Shareholder Update (4287W)

TIDMECDC
RNS Number : 4287W
European Convergence Develop. CoPLC
31 January 2012
EuroPean convergence development company plc
("ECDC" OR THE "COMPANY")
Shareholder Update: 1st October 2011 to 31st December 2011
 
The Manager presents its latest Shareholder Update report covering 
 the three month period 1st September 2011 to 31st December 2011. 
 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 fourth 
 quarter of 2011, 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 significantly in the last 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 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 
 Moody's Investors Service said on 20 January 2012 that the outlook 
 for Romania's credit rating is stable, reflecting its growth 
 outlook, policy reforms and external multilateral support, but 
 warned that the Euro-zone debt crisis is likely to affect the 
 country through its exports and banking sector. Romania maintained 
 its credit ratings to investment grade. The Government remains 
 on track to meet the budget deficit target of 4.4% of GDP for 
 2012 whilst Parliament approved the 2012 budget plan which has 
 a deficit target of 1.9% of GDP. 
 On 19 December 2011, IMF completed the third review of Romania's 
 economic performance under the two-year Stand-By Arrangement 
 (SBA) approved on 25 March 2011 for the amount of Special Drawing 
 Rights (SDR) 3.1 billion (about EUR 3.6 billion). The authorities 
 have indicated that they will continue treating the arrangement 
 as precautionary and therefore do not intend to draw under it. 
 Completion of the review makes an additional amount equivalent 
 to SDR 430 million (EUR 507 million) available for disbursement, 
 bringing the total resources that are currently available to 
 Romania under the agreement to SDR 1.35 billion (EUR 1.6 billion). 
 Romania has not made use of any of the funds as yet. The funds 
 are available to be used in case of necessity. This means Romania 
 might gain access to another EUR 2 billion from the IMF by March 
 2013 provided it fulfils the targets. Also, Romania has a two-year 
 precautionary agreement with the European Commission amounting 
 to EUR 1.4 billion. The dates for the fourth review by the IMF 
 have been set for the end of this January. 
 In Quarter 3 GDP grew by 2.6% over the same quarter in 2010 and 
 1.8% over Quarter 2. While agriculture had a large positive contribution 
 to GDP growth in Quarter 3, economic activity expanded in all 
 other sectors as well (industry, construction, and private services). 
 At the same time, domestic demand (private consumption and investments) 
 remained on an upward trend. Industrial activity gained some 
 momentum during Quarter 3 which has helped the country rise out 
 some of the stresses in the external markets during Quarter 4. 
 Growth is expected is expected to be flat in Quarter 4 which 
 would give a full year out turn figure of around 1.5% to 2.0%. 
 The annual inflation rate in Romania has been trending down in 
 the last few months and in December was 3.14%, down from 3.4% 
 in November. The Central Bank has, in a surprising move cut the 
 Base Rate twice in Quarter 4 from 6.25% to 5.75% justifying the 
 action as a prudent response to lower CPI inflation and the negative 
 implications for growth and financial market conditions of the 
 European sovereign debt crisis. The Central Bank stated that 
 the growing uncertainties regarding global and European growth 
 amid a worsened global risk appetite and heightened sovereign 
 debt crisis in the Euro-zone are hindering the short-term outlook 
 for the overall economic activity in Romania and the action reaffirms 
 that the gradual adjustment of monetary conditions will not only 
 help resume robust economic growth, but also boost domestic savings, 
 including the aim to support a sustainable external deficit and 
 a lower dependence on external financing. 
 FDI remained at record low for the year with an estimated maximum 
 amount of EUR 1.5 billion being invested. During 2011 there was 
 one notable divestment, the Finnish phone manufacturer Nokia 
 announced in October that it had decided to close down its operating 
 facilities in Romania, which only opened in 2008. Nokia's departure 
 is estimated to have an approximate 0.5% impact on the GDP as 
 the business had a turnover of EUR 1.6 billion in 2010. 
 The Finance Ministry was unable to fully rollover maturing government 
 securities in October. However, the situation reversed in November 
 and December when demand for RON government securities increased. 
 It is expected that the recovery in the demand was driven by 
 local investors. In December yields on short dated maturities 
 started to reduce indicating greater confidence in the sovereign 
 debt. 
 Bulgaria 
 Quarter3 GDP growth was 1.3% up on the same quarter in 2010 and 
 Annual GDP growth was 2.0% positive, which represents the seventh 
 consecutive quarter of non negative GDP growth. Growth was driven 
 by export, which led to a current account surplus of EUR 1.26 
 billion in October. Exports grew strongly, up 12% month-on-month 
 and up 31% on the same period last year. However, the reliance 
 on exports to drive the economy, of which trading with EU countries 
 accounts for 60%, makes most commentators negatively revise expectations 
 for 2011 and 2012. 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. Despite 
 overall economic growth, Bulgaria is one of the tightest credit 
 markets in the region and worst performers in public and private 
 consumption. 
 Inflation continued on its downward path to reach 2.8% in December 
 a reduction of 0.3% in over the preceding month. The most recent 
 peak inflation rate was in March 2011 when it was at a rate of 
 5.6%, since then it has trended down gradually to the latest 
 figure in December. 
 A major concern for the economy is the continued decline in FDI, 
 with inflows plunging from 30% of GDP in 2007 to just 4.5% of 
 GDP in 2010 and forecast to decline even further in 2012. In 
 the first ten months of 2011, Bulgaria attracted a meagre EUR 
 668 million of FDI compared to EUR 1,106 million in the same 
 period last year, a 40.6% reduction. Given limited global appetite 
 for risk, the issues within the EU area, and specifically neighbouring 
 Greece, it is unlikely that FDI inflows will pick up in 2012 
 which is going to perpetuate the adverse effect on employment 
 and consumption. 
 After peaking in February 2010 at 10.3%, unemployment declined 
 to 8.9% in May 2011 but has subsequently increased back to 10.0% 
 in November. 
 Retail sales declined 0.3% year on year in October 2011, down 
 from 2.0% positive in September. In 2011 year-on-year retail 
 sales peaked in March at 9.4% but have declined steadily to the 
 current position. The month on month trend is even starker with 
 negative month-on-month retails sales since May 2011. 
 The Government's finances continue to compare favourably to most 
 European countries. At the end of November, Bulgaria generated 
 a budget deficit of 1.4 % 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 15.8% of 
 GDP. 
 Property Market Overview 
 Romanian Real Estate Market 
 Investor interest has increased during Quarter 3, with both value 
 added and core funds actively looking for prime product in the 
 market. But the difficult conditions and instability of the global 
 financial markets has made it difficult for decisions to be made 
 although transactions have been negotiated for several assets 
 in the market. 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 at the end of Quarter 3 was 
 c. 2.1 million sqm, which is a 3% quarter-on-quarter increase 
 with new deliveries; Platinum Business & Convention Centre, Golden 
 Blitz OB and Grawe II, growing office stock by 49,700 sqm. This 
 was the highest quarterly level of completion registered this 
 year. During Quarter 4 there was over 25,000 sqm expected to 
 be delivered including the delivery of Crystal Tower, a centrally 
 located office project, which has been leased by ING Bank Romania. 
 Quarter 3 witnessed the highest level of leasing activity in 
 2011 (including renewals and renegotiations) with 87,500 sqm 
 transacted, up 13,000 sqm on Quarter 2 however approximately 
 the same as Quarter 3 2010. As a result Bucharest office market 
 vacancy rate fell 0.2% compared to the second quarter standing 
 at 15.9%. The vacancy rate is expected to continue to fall in 
 the coming months. The CBD area took the lead in take up with 
 27,500 sqm transacted, with 98% being new lease agreements. Vacancy 
 rate for the CBD and Centre has continued its decline since the 
 end of 2010 with Grade A vacancy levels at around 13%. 
 There has been no significant pick up in headline rents which 
 remain within the range of EUR19 sqm/month, for the fourth quarter 
 in a row. Rents are unlikely to rise even though the vacancy 
 levels have decreased to an estimated 16.3% with large leases 
 being signed for buildings located in decentralised submarkets. 
 The delivery pipeline for 2012 and 2013 is estimated to be more 
 than 200,000 sqm the majority in already announced projects, 
 such as Raiffeisen Evolution's Sky Tower, or the first phase 
 of AFI Offices 
 Residential Market 
 The residential market has continued its steady decline in prices 
 although the number of transactions remained fairly constant. 
 The volumes are now being created by the old communist apartments 
 market, with a crucial input from the government backed mortgage 
 programme, Prima Casa. Despite the intended floor in prices set 
 by the lending programme with the initial target amount to be 
 financed to c. EUR 60,000 for a 1 bedroom apartment, the prices 
 have continued to decrease well under this level. 
 Virtually no new product is under development as developers are 
 still reluctant to start new projects due to low transaction 
 numbers and a reluctance of commercial banks to start financing 
 residential schemes. The National Bank of Romania (NBR) is implementing 
 new lending criteria which will further restrict the availability 
 of credit having an impact on prices of both new and old apartments. 
 The new lending criteria do not apply to the Prima Casa programme. 
 Retail 
 In Quarter 3 the following retail units were opened in Bucharest: 
 Leroy Merlin opened its first store in Romania as part of the 
 Coliseum Retail Park (37,500 sqm) and Baneasa Shopping City opened 
 a 14,000 sqm cinema extension. In Quarter 4, three shopping schemes 
 were opened, all outside Bucharest: Oradea Shopping City for 
 30,000sqm, Maritimo Constanta for an area of 51,000 sqm and Galleria 
 Arad for 32,500 sqm. 
 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, Mic.ro, Profi and Carrefour 
 Express, continue their aggressive expansion plans taking advantage 
 of the current level of high street retail rents. 
 The level of prime shopping centres rents in Bucharest stands 
 at EUR65-70 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 will continue to widen during the following period. 
 Bulgarian Real Estate Market 
 Retail 
 No significant retail schemes opened in Quarter 4 2011. 
 The next wave of shopping centre supply is anticipated in Quarter 
 3 2012 onwards with three schemes with a total Gross Leasable 
 Area (GLA) of over 150,000 sq m expected to be delivered to the 
 market in Sofia in 2012/2013. The development activity in the 
 secondary cities is concentrated mainly in Bourgas, with two 
 projects with combines GLA of 65,000 sqm expected to open in 
 2012. 
 Retail rents have continued to decline during the year. High 
 streets retail levels witnessed a decline of about 9% in Sofia 
 and between 16% and 25% for other major cities on a yearly basis. 
 In the shopping centre segment, the gap between rental levels 
 in the capital city and the rest of the country is widening although 
 both areas recorded decreases. The overall fall in shopping center 
 rents from their peak in 2008 is estimated at about 35% in Sofia 
 and almost 60% in the rest of the country. 
 Investment activity in the Bulgarian retail sector remains limited. 
 The accelerated investment activity in first half of 2011 previously 
 reported, gradually slowed down and no transactions were completed 
 during second half of 2011. 
 
 Development Projects 
 Detailed Project Reports 
 Romanian Assets 
 Asmita Gardens 
 The insolvency procedure was approved by the Court on 7 November 
 2011 with the appointment of a Legal Administrator for the company. 
 The Bank has refused to enter into any additional negotiations 
 with the shareholders in order to find an amicable solution of 
 the current situation. 
 The legal steps are currently being followed by the Legal Administrator 
 according to the Romanian insolvency law. The Manager is seeking 
 legal advice and counsel in order to improve the minimal chances 
 of recovering any of the invested amounts. 
 The Manager will duly notify the Shareholders of the Company 
 of any changes or progress during the insolvency process. 
 Cascade 
 No new leases were signed during Quarter 4 2011, but significant 
 additional interest is being shown for the remaining space. The 
 building is now 92% let. Rental income is such that the company 
 can meet its current obligations under its bank financing. 
 As previously informed to Shareholders, the company lost the 
 arbitration case in Switzerland resulting in a significant additional 
 liability for the company 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 resulting in a significant reduction of the amount 
 to be paid. The company has reached an agreement with the financing 
 banks on how best to finance this shortfall in cash flow. The 
 banks are currently going through their internal approval processes 
 with expected implementation of the agreed solution by mid-February 
 2012. 
 Baneasa 
 There have been no significant developments in this project since 
 the last shareholders report. 
 Iasi and Oradea Shopping Centre 
 The Oradea construction loan facility was fully drawn at the 
 end of 2011. The construction of Phase 2 of the shopping mall 
 is 98% complete. The full property is 80% let which is broken 
 down as follows: shopping gallery is 93% let, Phase 1 of the 
 shopping mall is 100% let and Phase 2 of the shopping mall is 
 58% let (c. 13,000 sqm out of 22,000 sqm). 
 The term sheet for the Iasi bank loan facility is signed with 
 the financing documentation pending formalisation. It is expected 
 that the documentation will be finalised and signed by the end 
 of March 2012. 
 There is significant additional interest for the vacant spaces 
 for both Oradea and Iasi. With more than 3,500 sqm under negotiation 
 for Oradea and c. 5,000 sqm for Iasi. 
 Rent collection rates are fairly good at both Oradea and Iasi 
 with over 80% collected as at the end of December 2011. Continuous 
 marketing activities have been implemented with the target of 
 increasing visitor numbers and reasonably good results have been 
 achieved. 
 Bulgarian Assets 
 Galleria Plovdiv 
 The leasing process remains difficult. At the end of 2011 approximately 
 62% of the GLA has been let and opened, which is a 1% improvement 
 on the previous quarter. It continues to be hard to attract and 
 secure new tenants for the vacant space mainly because of the 
 inability to offer tenants financial incentives to take space 
 though there is good general interest in the development. 
 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. 
 Further to the negotiations with the bank about the terms of 
 the bank loan facility, the company has employed an international 
 consultant to undertake a strategic review of the shopping centre 
 with the overall goal of optimising the scheme, returning it 
 to sustainable profitability and enhancing capital value. It 
 is intended to make a full report to the lending bank at the 
 end of Quarter 1 2012. Continued delays in finalising the funding 
 may impact on the value of the asset. 
 Mega Mall Rousse 
 At the end of 2011 approximately 53% of the increased GLA had 
 been let and opened, which is a 3% improvement on the previous 
 quarter. The Mall is letting up but at a slower rate than previously 
 forecasted mainly because of the inability to offer financial 
 incentives to prospective tenants. The retailers' interest in 
 the development is still high because of the build quality and 
 location but in order to convert interest into signed leases, 
 an additional investment in fit-out contributions will be necessary. 
 To this end, the company is having detailed 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 investment into the scheme. Continued 
 delays in finalising the funding may impact on the value of the 
 asset. 
 Trade Centre Sliven 
 The partner has paid his accrued interest as at 31October 2011 
 and it is expected that repayment of the outstanding loan will 
 be negotiated in early 2012. The company's cash has been deposited 
 in three banks which will achieve essential diversification and 
 capital protection but will result in lower interest rates being 
 achieved. 
 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 sectors. The Manager 
 is considering employing 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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