TIDMECDC
RNS Number : 1004J
European Convergence Develop. CoPLC
02 August 2012
02 August 2012
EUROPEAN CONVERGENCE DEVELOPMENT COMPANY PLC ("ECDC" OR "THE
COMPANY")
Shareholder Update: 1st April 2012 to 30th June 2012
The Manager presents its latest Shareholder Update report
covering the three month period 1st April 2012 to 30th June 2012.
This report is intended to update investors on progress over the
last three months and is not intended to deal with the financial
statements of the fund.
Economic Overview
Romania
Romania was one of the few European states that reported growth
in GDP during 2011 at 2.5 per cent. Unfortunately this growth has
not persisted in the first quarter of 2012 when GDP contracted 0.1
per cent quarter on quarter but expanded 0.6 per cent year on year.
The full year forecast is for further expansion but at levels
around 0.5 per cent to 1.0 per cent. In the first five months of
the year exports grew 6 per cent to EUR18.5 billion year on year
whilst imports grew 5.1 per cent to EUR22.0 billion over the same
period. As a result the trade deficit widened 0.6 per cent, EUR3.5
billion through to May. During this period the biggest market for
imports, 72.9 per cent and exports, 71.1 per cent was the EU and
therefore the crisis currently taking place within the Region could
have a disproportionately large impact on the Romanian economy.
Romania maintained its Investment Grade rating, but at the end
of June Moody's changed the outlook from "stable" to "negative",
based on the current vulnerability to adverse developments in other
European countries.
Inflation increased in quarter 2 but at a lower rate than
expected by the Central Bank and economists. The inflation rate
rose to 2.04 per cent, the first increase in eight months as stated
by the Bucharest-based National Statistics Institute. Romania's
inflation outlook, which points to an increase in prices by the end
of the year from a record-low 1.8 per cent in May and political
turmoil that caused the leu to tumble, have prevented policy makers
from cutting borrowing costs needed to help the recession-hit
economy. Citigroup predict year-end inflation reaching about 3.5
per cent versus the Central Bank's most recent forecast of 3.2 per
cent. The Central Bank has been set an inflation target of 3 per
cent plus or minus 1 per cent.
In quarter 2 the Central Bank kept the monetary policy rate at
the record low level of 5.25 per cent having cut the rate at the
last four meetings since November when the rate was 6.25 per cent.
These moves are widely seen as a way of stimulating consumption to
compensate for declining export demand from the EU. The main issue
arising from the Central Bank's statement is related to the
liquidity in the financial sector. While an excess of liquidity
emerged in the money market at the end of last year pushing the
interbank interest rates to very low levels in quarter 1, the
Central Bank believes that a structural deficit might be in place
at this moment. This structural deficit, the asymmetric
distribution of liquidity across the banks, and the tensions in
functioning of the money market were the main factors triggering an
increase in funds borrowed by banks from Central Bank in repo
operations in the last few months. Outstanding daily volume of repo
operations almost doubled in June, climbing to RON 11.7 bn from RON
6.7 bn in May.
Local elections on 10 June resulted in a clear victory for the
current ruling alliance (Social Liberal Union - USL) between the
Social Democratic Party (PSD) and the National Liberal Party (PNL),
which received around 50 per cent of the votes. The previous ruling
party (Democratic Liberal Party - PDL) received around 15 per cent.
The Party of People - Dan Diaconescu which is not represented
currently in Parliament also received a good result. The outcome
suggests an important advantage for the USL alliance in the
parliamentary elections due at the end of the year.
Tensions within political structure increased over the last
month. A conflict has arisen between the new ruling coalition and
President Basescu which resulted in Parliament voting for the
impeachment of the President on the 6th July 2012. These, together
with other measures, taken by the ruling coalition have given rise
to major concerns over the continuation of functioning democracy in
Romania. As a direct result the EU is sending a delegation to
Romania and statements have been made by Angela Merkel and other EU
politicians expressing concerns over the rule of law and on-going
democracy in the country.
The political tensions had a direct impact on the exchange rate
with the EUR/RON rate climbing to 4.54 RON for the EURO, from 4, 45
a week earlier. Also bond yields, especially given the context of
high uncertainty on the external markets, are expected to
significantly rise over the short term.
Bulgaria
Bulgaria issued EUR950 million 4.25 per cent 5 year bonds in
July which were oversubscribed by investors with the final order
book standing at over EUR6bn. The strong investor response and
robust participation in this deal demonstrated Bulgaria's credit
strengths, relatively solid macroeconomic performance, fiscal and
financial stability.
According to GDP flash estimates, Bulgarian economy expanded by
0.5 per cent year on year in quarter 1 2012 while the economic
activity remained unchanged over the previous quarter. Final
consumption went up by 2.2 per cent on a year earlier and had a
positive contribution to GDP growth. Exports however, posted their
first year on year contraction since the start of the recovery,
down by 1.9 per cent. The lower demand from export-oriented
industries resulted in a subsequent decline in imports, down 1.6
per cent year on year. In line with the lower external demand and
the corresponding decrease in exports, industry growth slowed down
to 2 per cent. Performance in the services sector was also weak,
while value added in the agricultural sector increased by 12.4 per
cent year on year.
Inflation stepped up by a marginal 0.2 per cent in April, thus
annual Harmonised Index for Consumer Prices (HICP) slightly
accelerated to 2 per cent. Bulgaria has one of the lowest inflation
rates amongst EU Members. However, prices of natural gas and
heating have increased by 9.3 per cent and 7.8 per cent
respectively, which, together with the increase in electricity
prices in July could feed into the price levels of most goods and
services resulting in a pickup in inflation later in the year.
Unemployment in quarter 1 2012 increased to 12.9 per cent - the
highest rate over the last eight years. Employment numbers declined
by 51.2K, down 1.8 per cent year on year, while the unemployed
climbed up to 421.4K.
Given limited global appetite for investment risk and the
well-publicised problems within the EU, it is not surprising that
Foreign Direct Investments (FDI) for the first four months of 2012
as a whole reached EUR 407.2 million, 1 per cent of GDP.
Retail sales continued to decline recording a 1.4 per cent year
on year decline in April 2012.
In the first quarter of 2012, the consolidated budget deficit
stood at BGN 687.2 million (EUR344 million) on a cash basis (0.9
per cent of GDP), a decline of 0.1 per cent year on year or BGN
54.7 million (EUR27 million). At the end of quarter 1 general
government debt, including government guaranteed debt amounted to
16.6 per cent of GDP, of which 6.5 per cent of GDP represented
domestic debt, 8.7 per cent of GDP external debt and 1.4 per cent
of GDP government guaranteed debt.
Property Market Overview
Romanian Real Estate Market
Total investment volume for quarter 1 2012 is estimated between
EUR90m and EUR100m, a 50 per cent decrease year on year. There were
only 3 transactions throughout the whole of Romania in the first
quarter and over 90 per cent of total investment was represented by
the sale of City Business Centre in Timisoara to the South African
fund NEPI. The debt markets remain severely constrained leading up
to the mid-year statutory Basel reporting requirements. With a
significant portion of outstanding loans set to re-gear by the end
of the year, new loans will be highly restrictive and new
development financing will continue to be scarce for all sectors in
the absence of significant, secured pre- leasing. New loan-to-value
requirements and increased lending margins are making new borrowing
prohibitive.
Office
Modern office supply in Bucharest at the end of 2011 was between
1.8 million and 1.87 million sqm and 90,000 sqm was delivered
during the year represented the lowest level of completions in any
year since 2004. In the first quarter of 2012 only c. 10,000 sqm
was delivered which when compared to total take up of circa 50,000
sqm led to an overall 0.3 per cent reduction in vacancy rates to
circa 13.85 per cent. The vacancy rates in peripheral markets
remain above the city average. Close to half of the take in quarter
one was represented by Raiffesen Bank's pre-lease in the RPHI
development on Barbu Vacarescu. With only circa 100,000 sqm
forecast to be delivered in the remainder of 2012, it is
anticipated that the vacancy rate will continue to fall.
In quarter 1 quoted prime rents remained stable at EUR19.0 -
19.5 sqm/month whilst headline rents remained unchanged quarter on
quarter in almost all sub markets. In central locations headline
rents range between EUR16.00 - EUR19.50 whilst in outlying
locations prime rents were between EUR11.00 and EUR15.50 sqm/month.
Due to a shortage of modern office supply in the CBD, mild rental
growth is forecast in the second half of 2012.
For 2012 the delivery pipeline is estimated at 100,000-120,000
sqm in already announced projects, such as Raiffeisen Evolution's
Sky Tower, or the first phase of AFI Offices, of which
approximately 37 per cent is pre-let or owner occupied. However,
because of certain issues surrounding some developments Jones Lang
LaSalle anticipate that total supply in 2012 will be less than that
in 2011. Also as a result of other uncertainties and continued take
up in the region of 200,000 sqm per annum vacancy rates could well
decrease substantially leading to a landlord driven rental
market.
Residential Market
In quarter 1 the average price of a residential unit decreased a
further 4 per cent which follows an approximate 20 per cent decline
in 2011.
Last year Bucharest recorded a significant decline in dwelling
completions. Around 1,600 dwellings were completed which represents
a decline of 41 per cent compared with 2010 and significantly lower
than other CEE capitals such as: Warsaw with 9,700 completed
dwellings in 2011, or Budapest more than 3,200 completed dwellings.
There is evidence of a significant shortage in residential units in
Bucharest and yet new completions have never exceeded 3,000 units
per year (2008).
Demand for housing remained weak throughout 2011 and at the
beginning of 2012. Residential mortgage growth statistics showed a
slight increase in the second half of 2011 though it has fallen
back in the first quarter of 2012. Interest rates are still high
and banks' lending policies have remained conservative, both
hampering growth in demand for housing. In addition, prices are
still too high for many households to participate on the primary
market.
Retail
The total shopping centre stock in Romania stands at 2.3 million
m2, with one completion recorded in quarter two - a small retail
park of approximately 5,300m2 developed by NEPI in Brasov.
Bucharest is by far the largest retail market in the country, with
a modern retail stock of 775,000m2. For 2012 it is estimated that
between 5 and 7 projects might be completed at the country level,
totalling around 180,000m2. The most representative and the largest
retail scheme, Palas Iasi, was opened in May. In Bucharest only 2
hypermarkets with attached galleries are expected to be delivered
totalling around 32,000m2 gross leasable areas (GLA).
Demand is slowly picking up as official statistics show that
retail sales have started to increase during the last months. Food
retailers continue to be very active on all fronts with Auchan and
Cora (among hypermarkets), Mega Image and Carrefour Express (among
supermarkets) and Lidl (among discounters) aggressively expanding
their networks in Bucharest and in top regional cities. Fashion
retailers are the next in line assessing expansion opportunities
but because of the limited pipeline, they are currently focusing on
existing schemes that have succeeded over the past couple of years
to improve their tenants' mix and to increase footfall.
In quarter 1 2012, several new retailers opened their first
stores in Bucharest including Burberry and Subway which opened its
first unit in Bucharest's CBD. Both brands came via franchise, the
current and dominant model for companies interested in entering the
Romanian retail market.
Prime shopping centre rents are quoted between EUR60-70/m2/month
as rental levels continue to be stable. Prime high street units are
in the same range, but a softening in the next 6-12 months would
not be surprising considering the availability of numerous units
along main retail streets.
Bulgarian Real Estate Market
Retail
2012 is proving to be a very challenging year for the Bulgarian
retail market with 9 shopping centres with a combined GLA of
318,000 sqm currently under construction.
In Quarter 2, Mall Galleria Bourgas (35,000 sqm) opened to the
public with another mall in Bourgas - the Strand (35,000 sqm)
expected to open in Quarter 3 2012. The next wave of mall openings,
delivering 180,000 sqm to the market is expected in 2013. By the
end of 2013 the retail provision per 1,000 inhabitants in Sofia
will exceed 300 sqm and in the country 100 sqm by the end of 2012,
the average rate in CEE is 200 sqm.
Occupancy in shopping centres continues to be at a less than
satisfactory level. About 23 per cent of shopping centres in
Bulgaria are vacant. Although the vacancy in the capital has
decreased slightly, the vacancy rates in the secondary cities is
over 30 per cent.
Average retail rental rates in shopping centres in Bulgaria in
quarter 1 were approximately EUR13.00 per sqm per month, a decrease
of more than 14 per cent year on year. In Sofia rental rates
dropped by 12 per cent while in the secondary cities they were down
by more than 16 per cent over the same period. The lowest rental
rates are forecast to be in Varna and Rousse.
As reported, the fashion market has been stirred by the opening
of H&M in Bulgaria during the first half of 2012. H&M has
already opened four stores in Sofia, Varna and Bourgas, with
further stores likely in other cities.
No commercial property transactions were announced in quarter 1
2012. Overall investor sentiment is in line with slowing volume of
transactions in CEE. The main reason cited is the unavailability of
bank finance which is anticipated to be a huge challenge for
commercial property markets throughout CEE.
Romanian Assets
Cascade
Two additional new leases were signed during the quarter and a
firm commitment was given for an expansion of an existing tenant.
As a result vacancy at the time of writing is only 3.5 per cent of
the building's GLA. Rental levels achieved were in the range quoted
above for central districts and enhances the ability of the company
to meet its current banking obligations.
The agreement reached with the financing banks and the partner
for financing the payment of the outstanding contractor amount was
signed and implemented during the quarter. All operational and
financing expenses are fully serviced from the cash flow of the
company.
Oradea Shopping Centre
The Oradea construction bank loan facility is fully drawn. The
construction of phase 2 of the shopping mall, 16,000 sqm, is fully
complete.
Argo have secured the opening of the Mobexpert furniture shop,
which was delayed during the last quarter of 2011. The delay proved
to be a significant draw back in attracting new tenants. Together
with Mobexpert, other furniture retailers such as Elvila and
Naturlich will provide a strong anchor for the target shoppers of
ERA Oradea and enables it to differentiate itself from other retail
offerings in the city.
There is another 4,000sqm to be completed in the third phase of
the mall's construction but this is dependent upon tenant
specifications for this space.
Even though the leasing market in Oradea is challenging, the
size of the operator, Argo Real Estate Opportunities Fund, provides
significant traction for attracting new tenants.
Iasi Shopping Centre
The term sheet for the Iasi bank loan facility has been signed
and the finance documentation is pending formalisation. It is
expected that the documentation will be finalised and completed in
the near future.
The existing shopping gallery in Iasi is 96 per cent let.
Marketing activities to increase visitor numbers are on-going and
have achieved good results.
Competition in the city has increased with the opening of the
Palas Shopping Center, in the centre of the city. It is expected
that the scheme will have a more pronounced impact on other city
centre schemes such as Iulius Mall and Moldova Mall rather than the
outlying retail parks such as Iasi Shopping.
Significant additional interest is being shown for the vacant
spaces with more than 5,000 sqm under negotiation.
AREOF - Proton loan agreement
The loan agreement between AREOF and Proton Bank was
successfully renegotiated, providing a roll forward of the
principal amount until 2016, together with the possibility of
capitalisation of part of the interest and a lower interest rate
being charged on the loan.
Asmita Gardens
All of the claims raised against the creditors went under review
of the syndic judge and were resolved by the end of June. It is
expected that a reorganisation plan will be submitted for the
judge's review by the end of September. After the approval from the
judge the plan will be submitted for the vote of the creditors of
the company.
Baneasa
There have been no significant developments in this project
since the last shareholders report.
Bulgarian Assets
Galleria Plovdiv
At the end of quarter 2, there are no significant changes in
tenant's occupancy level. Some new shops with total area of 830 sqm
opened during the period, while at the same time some existing
tenants have closed stores, with occupancy staying stable at c. 62
per cent of the lettable area. Negotiations with some key
international anchor fashion brands are ongoing and initial
feedback has been positive.
As previously reported the shareholders approved the strategy
plan of the international consultant and at the moment are
discussing the interim appointment of the consultant. This interim
contract will include implementation the initial part of the
strategy.
The company continues to negotiate with the bank to restructure
the banking facility, which is presently in default.
It is likely that a small working capital facility will need to
be provided by the shareholders whilst the bank restructuring
negotiations are ongoing.
Mega Mall Rousse
At the end of quarter 2, occupancy was stable at c. 51 per cent
of the GLA. Recently secured tenants for an area of 430 sqm were
signed and are expected to open in quarter 3. Specifically, a Sky
bar of 300 sqm is expected to open in July and a 130 sqm food court
unit in September. The supermarket operator announced its
intentions to close its store in the mall following a strategic
review of its operations. The management team has been negotiating
the exit to ensure a smooth handover to a replacement operator. The
replacement operator is expected to open in September which will
have little impact on the mall as August is a traditionally poor
trading month.
The leasing process is proving to be difficult. At the moment
3,700 sqm or 18 per cent of the GLA is under discussion but to
convert most of this interest into signed and trading leases will
require an additional investment in fit-out contributions. To this
end, the company continues its discussions with the bank and is
hopeful that, despite the fact that the bank facility is in
default, a satisfactory solution will be found in the near
future.
Trade Centre Sliven
The company's cash continues to be deposited in three banks to
achieve security by diversification but at the expense of lower
interest revenue.
There has been no change in the position regarding the
development itself, with the Manager considering the employment of
an international consultant to undertake a strategy review and
advice on any alternative development options.
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.
Enquiries:
European Convergence Development +44 (0)1624
Company plc 640200
Anderson Whamond
+44 (0)207
Charlemagne Capital 518 2100
Varda Lotan
+44 (0)1624
Galileo Fund Services Limited 692600
Ian Dungate, Company Secretary
44 (0)20
Panmure Gordon 7459 3600
Hugh Morgan
Grishma Patel
+44 (0)20
Smithfield Consultants 7360 4900
John Kiely
Ged Brumby
Website: www.europeanconvergencedevelopment.com
This information is provided by RNS
The company news service from the London Stock Exchange
END
MSCUGURWRUPPGAG
Eur.Conv.Dev (LSE:ECDC)
Historical Stock Chart
From Jun 2024 to Jul 2024
Eur.Conv.Dev (LSE:ECDC)
Historical Stock Chart
From Jul 2023 to Jul 2024
