Shareholder Update
November 02 2010 - 5:02AM
UK Regulatory
TIDMECDC
RNS Number : 4380V
European Convergence Develop. CoPLC
02 November 2010
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| | 02 November 2010 |
| | EuroPean convergence development company plc |
| | ("ECDC" OR "THE COMPANY") |
| | |
| | |
| | Shareholder Update: 01st July 2010 to 30th September 2010 |
| | |
| | The purpose of this document is to update shareholders with |
| | new developments since the Company's last shareholder update |
| | report in August 2010. This latest update covers the |
| | developments during the third 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. |
| | |
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| | Bulgaria |
| | 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. In August |
| | Government debt stood at approximately 16.3% of GDP 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 the mall are no longer |
| | the prime criteria for tenants, instead it appears that small |
| | local tenants are now 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 Q210 |
| | 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. 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 and |
| | uncertainty when trying to open premises to 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 conditions until sentiment changes |
| | significantly. |
| | |
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| | Bulgarian Assets |
| | Galleria Plovdiv |
| | Following the soft opening of Galleria Plovdiv in April, the |
| | management team has continued with its strategy of dealing |
| | with snagging issues on an ongoing basis. The team has also |
| | continued to let vacant units but unfortunately not at the |
| | speed originally anticipated. At the end of Q3 approximately |
| | 50% of the GLA has been let. The delay in attracting tenants |
| | is a direct result of the market conditions mentioned above |
| | rather than the Mall itself. The continued deterioration in |
| | market conditions is resulting in the Manager having to |
| | readjust its expectations on the speed of take up of space. |
| | It is also becoming evident that even though certain tenants |
| | have a desire to open in Plovdiv they have insufficient |
| | capital/budget in this financial year to open new stores. |
| | |
| | The end of the summer has brought more urgency from |
| | prospective tenants to complete negotiations and start |
| | fitting-out in time to capture the Christmas trade. The |
| | management anticipates further openings during Q4 from |
| | international fashion brands and some electronic retailers and |
| | is currently in advanced negotiations with other prospective |
| | tenants which should ensure that the Mall is between 70% and |
| | 75% let by the end of the calendar year. |
| | |
| | The delay in signing tenants and the use of temporary rental |
| | concessions during the difficult trading months of June to |
| | September have had a detrimental effect on the liquidity of |
| | Galleria Plovdiv. The Company is in detailed negotiations with |
| | the senior lender, which continues to be supportive of the |
| | project about the terms of the current facility and the |
| | provision of some additional liquidity to entice tenants to |
| | take space and meet operational cash flow requirements until |
| | sufficient tenants are signed up. Tenant incentives will |
| | normally take the form of a contribution towards their fitting |
| | out works. |
| | |
| | Mega Mall Rousse |
| | Rousse is a secondary city with a population of 170,000 and as |
| | such is suffering like all other cities from the general down |
| | turn in the retail market. Despite this the Mall is |
| | attracting an increasing amount of interest and visits from |
| | prospective tenants. The management team is pleased to |
| | announce that it has secured a key anchor tenant, an |
| | international drugstore. However current market sentiment is |
| | ensuring that every tenant is taking a significantly longer |
| | time to negotiate and decide on taking a lease |
| | |
| | The project is expected to complete in time to enable a soft |
| | opening in late November when it is expected that the road |
| | network will be completed. The management team is discussing |
| | various logistical issues around the soft opening of the Mall |
| | with a full opening in March 2011. Discussions are being held |
| | with the senior lender to ensure that it will accommodate the |
| | delay in opening. |
| | |
| | The management team is of the opinion that 75% occupancy is |
| | achievable for Spring 2011. |
| | |
| | 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. |
| | |
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| | Romania |
| | Market Overview |
| | |
| | In order to reduce the budget deficit the Government has, from |
| | 1st July implemented an austerity program. The key measures |
| | are: |
| | |
| | - 25% cut public sector wages; |
| | - Increase in value added tax from 19% to 24%; |
| | - 15% cut in social transfers (excluding pensions) by 15%; |
| | |
| | - 16% tax on deposit interest and luncheon tickets; |
| | - Reduction in public sector current expenses; |
| | - Reduction in public sector employees. |
| | |
| | The initial response to these measures was an immediate |
| | increase in inflation. At the end of September the rate had |
| | climbed from a pre measure rate of 4.4% to 7.8% year on year. |
| | This jump was greater than forecast mainly due to additional |
| | higher food prices. |
| | |
| | Economic activity slowed following the introduction of the |
| | austerity measures. Available indicators point to a |
| | substantial contraction in both the construction sector and |
| | household expenditure between July and August and a slowing |
| | down of industrial output. The current budget deficit stands |
| | at -4.2% of GDP, as of August 2010 and is forecasted to reach |
| | -7.2% by year end, compared with -7.4% last year. |
| | |
| | The unemployment rate remained stable at around 7.8%, with a |
| | forecasted increase to around 8.3% by year end. The FDI |
| | declined significantly in 2010 with a balance of EUR1.8 billion |
| | to July 2010, compared with EUR4.4 billion for the entire year |
| | 2009, and EUR9.3 billion for the entire year 2008. |
| | |
| | The last monetary policy meeting held on 29 September, kept |
| | the monetary policy rate unchanged at 6.25%. |
| | |
| | In September, Romania received another EUR885 million from the |
| | IMF and EUR1.15 billion from the European Commission as part of |
| | the external financing package agreed in 2009. To date, total |
| | funds received from the EC and IMF under the financing |
| | programme amount to EUR14.95 billion. EC released EUR3.65 billion |
| | out of the total agreed of EUR5 billion, while IMF instalments |
| | sum to EUR11.3 billion out of a total of EUR13.2 billion. Both the |
| | EC and IMF positively assessed the efforts undertaken to |
| | implement the fiscal consolidation measures, stressing also |
| | the necessity for the Government to continue the |
| | implementation of the reforms agreed in the context of the |
| | financing program. |
| | |
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| | Romanian Real Estate Market |
| | |
| | Residential Property |
| | The building and delivery of residential stock has virtually |
| | dried up over the past one and a half years. Despite the |
| | weakened demand and limited transactions towards the end of Q2 |
| | 2010, prices remained stable for the last 3 quarters. It is |
| | expected that there will be no material change in the current |
| | situation for the short term. |
| | |
| | The Government's austerity measures particularly the increase |
| | in VAT has had a direct affect on the affordability of new |
| | product as VAT is charged on new houses. |
| | |
| | The introduction of Government guarantees for mortgages to |
| | first time buyers has had a beneficial affect on the old |
| | communist apartment market. However, the harmonisation of the |
| | local legal regulations to the EU regulations has caused |
| | uncertainty in the mortgage lending market. The new rules |
| | resulted in a large number of borrowers requesting a decrease |
| | in their contracted lending margins. These actions, which are |
| | supported by the new regulations, are causing significant |
| | problems for the commercial banks, as this latest challenge is |
| | coming on top of the current write-downs and losses caused by |
| | the economic crisis. |
| | |
| | An improvement in housing demand is now not expected to be |
| | seen until the second half of 2011. |
| | |
| | Office Market |
| | Investment volumes increased to almost EUR200 million in the |
| | first half of 2010. This represented almost 3.2 times the |
| | sales in the same period in 2009. However, market observers |
| | are suggesting that this does not represent an end to the |
| | problems as most of the transactions were either intra-group |
| | or involved no cash, such as the disposal of a shopping centre |
| | in Oradea by the senior lender as part of an insolvency where |
| | no cash is reported to have changed hands. |
| | |
| | Prime yields are estimated to have contracted slightly over |
| | the period with prime Grade A offices currently valued at |
| | around 8.50% to 8.75% and retail at 8.50% to 9.00%. |
| | |
| | For Q2 2010 prime office headline rents remained in the range |
| | of EUR19-20 sqm/month, although significant tenant incentives |
| | such as free rent periods, fit out contributions, relocation |
| | costs including covered break penalties are increasingly |
| | offered by landlords. These incentives have had the effect of |
| | decreasing the headline rent by EUR1-2 sqm/month, while in |
| | decentralised locations the effect of these incentives may be |
| | as high as EUR2-3 sqm/month. The average vacancy rate increased |
| | to 19.8%, almost double the vacancy level recorded in H1 2009, |
| | though the majority is located in decentralised locations. |
| | |
| | Retail Property |
| | Bucharest's modern retail supply stands at 580,000 sqm, as of |
| | June 2010, including shopping centres and shopping galleries. |
| | Country wide modern retail supply reached 1.4 million sqm. |
| | |
| | In Q2 2010, two projects were re-launched, Colosseum, located |
| | in the north-western part of Bucharest, with the first phase |
| | consisting of a retail park of 55,000sqm and the 50,000sqm |
| | Polus Centre in Constanta. Both projects are scheduled for |
| | opening in 2011. The developers have been able to re-launch |
| | the developments because they have secured key anchor tenants. |
| | Colosseum has secured Carrefour and Leroy Merlin and the Polus |
| | Centre, Auchan. Demand in Bucharest remains focused on the |
| | best performing projects. Landlords are increasingly trying to |
| | optimise tenant mix to adapt to the current consumer demand |
| | requirements. |
| | |
| | Several international retailers such as H&M, Pure Fitness and |
| | Leroy Merlin have committed to Romania and plan to expand |
| | rapidly in Bucharest and nationwide. Rental levels continue to |
| | decrease even in the best performing shopping centres. In Q2 |
| | prime rents in Bucharest decreased to EUR60-70 sqm/month. 2011 |
| | pipeline has further decreased to 240,000sqm represented by 6 |
| | projects to be developed in Bucharest and 5 in secondary |
| | cities. |
| | |
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| | Romanian Assets |
| | Asmita Gardens |
| | By the end of September, 284 apartment sales were completed, |
| | and another 72 units pre-contracted out of a total of 758 |
| | apartments. Phase 1 is complete and almost fully occupied. |
| | Phase 2 testing and commissioning has stopped due to the |
| | refusal of the contractor to perform its obligations. |
| | |
| | All Phase 2 buyers have been advised of this and been offered |
| | Phase 1 apartments. As a result, out of the 114 pre-contracted |
| | units in Phase 2, 41 units have been changed to Phase 1. This |
| | transfer together with the new contracts signed during the |
| | year took the total occupancy of Phase 1 to 85%, with 77% of |
| | the contracts being completed sales and the balance remaining |
| | pre-contracts. New sales continue to be very slow due to the |
| | deepening crisis and adverse market conditions. |
| | |
| | Strabag's suspension notice, effective since the 21st March |
| | 2010 is still in place with no additional works carried out |
| | since that date. On 6th September Strabag obtained a judgment |
| | for unpaid invoices and the Manager is in negotiations in an |
| | attempt to find an amicable solution. Those discussions are |
| | ongoing. |
| | |
| | In recognition of the significant counterclaims that the |
| | Company has against Strabag, the Company called the on demand |
| | performance bond of Strabag. Strabag obtained an injunction |
| | against this action in the Austrian Courts which has remained |
| | in place following an appeal to the Vienna Court of Appeal. |
| | |
| | The Manager is also in negotiation with both the senior lender |
| | and the JV Partner on how best to restructure the facility |
| | which is technically in default to enable a timely and |
| | efficient work out of the development. |
| | |
| | Cascade |
| | During the period leases have been signed with Avon, Huawei |
| | and Poyry, for c. 3,750 sqm. The E.ON lease has been |
| | cancelled. These changes and the restructuring of the BROM |
| | lease (not signed as of 1st November) ensure the building is |
| | c. 66% let. |
| | |
| | The shareholders have reached agreement with their bankers on |
| | the restructuring of the facility which is expected to be |
| | signed in early November. |
| | |
| | Baneasa |
| | There have been no significant developments in this project |
| | since the last shareholders report. |
| | |
| | Iasi and Oradea Shopping Centres |
| | During September 2010 the investment in the two European |
| | Retail Park Projects located in Iasi and Oradea were finalised |
| | and the capital deployed. The investment was made jointly with |
| | another fund managed by the Manager. |
| | |
| | Bank facilities for both projects have been approved with |
| | Oradea already implemented and operational. The Iasi facility |
| | is expected to be formalised and signed in the next two weeks. |
| | |
| | Construction on the main shopping centre has already started |
| | in Oradea and the Decathlon store in Iasi is underway. |
| | |
| | In accordance with the previously stated policies, it is the |
| | intention of the Board to review, with its auditors the |
| | carrying value of all its investments at the year end. |
| | |
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This information is provided by RNS
The company news service from the London Stock Exchange
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