Shareholder Update

 

TIDMECPC 
 
RNS Number : 4379V 
European Convergence Property CoPLC 
02 November 2010 
 

02 November 2010 
 
                    European Convergence Property Company plc 
                            ("ECPC" OR "THE COMPANY") 
 
 
          Shareholder Update from 1st July 2010 to 30th September 2010 
 
 
European Convergence Property Company plc (The "Company" Or "ECPC") 
 
The purpose of this document is to update shareholders with new developments 
since the Company's last report dated 6 August 2010.  This update should be read 
in conjunction with all prior reports, which provides commentary on the 
historical evolution of the Company's business, and the associated detailed 
background information. 
 
This Shareholder Update only deals with Bulgaria as it remains the only country 
to which the Company has operating asset exposure. 
 
Market Overview 
 
In the third quarter the Bulgarian economy continued to struggle for recovery 
though some macro economic indicators showed a slightly improved position.  On 
the positive side, unemployment continued its downward trend and registered a 
sixth consecutive month of decline falling from a peak of 10.3% in February to 
9.1% in August.  Exports have gradually increased recording EUR8.34 billion in 
July 2010 against EUR6.45 billion for the same period in 2009.  The negative trend 
for GDP growth from 2009 continued into Q1 (3.2%) and Q2 (1.4%) 2010 though the 
downward trend appears to be flattening out.  The FDI continued to decline 
during the first four months of the year representing only 2.1% of GDP (5.8% of 
GDP 2009). 
 
The Government's finances compare favourably to most European countries.  In the 
first eight months of the year Bulgaria generated a budget deficit of 2.3% of 
GDP.  Government debt stood at approximately 16.3% of GDP in August and foreign 
currency reserves were over 44% of GDP. 
 
Meanwhile, preliminary figures from the Bulgarian National Statistical Institute 
(NSI) indicate that retail sales continue to slow.  For the first five months of 
the year wholesale and retail sales were 12.4% down year on year.  Whilst food 
sales were basically static, sales of consumer electronics, furniture and cars 
were considerably lower. 
 
Bulgaria - Retail Property 
 
Modern retail floor space increased 96% in the first half of 2010 (Cushman & 
Wakefield) and retailers' interest to participate in the new malls remains low. 
The location, quality of construction and fit out of a mall are no longer the 
prime criteria for tenants, instead it appears that small local tenants are 
becoming more focused on a mall's tenant mix and higher occupancy levels.  The 
majority of new shopping centres to be opened outside Sofia are suffering from 
high vacancy levels which will see some new malls opening with less than 50% 
occupancy.  This reflects a growing level of concern by tenants over both the 
retail market and the increased risk of the developer completion default. 
 
Brokers reported 30% decreases in rent levels in Sofia in Q2, and declines of 
between 43% and 50% in other cities across the country.  This downward pressure 
on rental levels appears to have continued in Q3.  The increased supply of 
retail space, on top of the continued fall in overall consumer consumption and 
general market weakness has strengthened the retailers' negotiating position and 
has led to downward pressure on rents.  Landlords are having to use more 
imaginative ways to retain tenants or induce them to take space with the 
introduction of stepped rents, longer rent-free periods, turnover rent only 
periods and landlords' fit-out contributions, or a combination of these being 
much more prevalent.  There is also evidence that tenants are cancelling signed 
lease contracts and refusing to open the leased premises and pay rent which is 
causing considerable delay when trying to open premises for the public. 
 
Rents and capital values are not expected to recover in the near term and it is 
very difficult to see an end to the current market until sentiment changes 
significantly. 
 
Mall Veliko Turnovo 
 
Asset Overview 
 
The Company's one remaining property asset is a wholly owned interest in a 
single shopping centre, Mall Veliko Turnovo ('MVT') in central Bulgaria. 
 
MVT continued to face the extremely demanding retail trading environment and 
provide tenant support by offering further rental concessions in order to 
maintain acceptable levels of occupancy, which further decreased the rental 
income during the quarter.  The continuation of this policy of support is 
anticipated to continue into next year. 
 
The Manager has employed King Sturge and another international consultant to 
undertake a full review of the shopping centre with the overall goal of 
returning the Mall to profitability, enhancing asset value and improving 
tenant/customer perceptions.  It will be achieved through the development of 
commercial strategies to increase secondary income, improve tenant mix and brand 
enhancement, consistent with the real market opportunities and technical 
feasibility of the building.  The aim is to retain existing and attract new 
quality tenants, thereby improving footfall and income. 
 
At the end of September 2010 net occupancy levels were at c91% or 14,447 sqm of 
the total lettable space, a slight reduction on Q2. 
 
The Mall is currently trading reasonably well in this very difficult market, 
though the impact on the cash flow following the tenant support strategy has had 
its affect.  The Mall is currently cash flow negative and the Manager does not 
anticipate the Mall returning to positive cashflow until 2011 especially as 
tenants are also having difficulty meeting reduced rental obligations.  The 
Manager is in discussion with the bank over the various initiatives it is taking 
in an attempt to turn the operation around. 
 
The difficult trading conditions are likely to have a negative impact on the 
value of the asset.  The Manager will undertake a full property valuation at the 
year end. 
 
General Fund Matters 
 
In July 2010 the Bulgarian tax authorities issued an assessment against European 
Convergence Property Company Bulgaria EOOD for withholding tax on interest 
accrued in the Accounts payable to its parent.  The company appealed to the 
Higher Tax Office against the assessment and was informed on the 13 September 
that the Higher Tax Office had upheld the original assessment.  The company is 
currently appealing this decision in the Administrative Court. 
 
The tax audit report covering the years from 2006 to 2008 was issued by the 
Revenue Authorities and handed to ECPC Bulgaria on 20 September 2010, which 
stated that for the audited period ECPC Bulgaria has to pay EUR135K withholding 
tax and EUR47K in penalties.  An objection against the Tax audit report was 
prepared by KPMG and submitted to the Revenue Authorities on 1 October 2010. 
 
If the Appeal fails and the 2009 accounts are included, the total assessment, 
including penalties, is expected to be in the region of EUR219K. 
 
 
 
This information is provided by RNS 
            The company news service from the London Stock Exchange 
   END 
 
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