Shareholder Update (0931R)
October 31 2011 - 3:00AM
UK Regulatory
TIDMECDC
RNS Number : 0931R
European Convergence Develop. CoPLC
31 October 2011
31 October 2011
EuroPean convergence development company plc
("ECDC" OR THE "COMPANY")
Shareholder Update: 1st July 2011 to 30th September 2011
The purpose of this document is to update shareholders with new developments
since the Company's last shareholder update report in August. This
latest update covers the developments during the third 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
is not a report on the financial status of the Company.
Economic Overview
Romania
On 4th July 2011, the rating agency Fitch upgraded Romania's credit
rating to investment grade for the first time in almost three years.
The country's credit rating was increased to "BBB-" (investment grade)
from "BB+" (non-investment grade). The rating outlook was set to "stable".
The Leu ("RON") appreciated 1.1% to 4.197 per Euro on the announcement
but has subsequently fallen back and is currently trading around 4.330
per Euro.
Recent data suggests that private consumption and investments have
stabilised at more sustainable levels whilst the correction in public
sector consumption is still underway. Real GDP growth rates have had
three consecutive quarters of positive news with the latest quarter
indicating a positive 0.2% quarter-on-quarter. This was down from the
0.7% increase in Quarter 1. Annualised GDP growth has remained static
at 0.3% for the first two quarters of 2011. Growth rates are at historically
low levels and paint a picture of a very gradual economic recovery
which may well stall if the country's main trading partners, Italy,
Germany and France, go into recession. Exports in August were EUR 3,870m,
indicating a marginal increase on July.
FDI in the first eight months to August amounted to c. EUR 1.1 billion,
with only EUR 20 million recorded in August which was down more than
80% year-on-year. The low level of inflows of foreign private capital
appears to be a major contributor to the slow pick up in consumption.
The annualised inflation rate fell by 0.8% in September, to a 20 year
record low of 3.45%. This reduction in inflation fuelled some optimism
that the National Bank of Romania's ("NBR") target rate for the end
of the year of 4.6% would be achieved. Interest rates remain on hold
at 6.25% and there is a possibility that once the 2012 budget has been
agreed with the IMF there may be a relaxation of interest rates and
other fiscal tightening measures employed by the Government. The rate
of unemployment rose again to 7.6% in Quarter 1. This was the fourth
consecutive quarter of rising unemployment.
The Finance Ministry easily refinanced RON denominated debt in June
and July and there is no doubt that the improvement in the rating influenced
the take up of long dated T bills in July. Yields for RON government
securities declined in both June and July.
Bulgaria
Annual GDP growth in Quarter 2 was 2% positive, up from the 1.5% increase
recorded in Quarter 1 2011, which represents the fifth consecutive
quarter of positive GDP growth. GDP on a quarterly basis expanded 0.3%
in Quarter 2 which was down on the 0.6% increase recorded in Quarter
1 but represents the sixth consecutive quarter-on-quarter growth. However
with the reliance on exports to drive the economy and also on the EU
as its major trading partner, the EU accounts for 60% of Bulgarian
exports. Most commentators including the Government are revising down
the full year out turn growth figures for 2011 and 2012 because of
the debt crisis in Europe. The Government has reduced its full year
forecasts from 3.6% to 2.8% for 2011 and from 4.1% to 2.9% in 2012.
Although Bulgaria may be considered to be on the path to recovery it
still remains one of the region's worst performers in terms of tight
credit conditions and very weak public and private consumption.
Export driven growth led to a current account surplus of EUR 0.64bn
in July. Exports grew strongly, up 15% month-on-month and up 20% on
the same period last year. However, as mentioned above, an exports
driven economy, reliant upon the EU poses considerable risk of a slowdown
in the coming months if the EU continues to slow. Bulgaria tends to
lag 3 to 6 months behind developments in the rest of the EU.
The major concern for the economy is the continued decline in FDI.
Since global liquidity evaporated, FDI inflows plunged from 30% of
GDP in 2007 to just 4.5% of GDP in 2010 and 0.3% of GDP in Quarter
2 2011. In the first seven months of 2011 Bulgaria attracted a mere
184m Bulgarian Lev ("BGN") of FDI compared to BGN 776m in the same
period last year. Given limited global appetite for risk and the Greece
issues, it is unlikely that FDI inflows will approach pre-crisis levels
for some time to come which is going to have an effect on employment
and therefore consumption in the future.
After peaking in February 2010 at 10.3%, unemployment declined to 8.9%
in May 2011 but has subsequently increased to a seasonally adjusted
9.5% in August.
The Government's finances continue to compare favourably to most European
countries. At the end of August, Bulgaria generated a budget deficit
of less than 1% of GDP. The Government is forecasting a full year deficit
to GDP closer to 2% and for next year between 1% and 1.3%. Government
debt stood at approximately 15.2% of GDP.
Property Market Overview
Romanian Real Estate Market
Investor interest is increasing with both Value Added and Core Funds
actively looking for prime product in the market. The first transaction
recorded in Quarter 2 was the purchase of Astoria Business Centre for
EUR 10.0m by the Greek fund Bluehouse Capital. Additionally, Immofinanz
completed the acquisition of Adama buying up the remaining holding
of 69%. The total deal value was estimated at c. EUR 42 million. Prime
yields are estimated to have contracted 0.25% over the period with
prime offices valued at around 8% and prime retail at 8.25%.
Office
Modern office supply in Bucharest reached 1.85 million sqm, with only
50,000 sqm delivered in Q2 2011 and an additional 100,000 sqm expected
to be built and delivered by December.
There has been no significant pick up in headline rents which remain
within the range of EUR 19 sqm/month for the fourth quarter in a row.
Rents are unlikely to rise given the high vacancy levels, estimated
at c.17.2% although this is highly differentiated between local submarkets,
with central prime property having a vacancy rate of less than 10%.
For 2012 the delivery pipeline is estimated to be closer to 50,000
sqm with already announced projects, such as Raiffeisen Evolution's
Sky Tower, and the first phase of AFI Offices.
Residential
The residential market has shown no signs of increased activity over
the first nine months of 2011. The existing market offer of high prices
and larger units does not fit the current market requirements. The
total building output for 2010 in Bucharest amounted to 2,735 dwellings
which was well below that required given the current housing shortfall.
In the first 5 months of 2011, mortgage lending increased by 2.2%,
reflecting the lack of progress seen in lending activity seen throughout
2010. In addition a large part of the demand is targeted at the secondary
market as well as the Government program for first time buyers, "Prima
Casa", which was also targeted at the secondary market, meaning that
new developments are struggling to sell new apartments. The main support
for mortgage lending proved to be Prima Casa.
Virtually no new products are under development as developers are unwilling
to start new projects due to low transaction numbers and a reluctance
of commercial banks to start financing residential schemes. The NBR
has proposed new lending criteria which if implemented will further
restrict the availability of credit which will also impact prices of
both new and old apartments. Sentiment in the market is also affected
by highly publicised insolvencies, bankruptcies and frozen projects.
Retail
No significant additional retail stock was delivered in Bucharest during
the first half of 2011. Country-wide the modern retail supply stands
at 1.45m sqm. By year end of 2011 it is expected that 73,000 sqm will
be delivered in Bucharest with the opening of the Colosseum Retail
Park and the extension of Baneasa Shopping City. Outside Bucharest
the main openings are expected to be Maritimo Constanta with 51,000
sqm and Galleria Arad with 32,500 sqm.
Demand continues to be fuelled by international operators. Recently
AFI Palace Cotroceni announced new brands such as Stefanel, US Polo,
Guess and New Look. H&M will end its first year in Romania with 10
stores, 6 in Bucharest and 4 in regional cities. In Quarter 2, Subway
reconfirmed its interest to enter the market in a nationwide expansion
campaign. The entrance of Lidl in Romania has increased competition
among hard discounters, all of them looking to expand into cities with
a population over 30,000 inhabitants.
The level of prime shopping centre rents in Bucharest stands at EUR
65-70 sqm/month, with significantly higher levels for units less than
100 sqm. The rent free periods and fit-out contributions are still
a key driver in the leasing process of less dominant shopping centres.
The gap between prime and poor quality shopping schemes is expected
to continue widening in the short to medium term.
Bulgarian Real Estate Market
Retail
Furniture giant IKEA's new project completed and opened in September.
No other significant retail schemes are expected to open until the
end of 2011.
The construction at Bulgaria Mall and Paradise Mall (combined GLA 108,000
sqm) is progressing and delivery is expected in 2012. The construction
of the Sofia South Ring Mall (72 000 sqm) started in Quarter 3 2011
and is expected to complete in 2013. There was only one development
underway outside Sofia which is Galleria Burgas by GTC which is expected
to be completed this year.
The main focus for demand remains on Sofia where international fashion
brands are interested in entering the Bulgarian market but demand in
secondary cities remains relatively weak. Vacancy rates increased in
both Sofia and secondary cities throughout the country for the second
quarter in succession. In Sofia vacancy rates increased to 6.5% whilst
vacancy in secondary cities reached 34% in Quarter 2.
The downward pressure on rental levels and pro-tenant leasing has continued
throughout the year with the food operators being the most active in
looking for new space.
Investment activity in the Bulgarian retail sector remains limited
despite increased interest and several investment transactions in the
first half of 2011. In Quarter 2 trading volumes reached EUR 120m and
EUR 160m for the first six months of the year. This sharp increase
in volume was driven by the acquisition of Mall Sofia by Europa Capital
for EUR 100m. Europa Capital were also responsible for a EUR 20m transaction
in Quarter 1 when it acquired its stake in the Retail Park Plovdiv.
Other transactions were the acquisition of a Praktiker hypermarket
and HQ in Sofia and Praktiker and Piccadilly hypermarkets in Varna.
Romanian Assets
Asmita Gardens
At the end of September no further apartments had been sold due to
the ongoing dispute with the main contractor and the unresolved restructuring
of the debt facility with the bank.
Since the end of the quarter the Manager has successfully negotiated
a settlement with the main contractor, which will ensure that all outstanding
works are completed including the testing and commissioning works for
Phase 2 and the reinstatement of all guarantees. The settlement needs
the approval of the bank in order to be implemented. Site operations
continue to be suspended pending approval of the bank for unlocking
short term financing for covering current expenses.
The Manager has agreed terms with the JV partner and has made a restructuring
proposal to the bank. The bank has chosen to take the legal route and
has filed an application in court requesting the insolvency of the
JV company. The Manager has agreed with the bank a postponement of
the insolvency proceedings to enable contracts to be drawn up with
the contractor and the bank and the insolvency hearing is now set for
7(th) November 2011. The Company's investment in Asmita has already
been fully impaired.
The Manager is currently in contact with all parties.
Cascade
During Quarter 2 new leases were signed with telecom companies Noble
and Woow at rental levels in line with the budget. The building is
now 92% let. Banca Romaneasca has finished fitting out its space and
took full occupation from 1(st) August 2011. There is significant additional
interest for the remaining unlet space. Rental income is such that
the company can meet its current operating obligations under its bank
financing.
The company lost the arbitration case in Switzerland with the structural
subcontractor which resulted in a significant additional liability
for the company which is not covered by its current bank facility.
Negotiations to reduce the liability with the sub-contractor have been
finalised and a settlement agreement has been signed by the partner
resulting in a significant reduction of the amount to be paid. The
company is currently discussing with its bankers how to finance the
settlement. All other sub contractor claims have been settled resulting
in savings to budget. There is no outstanding litigation against the
company.
Baneasa
There have been no significant developments in this project since the
last shareholders report.
Iasi and Oradea Shopping Centres
The merger between Argo Real Estate Opportunities Fund (AREOF) and
Omilos Group was approved in September. AREOF will assume responsibility
for the management of the leasing and daily operations of the centres.
The merger will create important synergies as AREOF currently owns
and actively manages two other shopping centres in Romania, in Sibiu
and Suceava, and another one in Ukraine, in the city of Odessa. With
more than 200,000 sqm GLA already under management, AREOF comes with
a good tenant base that it is hoped will assist in leasing at Oradea
and Iasi. Currently the three centres managed by AREOF are averaging
leasing rates of above 96%, secured by a mix of international and local
retailers.
The Oradea bank loan facility has been approved and signed and construction
is underway. Delivery of the completed building is expected in November.
It is intended that there will be a phased opening of the mall in time
for the Christmas trade.
The Iasi bank loan facility is still under renegotiation with the financing
banks and the developer has informed the Manager that they are anticipating
the loan being in place by the end of the year.
In Oradea there is significant additional tenant interest for the leasing
of the areas. In the Carrefour gallery and Phase 1 of the shopping
mall there has been over 3,800 sqm leased or renewed during 2011. For
Phase 2 of the shopping mall there are currently 11,900 sqm leased
and another 3,500 sqm under negotiation, out of a total of 21,100 sqm
built. Collection rates are fairly good for Oradea, but below expectations
in Iasi.
A campaign of continuous marketing activities has proved reasonably
successful at increasing visitor numbers.
Bulgarian Assets
Galleria Plovdiv
As stated in the last update, the leasing process is proving extremely
difficult. At the end of Quarter 3 approximately 61% of the GLA had
been let and open, which is a 2% improvement on the previous quarter.
It continues to be extremely difficult to attract and secure new tenants
for the vacant space mainly because of the inability to offer tenants
financial incentives as well as low consumer spend and negative sentiment.
The low level of occupancy and the continuation of temporary rental
concessions to tenants in compensation for the delay in letting up
the mall continue to pose some serious liquidity challenges.
The company is in negotiations with its bankers to renegotiate its
banking facilities and hire an external consultant to assist in the
development of the restructuring of the business and the retail turnaround
strategy. 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 however the previous
expectation that the mall would achieve occupancy levels in the region
of 70% in time for the Christmas trade have had to be revised downwards
to 60% because of the delay in the availability of funding for tenant
fit-out contributions and incentives. As a result the advantage Mega
Mall had over competition is being slowly eroded.
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-kart ring. This has been successfully let and first trading impressions
are very promising. In August the entertainment section on level 2
was opened with the launch of the ten pin bowling unit. A vote of confidence
in the mall was made by the children's toy supplier Hippoland which
extended its existing shop. At the end of September the total occupied
space had increased to 9,216 sqm representing 50% of the enlarged GLA.
At present the bank facility is in default though the Manager is having
detailed discussions with the bank and is hopeful that a satisfactory
solution will be found in the near future though continued delays in
finalising the funding is going to impact on the value of the asset.
Trade Centre Sliven
Agreement has been reached with the partner to repay the outstanding
loan and accrued interest by the end of this year. Other cash in the
development company has been redeposited with a number of banks which
will have an impact on the interest receipts but should ensure diversity
of bank failure risk.
There has been no further progress made on the development itself and
the position is unlikely to change 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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