ECDC Eur.Conv.Dev

TIDMECDC

RNS Number : 1286H

European Convergence Develop. CoPLC

24 May 2011

24 May 2011

EuroPean convergence development company plc

("ECDC" OR "THE COMPANY")

Shareholder Update: 1st January 2011 to 31st March 2011

The purpose of this document is to update shareholders with new developments since the Company's last shareholder update report in February. This latest update covers the developments during the first quarter of 2011 and should be read in conjunction with all prior reports, which provide commentary on the historical evolution of the Company's business, and not a report on the financial status of the Company.

Economic Overview

Romania

Economic activity stabilised during Q1 2011 and there were some small signs of recovery. GDP growth for the first quarter is estimated to be between 0.0% and 0.5% against 0.2% for the last quarter of 2010. The full year out turn GDP for 2010 was -1.3% and for 2011 is being at 1.5%.

Though the economy appears to have absorbed the majority of the austerity measures introduced during 2010, there has not been a significant pick up in consumption. The various measures taken by the Government in 2010 appear to have had the desired affect on the Budget Deficit with a -1.0% deficit registered in Q1 2011 compared to an out turn deficit for 2010 of -7.3%. The full year forecast for 2011 is for a deficit of -5.4%. Similar to many countries in the world, inflation remained high, at approximately 8% March 2011 mainly due to increased food and fuel prices. Inflation is expected to rise by a further 0.5% before starting to decrease to a year end figure closer to 5.5%.

The International Monetary Fund approved a new EUR3.5 billion Stand-By Arrangement for Romania as part of the EUR20 billion financing package initiated in early 2009. Romanian authorities intend to retain this additional facility along with previous undrawn amounts of EUR2.4 billion in reserve with the intention of holding these funds for the next two years to meet any unforeseen problems.

At the last monetary policy meeting at the end of March the benchmark interest rate remained unchanged at 6.25%. As part of the Central Bank's actions to curb inflation it allowed the RON to appreciate against the EUR which has improved over 3% since February. To improve liquidity in the market the Government reduced the minimum reserve requirements for foreign exchange denominated financing from 25% to 20%. It is estimated that this action improved market liquidity by approximately EUR1.0 billion.

Bulgaria

First quarter statistics indicate a continuation of the improvements in previous quarters. The key indicators such as GDP growth and export volumes improved while unemployment decreased. Overall the economy improved, though it is probably too early to talk about a sustained recovery.

In December exports were EUR 15.6 billion, an increase of EUR3.8 billion year-on-year. There has been a continual improvement in GDP performance since Q1 2010 and a full year out turn for 2010 of +0.2%, the similar figure for 2009 was -5.0%. This performance for 2010 was in part a result of 3.2% growth in the last quarter. The major concern for the economy is the continued decline in FDI which was 4.5% of GDP for 2010, a decline of 5% over the previous year.

Unemployment peaked in February 2010 at 10.3% but declined month on month to end the year at 9.2%. Some seasonal factors resulted in unemployment increasing to 9.8% in January and remaining at this level in February.

The Government's finances continue to compare favourably to most European countries. At the end of 2010 Bulgaria generated a budget deficit of 3.9% of GDP, Government debt stood at approximately 15.5% of GDP and foreign currency reserves were over 44% of GDP.

Real Estate Market

Romania

Residential Property

The residential market showed no sign of improvement throughout the whole of 2010. The existing stock is difficult to sell due to both high price expectations per sqm and apartments larger than the market is demanding. The combination of both these factors render the apartments too expensive for the local buyer.

Prices are estimated to have declined by a further 10% during 2010. This decline was accelerated by the increase in VAT rates from 19% to 24% introduced as part of the Governments austerity measures, Most of the VAT increase has had to be absorbed by developers.

Developers are still reluctant to start new projects due to the low numbers of transactions being achieved and a continued reluctance of commercial banks to start financing residential schemes. As a result, virtually no new development projects have been started.

The old communist apartments remained the most active sector with most apartments falling under the Government backed lending programme "First Home". This programme has entered its third year with a changed structure intended to increase the number of individuals who would qualify for the product.

Prices are still under pressure from the limited mortgage funding available, other than for the product guaranteed by the State. Customers also remain reluctant to apply for mortgages until there is a change in the economic environment which will lead to a change in sentiment.

Office Market

For Q4 2010 prime office headline rents remained in the range of EUR19 m(2) per month, although significant tenant incentives such as free rent periods or fit out contributions continued to be offered by landlords. In 2010 prime rents decreased by an average of 10.5% compared to the same period in 2009. The overall vacancy rate in Bucharest stands at 17.5% but it should be noted that there are considerable differences in availability within different submarkets for example, central prime property vacancy was closer to 10%.

Modern office supply in Bucharest reached 1.8 million m(2) , with over 280,000 m(2) delivered in 2010; out of which 85,000 m(2) represent owner occupied developments. In 2010 the new office take-up reached 203,000 m(2) .

Investor interest remains on a positive trend but failed to convert into a significant increases in transactions. During Q1 2011 deal volumes amounted to approximately EUR200 million the largest part of which was represented by the takeover of the regional Romanian portfolio of Europolis by CA Immo. The main interest is still shown by opportunity funds and value added investors, both have a high return target which prevents very aggressive purchase bids. It is expected that continuing economic recovery, decreasing product availability and improving pricing in more mature CEE markets, will move core investors towards Romania and Bulgaria in the later part of 2011 and the beginning of 2012. Prime yields are estimated to have contracted by 25 bps over the period with prime offices currently valued between 8% to 8.25% and retail at 8.25% to 8.50%.

Retail Property

Demand for retail space continues to be fuelled by international operators. Some of the largest European retailers such as H&M, Inditex and Decathlon are aggressively trying to secure new locations for new stores mainly in cities with over 150,000 inhabitants. Fashion discounters such as Takko and Deichman are also expanding their networks, but mostly in smaller cities where there is limited competition. One notable change in Q4 was the renewed interest from certain electronics retailers which were severely hit by the crisis.

No additional retail stock was delivered in Bucharest during the second part of 2010. Country wide the modern retail supply reached 1.4 million m(2) , with the only notable delivery of Gold Plaza in Baia Mare. In total, 2010 completions reached 150,000 m(2) with the most important opening being Sun Plaza with more than 80,000 m(2) in Q1 2010.

Rental levels in prime centres stabilised or slightly increased due to growing retail sales. The level of prime rents in Bucharest is in the region of EUR65-80 m(2) per month. Rent free periods and fit-out contributions are still a key driver in the leasing process of less dominant shopping centres. Pipeline for 2011 consists of around 250,000 m(2) GLA spread over a number of shopping centres across the country.

Bulgaria

Retail Property

The general drop in consumer spending which continued into 2011 has led to reduced retail sales and retailers continue to be extremely cautious on expanding. The larger international brands are still delaying expansion plans whilst the local and smaller operators are more focused on optimising costs. Tenants continue to be more aggressive in lease negotiations, insisting on rent reductions and/or moving to turnover rent only.

However some brokers are starting to see some positive signs and report expectations of an upswing in almost all real estate segments during the second half of the year. There is also greater expectation of increased investment activity in 2011.

Investment in the retail sector remains subdued though there has been some limited interest in prime assets, mainly in Sofia with one transaction about to be completed at a reported yield below 9%. Retail Park Plovdiv was also purchased in February 2011 by Europa Capital at a price which reflected a yield of just over 10%.

Development Projects

Romanian Assets

Asmita Gardens

At the end of March, 314 apartment sales were completed and 42 units were pre-sold out of a total of 758 apartments. Phase 1 is complete and 92% occupied.

In March Asmita was successful in its appeal against Strabag's executory title over outstanding invoices which resulted in all existing blocks on the company's accounts and assets being removed. Strabag is still refusing to undertake its contractual obligations to provide the necessary testing and commissioning of utilities for Phase 2. The legal dispute with the general contractor is ongoing and until that is resolved it is unlikely the out standing works will be completed.

As of 31st March site operations were suspended whilst negotiations with the lending bank on how best to restructure the facility, which is in default, and enable a timely and efficient continuation of the development.

Cascade

Following the agreement reached with BROM and the signing of their amended lease agreement the building is currently 81% let.

The renegotiation of the loan facility with the banking syndicate was agreed and signed at the beginning of March with the injection of EUR2.0 million of mezzanine finance. The existing signed rent roll ensures that the company can meet the current obligations under the financing agreements

All existing tenants are either operating or fitting out their leased areas. The rental level and conditions are within the parameters of the estimated budget

Baneasa

There have been no significant developments in this project since the last shareholders report.

Iasi and Oradea Shopping Centres

In both centres trade was in line with the Company's estimates, after the December holiday season. Footfall has increased compared with the similar period in 2010 which is reflected in increased turnover of the retailers.

Both loan facilities are currently under re-negotiation, with the Iasi facility approved by the lenders and awaiting formalisation.

Bulgarian Assets

Galleria Plovdiv

As stated in the last report, the leasing process continues to take longer than previously thought. At the end of Q1 2011 approximately 61% of the GLA was let and open. Some retailers, having signed leases are still delaying opening of their units. As a result the forecast for unit openings has been slowed down. It remains extremely difficult to attract and secure new tenants for the unlet space because of the general economic and market sentiment. Lease renegotiations with Carrefour were completed satisfactorily.

The company is seeking to appoint a professional property management company to take over the day to day operations of the Mall. The company has commenced a tender process and has invited a number of highly reputable, international firms to participate.

In January the shareholders jointly injected EUR300,000 of additional equity to meet the ongoing operational expenses of the business unable to be met by the rent and service charges. This additional equity also gave time to enable negotiations on restructuring of the main banking facility to continue.

Mega Mall Rousse

Following the soft opening in December 2010, high public interest, positive local PR and high footfall have boosted retailer interest in the development and resulted in an increase in enquiries and negotiations with potential retailers. At the end of March the ground and first floors were 46% let (31% of the GLA) and include brands such as supermarket operator Piccadilly, drugstore chain DM, fashion stores Miss Sixty, Seven hill, Silvian Heach and a number of other popular national brands.

The Manager believes that with the opening of the entertainment section, the Mall should be around 60% let by the end the end of May.

The Manager has entered into negotiations with the lending bank to restructure the loan facility. To facilitate those negotiations the Board of ECDC agreed, as part of its contractual obligations to the Partner to invest a further EUR300,000 to meet short term operational costs of the Mall. At present the facility is in default though the Manager is hopeful that a satisfactory solution will be found in the near future.

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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