ECDC Eur.Conv.Dev

 

TIDMECDC 
 
RNS Number : 9864Q 
European Convergence Develop. CoPLC 
12 August 2010 
 

12 August 2010 
 
                  EuroPean convergence development company plc 
                            ("ECDC" OR "THE COMPANY") 
 
                Shareholder Update: 01 March 2010 to 30 June 2010 
 
The purpose of this document is to update shareholders with new developments 
since the Company's last shareholder update report in May 2010. This latest 
update covers the developments during the second quarter of 2010, but should be 
read in conjunction with all prior reports, which provide commentary on the 
historical evolution of the Company's business, and the associated detailed 
background information. 
 
Bulgaria 
 
Economic Update 
The economy remained in a difficult state with mixed macroeconomic signals. On 
the negative side preliminary data indicate that the GDP has contracted 3.6% in 
Q1 2010 and FDI continued to decline during the first four months of the year 
representing only 0.7% of GDP (3.9% of GDP 2009). On the positive side, 
unemployment continued its downward trend and registered a third consecutive 
month of decline falling from a peak of 10.3% in February to 9.5% in May. 
Exports have gradually increased recording EUR 4.18 billion in April 2010 against 
EUR 3.5 billion for the same period in 2009. 
 
The government's finances compare favourably to other European countries. In the 
first five months of the year Bulgaria generated a budget deficit of 2% of GDP. 
Government debt stood at approximately 16% of GDP in May and foreign currency 
reserves were over 38% of GDP. 
 
Meanwhile, preliminary figures from the Bulgarian National Statistical Institute 
(NSI) indicated 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 
Against ? backdrop of difficult market conditions, four large mall schemes with 
total Gross Lettable Area (GLA) of over 200,000 sqm have opened during the first 
half of the year: Serdika Centre (50,000 sqm) and The Mall (66,000 sqm) both in 
Sofia, Galleria Plovdiv (50,000 sqm) in Plovdiv, and Grand Mall Varna (50,000 
sqm) in Varna. A further 6 to 7 shopping centres are expected to open by the end 
of the year. Consequently, 2010 is set to be a record year in terms of shopping 
centre development. 
 
Large and established international brands like P&C from Germany and the Inditex 
brands from Spain have entered the market by opening their first stores in the 
new developments in Sofia. However, these brands tend to be extremely cautious 
preferring to wait and see how they perform before choosing their next expansion 
move. 
 
Occupier demand is mainly driven by these international brands which are seeking 
significant discounts on rents. Coupled with the increased supply of retail 
space and the existence of further space in progress has lead to further 
downward pressure on rents, shortening of lease contract length, rent 
concessions like step rents, longer rent-free periods, and turnover rents, as 
well as landlord fit-out contributions. In Q1 2010 prime shopping centre rents 
were down around 12.5% on the quarter and regional centres declines were 
greater. 
 
The retail investment market has come to a virtual standstill with no 
significant retail transactions recorded in the first six months of the year. 
Distressed vendors continue to lower their prices but there is a general 
reluctance to buy. Shopping Centre yields saw a 100 basis point reduction in Q1 
2010 to stand at 9.5%. 
 
Rents and capital values are not expected to recover in the near term and little 
real recovery expected until H2 2011. 
 
Bulgarian Assets 
 
Galleria Plovdiv 
Following the Carrefour led soft opening in April 2010, 26 retailers 
representing c. 4,000 sqm (8.4% of total retail GLA) opened shops by the end of 
June, increasing total commercialization at the end of June to 37%. This figure 
is below the Managers' previous expectations and reflects the general difficult 
retail trading environment existing in Bulgaria. At the end of June a further 32 
tenants representing c. 11,500 sqm (c. 25% of total retail GLA) have signed 
contracts and are expected to fit out and open their units by the end of 
September. Advance negotiations continue with several other prospective tenants 
which the Manager expects will result in the Mall being over 70% let by the end 
of September. It is likely that the successful conclusion of these negotiations 
will entail the provision of fit-out contributions, for which additional funding 
may be necessary. 
 
The low levels of occupancy and the temporary rental concessions provided to 
retailers because the Mall has not let up as quickly as originally envisaged has 
created short term liquidity issues which may necessitate restructuring of some 
of the terms with the financing bank and key service providers. The increase in 
occupancy shall contribute positively to the income stream and overcoming any 
temporary difficulties. 
 
As a result of the delay in tenants taking over their space and fitting out 
their units it has been decide to move the official opening back to the end of 
September. 
 
The Manager is also talking to a local subsidiary of an unrelated UK company to 
develop and execute secondary income streams which will ultimately benefit the 
shareholders. It is intended that this opportunity will be outsourced and the 
costs of operating this business stream will be allocated over ECDC's two 
shopping malls and another Mall managed by the Manager. This will ensure that 
the maximum benefit is obtained. 
 
Mega Mall Rousse 
Opening of the Mall is presently scheduled for early November this year. This 
delay is partially down to problems in getting the road network completed for 
the opening and the difficult market conditions that exist in secondary cities 
in Bulgaria. 
 
It is now apparent that the other retail developments in Rousse have either been 
put on hold or their opening has being delayed to 2011. This is creating an 
opportunity for the operator and recent interest shown by retailers in this 
project has resulted in advance lease negotiations with several key fashion 
retailers and entertainment anchors. 
 
The Manager's expectation is that on opening the Mall will be around 75% leased. 
 
Bourgas Retail Park & Trade Centre Sliven 
 
There has been no further progress made on these developments since there has 
been no marked improvement in either the Banking or Retail market conditions. 
 
Romania 
 
Political & Economic Update 
In order to comply with the terms of the EUR20 billion financial support package 
from the IMF, European Union, World Bank and European Bank to reduce the budget 
deficit, the government has had to take certain radical measures. An austerity 
program was introduced at the start of July. The key measures of this austerity 
program are: 
 
a)         a cut of 25% in wages within the public sector, 
b)         an increase in value added tax (VAT) from 19% to 24%, 
c)         a cut in social transfers (excluding pensions) by 15%, 
d)         a tax of 16% on interest on deposits and luncheon tickets, 
e)         a cut in current expenses with goods and services in the public 
sector, 
f)          redundancies in the public sector. 
 
Initially, the government planned to reduce pensions by 15% but the measure was 
rejected by the Constitutional Court and it was replaced by the increase in VAT. 
 
Given these measures inflation is forecast to increase from an estimated 4% to 
around 8%-8.5%. The monetary policy is expected to tighten up by potential 
increases in the RON reference inter-bank rates, and by a strict liquidity 
control of the central bank. 
 
The short term indicators suggest that economic activity has most likely 
improved in the second quarter as compared with the first quarter. The potential 
quarterly GDP growth rate could be close to 0%-0.5% quarter on quarter in Q2 
2010. However, the austerity measures are forecast to have a negative impact on 
real disposable income and consumption in Q3 2010 and Q4 2010. Given these 
circumstances, the expected GDP growth projection for 2010 varies depending on 
sources, at anywhere between 1.5% to 3% contraction. 
 
Romanian Real Estate Market 
 
Residential Property 
In line with the slight pickup in economic activity during Q2 2010, there has 
been an increase in buyer interest levels for the purchase of residential 
property. The basic parameters remain the same with low bank financing 
available, low appetite for contracting loans from the buyer side and developers 
holding out at what seem to be bottom of the market prices. 
 
The Government-launched mortgage support program has been in place since 2009, 
whereby there was a EUR 600 million take-up of the EUR 1 billion allocated. For 2010 
the Government allocated a EUR 700 million package, and this is producing 
liquidity but at the lower pricing levels of the residential market. 
 
During the reporting period there have been a number of insolvencies and 
foreclosure procedures on a small number of large scale projects and developers. 
This will have a limited impact, in the short term, as very few of these 
projects were completed and ready for delivery. The concern will be if the Banks 
decide to dispose of these assets at low levels which will give the new owners a 
pricing advantage. 
 
Office Market 
Investors continue to be cautious due to the lack of activity within the local 
market. There have only been three deals signed in the year so far; GTC 
increased its share in the City Gate and City Gate Bucharest projects by 15%, 
estimated at EUR9.8 million. NEPI exercised its resale option on a small office 
property and Cinema City bought a small office building for approximately EUR1.4 
million. This lack of activity is due to well performing buildings being held by 
stable, non-distressed owners. The lack of transactional evidence makes it 
difficult to forecast prime yields but these are estimated to be around 8.5% to 
8.75 
 
Romanian Assets 
 
Asmita Gardens 
Asmita Gardens is a residential development of 758 apartments, being delivered 
in seven tower blocks in two phases. As at 30 April 2010 the following position 
was reported: 
 
?   Phase 1: 324 apartments. Certified: 'TOC'-'Take-over Certificate' - right to 
occupy - issued on 
 7 October 2009, and; 
?   Phase 2: 434 apartments. Certified: TOC issued on 11 March 2010 
 
The number of completed sales to June 30th 2010 were as follows: 
 
?   Of the 269 sales (83%) agreed in Phase 1, 245 have legally completed, and in 
Phase 2, 19 units have completed of the 96 agreed sales (22%). A number of 
clients have chosen to relocate between the 2 phases, bringing the Company 
closer to achieving the target of having a fully sold and occupied Phase 1. 
?   The project's profile has been improved by the signing of a SPA & Gym 
operator for 1,500 sqm, as part of the available commercial space on the ground 
floor levels. 
 
The Manager has worked with the sales team of the Developer to introduce a 
number of initiatives which appear to have been well received by the market. 
Since the initiative a total of 16 units were sold up to June 2010 at prices in 
line with market levels for a quality residential development. 
 
As mentioned in the last report announced on the 13th May 2010 Strabag Srl had 
issued a notice of suspension of work which was effective from 21st March, 2010. 
The contractor has since also filed for a fast track Civil Court procedure for 
enforcing the outstanding payments which was heard on 10th August 2010. 
 
In recognition of the significant counterclaims that the Developer has against 
Strabag, the Developer took legal advice and called the performance bond of 
Strabag.  Strabag obtained an injunction against this action in the Austrian 
Courts. An appeal has been filed and an oral hearing was held in Vienna on July 
28. The Austrian Court backed its initial decision and kept the injunction in 
place. Following this decision ECDC is currently evaluating its position. 
 
The Developer has also commenced proceedings for a damages claim in the Romanian 
Court of Arbitration, which was submitted at the end of July 2010; at the time 
of the publication of this report the Court has not submitted any rulings in 
relation to this action. 
 
The financing bank is currently supportive of the Developer's action, and has 
approved an additional working capital budget meant to cover the projects short 
term running costs. 
 
Cascade 
On 1st March 2010 the Fire Brigade certified the building fit for occupancy 
enabling tenants to commence fitting out of their respective leased space. 
 
The previously agreed leases to Banca Romaneasca and its two subsidiaries are 
currently being renegotiated which, if concluded, should result in the Cascade 
building being 65% let. The Company is also renegotiating its bank facility in 
the direction of obtaining an effective 12 month grace period on the repayment 
of capital which will significantly support the cash flow of the Company. 
 
Due to the late take up of space by the current tenants the project is currently 
requiring additional short term financing. Negotiations are currently underway 
with the lead bank to find a resolution to this short term funding gap. 
 
Interest in the building is high with a significant number of good quality 
tenant enquiries which should lead to a satisfactory lease up of the project by 
year end. 
 
Baneasa 
There have been no significant developments in this project since the last 
shareholders report. 
 
The Manager and the Partner are continuing discussions with the Bank to identify 
potential ways of taking the project forward on a profitable basis. 
 
Interim Results 
 
The Company's interim results for the six month period ending 30 June 2010 are 
expected to be announced in September. 
 
Further update announcements will be made to the market as appropriate. 
 
 
This information is provided by RNS 
            The company news service from the London Stock Exchange 
   END 
 
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