European Convergence Develop. CoPLC Shareholder Update (4532K)

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RNS Number : 4532K

European Convergence Develop. CoPLC

30 July 2013

 
                      ECDC plc 
                      Shareholder Update                                                   July 2013 
 
                        European Convergence Development Company PLC ("ECDC" 
                        or "The Company") 
                      The Manager presents its latest Shareholder Update 
                       report covering the three month period 1(st) April 
                       2013 to 30(th) June 2013. 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 
                       Bulgaria held early parliamentary elections on 12(th) 
                       May and a new Government took office on 29(th) May, 
                       supported by the Bulgarian socialists, a party of 
                       ethnic minorities and the nationalist party in Bulgaria. 
                       From 14(th) June numerous protests have been and are 
                       continuing to be held throughout major cities in Bulgaria 
                       calling for the resignation of the new Government. 
                       The spark that ignited the demonstrations was the 
                       appointment of a controversial media mogul with a 
                       negative public image as head of the powerful national 
                       security agency. The demonstrations are ongoing. 
                       The Gross Domestic Product (GDP) of Bulgaria expanded 
                       0.4% year-on-year in quarter 1 and 0.1%quarter-on-quarter. 
                       Quarter on quarter growth has remained at 0.1% or 
                       less for the last seven quarters and the World Bank 
                       recently reduced its GDP growth for 2013 and 2014 
                       to 1.2% and 2.1% Unemployment in quarter 1 increased 
                       to 13.8% from 12.4% at the end of 2012 and represents 
                       one of highest rates over the last 10 years. Industrial 
                       production declined 6% year on year in May, both exports 
                       and imports fell in May whilst the current account 
                       deficit was EUR120 million. Inflation in June increased 
                       to 2.6% after two months of 2.0% inflation 
                       At the end of April net FDI amounted to a meagre EUR 
                       408.5 million (1.0% of GDP) which was worse than the 
                       low figure of EUR 895.2 million recorded for the same 
                       period for 2012 (2.3% of GDP). In addition to the 
                       struggling Bulgarian economy and limited global appetite 
                       for risk, FDI was affected since February by the unstable 
                       political situation in Bulgaria. At the end of April 
                       2013, the consolidated budget deficit stood at BGN 
                       286.4 million (EUR143 million) on a cash basis (-0.4% 
                       of GDP), while general government debt, including 
                       government guaranteed debt, amounted to 18%of GDP. 
                       Both the deficit and the government debt compare favourably 
                       to other EU countries and the Government has announced 
                       that it will be placing an amended budget before the 
                       Senate in an attempt to drive growth. 
                       ROMANIA 
                       Economic activity remained on an upward trend in quarter 
                       1. GDP expanded by 0.6% quarter on quarter and 2.2% 
                       on an annualised basis. The increase in GDP stemmed 
                       from the positive growth in industrial production 
                       and there is a good chance that this will be maintained 
                       in coming quarters. On the demand side growth came 
                       from a significant increase in exports. Total consumption 
                       decline 0.5% with household consumption declining 
                       0.6%. Analysts estimate around 2% GDP growth for 2013. 
                       In May exports were slightly down on April at EUR4,020 
                       million but represented the third month in a row when 
                       exports exceeded EUR4,000 million since quarter 3, 
                       2011. Imports also declined in May from EUR4,700 million 
                       in April to EUR4,520 million. According to current 
                       estimates, in quarter 1 the foreign trade deficit 
                       achieved its lowest level since 2000 (starting point 
                       of last business cycle) at around 3.0% of GDP. Year 
                       on year Industrial production, which has climbed consistently 
                       over the last four months declined 1.2% in May compare 
                       to May 2012. Inflation in June was 5.37% and has remained 
                       around this level for the last four months indicating 
                       no real inflationary pressure in the system. Interest 
                       rates remained on hold at 5.0%. Retail sales declined 
                       3.25% year on year and just under 3.0% month on month 
                       in May. Consumer spending in quarter 1 declined ROM 
                       125 million quarter on quarter but was almost the 
                       same as the previous year comparison. 
                       The International Monetary Fund (IMF) completed their 
                       seventh and eighth reviews of Romania's performance 
                       under its economic program supported by a 24-month 
                       Stand-By Arrangement (SBA). The favourable outlook 
                       and consequent approval by the IMF allowed the funds 
                       available for Romania to increase to EUR3,571.68 million. 
                       The arrangement is viewed by the Romanian authorities 
                       as precautionary and not intended to be drawn down. 
     Property Market  Bulgaria 
            Overview   Retail 
                       There are no significant changes in the retail market 
                       in Bulgaria in quarter 2 2013 as no Shopping centres 
                       were open for trading during the period and the country's 
                       shopping centre stock remained at 704,000 sqm. As 
                       previously reported, there are three shopping centres 
                       with a total GLA of over 120,000 sqm, which are scheduled 
                       for completion by the end of 2013 and early 2014. 
                       The expected average lettable area per 1,000 inhabitants 
                       for the country after the opening of the scheduled 
                       Retail centres will increase to approximately 115 
                       sqm compared to 247 sqm for Europe as a whole and 
                       200 sqm for CEE. In quarter 2 2013, the shopping centre 
                       stock per capita in Plovdiv, where Galleria Plovdiv 
                       is located, was less than 200 sqm per 1,000 inhabitants, 
                       while the comparable figure for Rousse, where Mega 
                       Mall Rousse is located, was approximately 300 sqm 
                       per 1,000 inhabitants. 
                       Quarter 2 of 2013 brought no surprises on the demand 
                       site. The retail market remained pro-tenant orientated 
                       due to the increasing availability of modern retail 
                       space and low turnovers. 
                       The investment market remained stagnant with no property 
                       investments undertaken in the quarter 2 of 2013. 
                       Romania 
                       No notable transactions were reported in the second 
                       quarter of 2013 though there are several commercial 
                       real estate projects in advanced stages of negotiation, 
                       predominantly in the retail sector. As JLL reports, 
                       timelines remain lengthy and they expect to see closing 
                       only in the letter part of the year. NEPI was again 
                       one of the most active investors securing several 
                       sites and announcing further developments plans following 
                       an additional capital raise. 
                       Commercial Office 
                       In the first half of the year total investment volume 
                       in Romania was approximately EUR62 million represented 
                       by one transaction reported last quarter, the sale 
                       of Lakeview to NEPI. This was the largest institutional 
                       transaction in the office sector in Bucharest since 
                       2010. To put this investment volume into context, 
                       the similar figure for Poland was EUR970 million and 
                       for Slovakia it was twice Romania. 
                       In Quarter 1 72,000sqm of office space was delivered 
                       in 3 buildings: Sky Tower, Floreasca Office and West 
                       Gate H5, taking the total modern office stock in Bucharest 
                       over the 2 million sqm mark. Over 2013 the pipeline 
                       for the remainder of 2013 is estimated at approximately 
                       50,000 sqm, taking the estimated yearend total above 
                       120,000 sqm, more than 2.5 times the supply delivered 
                       in 2012. 
                       In Quarter 1 take up is estimated at 63,000 sqm with 
                       over 59 transactions completed. It is to be noted 
                       that that only 3% were represented by pre-leases, 
                       the rest being new leases and renewals. 
                       Prime headline rent remained unchanged to the end 
                       of quarter 1 at EUR 18.50 per sqm per month. These 
                       levels are expected to soften slightly. Incentive 
                       packages are still common practice although the value 
                       will vary significantly depending on the type of space 
                       being let. Overall vacancy rate is estimated at 16% 
                       but with significant variations depending on submarket 
                       and property type, with Pipera North and Baneasa reaching 
                       more than 35%. As a change from previous quarters 
                       a number of new developments totalling up to c. 170,000 
                       sqm have been announced in the Barbu Vacarescu sub-market, 
                       all aiming to be delivered within a 12-18 months period. 
                       Only Portland Trust is currently building its Floreasca 
                       Park at a rapid pace. Developers such as Skanska, 
                       Ioanis Papalekas, and Nusco have secured building 
                       sites and are currently going through the building 
                       approval process. For 2014, the supply is estimated 
                       at about 150,000sqm. 
                       The specification of new buildings is improving and 
                       most developers are looking for energy efficient and 
                       green certificated buildings, following both occupier 
                       and investor interest for such improvements. 
                       Retail 
                       Food and fashion 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. 
                       As mentioned before the purchase of the Real operations 
                       by Auchan will bring a new dynamic into the market. 
                       Fashion retailers are concentrating on existing schemes 
                       given the scarcity of new pipeline being developed. 
                       Prime shopping centre rents are quoted between EUR60-70 
                       per sqm per month as rental levels continue to be 
                       stable. Prime high street units are in the same range, 
                       but a forecast to soften over the next 6-12 considering 
                       the availability of numerous units along main retail 
                       streets. 
                       After significant openings during the last few years, 
                       according to Jones Lang LaSalle (JLL) the estimated 
                       deliveries for 2013 are only set to reach about 120,000sqm 
                       in 5 projects in 2013 and 65,000 in 3 projects in 
                       2014. The main projects looking to be developed in 
                       the near future are: Promenada Mall (part of the Raiffeisen 
                       Evolution Sky Tower complex), AFI Palace Ploiesti, 
                       the extension of the Anchor Group projects (Bucuresti 
                       Mall and Plaza Romania), the NEPI and Cora projects 
                       in Brasov and the Corall in Constanta. 
Development Projects  Galleria Plovdiv 
            Bulgaria   At the beginning of quarter 2 the overall occupancy 
                       of the Mall had remained approximately 75% of the 
                       lettable area. The higher occupancy levels were expected 
                       to trigger certain thresholds for major tenants to 
                       start making rental payments which has not been the 
                       case and negotiations are ongoing with the majority 
                       of these tenants which is negatively affecting the 
                       cash flow position of the development SPV. 
                       Despite the achieved increase in occupancy, additional 
                       leasing continues to be difficult and is highly dependent 
                       upon the successful implementation of the leasing 
                       strategy developed by the international consultant. 
                       During the period the interim contract with the international 
                       consultant was extended by a further two months. During 
                       this period, it is hoped that the negotiations with 
                       the Bank will progress and a long term contract negotiated 
                       with the international consultant, which will allow 
                       the implementation of the strategy. 
                       In line with the strategy, the initial negotiations 
                       with several international tenants continued. The 
                       signing of such tenants will be heavily dependent 
                       upon the availability of fitting out contributions 
                       to new tenant, as well as meeting their demands for 
                       co-tenancy presence of other international brands. 
                       This makes letting of new areas even more challenging 
                       and somewhat uncertain. 
                       The discussions with the bank to restructure the banking 
                       facility have slowed but it is hoped that they will 
                       be resumed in the next quarter as any further delays 
                       may negatively impact the project. The facility continues 
                       to be in default and any further equity injection 
                       by the project company will be subject to strict conditions 
                       and will require the formal sanction by the Directors 
                       of ECDC. 
                       The shareholders have provided very limited temporary 
                       funding to support the international consultant in 
                       quarter 2. 
                       At the end of the reported period the centre manager 
                       left the project and the shareholders are considering 
                       various options to address this issue. The day to 
                       day operations are presently carried out by the technical 
                       manager. 
                       The Mall has been unable to meet all of its operational 
                       obligations from the collected rental and service 
                       charge income, which has led to increasing overdue 
                       payments to service providers and the fiscal authorities. 
                       Unless the bank restructuring is resolved quickly 
                       and fresh cash made available to cover operational 
                       needs, the company faces serious liquidity problems 
                       and even foreclosure risks, which threaten its operations. 
                       Mega Mall Rousse 
                       During quarter 2, occupancy dropped from 60% to 56% 
                       following the closure of the anchor children's toy 
                       operator Hippoland. As reported, the management team 
                       immediately started initial talks with another operator 
                       in order to secure an adequate replacement. Advanced 
                       negotiations with a bank and café operator on 
                       the ground floor are in progress, with lease agreements 
                       under discussions. During quarter 2 the management 
                       team secured a replacement café operator for 
                       the first floor which is expected to improve the rent 
                       collection. Leasing is still proving to be extremely 
                       difficult and as previously announced, is highly dependent 
                       upon the provision of fit-out contributions. 
                       As previously reported, the bank has initiated a series 
                       of aggressive actions culminating in making of the 
                       whole facility payable end of April 2013. The Manager 
                       and representatives of the partner have held meetings 
                       with the Bank and discussed various options going 
                       forward. Agreeing terms with the Bank is paramount, 
                       as otherwise the viability of the Project will be 
                       severely undermined, especially given overdue liabilities 
                       which pose some foreclosure risks. 
                       Trade Centre Sliven 
                       During the quarter the operating company distributed 
                       the retained profits enabling our Partner to repay 
                       the majority of his outstanding loan. In total ECDC 
                       received BGN 876K (c. EUR 438K) of which c. BGN 485K 
                       (c. EUR 243K) represented loan repayment and the balance 
                       - a distribution. 
                       As previously announced, there has been no change 
                       in the position regarding the development itself and 
                       the Manager is considering various alternatives for 
                       the site. 
                       Bourgas Retail Park 
                       There has been no further progress made with this 
                       development. 
Development Projects  Cascade 
             Romania   The building is fully leased and generating income 
                       in line with the budget. All the financial obligations 
                       of the company are up to date with there are no outstanding 
                       debtors. 
                       With the completion of the leasing process the partner 
                       has managed to position the building as one of the 
                       premier office products in the Bucharest real estate 
                       market. There is continued interest in the building 
                       by potential tenants, with inquiries being addressed 
                       and managed by the building's management team. 
                       In accordance with the most recent loan agreement 
                       the company has made use of its option and paid down 
                       some additional debt on the first anniversary. 
                       Oradea and Iasi Shopping Centres 
                       Further to the Cypriot crisis reported in the last 
                       shareholder update, the restructuring of the loans 
                       for both Iasi and Oradea is still pending. It is expected 
                       that the current situation will continue for a few 
                       more months until a solution is found for the current 
                       loan book of Bank of Cyprus Romania. 
                       The other banks in the syndicate are providing support 
                       for daily operations although the banks are often 
                       prioritizing repayments of interest and bank related 
                       fees in front of service charge related expenses. 
                       AREOF has announced at the beginning of June that 
                       the Oradea loan facility is in default and that pending 
                       remedy of the default, the banks will continue to 
                       sweep the accounts at the expense of service charge 
                       which will put pressure on the cash flow. An additional 
                       threat to the operations of AREOF came with the announcement 
                       made by NEPI that it is in advanced negotiations for 
                       the purchase of part of the bank debt in another shopping 
                       centre owned by AREOF, namely Sibiu Shopping City. 
                       Given the debt facility expiry in November this year, 
                       it is anticipated that NEPI wish to push for the full 
                       purchase of the debt and attempt to take over the 
                       asset. Although not directly impacting the investments 
                       in Iasi and Oradea, if NEPI are successful in achieving 
                       its objective it could significantly weaken AREOF's 
                       position thereby threatening the security of ECDC's 
                       investment. Various solutions and courses of action 
                       are currently evaluated by AREOF in finding a favourable 
                       outcome to this threat including a legal claim through 
                       the Romanian courts against NEPI as to the practices 
                       used in seeking to acquire part of the bank debt. 
                       AREOF has remedied the default occurred under the 
                       Sibiu 2 loan agreement by making a EUR 1m cash injection 
                       in the company in the beginning of May. 
                       Oradea Shopping Centre 
                       ERA Oradea has consistently increased traffic every 
                       month this year recording a 40% increase in traffic 
                       for May year on year. Carrefour reported a 20% increase 
                       in sales year on year in May following a 6% decline 
                       for April. The late Easter accounted for most of this 
                       increase, together with a range of attractive marketing 
                       events designed to generate traffic and sales growth. 
                       As Easter is traditionally a time for purchasing new 
                       clothes, it is not surprising that fashion and footwear 
                       retailers traded higher for May. The increased expenditure 
                       for food, electrical and fashion was at the expense 
                       of furniture retailers, where sales declined significantly. 
                       Another large furniture tenant was secured and there 
                       are ongoing negotiations with a large fashion retailer 
                       following Sprider's recent closure of their store 
                       due to the company's insolvency in Greece. 
                       Letting activity remains competitive given the existence 
                       of the three other shopping centres in the city. The 
                       absence of available tenant fit out facility is significantly 
                       limiting possible transactions, as this remains an 
                       important influencing factor under the current tenant 
                       favourable market conditions. 
                       Iasi Shopping Centre 
                       Monthly traffic remains consistently lower year on 
                       year, due mainly to the retail competition within 
                       Iasi. The City council has embarked on a number of 
                       major road improvement works simultaneously throughout 
                       the city which has reduced the number of people willing 
                       to drive to the centre. April's marketing activities 
                       and promotions repeated March's success and produced 
                       a 20% month on month traffic increase. This was also 
                       true for the first half of May for the Easter campaign 
                       period. The improved weather from early April has 
                       also helped. 
                       Retailer sales increased with the improved footfall 
                       but the late Easter delayed the peak sales period. 
                       The very warm weather in early May helped drive sales 
                       for shoes, accessories, cosmetic, toys and children's 
                       clothes. 
                       New and interesting sales promotions, gifts, prizes 
                       and giveaways are largely driving the increased customer 
                       traffic and sales. Marketing budgets have increased 
                       to ensure that campaigns are being extensively marketed 
                       throughout the city. Surprisingly after the Easter 
                       campaigns finished, traffic and sales declined for 
                       the second half of May producing an overall monthly 
                       footfall decline against April. Clearly increased 
                       marketing activities and increased expenditure will 
                       have to be maintained for the next 12 months to maintain 
                       and increase visitor numbers. 
                       Sprider closed their store in May, for the reason 
                       mentioned above and will be replaced by a discount 
                       fashion tenant trading as San Francisco. This unit 
                       will be selling end of range items at discounted prices 
                       and it is anticipated that this will be an attractive 
                       draw for customers. Further lettings to Tiffany (tailors 
                       98 sqm), Dry Cleaners (98 sqm), Schneider (fashion 
                       129 sqm), were signed and Divanissimi (furniture 284 
                       sqm) is opening next month. 
                      Investor Relations 
                       Tel: + 44 (0)20 7518 2100 Fax: + 44 (0)20 7518 2199 
                       Email: [e-mail] Website: www.charlemagnecapital.com 
 
                       Issued by Charlemagne Capital (UK) Limited, 39 St 
                       James's Street, London SW1A 1JD 
                       A company authorised and regulated by the Financial 
                       Conduct Authority 
 
 
                       The purpose of this document is to provide a mere 
                       legal and tax outline of the structure proposed. This 
                       document cannot be regarded as a fully comprehensive 
                       report or as a binding legal and tax opinion since 
                       it has been prepared solely for information purposes. 
                       Therefore, investors willing to obtain the comfort 
                       they may deem necessary as to the application of the 
                       above-mentioned tax advantages in order to invest 
                       into this structure should seek and rely on its own 
                       independent advice. This document does not constitute 
                       an offer to sell or solicitation of an offer to buy 
                       shares in the Company and subscriptions for shares 
                       in the Company may only be made on the terms and subject 
                       to the conditions (and risk factors) contained in 
                       the prospectus of the Company. Potential investors 
                       should carefully read the prospectus to be issued 
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                       information needed to evaluate an investment in the 
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                       competent supervisory authority and no supervisory 
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                       The information in this document/financial promotion 
                       is confidential and it should not be distributed or 
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                       satisfied. This document is not intended for public 
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                       Company constitutes a high risk investment and investors 
                       may lose a substantial portion or even all of the 
                       money they invest in the Company. An investment in 
                       the Company is, therefore, suitable only for financially 
                       sophisticated investors who are capable of evaluating 
                       the risks and merits of such investment and who have 
                       sufficient resources to bear any loss that might result 
                       from such investment. If you are in any doubt about 
                       the contents of this document you should consult an 
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                       should note that: past performance should not be seen 
                       as an indication of future performance; investments 
                       denominated in foreign currencies result in the risk 
                       of loss from currency movements as well as movements 
                       in the value, price or income derived from the investments 
                       themselves; and there are additional risks associated 
                       with investments (made directly or through investment 
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                       Charlemagne Capital (UK) Limited does not guarantee 
                       the accuracy, adequacy or completeness of any information 
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                       The information is indicative only and is for background 
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                       amendment and verification. All quoted returns are 
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                      ============================================================================== 
 

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