ECDC Eur.Conv.Dev

TIDMECDC

RNS Number : 6726A

European Convergence Develop. CoPLC

04 February 2011

04 February 2011

EuroPean convergence development company plc

("ECDC" OR "THE COMPANY")

Shareholder Update: 1st October 2010 to 31st December 2010

The purpose of this document is to update shareholders with new developments since the Company's last shareholder update report in November 2010. This latest update covers the developments during the fourth 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. This update does not deal with the Financial Report and Accounts of the business as these are subject to the Annual Audit process. Investors should be aware that the continued deterioration in the market, downward pressure on rents and therefore reductions in capital values will probably result in further impairment having to be taken on an asset by asset basis as part of the year end review by the Company and its auditors.

Romania

Economic Overview

The unpopular austerity measures introduced since the middle of last year have resulted in a number of no confidence votes against the Government, the latest being at the end of October, which the Government have so far survived.

The EUR20 billion support package agreed with the IMF and the European Commission remains on track, but disbursement of new funds have been delayed until Romanian authorities approve the new unitary wage law for public sector employees, the new pension law and the budget plan for 2011. It is believed that the latest tranche of funds from the IMF and EC will be made available early in February. The IMF has also approved an additional stand-by agreement of EUR3.6 billion which will be available to be drawn-down by the Romanian government should the economic situation deteriorate further.

Inflation increased to 8% year on year at the end of December. Increased food prices appear to be the main driver of inflation and will remain the main risk of curbing further increases in inflation over the forthcoming months.

Real GDP fell in the third quarter of 2010 by 0.7% quarter on quarter. Though disappointing this contraction was lower than many market analysts had expected. Moreover, most of the key indicators in Quarter 3 were on the positive side thereby reducing the chances for a further contraction in real GDP in Quarter 4 2010. The Quarter 4 real GDP position is now expected to be close to zero or possibly slightly positive. The full year GDP forecasts for 2010 currently vary between -1% and -3%.

The benchmark interest rate remained unchanged at 6.25% at the last monetary policy meeting at the beginning of November. Short-term inter bank rates continued to trade below the benchmark helped by excess liquidity in the market. However longer term rates are considerably higher to reflect the higher risk premium as investors wait to see what happens to both the Government and the economy.

The Government was successful in refinancing all maturing government securities in the last few months and has maintained a strong control over the public budget deficit which at the end of October was 4.6%.

Romanian Real Estate Market

Residential Property

Market activity in the residential market continues to be very slow. This is seen at all levels from the development of new product to the volume of sales of finished units. This is driven mainly by elements such as: pressures on pricing deriving from high construction costs or high land prices for the units already finished, or the uncertainties related to the general macroeconomic developments on short and medium term which impact significantly on consumer confidence.

New completions and the supply of new product in Bucharest were again at very low levels. The number of completions in the first half of 2010 was less than 1,000 units and the number of residential building permits applied for declined further indicating a shortage in the pipeline should the market return in the short term. This restricted pipeline was further tightened as the number of new starts and development loans granted to developers remained minimal. The existing product on the market is generally considered to be out of line with what individuals are looking for in both size and price of apartments. Therefore sales have remained depressed.

The mortgage market continues to be the main driver for purchases and 97% of all mortgages granted are foreign currency mortgages, opening up purchasers to further foreign exchange risk. There appears to be no real improvement in the market as the increased requirements imposed by lenders act as a block to freeing up funds. The only area that has seen growth is in the affordable housing sector where the Government is underwriting mortgage loans up to EUR80,000 through its "First Home" program.

Residential prices have continued their downward spiral with an 8th consecutive quarter on quarter reduction and now stand at a level comparable to Quarter 3 2007. However, even these low prices have not caused a significant increase in the number of people looking to acquire a property. It is highly likely that conditions will remain challenging for the remainder of 2011.

Office Market

The third quarter of 2010 has seen very low transaction levels even compared with the first 6 months of the year with only EUR10 million worth of deals announced compared with almost EUR200 million in the first half of the year. Quarter 4 opened more brightly with the first major transaction between two of the most experienced international players on the market. As reported in the local media, the cEUR100 million disposal of the Floreasca 169 Business Centre by Portland Trust to the Investment Fund NEPI was concluded. NEPI has built up a significant portfolio of income generating properties over the past few years. There does appear to have been an increase in activity shown by property investors active on the CEE markets with some very good opportunities being offered.

Prime yields have remained stable since the last update with levels of around 8.50% to 8.75% for offices and 8.50% to 9.00% for retail properties, though it will be interesting to see if the pickup in transactions has a favourable impact on the investment yield.

In Quarter 3 2010 prime office headline rents decreased to around EUR19 per sqm per month and landlords are continuing to offer significant tenant incentives. The level of incentives offered to tenants increased significantly in decentralised submarkets, reaching as high as 9 months' rent free. These incentives appear to have had an effect on the market as there has been an overall decrease in the overall vacancy rate to around 17.3% at the end of the third quarter. However, this is expected to be a short term benefit as over 100,000 sqm of new space was expected to be released onto the market in Quarter 4 2010, mainly in decentralised areas. This new space will increase the vacancy rate in the City to around 20% though levels are considerably lower in the central area.

Retail Property

There is continuing interest being shown by international and local retailers to expand their operations in Romania. The main demand is coming from the hypermarket chains and discounters such as Cora, Auchan, Kaufland, and Lidl, whilst within the fashion retailers H&M, Decathlon, Inditex, New Yorker, Takko and Deichmann have expressed a desire to expand throughout the country.

Retail stock increased marginally during Quarter 3 2010 with the opening of a 10,000 sqm store operated by Cocor which brought the total supply in Bucharest to 590,000 sqm. Countrywide modern retail supply reached approximately 1.4 million sqm.

With few representative openings or projects announced, rental levels achieved by prime shopping centres have stabilised or, in some cases, even registered a small increase. Average prime shopping centre rents range from EUR60 to EUR80 per sqm per month compared with EUR60 to EUR75 per sqm per month in the second quarter.

Larger schemes such as the Maritimo Shopping Centre Palas in Iasi or Oradea Shopping City have confirmed intentions to open in 2012. Retail demand has increased and diversified in the first 9 months of the year and the process is expected to continue over the next 6-12 months. The main focus for the vast majority of retailers will be on Bucharest and selected secondary cities.

Bulgaria

Economic Overview

The fourth quarter information on the Bulgarian economy indicated a continuation of the improvements from previous quarters. Not all indicators were positive but the latest forecast by the IMF indicates GDP growth for 2010 should be between 0% and 0.4%, however the IMF did warn that the economy relies on only one engine for growth: exports.

Exports gradually increased recording EUR12.70 billion in October 2010 against EUR9.65 billion for the same period in 2009. After a negative GDP growth in Quarter 1 2010, the GDP rose by 0.5% quarter on quarter (seasonally adjusted data) during Quarter 2 and further increased in Quarter 3 to 1%. However, FDI continued to decline during the first ten months of the year representing only 2.3% of GDP as opposed to 7.2% of GDP in 2009. Unemployment continued its downward trend and registered an eighth consecutive month of decline, falling from a peak of 10.3% in February to 8.9% in October.

The Government's finances continue to compare favourably to most European countries. In the first ten months of the year Bulgaria generated a budget deficit of 2.6% of GDP. In October Government debt stood at approximately 16.2% of GDP and foreign currency reserves were over 44% of GDP.

Meanwhile, retail sees no respite to the downward trend. Preliminary figures issued by the Bulgarian National Statistical Institute (NSI) indicate that in November turnover in the retail trade, calculated based on calendar adjusted data, decreased by 5.2% compared to the same month last year.

Bulgarian Retail Property

Modern retail floor space continued to increase during the period. In provincial cities, four retail centres partially or fully opened to the public but suffered from high vacancy levels.

Brokers report that in Quarter 3 2010 there was an annual rent decrease of approximately 25% compared with the third quarter of 2009. Although conditions in the retail market continue to be generally unstable there is evidence of a slight stabilisation and a resurgence of retailers' interest in opportunities is expected in the near future. Brokers further report that the mid-term outlook for the sector is positive for Sofia and slowly improving for the larger provincial cities. The previously reported introduction of stepped rents, longer rent-free periods, turnover rent only periods and landlords' fit-out contributions or a combination of these are still prevalent. Rent collection is generally proving problematic.

Rents and capital values are not expected to recover in the near term and it is difficult to see a change to the current market conditions until there is a significant change in sentiment.

Romanian Assets

Asmita Gardens

By the end of December, 321 apartment sales had completed and another 51 units were pre-contracted out of a total of 758 apartments. Phase 1 is complete and 92% occupied.

To prevent damage to the fabric of the building and water pipes etc during the winter months, the management of the development SPV decided to undertake the necessary testing and commissioning of the Phase 2 towers as the contractor, Strabag were refusing to undertake the works which were part of their construction contract. All Phase 2 buyers were advised that the work was to be undertaken and offered a replacement apartment in Phase 1. As a result, of the original 114 pre-contracted units in Phase 2, 42 units have been transferred to Phase 1. This transfer together with new contracts signed during the year took the total occupancy of Phase 1 to 92%. Of the sales in Phase 1, 89% of the contracts have been completed and the balance represents remaining pre-contracts which need to complete. New sales continue to be very slow due to the adverse market conditions and ongoing dispute with Strabag.

A total of 27 apartments were contracted during 2010. A breakdown of those sales illustrates the poor mortgage market that existed in Bucharest during 2010. Of the 27 sales, 8 apartments were cash sales and 19 were sold using the rent to buy product that was set up at the beginning of 2010.

Strabag's suspension notice, effective since the 21st March 2010 is still in place and no additional works have been carried out since that date. The dispute with Strabag is ongoing though discussions are continuing with a view to finding a reasonable solution for all sides.

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 a project management and architecture company and an IT services multinational, for a total of c. 2,000 sqm, at a competitive rental level. These changes together with BROM's commitment on their amended lease ensure the building is c. 80% let and rent producing. This level of leases also ensures that the debt can be fully serviced from the cash flow derived from rent and service changes.

The shareholders have secured an additional EUR 2 million financing that was already committed to the project, and also reached agreement with their bankers in Romania on the amended terms of the facility which is expected to be signed in early February. A full announcement will be made when the transaction has completed.

Baneasa

The carrying value of this asset has previously been fully impaired and the shareholders in the JV Company have jointly decided to terminate the agreement with the Bank.

Iasi and Oradea Shopping Centres

In both centres trade has increased significantly when compared with previous quarters and when compared to 2009. The increase can be seen in both number of visitors and turnover of the retailers. In line with the improved trading, the rent collection levels remain at secure levels.

At Oradea, construction continued and the secondary structure and roof have been installed. The bank facility is operational enabling the developer to continue the works in line with its schedule.

At Iasi the main event of the period was represented by the opening of the Decathlon store, which had a positive impact on the footfall of the centre and enhances the overall offering to the public. The bank facility is approved pending signature by all the parties involved. The obtaining of an amended building permit is currently in progress and the final re-designs and plans are being evaluated.

Bulgarian Assets

Galleria Plovdiv

During the period, the Company's management team has continued to deal with multiple operational and funding issues as well as with the letting of vacant units. Unfortunately the lease process has continued to be slower than the Manager's previous expectations. At the end of Quarter 4 2010 approximately 58% of the GLA was let and open.

The delay in signing tenants and the use of temporary rental concessions during the period have further worsened the liquidity position of Galleria Plovdiv. To address the immediate liquidity needs, the Company has completed negotiations with the Bank for a temporary restructuring of the debt facility and received shareholders funding of EUR0.3 million to meet operational costs. ECDC contributed EUR0.1 million along with the two other shareholders. As stated above this is a temporary restructuring to enable shareholders and its bankers to solve the ongoing liquidity issues brought about by delays in leasing up retail space and the continuing need to grant rental concessions. At present the Company's bankers are being very supportive. In addition, the shareholders have employed an international consultancy to undertake a leasing strategy review of the shopping centre.

Mega Mall Rousse

Following the soft opening in December 2010, the shopping centre has enjoyed high public interest and footfall which has boosted retailers' interest for the full opening during the Spring of 2011 when 75% occupancy is expected. To support the Project until full opening, the Company has started negotiations with the Bank for restructuring of the credit facility to enable the Company to make use of considerable savings achieved during the construction phase. The shareholders have supported the Company by providing additional funding, of which ECDC has invested a further EUR0.25 million.

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.

This information is provided by RNS

The company news service from the London Stock Exchange

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