Shareholder Update (7460A)
07 February 2011 - 6:00PM
UK Regulatory
TIDMECPC
RNS Number : 7460A
European Convergence Property CoPLC
07 February 2011
07 February 2011
European Convergence Property Company plc
("ECPC" OR "THE COMPANY")
Shareholder Update from 1st October 2010 to 31st December
2010
The purpose of this document is to update shareholders with new
developments since the Company's last report dated 2 November 2010.
This update should be read in conjunction with all prior reports,
which provides commentary on the historical evolution of the
Company's business, and the associated detailed background
information.
This Shareholder Update only deals with Bulgaria as it remains
the only country to which the Company has operating asset
exposure.
Economic Overview
The fourth quarter information on the Bulgarian economy
indicated a continuation of the improvements from previous
quarters. Not all indicators were positive but the latest forecast
by the IMF indicates GDP growth for 2010 should be between 0% and
0.4%, however the IMF did warn that the economy relies on only one
engine for growth: exports.
Exports gradually increased, recording EUR12.70 billion in
October 2010 against EUR9.65 billion for the same period in 2009.
After a negative GDP growth in Quarter 1 2010, the GDP rose by 0.5%
quarter on quarter (seasonally adjusted data) during Quarter 2 and
further increased in Quarter 3 to 1%. However, FDI continued to
decline during the first ten months of the year representing only
2.3% of GDP as opposed to 7.2% of GDP in 2009. Unemployment
continued its downward trend and registered an eighth consecutive
month of decline, falling from a peak of 10.3% in February to 8.9%
in October.
The Government's finances continue to compare favourably to most
European countries. In the first ten months of the year Bulgaria
generated a budget deficit of 2.6% of GDP. In October Government
debt stood at approximately 16.2% of GDP and foreign currency
reserves were over 44% of GDP.
Meanwhile, retail sees no respite to the downward trend.
Preliminary figures issued by the Bulgarian National Statistical
Institute (NSI) indicate that in November turnover in the retail
trade, calculated based on calendar adjusted data, decreased by
5.2% compared to the same month last year.
Bulgarian Retail Property
Modern retail floor space continued to increase during the
period. In provincial cities, four retail centres partially or
fully opened to the public but suffered from high vacancy
levels.
Brokers report that in Quarter 3 2010 there was an annual rent
decrease of approximately 25% compared with the third quarter of
2009. Although conditions in the retail market continue to be
generally unstable there is evidence of a slight stabilisation and
a resurgence of retailers' interest in opportunities is expected in
the near future. Brokers further report that the mid-term outlook
for the sector is positive for Sofia and slowly improving for the
larger provincial cities. The previously reported introduction of
stepped rents, longer rent-free periods, turnover rent only periods
and landlords' fit-out contributions or a combination of these are
still prevalent. Rent collection is generally proving
problematic.
Rents and capital values are not expected to recover in the near
term and it is difficult to see a change to the current market
conditions until there is a significant change in sentiment.
Mall Veliko Turnovo
Asset Overview
The Company's one remaining property asset is a wholly owned
interest in a single shopping centre, Mall Veliko Turnovo ('MVT')
in central Bulgaria.
MVT continued to face the extremely demanding retail trading
environment and provide tenant support by offering further rental
concessions in order to maintain acceptable levels of occupancy,
which further decreased the rental income during the quarter.
At the end of December 2010 occupancy levels were at c 91% or
14,423 sqm of the total lettable space.
While the use of rental concessions is helping to maintain
occupancy levels, the fall in rental income has impacted MVT's
cashflow which is now negative and even with the planned makeover
it is anticipated that rents will remain low at least until 2012.
The negative cashflow is currently being funded from MVT's cash
reserves with Alpha Bank.
The Manager is in detailed discussions with its senior lender
about how best to take the Mall forward.
The difficult trading conditions will have had a negative impact
on the carrying value of the investment. The Manager has therefore
appointed Smith & Williamson to undertake a full property
valuation as at 31st December 2010.
General Fund Matters
The Directors of the Company adjourned the shareholder meeting
to consider the possible delisting of ECPC whilst all options were
being explored with the senior lender of its subsidiary.
In July 2010 the Bulgarian tax authorities issued an assessment
against European Convergence Property Company Bulgaria EOOD ("ECPC
Bulgaria"), the company which directly owns MVT, for withholding
tax on the interest accrued and payable to its parent. The company
appealed to the Higher Tax Office against the assessment and was
informed on 13th September 2010 that the Higher Tax Office had
upheld the original assessment. The company then appealed this
decision in the Administrative Court and a hearing has been
scheduled to take place on 15th February 2011.
In parallel, a tax audit report covering the years from 2006 to
2008 was issued by the Revenue Authorities and handed to ECPC
Bulgaria on 20th September 2010, which stated that for the audited
period ECPC Bulgaria had to pay EUR135,000 withholding tax and
EUR47,000 in penalties. An objection against the tax audit report
was prepared by KPMG and submitted to the Revenue Authorities on
1st October 2010. The Manager is currently in discussions with the
Bank on how best to proceed with the objection.
If the appeal fails and the 2009 and 2010 accounts are included,
the total assessment including penalties will be in the region of
EUR290 000.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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