ECDC Eur.Conv.Dev

TIDMECDC

RNS Number : 6223C

European Convergence Develop. CoPLC

03 May 2012

03 May 2012

EuroPean convergence development company plc

("ECDC" OR THE "COMPANY")

Shareholder Update: 1st January 2012 to 31st March 2012

 
The Manager presents its latest Shareholder Update report covering 
 the three month period 1st January 2012 to 31st March 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. 
General Fund Overview 
 
 This latest update covers the developments during the first quarter 
 of 2012, 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. 
 As part of the annual account production process, the Company 
 is undertaking full externally generated capital valuations of 
 all its assets. As a general comment the market has not improved 
 notably in the first quarter of the year and there is the possibility 
 that the external valuations could result in a significant impairment 
 in some of the completed assets but an improvement in others. 
 The Annual Report and Accounts are expected to be published in 
 May 2012. 
 The Company has been unable to reduce its reliance upon the Greek 
 banks for debt funding as a number of financial institutions 
 are withdrawing lending facilities to both the region and real 
 estate. 
 
 Economic Overview 
 Romania 
 Romania maintained its Investment Grade rating whilst the Government 
 met the targets set by the IMF and the European Commission. Technical 
 missions from both the IMF and the EU visited Bucharest between 
 25 January and 6 February 2012 for the regular quarterly review 
 and gave a favourable assessment at the end of their visit. 
 GDP in Quarter 4 2011 indicated a small decline of 0.2% when 
 compared to the previous quarter but a 1.9% increase over the 
 same quarter in 2010. The 2011 out turn GDP recorded a growth 
 of 2.5% which was ahead of the consensus view of 2.0% and a direct 
 result of strong growth in exports and agriculture. However, 
 according to the IMF, Romania is likely to face very strong challenges 
 which may impede growth in the economy over the coming period 
 because of problems faced by its major trading partners. It is 
 likely that bad weather and reduced consumption will contribute 
 to a decline in GDP in the first quarter though the consensus 
 view for 2012 GDP growth is between 0.5% and 1.0%. 
 Inflation continued its downward movement since peaking at 8.4% 
 in the middle of 2011. At the end of March 2012 inflation was 
 2.4% year on year, a recent historical low for the country. The 
 full year target for inflation is 2%. The record low inflation 
 rate has given room to the Central Bank to ease monetary policy 
 to boost economic growth amid the European debt crisis. In Quarter 
 1 2012 the Central Bank has cut the monetary policy rate by 0.25% 
 three times to a record low of 5.25% from 6.00%. These moves 
 are widely seen as a way of stimulating consumption to compensate 
 for declining export demand from the EU. UniCredit believe that 
 real interest rates are still too high for the weak economic 
 outlook and should fall further during 2012. 
 Romanian Prime Minister Emil Boc resigned on 6 February 2012 
 in response to widespread social dissatisfaction over the Government's 
 austerity measures. Also on 6 February, President Traian B sescu 
 nominated Mihai R zvan Ungureanu, head of the Foreign Intelligence 
 Service, as Romania's Prime Minister and requested that he form 
 a new government. New local and parliamentary elections will 
 be held this year. Prior to his resignation Emil Boc had been 
 mandated by the coalition to seek discussions with the IMF/EU 
 over public sector wage and pension increases from April. The 
 success of these actions will be dependent upon the growth story 
 being maintained otherwise there is the risk of alienating foreign 
 investors. The Finance Ministry issued RON 10.9 Bn in government 
 securities during January-February and borrowed USD 2.25 Bn in 
 10 year Eurobonds as part of its Euro Medium Term Notes Programme 
 established last year at rates between 6.45% and 6.875%. 
 The initial results from last year's census indicate a population 
 of 19.0 million in Romania, a 2.6 million drop since the last 
 census in 2002. This reduction is explained mainly by the large 
 migration which took place after 2004 when people went in search 
 of employment in other EU countries. 
 
 Bulgaria 
 In Quarter 4 of 2011 Bulgarian GDP grew by 0.4% quarter on quarter 
 and 1.6% year on year and for 2011 GDP grew by 1.7%. This made 
 Bulgaria the fifth fastest growing economy in the EU and Quarter 
 4 represented the eight consecutive quarter of non-negative GDP 
 growth. However, almost 60% of Bulgaria's exports depend upon 
 Eurozone demand and because of the problems the EU is facing 
 Bulgaria has reduced the 2012 full year forecast for GDP growth 
 from 3.7% to 2.3%. External demand was the largest contributor 
 to the pickup in real GDP growth during the last 3 months of 
 the year. After the moderate growth seen in Quarter 3 2011, exports 
 gained further momentum and reached 12.6% year on year growth 
 in Quarter 4 2011. In addition, private consumption grew by 1.4% 
 though investment activity and government collective consumption 
 declined by 9.7% and 1.2%, respectively. There was a continued 
 decline in consumer confidence whilst business confidence increased 
 slightly. 
 According to preliminary data, Harmonised Index for Consumer 
 Prices (HICP) increased by a moderate 0.3% month on month in 
 January 2012. The annual inflation rate continued its downward 
 path from an annual rate of 2.0% at the end of the 2011 to 1.7% 
 in March 2012. 
 Unemployment in Bulgaria increased by 1% to 11.2% year on year 
 and in Quarter 4 2011 the unemployment rate increased to 11.4%. 
 This increase follows ongoing economic restructuring and seasonal 
 factors, whilst the average wage rose by 8.6% year on year in 
 nominal terms. Continuing job reductions boosted productivity 
 growth by 2.6% year on year in Quarter 4 2011 but in 2012 productivity 
 has declined for both January and February. 
 Foreign Direct Investments (FDI) stood at EUR 274.7 million during 
 the last month of 2011, thus the total FDI for the year as a 
 whole reached EUR 1.06 billion, down 40% over 2010. Given limited 
 global appetite for investment risk and problems within the EU 
 area, it is not surprising that FDI in January and February fell 
 EUR248m to EUR85m, a decline of almost 75% compared to the same 
 period in 2011. 
 Retail sales in Quarter 4 2011 continued to the decline recorded 
 in previous quarters with a 2.5% decline year on year. Although 
 it is normal to expect higher consumption of durable goods at 
 the end of the year as a result of the holiday shopping season, 
 purchases of these items reported the largest decrease. 
 The Government's finances continue to compare favorably with 
 most European countries. At the end of 2011 Bulgaria had a budget 
 deficit of 2.1 % of GDP. The Government is forecasting a full 
 year budget deficit for 2012 between 1.0% and 1.3% of GDP. Government 
 debt stood at approximately 15.9% of GDP in February. 
 
 Property Market Overview 
 Romanian Real Estate Market 
 Total investment volume for 2011 is estimated at approximately 
 EUR 400 million, but the majority of these transactions involved 
 either intra-group or non-cash transactions, only EUR 45 million 
 would be considered classic investment deals. Investor interest 
 continues to increase but the transaction process continues to 
 be lengthy. Prime yields are estimated to have remained constant 
 over the period with prime offices valued at around 8.00% and 
 prime retail at 8.25%. 
 Office 
 Modern office supply in Bucharest increased by 90,000 sqm during 
 the year to c. 1.87 million sqm, with only 38,000 sqm completed 
 in Quarter 4 2011. In total, nine buildings were completed in 
 2011 and the increase in Gross Lettable Area (GLA) was 65% down 
 on 2010 and the lowest level of supply in the last six years. 
 Take up during the 2011 amounted to approximately 200,000 sqm 
 which is the first time since 2008 when take up has exceeded 
 supply which is likely to lead to an increase in pre-leasing 
 during 2012. 
 In Quarter 4 2011 headline rents improved 2.5% over Quarter 3 
 to EUR 19.0 - 19.5 sqm / month. Further mild rental growth is 
 forecast for 2012 due mainly to the shortage of prime supply 
 in the CBD and established business districts. The vacancy level 
 decreased to an estimated 14.8% with the largest areas of vacant 
 space located in decentralised submarkets such as Baneasa and 
 Pipera North. 
 For 2012 the delivery pipeline is estimated at 130,000 sqm in 
 already announced projects, such as Raiffeisen Evolution's Sky 
 Tower, or the first phase of AFI Offices of which approximately 
 45,000 sqm is pre-let or owner occupied. For 2013 the supply 
 remains limited to c. 70,000 sqm. 
 Residential Market 
 Based upon asking prices, residential prices in Bucharest would 
 appear to have declined by only 3-5% during 2011 but, based upon 
 real transaction values listed with the notaries the decline 
 is in the region of 20%. This indicates a substantial gap between 
 asking prices and actual transaction prices and a continuing 
 fall in residential property prices. Currently the floor provided 
 by the Government backed mortgage programme, Prima Casa, has 
 been breached with prices falling well below the initial set 
 target of EUR 60,000 for an average 1 bedroom apartment. 
 Additional price pressure may be introduced into the market by 
 the banking sector as it continues to grapple with increasing 
 arrears within their residential real estate loans portfolios. 
 The increasing arrears are leading to increasing pressure on 
 the banks to foreclose on loans and start selling the mortgaged 
 assets. 
 Retail 
 The Romanian retail market in 2011 recorded one of its best years 
 with the opening of nine retail schemes and 7 extensions totalling 
 over 300,000 sqm. In Quarter 4 2011 alone the following retail 
 schemes were opened: Maritimo (Constanta), Electroputere (Craiova), 
 Galleria (Arad), Oradea Shopping City (Oradea), ERP Botosani 
 (Botosani). Currently 170,000 sqm of space is under construction 
 and due for delivery during 2012 and the forecast for 2013 is 
 approximately 110,000 sqm but there may be movement between the 
 two years. 
 Demand continues to be fuelled by international operators. H&M 
 and Inditex continued their expansion in both modern retail schemes 
 but also on high street location. Supermarket retailers and hard 
 discounters such as Lidl, Mega Image, Profi, Carrefour Express, 
 continue their aggressive expansion plans taking advantage of 
 the current level of high street retail rents. 
 The retail scheme Mic.ro and the larger format Minimax Discount 
 both filed for insolvency in February 2012. 
 Rental levels for prime shopping centres in Bucharest stands 
 at EUR 65-70 sqm / month, with noticeably 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 likely to continue to widen. 
 The first major foreclosure sale in this sector was recorded 
 when the City Mall Bucharest was sold by UniCredit Romania to 
 a local developer. 
 
 Bulgarian Real Estate Market 
 Retail 
 Rental levels in shopping centres remained relatively stable 
 in 2011. Large centres in Sofia commanded rents around EUR32 
 per sqm pcm while shopping centres in secondary cities saw rents 
 range from EUR 20-22 sqm / month. High street rents declined 
 approximately 27% in Sofia mainly because retail concentration 
 in the new malls. The fashion market has been stirred by the 
 opening of H&M in Bulgaria during the first half of 2012. H&M 
 has already secured locations in Sofia, Varna and Burgas with 
 further stores likely in other cities. Other international fashion, 
 DIY and sports good operators are setting plans for expansion 
 in Bulgaria. 
 No major retail schemes opened in Quarter 1 2012 though three 
 new centres delivering 180,000 sqm are anticipated to open during 
 2012 and 2013 in Sofia. Developments in secondary cities are 
 focused on Bourgas where two projects are expected to open during 
 2012 representing 65,000 sqm. 
 In 2011, Bulgaria's real estate transactions reached EUR 186m, 
 the highest level since 2008 when EUR 400m of transactions were 
 concluded. As previously mentioned two transactions represented 
 the majority of the volumes in 2011. Mainly due to the lack of 
 sizeable and stable income producing assets, turnover in 2012 
 is not expected to exceed 2011 levels. Yields are expected to 
 remain stable and as of January 2012 there were no signs of deteriorating 
 loan terms though margins are still around the 300 to 350 bps. 
 
 Development Projects 
 Detailed Project Reports 
 Romanian Assets 
 Cascade 
 No new leases were signed during Quarter 1 2012, but considerable 
 interest is being shown for the remaining space. The building 
 is currently 92% let. Rental income is at a level that the company 
 can meet its current banking obligations. 
 As previously mentioned the company lost the arbitration case 
 in Switzerland 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 our Partner. 
 The company has also reached agreement with the financing banks 
 on how to discharge this liability. The bank has agreed to meet 
 half the requirement with the shareholders financing the remainder. 
 This will require additional funding from ECDC of approximately 
 EUR 510,000. The banks have finalised their internal approval 
 processes and the transaction is expected to complete by the 
 end of April 2012. 
 Oradea Shopping Centre 
 The Oradea construction bank loan facility is fully drawn, with 
 the fit-out funds remaining to be drawn to assist lease up. The 
 construction of Phase 2 of the Shopping Mall is fully complete. 
 The centre is 82% leased which is broken down as follows: 
 -- The shopping gallery is 94% let, 
 -- Phase 1 of the Shopping Mall is 95% let, 
 -- Phase 2 of the Shopping Mall is 62% let. 
 There is considerable interest for the vacant spaces for both 
 Oradea with more than 8,000 sqm under negotiation. 
 Collection rates in Oradea are currently over 80% at the end 
 of Quarter 1 2012. 
 Iasi Shopping Centre 
 The term sheet for the Iasi bank loan facility is to be signed 
 in the next few days with the financing documentation to be finalised 
 and completed by the end of June 2012. 
 The existing shopping gallery in Iasi is 96% leased. 
 There is considerable interest for the remaining 1,900 sqm of 
 vacant spaces in Iasi. 
 Collection rates are also over 80% in Iasi at the end of March 
 2012. 
 Marketing activities to increase visitor numbers are on -going 
 and have achieved good results. 
 Asmita Gardens 
 The insolvency of the company is being undertaken by the Legal 
 Administrator according to the Romanian insolvency law. The Manager, 
 representing the shareholders in ECDC will be part of the creditor 
 committee and will play an active role in the reorganisation 
 process. 
 The Manager will keep Shareholders informed of progress. 
 Baneasa 
 There have been no significant developments in this project since 
 the last shareholders report. 
 
 Bulgarian Assets 
 Galleria Plovdiv 
 The leasing of new space continues to be difficult mainly because 
 prospective tenant are looking for capital contribution towards 
 fitting out costs. At the end of Quarter 1 2012, occupancy was 
 stable at c. 62% of the Gross Lettable Area (GLA). Negotiations 
 with some key international anchor fashion brands are ongoing 
 and initial feedback has been positive. 
 As previously reported, the company has employed an international 
 retail consultant to assist in setting the strategic plan for 
 the centre. In March 2012 the consultant completed and presented 
 his strategic report with the overall goal of optimising the 
 scheme, returning it to sustainable profitability and enhancing 
 capital value. The shareholders approved the plan which has been 
 presented to the funding bank as part of the initial negotiations. 
 The plan was in principle accepted by the Bank and on this basis, 
 the company has started negotiations with the bank to restructure 
 the banking facility, which is presently in default. 
 At present the Mall is unable to meet its full obligations from 
 rent and service charges generated from the Mall and may require 
 some minor additional shareholder loans before the restructuring 
 has been agreed with the bank 
 Mega Mall Rousse 
 At the end of Quarter 1 2012 approximately 51% of the GLA was 
 let and trading. The leasing process continues to be difficult 
 for similar reasons as Galleria Plovdiv. Additional tenants are 
 being secured but at a slower rate than previously forecast and 
 at lower rents. Lease agreement for about 350 sqm with a food 
 operator was recently signed, which will add to the attractiveness 
 of the second floor. 
 As previously reported, there is retailer interest in the development 
 but in order to convert this interest into signed leases, an 
 additional investment in fit-out contributions will be necessary. 
 To this end, the company continues its discussions with the bank 
 and is hopeful that, despite the fact that bank facility is in 
 default, a satisfactory solution will be found in the near future 
 which will allow for a combination of additional shareholder 
 loans and an increased banking facility. 
 Trade Centre Sliven 
 The partner has paid the accrued interest in Quarter 4 2011 and 
 the Manager believes full repayment of the outstanding loan will 
 be achieved. 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. 
 
 
 Investor Relations 
 Tel: + 44 (0)20 7518 2100 Fax: + 44 (0)20 7518 2199 
 Email: marketing@charlemagnecapital.com Website: www.charlemagnecapital.com 
 
 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. 
============================================================================ 
 

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