ECDC Eur.Conv.Dev

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

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