a monthly basis recorded no increase over July. This is the third consecutive month of year on year growth after twelve months of negative performance.

According to recent data, the harmonised Index for Consumer Prices (HICP) in September indicated inflation was 0.3% higher compared to August and the annualised rate in September was 3.4%. The main driver for the monthly increase was an increase in food and non-alcoholic beverages. On the more widely used RPI measure monthly inflation in September was 1.1% higher compared to August and annual inflation was 4.9%, up from 1.6% in June and the result of energy price increases as well as the previously mentioned food and beverage price increases.

According to Bulgaria's Employment Agency, unemployment decreased 0.1% in September to 10.6% whilst EuroStat estimates unemployment to be 12.6% in August. Any decrease in unemployment is likely to have been driven by seasonality factors leading to temporary reductions in the rate.

Following the limited global appetite for investment risk and the problems within the EU, Foreign Direct Investments (FDI) for the first seven months of 2012 remained low at EUR 846.2 million or 2.1% of GDP, though this represents almost a EUR 500 million increase over the same period in 2011.The majority of this increase was derived from investments in real estate and the largest contributor country was the Netherlands.

At the end of August 2012, the consolidated budget surplus stood at BGN 107.6 million (EUR55 million) on a cash basis (0.1% of GDP). At the end of August 2012 general Government debt, including Government guaranteed debt amounted to 19% of GDP.

Romania

The annualised Gross Domestic Product (GDP) in Romania expanded 1.70% in the second quarter of 2012 over the same quarter of the previous year whilst on a quarterly basis GDP expanded 0.50% in the second quarter over the previous quarter. The Government has reduced its full year 2012 GDP forecast by 0.3% to 1.2% growth whilst the IMF is forecasting 0.9% for 2012 and 3.0% for 2013.

Quarter 2 growth was driven mainly by domestic demand and is reflected in consistently improving, if moderately, consumption figures since quarter 3 2010. Retail sales grew 4.7% in August compared to the previous year and 0.7% month on month.

Exports fell to almost EUR 3,500 million in August, one of the lowest levels recorded in 2012. At the same time imports were roughly the same in August as July contributing to Romania having one of the highest foreign trade deficits in the new EU, at 5.5% of GDP in H1 2012.

As a result of the sharp decrease in foreign capital inflows and also the decrease of the remittances from the Romanian individuals working abroad there is a funding gap that is being covered partly by Government borrowings and partly by the usage of the National Bank of Romania external reserves.

Romania maintained its Investment Grade rating, with stable outlooks from S&P and Fitch and negative outlook from Moody's. It is expected that developments within the EU will have further impact on the Romanian economic situation.

The annual inflation rate rose to 5.3% at the end of September, its highest level since June 2011 and well above the analysts and Central Bank's estimates. Prices increased 1.2% from August which was fueled by food costs which rose 6.9% in September from a year earlier, compared with a 3.3% growth in August, and non-food items quickened to 4.3%, compared with 3.9% in August, after the country raised natural-gas prices to meet pledges to its international lenders. Current year end estimates have been also increased due to recent developments to values closer to 4.5 to 5.0%. The upcoming elections and the poor agricultural output will put additional pressure on both food and administered prices.

At the last NBR monetary policy meeting the Central Bank kept the monetary policy rate at the record low of 5.25%. Increasing inflation is putting significant pressure on the Central Bank and reducing its ability for further reductions in the rate. However the Central Bank's view is that the inflationary pressures are present on the short term while the negative output gap will further exert disinflationary effects. It is expected that while keeping the policy rate fixed, the Central Bank is carefully managing the liquidity in the market.

Following the local elections victory, a conflict arose between the new ruling coalition and President Basescu which resulted in Parliament voting for the impeachment of the President on 6th July 2012. This action, together with other measures taken by the ruling coalition has given rise to major concerns over the continuation of a functioning democracy in Romania. Following a national vote the validation of the president's impeachment rested on the shoulders of the Constitutional Court of Romania as there was deemed to not be a quorum. After more than a month the Constitutional Court decided to invalidate the results of the public vote. As a result President Basescu returned in office at the beginning of September. The turmoil proved to be very damaging on the image of the country in front of the international media, western governments and most importantly in front of the money markets on which Romania is currently dependent.

The Government continues to meet the targets set by the IMF and the European Commission. Technical missions from both the IMF and the EU visited and gave a favourable assessment at the end of their visit. The pressure on the Central Bank reserves is continuing to build up as Romania has started repaying its IMF loan.

Property Market Overview

Bulgaria

Retail

The most notable event for the first half of 2012 was the opening of Galleria Burgas shopping mall (GLA 35,000 sqm), which increased modern shopping centre stock in Bulgaria to 594,410 sqm. Even with this most recent opening the retail lettable area per 1,000 residents in Bulgaria amounts to 81 sqm and is still among the lowest levels in the EU.

At the end of June 2012, the total shopping mall space under construction was 239,500 sqm of Gross Leaseable Area (GLA). Four shopping centres are scheduled to be completed by the end of 2013, of which three are in Sofia: Paradise Center (GLA 80,000 sqm), Bulgaria Mall (GLA 33,000 sqm) and South Ring Mall (GLA 72,000 sqm) and the fourth is in Bourgas: the Strand (GLA 30,500).

Generally, rental levels are remaining flat despite some downward pressures due to the increasing supply and stagnant consumer expenditure.

Occupancy in shopping centres continues to be at less than satisfactory levels with 23% of lettable area in the shopping centres vacant. Although the vacancy in the Sofia has decreased slightly, the vacancy rates in the secondary cities is reported to be over 30%.

No commercial property transactions were realised in the first half of 2012.

Romania

The investment activity for the quarter was comprised mainly of joint venture agreements and land acquisition deals for retail development. NEPI, a South African London listed fund, has announced a joint venture with Benevo to develop a big box retail scheme in Bucharest and NEPI has managed to secure the financing for the finalisation of the Ploiesti Shopping City developed in a joint venture with Carrefour. Portland Trust has started construction on their Floreasca Park development with more than 60% pre let to Oracle. Financing remains difficult to secure, with loan-to-value requirements and lending margins proving prohibitive most of the time.

Office

In the first half of 2012 only 24,600 sqm of office space were delivered on the Bucharest market, with another 68,000 sqm to be delivered by year end. The Unicredit Tiriac Bank's headquarters was completed and delivered in quarter 2, accounting for 14,000 sqm of the new deliveries. The quarter 2 office take up was estimated by JLL at 72,700sqm including renewals and renegotiations. The new take up was estimated at 58,700sqm with pre-leases capturing about 42.3% of the space. In Quarter 2 prime rents remained stable at EUR19.00 to EUR19.50 sqm/month, but there is evidence that the incentive packages offered by landlords have started to soften. For 2012 the delivery pipeline is estimated at c. 90,000-100,000 sqm in already announced projects. Looking forward in 2013 pipeline is estimated at c. 130,000 sqm 34% of which are pre-let. The demand will be driven mainly by the consolidation process of larger multinational occupiers.

Vacancy is forecast to continue to decrease as new supply is exceeded by demand. However, rents are estimated to remain stable but the lack of supply is expected to shift the negotiating position back towards the landlord resulting in less generous incentive packages. The vacancy rate has been significantly influenced by the start of the leasing process for TCI (c. 26,000 sqm GLA) and is reported to close to 17% by JLL as compared with the 13% reported by CBRE.

Retail

The total shopping centre stock in Romania stands at 2.31 million sqm, with no new completions recorded during the summer months. Bucharest's stock, the largest retail market in the country, remains unchanged at c. 775,000 sqm. For 2012 it is estimated that between 5 and 7 projects might be completed at the country level, totaling around 130,000 sqm. The most representative and the largest retail scheme, Palais Iasi, opened in May. In Bucharest only 2 hypermarkets with attached galleries are expected to be delivered totaling around 32,000 sqm GLA.

Food retailers continue to be very active on all fronts with Auchan and Cora (among hypermarkets), Mega Image and Carrefour Express (among supermarkets) and Lidl (among discounters) aggressively expanding their networks in Bucharest and in top regional cities. This is driven by the consumption profile of the Romanian consumer, where 41% of the monthly expenditure budget goes towards food and food related products. The increase in retail sales in the first half of 2012 was about 5% compared with the same period of 2011. Fashion retailers are currently very careful with their expansion process focusing on the optimisation of their existing operations. The selection of new locations is based on the performance of the existing centres, which are the main targets for expansion given the lack of expected deliveries.

Prime shopping centre rents are quoted between EUR65-70 per sqm per month as rental levels continue to be stable. Prime high street units are in the same range, but a softening in the next 6-12 months would not be surprising considering the availability of numerous units along main retail streets.

Bulgarian Assets

Galleria Plovdiv

At the end of quarter 3, there are no significant changes in the tenant's occupancy level, which remain at 61% of the lettable area.

During the period the company has started the implementation of the initial part of the strategy delivered by the international consultant. Due to the efforts of the local leasing team and the consultant, Galleria Plovdiv is in advance negotiations with and, subject to successful completion of the discussions and funding availability for fit-out contributions, expects to open to the public over 7,000 sqm of retail area before the end of 2012, which will drive occupancy up to over 75% of the GLA.

The company continues to negotiate with the bank to restructure the banking facility, which is presently in default.

The shareholders are reviewing the opportunity to provide limited temporary funding to support the project in terms of necessary capital investment for the fit-out works related to the new retail space as well as to cover the operational shortfall till the end of November.

Mega Mall Rousse

During quarter 3 Piccadilly vacated their space but the management team have secured a new tenant on similar terms and the new supermarket will open for trading during October. In addition, a lease agreement for 1,600 sqm has been entered into with a retail operator who is also scheduled to open in October. The Manager is therefore confident that over 4,500 sqm of retail area will be trading before the end of 2012, which will take the occupancy to approximately 60% of the GLA.

Despite the expected increase in occupancy additional leasing is still proving to be difficult. At the moment an additional 1,500 sqm or 8% of the GLA is under detailed negotiation but, as previously announced is highly dependent upon fit-out contributions. To this end, the company will enter into detailed discussions with the bank and is hopeful that, despite the fact that the bank facility is in default, a satisfactory solution will be found in the near future.

Trade Centre Sliven

The company's cash is still deposited in three banks to achieve security but at the expense of lower interest revenue.

As previously announced, there has been no change in the position regarding the development itself and the Manager considering various alternatives for the site.

Bourgas Retail Park

There has been no further progress made with this development.

Romanian Assets

Cascade

Vacancy levels are at 3.5% of the building's GLA. Rental levels achieved were in the range quoted above for central districts and the company is able to meet all its current banking obligations and all operational expenses are fully serviced from the cash flow of the company. The Manager and the partner are actively looking to improve the profile of the asset through various asset management initiatives.

Oradea Shopping Centre

The Oradea construction bank loan facility is fully drawn. The construction of phase 2 of the Shopping Mall, 16,000 sqm, is now fully complete.

Mobexpert, Elvila and Naturlich are now open, with another four units in the pipeline having leases signed and waiting for the financing banks to release the necessary amounts for the fit out of the units. Two further tenants Zoomania and Libraille Alexandria will occupy a total of 800 sqm in the Carrefour Gallery. There is another 4,000 sqm to be completed in the third phase of the Mall's construction, but this phase is dependent upon tenant requirements for this space.

Marketing activities have been successful with increasing the footfall at the site and the centre has been positioned as a family oriented venue with an increasing profile and visibility in the local community.

Even though the leasing market in Oradea is challenging, the size of the operator, Argo Real Estate Opportunities Fund, provides significant traction for attracting new tenants.

Iasi Shopping Centre

The term sheet for the Iasi bank loan facility is signed with the financing documentation pending formalisation. It is expected that the documentation will be finalised and completed in the near future.

Construction of the new 28,000 sqm extension will be undertaken in two phases with phase one, 15,000 sqm planned for completion in the summer of 2013 and the second phase, 13,000 sqm in quarter 4 of the same year. There is significant interest in the first phase with around one third of the available space under negotiation.

The opening of the town centre Palas Shopping Centre has increased competition though the impact on ERA Iasi, an out of town retail park appears to be limited as footfall has fully recovered since the opening.

Asmita Gardens

The insolvency plan proposed by the main creditor, Alpha Bank, has been submitted and approved giving Alpha Bank control over the creditor's pool voting for the plan. The Company is not expected to recover any of its investment following the insolvency process.

Baneasa

There have been no significant developments in this project since the last shareholders report.

Enquiries:

 
 European Convergence Development Company 
  plc                                        [phone] 
 Anderson Whamond 
 
                                             [phone] 
 Charlemagne Capital                          2100 
 Varda Lotan 
 
 Galileo Fund Services Limited               [phone] 
 Ian Dungate, Company Secretary 
 
                                             [phone] 
 Panmure Gordon                               2500 
 Hugh Morgan 
 Grishma Patel 
 
                                             [phone] 
 Smithfield Consultants                       4900 
 John Kiely 
 Ged Brumby 
 

Website: www.europeanconvergencedevelopment.com

This information is provided by RNS

The company news service from the London Stock Exchange

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