European Convergence Develop. CoPLC Shareholder Update (5720R)

TIDMECDC

RNS Number : 5720R

European Convergence Develop. CoPLC

28 October 2013

 
                  ECDC plc 
                  Shareholder Update                     October 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) July 2013 to 30(th) September 
                   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  ROMANIA 
        Overview   GDP expanded in quarter 2 by 1.5% year 
                   on year, down from the 2.2% recorded 
                   in the first quarter of the year. The 
                   Government recently increased its full 
                   year GDP forecast to 1.9% with further 
                   acceleration in 2014 to 2.2%. The main 
                   driver for the improvement in the second 
                   half is a strong performance by the agricultural 
                   sector, excluding agriculture GDP flat 
                   lined in quarter 2. However, underlying 
                   GDP growth for 2013, excluding agriculture, 
                   is forecast at 1.4% year on year expansion. 
                   For the first time since 2008, Romania 
                   recorded an external funding surplus 
                   in foreign capital flows in the first 
                   half of the year (January-July). The 
                   surplus amounted to around 6.3% of GDP. 
                   The main factors fuelling the external 
                   funding surplus were very large portfolio 
                   inflows, a contraction in current account 
                   deficit and an increase in the use of 
                   EU funds. The external funding surplus 
                   enabled the country to cover loan repayments 
                   to the IMF due by the central bank and 
                   the Finance Ministry (2.5% of GDP) and 
                   also resulted in an increase in official 
                   reserves to 3.1% of GDP. Exports grew 
                   12.1% in quarter 2 compared to 9.1% in 
                   the first quarter and imports contracted 
                   from -0.1% in quarter 1 to -1.7% in quarter 
                   2. 
                   In September annual inflation fell from 
                   3.67% in August to 1.88% due to tax-driven 
                   falls in bread prices and within the 
                   1.5% - 3.5% central bank target range. 
                   Bread prices were down approximately 
                   12% on the month after the government 
                   cut value-added tax for bakery products 
                   to 9% from 24%. The central bank forecasts 
                   monthly inflation to fall to 3.1% year-on-year 
                   by the end of 2013. Data showed consumer 
                   prices were down 0.6% on the month in 
                   September. Food prices fell 1.8%, while 
                   non-food prices were flat. Services edged 
                   up 0.4%. 
                   The NBR further eased the monetary policy 
                   rate at the end of September by another 
                   25bps, to a current level of 4%. This 
                   was the fourth reduction and was followed 
                   up by an unequivocal public communication 
                   towards the commercial banks regarding 
                   lowering the interest rate on RON denominated 
                   loans. 
                   On 12(th) September Romania borrowed 
                   EUR 1.5bn in a 7Y Eurobond. Investors' 
                   appetite for RON denominated government 
                   securities improved also in the second 
                   half of September. Fitch Ratings affirmed 
                   the country rating at BBB- and its current 
                   outlook. 
                   BULGARIA 
                   As reported in the half year financial 
                   statements, the government continues 
                   to work under the daily pressure of large 
                   protests which started on 14(th) June. 
                   The Government has amended the budget 
                   for 2013 by increasing the deficit by 
                   BGN 500 million to 2.0% of GDP and permitting 
                   the Government to issue BGN 1 billion 
                   of additional government debt. This has 
                   been necessary because the full year 
                   forecast GDP is reduced to 1%, lower 
                   tax revenues (BGN 555 m) through weaker 
                   domestic demand. 
                   GDP expanded 0.2% in quarter 2 compared 
                   to the same quarter in 2012 and decreased 
                   0.1% compared to quarter 1, representing 
                   virtual stagnation. Unemployment declined 
                   by 0.9% to 12.9% in the second quarter 
                   because of seasonal activities in agriculture, 
                   tourism and trade. Industrial Production 
                   decreased 2.4% in August compared to 
                   the same month in 2012 and represented 
                   the sixth straight month of declining 
                   numbers. 
                   Exports declined approximately BGN 70 
                   m between July and August to BGN 3,909 
                   million. In August imports declined BGN 
                   760 million between July and August to 
                   BGN 3,664 million. 
                   Inflation in September was -1.6%, declining 
                   further from the -0.7% recorded in August 
                   driven largely by base effects in energy 
                   and administered prices. This was the 
                   lowest rate in the EU. 
                   General government debt, including government 
                   guaranteed debt, amounted to 17% 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. 
        Property  Romania 
 Market Overview   No notable transactions were reported 
                   in the second quarter of 2013. NEPI was 
                   again one of the most active investor 
                   securing several sites and announcing 
                   further development plans following additional 
                   capital raising. Separately it is noted 
                   that the successful float of the Global 
                   Growth real estate fund launched by Ioanis 
                   Papalekas on AIM with a total raised 
                   amount of approximately EUR 53.6 m was 
                   on the base of a Romanian investment 
                   property portfolio. 
                   Office 
                   Only two medium sized office buildings 
                   totalling 7,800 sqm completed in quarter 
                   2 which took the office supply completed 
                   in the first half of the year to approximately 
                   80,000 sqm and the total modern office 
                   stock in Bucharest to an estimated 2.04 
                   million sqm, with class A stock accounting 
                   for 51%. Several projects are expected 
                   to complete during the second half of 
                   the year with Floreasca Park (37,500 
                   sqm) probably the most advanced. 
                   The overall vacancy rate for Bucharest 
                   is estimated to be 15.66%. This represents 
                   a slight quarter-on-quarter decrease 
                   of 22 basis points. The highest vacancy 
                   rates were recorded in the northern locations 
                   such as Baneasa and Pipera North, both 
                   with vacancy rates exceeding 35%. 
                   Prime headline rent remained unchanged 
                   over the last 12 months at EUR18.00 to 
                   EUR18.50 per sqm per month. Over the 
                   last quarter, a generous increase of 
                   the incentive packages, in both rent 
                   free periods and fit out contributions, 
                   was noticed. These are applicable to 
                   lease requirements exceeding 2,000-3,000 
                   sqm for existing buildings where previously 
                   it would have been applicable to larger 
                   pre-leases. 
                   In quarter 2 the total gross take-up 
                   reached 59,000 sqm in 45 contracts with 
                   new demand generating 49% of the quarter 
                   leasing activity and 35% represented 
                   by lease renewals. By geography, Pipera 
                   North attracted 32% of the gross takeup 
                   activity, followed by Center North and 
                   CBD locations with 27% each. By industry 
                   IT&C, FMCG and automotive related companies 
                   generated 37% of the total leasing activity. 
                   The total leasing activity in the first 
                   half of the year reached 123,000 sqm 
                   which is similar to the total area leased 
                   in the same period in 2012. 
                   In the second half of the year project 
                   pipeline has been revised down to 40,000-50,000 
                   sqm. The pipeline for the next two years, 
                   2014-2015, is estimated by Jones Lang 
                   LaSalle at between 180,000 - 200,000 
                   sqm with some projects expected to be 
                   completed in 2014 but, due to the large 
                   volume, delivery may easily slip into 
                   2015. In addition, a couple of phased 
                   business parks may start construction 
                   works or their additional phases by the 
                   year end, based on pre-leasing activity. 
                   In this case, the current pipeline can 
                   be extended by circa 30,000 sqm. Take-up 
                   is forecast to remain at the level recorded 
                   in the last couple of years. 
                   Retail 
                   No modern shopping centre was delivered 
                   in Romania during quarter 2 and therefore 
                   the modern shopping centre stock remains 
                   unchanged at an estimated 850,000 sqm 
                   in Bucharest and at 1.5 million sqm for 
                   the rest of the country. In Bucharest, 
                   the most notable addition will be in 
                   October with the opening of the 35,000 
                   sqm Calea Floreasca, which is currently 
                   more than 80% pre-let. 
                   As mentioned in the half year financial 
                   statements for the Company, Kingfisher 
                   acquired the 15 unit Bricostore business. 
                   Kingfisher plans to increase the network 
                   to 50 stores in the medium term, most 
                   probably through another acquisition 
                   on the local DIY market. 
                   Retailers remain cautious in expanding 
                   their networks and focus mainly on prime 
                   projects. Mass market retailers who are 
                   already present in most of the well performing 
                   shopping centres in the country are starting 
                   to assess the new retail projects, but 
                   the conditions they are prepared to offer 
                   make it difficult to justify new developments. 
                   Rent for both prime shopping centres 
                   and prime high street units remains at 
                   EUR55-65/sqm/month. The highest rents 
                   are achieved in Baneasa Shopping City 
                   and AFI Palace Cotroceni which are considered 
                   the two most dominant retail schemes 
                   in Romania. Rental decreases were reported 
                   in the old city centre, as the location 
                   has lost some of its initial attraction 
                   and became more of a mass market destination. 
                   Residential 
                   Two major developments are moving this 
                   segment of the market. First the banks 
                   have become more aggressive in their 
                   liquidation process of both foreclosed 
                   residential units in old communist apartment 
                   buildings as well as the bulk sale of 
                   distressed new developments in various 
                   stages of completion. Secondly a significant 
                   shift was recorded this summer with the 
                   cancellation of the Prima Casa, the Government 
                   backed mortgage lending scheme. The Government 
                   in close cooperation with the Central 
                   Bank has stopped the backing of EUR denominated 
                   lending scheme and replaced it instead 
                   with a new format where it supports a 
                   RON denominated programme. This measure 
                   together with the decision of the largest 
                   commercial bank, BCR, (20% of the market 
                   by assets) to only finance RON denominated 
                   mortgages is putting significant pressure 
                   on the current market prices. 
                   Despite this, transaction volumes have 
                   stabilized to fairly low levels suggesting 
                   a reluctance of sellers who are not pressured 
                   to dispose of their assets, to adjust 
                   to further price decreases. 
                   Bulgaria 
                   Retail 
                   The Strand Bourgas (30,500 sqm) opened 
                   to the public in July. Its opening puts 
                   Bourgas on top of Bulgaria's city rankings 
                   for shopping space per capita with 468 
                   sqm per 1,000 residents. Three other 
                   projects in Sofia are currently under 
                   construction and will provide an additional 
                   120,000 sqm. 
                   With the opening of all these malls the 
                   average lettable area per 1,000 inhabitants 
                   for Bulgaria will increase to approximately 
                   120 sqm compared to 250 sqm for Europe 
                   as a whole (Colliers International, Retail 
                   Real Estate Marker Overview) and 200 
                   sqm for CEE. Presently the gross leasable 
                   area of all the operational shopping 
                   malls is about 735,000 sqm and the GLA 
                   per 1,000 residents is 101 sqm. 
                   As developers try to lure consumers to 
                   locations in Sofia's periphery, prospective 
                   tenants recognise their bargaining position 
                   and as a result prime rents for new leases 
                   were down 11% from quarter 2 to EUR24 
                   per sqm per month. Underperformance and 
                   store closures are to be blamed for a 
                   similar decline of rents outside Sofia. 
                   In the country's second-tier markets 
                   prime shops in the 100-150 sqm range 
                   are expected to lease for between EUR16 
                   and EUR18 per sqm. But lack of transactional 
                   evidence and elevated vacancies in most 
                   cities suggest even these rates may prove 
                   unsustainable. 
                   The investment market remained stagnant, 
                   the only transaction in the retail sector 
                   was an investor acquisition Panorama 
                   Mall in Pleven with 17,000sqm lettable 
                   area through a distressed public sale. 
                   The deal was concluded at a value considerably 
                   lower than the total development cost 
                   and below the bank debt. 
     Development  Cascade 
        Projects   Currently the building is fully leased 
         Romania   generating positive cash flow after meeting 
                   all its financial obligations from an 
                   operational and banking point of view. 
                   All financial obligations are up to date 
                   with no collection delays on the revenues 
                   side. 
                   With the completion of the leasing process 
                   the JV partner has managed to position 
                   the building as one of the prime office 
                   products on 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. 
                   Oradea and Iasi Shopping Centres 
                   Following the notice for repayment issued 
                   by the Company with respect to the investments 
                   in both Oradea and Iasi, the Manager 
                   is currently in advanced negotiations 
                   over a possible structuring of the repayment. 
                   Further to the Cypriot crisis as reported 
                   in the last shareholder update, the loan 
                   situation with the banking loan syndicate 
                   for both Iasi and Oradea is still pending 
                   a resolution with regards to both the 
                   main development loan in Iasi and additional 
                   tenant fit out contributions pending 
                   release in Oradea. It is expected that 
                   the current situation will continue for 
                   the foreseeable future until a solution 
                   is found for the current loan book of 
                   the Bank of Cyprus Romania. 
                   Argo Real Estate Opportunities Fund (AREOF) 
                   Proton Bank has served a termination 
                   notice to AREOF for its EUR 28.5 million 
                   loan. As a consequence AREOF's shares 
                   have been suspended from trading pending 
                   further clarification of the current 
                   situation. The AREOF representatives 
                   are in continuous negotiation with the 
                   Bank to find a suitable resolution. 
                   An additional threat had been presented 
                   to AREOF by the announcement made by 
                   NEPI of negotiations for the purchase 
                   of part of the Volksbank's debt in another 
                   shopping centre owned by the company 
                   in Romania, Sibiu Shopping City. However, 
                   this threat has since been diminished 
                   as it is unlikely NEPI will be able to 
                   acquire the whole debt. AREOF are in 
                   advanced restructure talks with its banks 
                   in Sibiu. 
                   The Manager will continue to monitor 
                   the restructuring process. 
                   Oradea Shopping Centre 
                   ERA Oradea continues to increase traffic 
                   each month recording a 20% increase in 
                   traffic for July year on year. Carrefour 
                   reported a 2.5% increase in sales year 
                   on year for July. 
                   LEMS, a large furniture tenant, signed 
                   a lease for 2,100 sqm of space and opened 
                   in September. A lease for 3,000 sqm was 
                   signed with Stockhouse, the sister company 
                   of Leonardo. The intention is to open 
                   a discount unit selling, clothes, food 
                   and electronics based upon a similar 
                   format of a German discount retailer 
                   Kik. In addition, they will open a 470 
                   sqm furniture store Studio Blue and will 
                   change the current Leonardo outlet back 
                   to a full Leonardo store. This is a significant 
                   boost in the letting activity. Competition 
                   for tenants remains fierce between the 
                   three other shopping centres in the city, 
                   resulting in very low rents. With Auchan 
                   taking over Real's unit across the road, 
                   there is likely be a decline in traffic 
                   in quarter 4 but the issue has been somewhat 
                   mitigated with the new tenants. 
                   Iasi Shopping Centre 
                   Monthly traffic remains consistently 
                   lower year on year, down 16% for July, 
                   due mainly to the retail competition 
                   within the city. July traffic is slightly 
                   higher than June due to returning migrant 
                   workers. The major road improvement works 
                   throughout the city increased journey 
                   times and reduced the number of people 
                   willing to drive to ERA. These works 
                   are progressing slowly, but on completion 
                   should improve the situation. The summers 
                   marketing activities and promotions have 
                   been successful with a third of tenants 
                   reporting year on year sales improvements 
                   in July. Marketing activities and expenditure 
                   are very focused on offers, giveaways 
                   and promotions and clearly are well received 
                   by customers. This marketing activity 
                   will have to be maintained over the next 
                   12 months to ensure increased traffic 
                   levels. 
                   Sprider closed their store in May and 
                   were replaced by a discount fashion tenant, 
                   San Francisco. San Francisco opened in 
                   early August and initial sales have been 
                   very encouraging. Lettings to Tiffany 
                   (tailors 98 sqm), Dry Cleaners (98 sqm), 
                   Schneider (fashion 129 sqm), Divanissimi 
                   (furniture 284 sqm) are open and trading. 
                   Several negotiations are ongoing with 
                   local retailers for small units. 
     Development  Plovdiv 
        Projects   In quarter 3, occupancy levels declined 
        Bulgaria   by 10% to 64% of the GLA and finding 
                   new tenants continues to be challenging, 
                   requiring the injection of new funds 
                   to pay fitting out contributions. At 
                   the beginning of quarter 3 the interim 
                   contract with the international leasing 
                   consultant was extended by a further 
                   two months but will not be renewed because 
                   of lack of support by one of the partners 
                   in the project. The shareholders provided 
                   very limited temporary funding to support 
                   the international consultant during July 
                   and August. 
                   In line with the strategy, the initial 
                   negotiations with several international 
                   tenants continued but did not materially 
                   progress beyond what has previously been 
                   reported. Conclusion and execution of 
                   lease deals continue to be predicated 
                   on the availability of funding for fitting-out 
                   contributions. 
                   The discussions with the bank to restructure 
                   the banking facility were resumed in 
                   quarter 3 and the management of the company 
                   and shareholder representatives held 
                   a couple of meetings with the Bank, at 
                   which it was agreed that a new restructuring 
                   proposal would be presented. The executive 
                   director of the development company led 
                   the negotiations with the bank and they 
                   are ongoing, a satisfactory conclusion 
                   has yet to be reached. 
                   As reported at the end of the quarter 
                   2 the centre manager left the project 
                   and the shareholders appointed the technical 
                   manager to temporarily carry out the 
                   day to day activities. The Mall still 
                   has operational deficit on a monthly 
                   basis and has been unable to meet all 
                   of its operational obligations from the 
                   collected rental and service charge income. 
                   This has led to increasing overdue payments 
                   to service providers and the fiscal authorities. 
                   Unless the restructuring is resolved 
                   quickly and fresh cash made available 
                   to cover operational needs, the company 
                   faces serious liquidity problems which 
                   threaten its operations. 
                   Mega Mall Rousse 
                   During quarter 3 occupancy dropped from 
                   56% to 51% due to closing of two fashion 
                   operators, the kids centre, and an insurance 
                   office. As reported, the management team 
                   immediately started initial talks with 
                   prospect tenants in order to secure adequate 
                   replacements. As at the end of quarter 
                   3 2013 a lease agreement with a bank 
                   was signed and the tenant opened in mid-August. 
                   The management team is completing the 
                   negotiations with a new kid's centre 
                   operator and a café. Despite the 
                   partial success in replacing tenants, 
                   leasing is still proving to be extremely 
                   difficult and as previously reported, 
                   is highly dependent upon the provision 
                   of fit-out contributions. 
                   As previously reported the Bank has initiated 
                   a series of aggressive actions and defaulted 
                   the entire facility, payable with effect 
                   from the end of April 2013. Further, 
                   during quarter 3, the Bank transferred 
                   the loan to its branch in London. The 
                   Manager and partner have tried to hold 
                   a number of meetings with the Bank to 
                   discuss restructuring the loan facility 
                   but no satisfactory results have been 
                   achieved. The Project continues to face 
                   liquidity problems and whilst our partner 
                   has provided some short term liquidity, 
                   if a restructuring plan is not achieved 
                   soon it is highly likely that key service 
                   providers may stop the supply. 
                   Trade Centre Sliven 
                   As previously announced, there has been 
                   no change in the position regarding the 
                   development itself and the Manager is 
                   discussing with the partner how best 
                   to take the development of the site forward. 
                   All options are being considered including 
                   an exit from the development and splitting 
                   the assets between the shareholders. 
                   Bourgas Retail Park 
                   There has been no further progress made 
                   with this site as it is very much linked 
                   to the developments in Plovdiv. 
 
                    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 
 
 
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