Eastern European Property Fund : Half-year Report

As has been the case for some time, during the period ended 30 June 2016 and to date, all of EEP's properties have been on the market and available for sale. This led to sales of all of the remaining units at Nil Passage in Istanbul. However, in a generally more subdued market, enquiries for EEP's largest asset (the Markiz Passage on Istiklal Street, Istanbul) have been less frequent than equivalent quarters in previous years. In Sofia, Bulgaria, enquiries for the property there remain only very occasional but in Bucharest, Romania, although serious enquiries remain limited, there is optimism, given the increasing level of economic activity, that the opportunity to conclude a transaction is now more positive.

As indicated above, during the period, the last units at Nil Passage in Beyoglu, Istanbul (specifically two office suites and one shop) were sold for a total of US$957,000 (including VAT). As with other major investment properties in Istanbul city centre, the prospects of a near term sale of the Markiz Passage appear to have been adversely impacted by the substantial reduction in tourists and the knock-on effect of a reduction in revenues and confidence in the area.

In Sofia, the overall income level of EEP's property has been maintained; however, the lease tenancies remain short term and opportunities for buyers to obtain loans are very restrictive.

The position in Bucharest is more positive as Romania appears to be more actively engaged with reforming its institutions and tackling corruption. The after effects of the nightclub fire tragedy that occurred last year continue to be felt, including the impact this has had on the relevant fire-related requirements for property generally. This has been taken into account in the valuation of EEP's property in this city.

The properties held at 30 June 2016 were as follows:

Markiz Passage, Istiklal Street, Beyoglu, Istanbul

The property remains EEP's largest and prime asset and is very prominent on Istiklal Street due to the presence of the Markiz café, which is historically significant and is currently partially occupied by the remaining tenant in the building, Yemek Kulubi (Food Club). Although we have received fewer enquiries this year than has been the case for some time, there remains interest in the building from local businesses. Many of these are hoteliers or developers but virtually all are involved in tourism-related businesses, which are experiencing the most difficulties at the present time.

Additional rental propositions have been explored but the shorter-term opportunities have also been adversely impacted by the reduction in tourism in the area. Longer-term options remain as local consumption levels continue to hold up.

The Atrium, 24 George Washington Street, Sofia

There has been limited interest in the property from investors and alternative options to realise value from the property are being explored.

The United Bulgarian Bank remains in occupation and is the largest tenant by some margin. The other tenants are short-term occupiers which provide income and activity in the building. While total income varies over time, it generally remains at a steady level.

Gara Progresului, Business & Logistics Centre, Bucharest

This property remains for sale and attracted some interest during the first half of 2016. While no specific offers have been received at the time of writing, the Property Manager and Investment Adviser are more optimistic that a sale is possible than has been the case for some years.

The building continues to attract tenants on a regular basis, although these are on short-term agreements, which gives rise to a constant turnover of tenants.

The more stringent regulatory requirements relating to fire precautions have been assessed and tenders for additional compliance works are being undertaken. The local authorities are also taking other regulatory requirements more seriously and this may have an impact on other physical and environmental issues relating to property in general, including EEP's property at this location.