ECDC Eur.Conv.Dev

TIDMECDC

RNS Number : 8664L

European Convergence Develop. CoPLC

05 August 2011

05 August 2011

EuroPean convergence development company plc

("ECDC" OR "THE COMPANY")

Shareholder Update: 1st April 2011 to 30th June 2011

The purpose of this document is to update shareholders with new developments since the Company's last shareholder update report in May. This latest update covers the developments during the second 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 improved in the first quarter of 2011 with a positive 0.7% increase in GDP compared to the 0.1% growth recorded in the last quarter of 2010. GDP growth in Quarter 1 was up 1.6% on the same period in 2010. The major driver for this improvement was a 10.1% improvement in the industrial sector. Exports showed strong growth, up 23.6% year on year whilst imports were up 15.4%. The IMF has estimated full year growth will be closer to 1.5% for 2011 and 3.7% for 2012.

Unemployment was 5.92% at the end of the first quarter of 2011 representing a 2.47% year on year improvement. Available data suggest consumption increased slowly in Quarter 2 2011.

Along with declining FDI, inflation still remains the major challenge for the authorities having increased steadily since the beginning of 2011. In March inflation was at 7.6% and in June it had increased further to 8.4%, its highest rate since August 2008. At the beginning of May, the central bank revised the full year out turn inflation rate to 5.1% from its previous forecast of 3.6%. FDI fell in 2010 over 25% year on year to EUR2.59 billion, a seven year low.

Interest rates have remained unchanged all year at 6.25% and there is no expectation that the Central Bank will increase rates further during 2011.

Technical missions from both the IMF and the European Commission gave a positive assessment on the policies pursued by Romanian authorities in Quarter 1. The reports stated that the Government had succeeded in keeping the budget deficit at March 2011 below the agreed target and it had made progress in reducing public sector arrears. The reports went on to say that the prospects for the achievement of the full year budget deficit target were good. The key targets to be met in 2011 and 2012 are:

-- cut of the budget deficit to 4.4% of GDP in 2011 and to 3% in 2012;

-- cut of losses in state owned companies by restructuring, privatisation or liquidation;

-- increase the efficiency of public sector spending and;

-- improve the collection of tax revenues.

The consolidated budget deficit, on a cash basis for Quarter 1 amounted to RON 5.2 bn or 1% of the Government's annual GDP projection. The figure was below the target agreed with the IMF.

Greek banks represent approximately 20% of the Romanian banking sector and the continuation of the banking crisis in Greece is likely to lead to a reduction of liquidity in the market which may have a dampening effect on the macro economic growth prospects for the country.

Bulgaria

Second quarter statistics indicate a continuation of the improvements in previous quarters, key indicators such as export volumes and unemployment improved though it is probably too early to talk about a sustained recovery.

Quarter on quarter, GDP growth in Quarter 1 was 0.6% positive, up from the 0.5% recorded in Quarter 4 2010 and the fourth continuous quarter of positive GDP growth. However, Quarter 1 results were less than the 2010 average quarterly growth figure because of very weak public and private consumption. At the end of March the full year GDP growth figure was 1.5% positive and Ernst & Young recently forecast an out turn GDP growth figure for 2011 of 3.2% with further improvement to 4.7% in 2012 and 5.6% in 2013. Although Bulgaria is on the path to recovery it still remains one of the region's worst performers as a result of tight credit conditions.

In the period January to March exports grew by 20.1% year on year against a much more moderate increase of 8.6% in imports. Exports to the European Union grew by 56.4% in the first three months of the year and by 52% in the month of March compared to the same period in 2010.

The major concern for the economy is the continued decline in FDI. Indeed, since global liquidity evaporated, FDI inflows plunged from 30% of GDP in 2007 to just 4.5% of GDP in 2010. There was a small net outflow in Quarter 1 2011. Given limited global appetite for risk, it is unlikely that FDI inflows will approach pre-crisis levels again for some time. Further tightening following an uncoordinated Greek debt restructuring would delay any recovery of FDI, in turn holding back the recovery.

After peaking in February 2010 at 10.3%, unemployment declined to 8.9% in May 2011, 0.4% lower than April and the first time unemployment has fallen below 9.0% since October 2010.

The Government's finances continue to compare favourably to most European countries. At the end of April, Bulgaria generated a budget deficit of less than 1% of GDP and Government debt stood at approximately 15.3% of GDP.

Real Estate Market

Romania

Residential Property

The two year economic decline between 2009 and 2010 combined with severe pay cuts in the public sector and the previously reported VAT increase has caused a further correction in the Romanian property market. At the end of April 2011 average prices in Bucharest showed a 12.7% year on year decline and are now approximately 50% below their March 2008 peak

There is still limited new residential construction activity taking place by developers in Bucharest. In official statistics, the trend in construction orders has been further decreasing. It can be expected that 2010 figures will be lower than in 2009. Though up to date information is not available, applications for building permits fell 40% in early 2009 and are expected to show further declines in 2010.

Demand has not returned to a decent level in spite of the fact that prices on Bucharest's primary residential market continued to decrease. One reason is that the offer of new apartments has not adjusted to meet current market demand.

The residential market remains a buyer's market with further pressure being exerted by purchasers requesting further discounts. In the first quarter of 2011 prices are estimated to have declined 4% against the last quarter of 2010. There is some evidence that demand for mortgage loans turned slightly positive in Quarter 4 2010 though the majority of the improvement is thought to come from the Government's First House Product. However the Government have reduced the amount available under the programme from a total of c. EUR700 million to c. EUR200 million. The latest version, the fourth iteration of the programme has the effect of increasing the number of potential applicants however it is still remaining focused on the smaller, lower end of the market and not the mid- to upper segment.

Office Market

Investor interest remains on a positive trend, but still no significant transactions have been registered in the market. Total investment volume was around EUR200 million however the largest part of this figure was the closing of the CA Imo acquisition started in 2010. The active buyers remain the Value Add and Opportunistic buyers who cannot find what they are looking for in other CEE countries. It is forecast that by the end of 2011 the more traditional core buyer may be attracted to Bucharest because of frustrations over pricing and product availability in Warsaw and Prague. Prime yields are estimated to have remained constant in quarter 1 with prime offices currently valued at around 8.00% to 8.25%.

For the first half of 2011, prime office headline rents remain in the range of EUR19 sqm/month and are expected to remain stable for the remainder of 2011. A moderate increase in rental values may occur in the first half of 2012 as the effects of an historically low delivery of new product, 106,000 sqm forecast for 2011 and a potential take up of 200,000 to 220,000 sqm has an effect on vacancy rates. Take up activity in Quarter 1 was 5.5% up on the same period last year and 66.5% up on Quarter 4 2010. Rental increases are likely to be witnessed only at the prime end of the spectrum but a weakening of the tenant position may only materialise in less generous packages of rent free periods and contributions to tenants fitting out works being offered. The overall vacancy rate dropped to 16.1% but is already starting to edge downwards and will continue to do so bearing in mind the increase in take up and the development pipeline.

Retail Property

Demand remains steady and continues to be focused primarily on the existing shopping centres and on the large projects under construction which have a relatively clear opening date. The retail market gained momentum by the opening of the first three H&M stores in Romania with a target to open a further five during the year. Luxury brands are also assessing the market, with Burberry announcing the opening in 2011 of their flagship store on Calea Victoriei.

No significant new projects were delivered onto the market in Quarter 1 2011. The estimate is that 9 new retail projects will open in 2011. The largest and most notable projects to be delivered in 2011 include: Maritimo Shopping Centre in Constanta, Palas in Iasi, Colosseum Retail Park and Baneasa Shopping City's extension in Bucharest.

Rental levels are now stabilising and consolidating. Prime shopping centre rents range between EUR65 and EUR75 m2/month. Fit-out contributions, stepped rents or even initial turnover-only rent periods are still a key driver in the leasing process of less dominant shopping centres. The toughest deals are achieved by international retailers which act as anchor tenants for both existing and under construction retail schemes.

Bulgaria

Retail Property

The general drop in consumer spending which continued into Quarter 2 2011 has led to reduced retail sales and retailers continue to be extremely cautious on expansion. Tenants continue to be more aggressive in lease negotiations, insisting on rent reductions and/or moving to turnover rent only. On a yearly basis, shopping centre headline rents have recorded a decrease of almost 23% against the levels of Quarter 1 2010 which, in reality will be higher after allowing for rental concessions and rent free periods.

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. After being on hold for 2 years, development activity in Sofia started with the construction of two schemes with a Gross Lettable Area (GLA) of 33,000 sqm and 24,000 sqm and there is the expectation of a third project of 72,000 sqm located on the ring road about to commence construction works.

Bulgaria has risen above both Greece and Ukraine in Cushman & Wakefield's "Shopping Center GLA per capita" ranking with approximately 73.4 sqm of shopping centre floor space per 1,000 people but is still well below the EU-27 average of 235.4 sqm.

Development Projects

Romanian Assets

Asmita Gardens

In the second quarter of 2011 no additional apartments were sold in either Phase 1 or 2.

Legal proceedings against the contractor are continuing both in local and international courts. At the current stage of these proceedings it is very difficult to advance an estimate of the likely outcome.

Site operations continue to be suspended due to current negotiations between the JV partner and the senior lender for unlocking short term funding of the project and then resolving the position with the main contractor.

Negotiation with both the senior lender and the JV Partner are continuing on how best to restructure the facility which is technically in default, with a view to securing and implementing a medium term financing package which will facilitate a work out of the development.

In the 2010 Annual Report and Accounts the Directors of the Company decided to fully impair its investment in Asmita and any improvement in the position is only likely to take place if the restructuring package is successful.

Cascade

The building is currently 80% let with the latest tenant, Banca Romaneasca fitting-out their occupied space with a view to starting operations in the building from the 1st August 2011. All existing tenants are under final lease contracts and save for Banca Romaneasca, are all currently operating in the building. The rent level and conditions are within the parameters of the estimated budget. There is significant additional interest for the remaining unlet space although the pressure on rental level is maintained.

The arbitration case with the steel subcontractor was lost introducing an additional liability on the budget of the development. Negotiations are currently ongoing on both the value and the timing of the payment. This arbitration award has resulted in the Bank taking precipitous action of putting the loan into technical default and discussions are ongoing between the Bank and the sub-contractor to find an acceptable solution.

Negotiations on nearly all of the remaining construction contracts have been closed, with favourable results compared with the budgeted settlement amounts.

Baneasa

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

ERA Shopping Centre - Oradea

Phase 1a, atrium space between the Carrefour Mall and the new extension, has been completed and the major tenant Spreader (1,800 sqm) has opened for trade. There have been three other smaller units let during the quarter, two of whom are fitting out.

Negotiations continue with prospective tenants for the Mall extension and early indications are that the lower level, and Mobexpert will be able to open in time for the Christmas trade, dependent upon the resolution of the restructuring of the banking facility. Construction is ongoing but minimal at present.

Negotiations with the lead bank are progressing and a resolution is expected in Quarter 3.

Footfall has increased year on year when compared with the similar period in 2010. The increase can be seen in both number of visitors and turnover of the retailers.

As previously mentioned the leasing market continues to be difficult, with retailers taking a defensive approach in undertaking significant fit-out costs, given the current slow pick-up in general consumption.

Shopping Centre - Oradea

The building permit for the new Mall was obtained during the quarter and negotiations continue with the various sub-contractors ready to progress the construction once the restructuring of the banking facility has been achieved.

The Manager understands that the renegotiation of the banking facility is progressing smoothly and it is hoped it will be concluded in Quarter 3. Once concluded, the construction contracts can be signed and the development progressed quickly.

Initial indications are that overall footfall to the retail park has improved and Carrefour is stating that both sales turnover and footfall have increased over the previous quarter. It would appear that there has been some migration from the other store in the City as residents realise the convenience of shopping at ERA. This increased footfall has not fully impacted on the other tenants and the marketing efforts are now being directed towards encouraging shoppers to visit the other stores at the Park.

Bulgarian Assets

Galleria Plovdiv

As stated in the last report, the leasing process is proving extremely difficult. At the end of Quarter 2 approximately 59% of the GLA had been let and open, which was down from 2% on the previous quarter, as some retailers vacated their premises. It remains extremely difficult to attract and secure new tenants for the unlet space mainly because of the inability to offer tenants financial incentives. The general economic climate and market sentiment are additional issues to be faced in the letting process.

The low level of occupancy and the continuation of temporary rental concessions to tenants in compensation for the delay in letting up the Mall have resulted in further liquidity issues which add another level of difficulty in running the Mall.

The company is in negotiations with its bankers to renegotiate its banking facilities to more reflect the difficult market situation that exists at present. To date the bank has been supportive of the developers and there is currently no indication of a change in that approach.

Mega Mall Rousse

Retailer interest in the development is still high and negotiations with potential retailers indicate the Mall may reach sustainable occupancy of over 70% in time for the Christmas trade this year, subject to availability of tenants' incentives in the form of fit-out contributions.

During the second quarter an additional 3,000 sqm was added to the GLA of the Mall as part of the underground car park was set aside for a go karting ring. This has been successfully let and first trading impressions are very promising. The GLA has therefore been increased to 20,900 sqm. At the end of June 2011, total occupied space had increased to 8,670 sqm representing 41% of the increased GLA.

Due to delays in the negotiations of the Bank debt restructuring, the opening of the entertainment section has been postponed until the Autumn. At present the facility is in default though the Manager is hopeful that a satisfactory solution will be found in the near future.

Trade Centre Sliven

Agreement has been reached with the Partner to repay the outstanding loan and accrued interest over the remaining five months of this year.

There has been no further progress made on the development itself until there is a market improvement in both the Banking and Retail sector.

Bourgas Retail Park

There has been no further progress made with this development as there has been no marked improvement in either the Banking or Retail market.

Issued by Charlemagne Capital (UK) Limited, 39 St James's Street, London SW1A 1JD A company authorised and regulated by the Financial Services Authority

The information in this document is confidential and it should not be distributed or passed on, directly or indirectly, by the recipient to any other person without the prior written consent of Charlemagne Capital (UK) Limited. This document is not intended for public use or distribution.

Charlemagne Capital (UK) Limited does not guarantee the accuracy, adequacy or completeness of any information contained herein and is not responsible for any omissions or for the results obtained from such information. The information is indicative only and is for background purposes and is subject to material updating, revision, amendment and verification. All quoted returns are illustrative. No representation or warranty, express or implied, is made as to the matters stated in this document and no liability whatsoever is accepted by Charlemagne Capital (UK) Limited or any other person in relation thereto.

Investors in the Company should note that: past performance should not be seen as an indication of future performance; investments denominated in foreign currencies result in the risk of loss from currency movements as well as movements in the value, price or income derived from the investments themselves; and there are additional risks associated with investments (made directly or through investment vehicles which invest) in emerging or developing markets.

This document and shares in the Company shall not be distributed, offered or sold in any jurisdiction in which such distribution, offer or sale would be unlawful and until the requirements of such jurisdiction have been satisfied.

This document does not constitute an offer to sell or solicitation of an offer to buy shares in the Company and subscriptions for shares in the Company may only be made on the terms and subject to the conditions (and risk factors) contained in the prospectus of the Company. Potential investors should carefully read the prospectus of the Company which contains significant information needed to evaluate an investment in the Company. This document has not been approved by a competent supervisory authority and no supervisory authority has consented to the issue of this document.

The purchase of shares in the Company constitutes a high risk investment and investors may lose a substantial portion or even all of the money they invest in the Company. An investment in the Company is, therefore, suitable only for financially sophisticated investors who are capable of evaluating the risks and merits of such investment and who have sufficient resources to bear any loss that might result from such investment. If you are in any doubt about the contents of this document you should consult an independent financial adviser.

This information is provided by RNS

The company news service from the London Stock Exchange

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