TIDMECDC
RNS Number : 9503W
European Convergence Develop. CoPLC
01 February 2013
ECDC plc
Shareholder Update 1(st) February 2013
European Convergence Development Company PLC ("ECDC"
or "The Company")
The Manager presents its latest Shareholder Update
report covering the three month period 1(st) October
2012 to 31(st) December 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 Company.
Economic Overview Bulgaria
It has been reported that Bulgaria's economy will
stagnate in 2013 before returning to 2%- 3% expansion.
This forecast comes on the heels of local analysts
warning that Bulgaria's economy will be struggling
to survive another difficult year after stagnating
for three successive years. Bulgaria's gross domestic
product marked an anaemic growth of 0.4% (2010),
1.7% (2011) and 0.5% (2012) in the wake of the slump
in the Euro Zone. Growth below 3% will not sustain
the employment rate and is practically stagnated,
according to experts' estimates. Standard & Poor's
Ratings Services stated in mid December 2012 that
it expects real GDP growth of about 1.7% in 2013
and an average of 2.0% from 2013-2015, supported
by a recovery in both domestic and external demand.
The agency expects the current account deficit to
remain close to balance in 2012, before slipping
back into a deficit as domestic demand gradually
recovers and the trade deficit widens over the next
three years.
Gross Domestic Product (GDP) in Bulgaria was 0.5%
higher in the third quarter of 2012 compared to
the same quarter of the previous year and grew by
0.1% over the previous quarter, according to preliminary
data released in early December. On a quarterly
basis GDP growth over the same period in 2011 has
been stable at 0.5%, whilst quarterly growth has
been positive for the last two quarters.
Inflation, measured by the Consumer Price Index
(CPI) in Bulgaria increased 0.3% to 4.2% in December
following a two month decline of 1% to 3.9% in November.
Month on month prices rose 0.4% in December driven
by a 0.9% increase in Food and Non Alcoholic beverage.
Annual average inflation during 2012 was 3.0%. The
Harmonized Index of Consumer Prices (HICP) increased
2.8% year-on-year in December, a 0.1% increase on
the November figure of 2.7%.
Average monthly wages in September increased to
BGN 768 (EUR384) from BGN 744 (EUR372) recorded
in August. September also represented a reversal
of five months of continuing decline that had seen
average monthly wages drop from BGN 760 (EUR380)
in April to the August figure.
The unemployment rate at the end of quarter 3 stood
at 11.5% a continuation of the falls recorded in
quarter 1 and 2. The unemployment rate has fallen
1.4% since quarter 1 In December monthly unemployment
was recorded at 11.4%, an increase of 0.1% on the
11.3% recorded in November which in turn was up
on the 11.0% registered in October. The reversal
of the downward trend is due mainly to the continuing
process of costs restructuring and the fall in seasonal
activities.
Consumer Confidence in Bulgaria fell 4.3 points
in the final quarter of 2012 to -42.3 from -38 in
the third quarter.
Following the limited global appetite for investment
risk and the problems within the EU, Foreign Direct
Investments (FDI) for the first ten months of 2012
remained low at EUR 1,335.7 million or 3.4% of GDP;
however this represented a EUR 569.2 million increase
over the same period in 2011.
At the end of November 2012, the consolidated budget
deficit stood at BGN 105.3 million (EUR53.8 million)
on a cash basis (-0.1% of GDP). At the end of October
2012 general Government debt, including Government
guaranteed debt, amounted to 19.1% of GDP.
Romania
The parliamentary elections brought a clarification
on the political stage with the USL coalition gaining
a comfortable majority with more than 60% of the
available seats in both the Chamber of Deputies
and the Senate. Victor Ponta was nominated by the
President and ratified by Parliament as the new
Prime Minister of Romania.
The annualised Gross Domestic Product (GDP) in Romania
contracted by 0.5% quarter on quarter and by 0.6%
year on year in the third quarter of 2012 mainly
due to the reduction of the agricultural output
caused by the severe drought earlier in the year.
Property Market When adjusting for the impact of the agricultural
Overview sector, the activity in quarter 3 was mainly flat.
The year-end GDP forecast has been further reduced
to just 0.1% growth year on year, the slowdown spilling
over in 2013 with a reduction of the forecasted
growth to 1.5%. The World Bank has revised down
its forecast for GDP growth in 2013 to 1.6% from
a mid-year forecast of 2.8% growth.
The Budget deficit increased to 1.8% of GDP as at
the end of November, with an expected year end figure
of 2.2% of GDP. Recent data suggests the economy
started quarter 4 on a weak note. According to initial
estimates, both retail sales and construction output
fell in October. Retail sales (in real terms) were
almost flat in quarter 3, after they expanded in
the previous three quarters. Moreover retail sales
declined in both September and October, which paved
the way for a poor performance in quarter 4. Construction
output also decreased both in September and October
after contraction in quarter 3. Poor performance
for retail sales and construction output suggest
a weak domestic demand in quarter 4. Domestic demand
(consumption and investment) was on an upward trend
in the last two years and it was also the main driver
of GDP growth for this year.
Romania recorded a trade deficit of EUR409m in November,
a big improvement on the October deficit of EUR1,111m
driven by a EUR700m reduction in imports. Over 70%
of Romania's trade is with the European Union, with
France, Germany and Italy being the biggest contributors.
With the German economy slowing, the forecasts are
not favourable.
The annual inflation rate increased from 4.6% in
November to 5.0% in December, slightly below the
Central Bank's forecast but above market expectations.
The National Statistics Board reported that consumer
prices rose 0.6% in December. . Food and non-food
prices were up 0.7% and 0.9%, respectively, while
services fell 0.2% from November. The fastest growth
was in power prices, which rose 7.3% on the month.
The Central Bank forecasted inflation at 5.1% in
December, above its 2-4% target, mostly due to food
prices. A Reuter's poll of 14 analysts expected
inflation at 4.6% year-on-year in December. Some
analysts are expecting further increases in the
first quarter of 2013 as scheduled increases in
administration prices take effect, however throughout
the year inflation is expected to be flat.
At the last NBR monetary policy meeting the Central
Bank kept the monetary policy rate at the record
low of 5.25 %. The Central Bank halted its rate
cutting cycle in May 2012 and political issues meant
that the country did not follow its neighbours in
reducing rates. There is no expectation of rate
cuts, however the Central Bank may ease the control
over the liquidity conditions in order to accommodate
the lower risk premium of foreign investors looking
at RON denominated assets.
Bulgaria
Retail
The Bulgarian retail market is awaiting the third
generation of shopping malls which are leisure led.
Following the successful opening of Bulgaria Mall
(Gross Lettable Area (GLA) 33,000 sqm) in December
2012, there are another four shopping centres scheduled
to be completed by the end of 2013 three in Sofia
- Paradise Center (GLA 80,000 sqm), South Ring Mall
(GLA 72,000 sqm) and Mega Mall (GLA 24 00 sqm) and
one in Bourgas - the Strand (GLA 30,500). With the
opening of these malls the average leasable area
per 1,000 inhabitants will have increased to approximately
115 sqm compared to 247 sqm for Europe as a whole.
Occupier demand remains very selective and limited
with international retailers focusing on Sofia and
major regional centres. In quarter 3, the overall
vacancy rate in shopping centres was around 18%
of lettable area down from 20% in quarter 2. In
Sofia, the vacancy level was approximately 8%, however
this is forecast to rise considerably as 176,000
sqm of the new space comes on to the market during
this year. Vacancy rates in the country, excluding
Sofia, dropped from 27% to 24%. In some secondary
cities vacancy rates were reported to be as high
as 40%, examples being cities like Plovdiv and Rousse.
(Source: MBL CBRE, Colliers).
Detailed Project The major factor in the overall decline in vacancy
Reports Bulgaria rates has been the constant decrease in rental levels.
In quarter 3 rental levels remained virtually unchanged
but it is not clear if rents have reached sustainable
levels. Average rental levels in Bulgaria are around
EUR12.20 per sqm per month, a decline of 10% year
on year. Outside of Sofia the average monthly rental
has declined by almost 20% to EUR10.30 per sqm per
month.
The level of activity in the Bulgarian commercial
property market during quarter 3 remained unchanged
with no property investment deals announced. With
lending terms remaining far from competitive, liquidity
in the commercial property sector remained at record
low levels. CBRE/MBL have also started to notice
a divergence in the yield expectations between buyers
and sellers of as much as 150 basis points which
is going to have an effect on the speed with which
the investment market will start to return.
Romania
The investment activity for the third quarter was
similar to the previous two quarters with a few
transactions taking place. Among the most notable
was the take over of Tower Center International
Office Building by Ioannis Papalekas and Dragos
Balteanu, the developers of the Upground Office
and Residential projects. Several other smaller
deals have taken place with the Greek investment
fund Zeus buying the headquarter Victoria Office
Building for an estimated EUR 12million. On the
retail market, Auchan purchased the Auchan Pitesti.
Although not being a real estate transaction, the
purchase of the Real Hypermarket operations in Eastern
Europe by Auchan will have a significant impact
on the local retail market. Real currently has around
20 hypermarkets trading across the country with
some of the locations such as Constanta directly
competing against Auchan. It is expected that a
consolidation process will take place before Auchan
start to expand into new developments.
Office
In quarter 3, 3 new office buildings accounting
for c. 20,000 sqm were delivered to the market:
AFI Business Park 1(13,700sqm); Aviatorilor Plaza
(3,300sqm); and Monolit Square (2,100sqm). These
do not include the reactivation of TCI which is
Development Projects another 25,000sqm of Gross Lettable Area (GLA).
Romania According to JLL, new stock delivered to the market
in the first nine months of the year was 44,000
sqm, a decrease of 14% compared to the same period
in 2011. Surprisingly, larger projects such as TCI,
Hermes Business Campus and Green Gate have resumed
construction activity which will increase the supply
pipeline this year.
The quarter 3 office take up was estimated by JLL
at 40,000sqm with about 8,900sqm representing renewals.
Leases for existing buildings were c.17,000sqm while
pre-leases were almost 10,000sqm. The cumulative
take up, excluding renewals, reached 140,000sqm
for the first three quarters of 2012, a 21% decrease
from the previous year. In quarter 3, prime rents
softened further to about EUR18.50sqm per month,
however there is evidence that the incentive packages
offered by landlords have started to soften.
As a change from previous quarters a number of new
developments totalling up to c. 170,000 sqm have
been announced in the Barbu Vacarescu sub-market,
all aiming to be delivered within a 18-24 months
period. Only Portland Trust is actually building
Floreasca Park, however developers such as Skanska,
Ioanis Papalekas, and Nusco have secured building
sites and are currently going through the building
approval process.
In quarter 3, vacancy rates were forecast by JLL
at 17.2% whilst CBRE reported a vacancy rate of
15.1%. CBRE is also reporting that CBD vacancy rates
have increased 8% to approximately 13%, however
CBRE are including the 25,000 sqm of TCI. Vacancy
rates are expected to decrease given the supply
gap coming up within the next 12 months.
Retail
No new projects were completed in quarter 3. By
the end of the year three new hypermarket schemes
with galleries attached will have been delivered
in Bucharest: Auchan City in Giulesti; Cora on Soseaua
Alexandriei; and Kaufland on Soseaua Mihai Bravu,
all developed by in house development arms of the
above mentioned retailers. Also the more notable
opening before Christmas was the Ploiesti Shopping
City development by NEPI in collaboration with Carrefour.
Food and fashion 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. As previously mentioned, the purchase of
the Real operations by Auchan will bring a new dynamic
into the market. Fashion retailers are concentrating
on existing schemes given the scarcity of new pipeline
being developed. Prime shopping centre rents are
quoted between EUR60-70 per sqm per 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.
After significant openings during the last few years
the estimated delivery for 2012 is only set to reach
about 187,000sqm according to JLL, with an even
lower figure of around 150,000sqm for 2013 forecast.
The main projects looking to be developed in the
near future are: Promenada Mall (part of the Raiffeisen
Evolution Sky Tower complex), AFI Palace Ploiesti,
the extension of the Anchor Group projects (Bucuresti
Mall and Plaza Romania) and the NEPI and Cora projects
in Brasov.
Bulgarian Assets
Galleria Plovdiv
In December, 3,800 sqm, representing approximately
7% of the retail area, opened for trading, while
around 4% of the areas closed during quarter 4.
This had a net positive effect on overall occupancy
increasing it to 64% of the leasable area from previous
61%. During the quarter, Galleria Plovdiv managed
to sign new lease agreements totalling 4,200 sqm
of retail area which will open to the public during
January, driving occupancy close to 75% of the leasable
area. The importance of this threshold is that it
will trigger certain thresholds for the three major
tenants in the scheme in respect of rent payment.
The company continues to negotiate with the bank
to restructure the banking facility, which is presently
in default and there appears to be a consensus to
find a solution. The Directors, on behalf of the
Company have committed to inject further loans,
alongside our partners once a solution has been
found to the restructuring. Any further equity injection
by the Company will be subject to strict conditions
and will be require advance approval of the Directors
of the Company.
The shareholders have provided limited temporary
funding to support the project in terms of necessary
capital investment for the fit-out works related
to the new retail space as well as to cover the
operational shortfall until the end of the year.
Mega Mall Rousse
During quarter 4 2012, occupancy increased to approximately
60% of the GLA with the reopening of the supermarket,
the opening of 1,650 sqm of retail space and the
first unit in the food court area.
Despite the achieved increase in occupancy additional
leasing is still proving to be difficult. At the
moment an additional 1,200 sqm or 6% of the GLA
is under detailed negotiation but, as previously
announced is highly dependent upon fit-out contributions.
The Company continues to negotiate with the bank
to restructure the banking facility, which is presently
in default.
Trade Centre Sliven
The company's cash is still deposited in three banks
to achieve security but at the expense of higher
interest revenue. It is the intention of the operating
company to make a distribution of retained profits
in quarter 1 which will enable our partner to repay
the outstanding loan to ECDC.
As previously announced, there has been no change
in the position regarding the development itself
and the Manager is considering various alternatives
for the site.
Bourgas Retail Park
There has been no further progress made with this
development.
Romanian Assets
Cascade
During quarter 4, another 355 sqm was let, which
took the occupancy levels to 98.6%. Rental levels
achieved were in the range quoted above for central
districts and the company is able to meet all of
its current banking obligations. All operational
expenses are fully serviced from the cash flow of
the company. Out of the increased EUR1.25m loan
facility taken out to meet the additional cost of
the arbitration award, EUR0,9m was outstanding at
December 2012. The outstanding amount should be
repaid by April 2014 at the latest however, it is
forecasted that excess funds will allow for an earlier
repayment.
The Manager and the partner are actively looking
to improve the profile of the asset through various
asset management initiatives.
Oradea Shopping Centre
The Oradea construction bank loan facility is fully
drawn. Argo requested a rescheduling of payments
and an interest rate reduction. In addition the
availability period for the standby facility of
EUR1.3m required for tenant fit out works needs
to be extended. Although the majority of terms are
accepted by the lenders, the interest rate reduction
seems to be the main issue in resolving the restructuring.
Mobexpert, Naturlich and other furniture stores
opened this year and are trading above expectations.
This part of the scheme has been branded as ERA
Home Centre and now offers the largest selection
of home decoration and furnishings in the region.
A further 5 leases have been signed, but fit-outs
can only commence when the standby facility has
been reopened, which is also impacting on further
leasing activity. Negotiations are on-going with
Decathlon for a 1,800 sqm unit in Phase 3 of the
Mall.
Marketing activities have been successful in increasing
the footfall at the site and the centre has been
positioned as a family oriented venue with an increasing
profile and visibility in the local community.
Iasi Shopping Centre
Competition in the City has increased with the opening
of the 45,000 sqm Palas scheme in the city centre.
This attracted a number of new retailers to the
city and reduced traffic and sales in the other
shopping centres in the city. Although traffic at
ERA has now returned to pre Palas opening, it is
clear that sales for the fashion retailers have
declined. This fact is also true for the other two
main shopping centre schemes in the City. Occupancy,
however remains at 97.8%, after the manager had
secured a further 21 lettings in 2012.
Construction of the 28,000 sqm Mall extension has
been delayed pending finalisation of the debt facility.
There is a further 8 hectares of land available
for sale or development of further retail units.
BMW have offered attractive terms to lease 6,000
sqm of land to develop a showroom and approval is
awaited approval from the lenders. Discussions with
IKEA are on-going with a positive outlook for 2013.
The restructuring of the existing facility has received
credit committee approvals, although the lenders
have delayed finalisation until completion of the
Oradea re-structuring. The Mall currently has all
permits necessary to commence construction and negotiations
are progressing with a number of contractors. Assuming
finalisation of the facility in March, the current
construction program envisages delivery of Phase
1, 15,000 sqm by March of 2014 and Phase 2 of 13,000
sqm by November 2014.
Reducing rental concessions throughout 2013 is unlikely
as most retailers are experiencing a 15-20% sales
decline following the Palas opening.
Argo Real Estate Opportunities Fund
In June 2012 the Fund announced a new facility of
EUR29.3m with Proton Bank with an interest rate
of Euribor plus a margin of 4.6%. The first interest
period was 31st December, 2012. The Fund has subsequently
announced that because of difficulties it has experienced
in up-streaming excess cash from its development
in Odessa, Ukraine, it has requested a two month
deferral to 28th February, 2013 of the interest
payment which was due on 31st December, 2012. The
Manager has consulted with the Fund and has been
reassured that this will have no impact on the investments
of NEFF3.
Asmita Gardens
The insolvency plan proposed by the main creditor,
Alpha Bank, has been submitted and approved given
Alpha Bank's control over the creditor pool voting
for the plan. The Company is not expected to recover
any of its investment following the insolvency process.
Baneasa
There have been no significant developments in this
project since the last Shareholders Report.
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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