EUROPEAN CONVERGENCE DEVELOPMENT CO PLC 
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ECDC plc | |||
Shareholder Update | July 2013 | ||
European Convergence Development Company PLC ("ECDC" or "The Company") | |||
The Manager presents its latest Shareholder Update report covering the three month period 1st April 2013 to 30th June 2013. 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 Bulgaria held early parliamentary elections on 12th May and a new Government took office on 29th May, supported by the Bulgarian socialists, a party of ethnic minorities and the nationalist party in Bulgaria. From 14th June numerous protests have been and are continuing to be held throughout major cities in Bulgaria calling for the resignation of the new Government. The spark that ignited the demonstrations was the appointment of a controversial media mogul with a negative public image as head of the powerful national security agency. The demonstrations are ongoing. The Gross Domestic Product (GDP) of Bulgaria expanded 0.4% year-on-year in quarter 1 and 0.1%quarter-on-quarter. Quarter on quarter growth has remained at 0.1% or less for the last seven quarters and the World Bank recently reduced its GDP growth for 2013 and 2014 to 1.2% and 2.1% Unemployment in quarter 1 increased to 13.8% from 12.4% at the end of 2012 and represents one of highest rates over the last 10 years. Industrial production declined 6% year on year in May, both exports and imports fell in May whilst the current account deficit was ?120 million. Inflation in June increased to 2.6% after two months of 2.0% inflation At the end of April net FDI amounted to a meagre EUR 408.5 million (1.0% of GDP) which was worse than the low figure of EUR 895.2 million recorded for the same period for 2012 (2.3% of GDP). In addition to the struggling Bulgarian economy and limited global appetite for risk, FDI was affected since February by the unstable political situation in Bulgaria. At the end of April 2013, the consolidated budget deficit stood at BGN 286.4 million (EUR143 million) on a cash basis (-0.4% of GDP), while general government debt, including government guaranteed debt, amounted to 18%of GDP. Both the deficit and the government debt compare favourably to other EU countries and the Government has announced that it will be placing an amended budget before the Senate in an attempt to drive growth. ROMANIA Economic activity remained on an upward trend in quarter 1. GDP expanded by 0.6% quarter on quarter and 2.2% on an annualised basis. The increase in GDP stemmed from the positive growth in industrial production and there is a good chance that this will be maintained in coming quarters. On the demand side growth came from a significant increase in exports. Total consumption decline 0.5% with household consumption declining 0.6%. Analysts estimate around 2% GDP growth for 2013. In May exports were slightly down on April at ?4,020 million but represented the third month in a row when exports exceeded ?4,000 million since quarter 3, 2011. Imports also declined in May from ?4,700 million in April to ?4,520 million. According to current estimates, in quarter 1 the foreign trade deficit achieved its lowest level since 2000 (starting point of last business cycle) at around 3.0% of GDP. Year on year Industrial production, which has climbed consistently over the last four months declined 1.2% in May compare to May 2012. Inflation in June was 5.37% and has remained around this level for the last four months indicating no real inflationary pressure in the system. Interest rates remained on hold at 5.0%. Retail sales declined 3.25% year on year and just under 3.0% month on month in May. Consumer spending in quarter 1 declined ROM 125 million quarter on quarter but was almost the same as the previous year comparison. The International Monetary Fund (IMF) completed their seventh and eighth reviews of Romania's performance under its economic program supported by a 24-month Stand-By Arrangement (SBA). The favourable outlook and consequent approval by the IMF allowed the funds available for Romania to increase to ?3,571.68 million. The arrangement is viewed by the Romanian authorities as precautionary and not intended to be drawn down. | ||
Property Market Overview | Bulgaria Retail There are no significant changes in the retail market in Bulgaria in quarter 2 2013 as no Shopping centres were open for trading during the period and the country's shopping centre stock remained at 704,000 sqm. As previously reported, there are three shopping centres with a total GLA of over 120,000 sqm, which are scheduled for completion by the end of 2013 and early 2014. The expected average lettable area per 1,000 inhabitants for the country after the opening of the scheduled Retail centres will increase to approximately 115 sqm compared to 247 sqm for Europe as a whole and 200 sqm for CEE. In quarter 2 2013, the shopping centre stock per capita in Plovdiv, where Galleria Plovdiv is located, was less than 200 sqm per 1,000 inhabitants, while the comparable figure for Rousse, where Mega Mall Rousse is located, was approximately 300 sqm per 1,000 inhabitants. Quarter 2 of 2013 brought no surprises on the demand site. The retail market remained pro-tenant orientated due to the increasing availability of modern retail space and low turnovers. The investment market remained stagnant with no property investments undertaken in the quarter 2 of 2013. Romania No notable transactions were reported in the second quarter of 2013 though there are several commercial real estate projects in advanced stages of negotiation, predominantly in the retail sector. As JLL reports, timelines remain lengthy and they expect to see closing only in the letter part of the year. NEPI was again one of the most active investors securing several sites and announcing further developments plans following an additional capital raise. Commercial Office In the first half of the year total investment volume in Romania was approximately ?62 million represented by one transaction reported last quarter, the sale of Lakeview to NEPI. This was the largest institutional transaction in the office sector in Bucharest since 2010. To put this investment volume into context, the similar figure for Poland was ?970 million and for Slovakia it was twice Romania. In Quarter 1 72,000sqm of office space was delivered in 3 buildings: Sky Tower, Floreasca Office and West Gate H5, taking the total modern office stock in Bucharest over the 2 million sqm mark. Over 2013 the pipeline for the remainder of 2013 is estimated at approximately 50,000 sqm, taking the estimated yearend total above 120,000 sqm, more than 2.5 times the supply delivered in 2012. In Quarter 1 take up is estimated at 63,000 sqm with over 59 transactions completed. It is to be noted that that only 3% were represented by pre-leases, the rest being new leases and renewals. Prime headline rent remained unchanged to the end of quarter 1 at EUR 18.50 per sqm per month. These levels are expected to soften slightly. Incentive packages are still common practice although the value will vary significantly depending on the type of space being let. Overall vacancy rate is estimated at 16% but with significant variations depending on submarket and property type, with Pipera North and Baneasa reaching more than 35%. 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 12-18 months period. Only Portland Trust is currently building its Floreasca Park at a rapid pace. Developers such as Skanska, Ioanis Papalekas, and Nusco have secured building sites and are currently going through the building approval process. For 2014, the supply is estimated at about 150,000sqm. The specification of new buildings is improving and most developers are looking for energy efficient and green certificated buildings, following both occupier and investor interest for such improvements. Retail 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 mentioned before 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 ?60-70 per sqm per month as rental levels continue to be stable. Prime high street units are in the same range, but a forecast to soften over the next 6-12 considering the availability of numerous units along main retail streets. After significant openings during the last few years, according to Jones Lang LaSalle (JLL) the estimated deliveries for 2013 are only set to reach about 120,000sqm in 5 projects in 2013 and 65,000 in 3 projects in 2014. 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), the NEPI and Cora projects in Brasov and the Corall in Constanta. | ||
Development Projects Bulgaria | Galleria Plovdiv At the beginning of quarter 2 the overall occupancy of the Mall had remained approximately 75% of the lettable area. The higher occupancy levels were expected to trigger certain thresholds for major tenants to start making rental payments which has not been the case and negotiations are ongoing with the majority of these tenants which is negatively affecting the cash flow position of the development SPV. Despite the achieved increase in occupancy, additional leasing continues to be difficult and is highly dependent upon the successful implementation of the leasing strategy developed by the international consultant. During the period the interim contract with the international consultant was extended by a further two months. During this period, it is hoped that the negotiations with the Bank will progress and a long term contract negotiated with the international consultant, which will allow the implementation of the strategy. In line with the strategy, the initial negotiations with several international tenants continued. The signing of such tenants will be heavily dependent upon the availability of fitting out contributions to new tenant, as well as meeting their demands for co-tenancy presence of other international brands. This makes letting of new areas even more challenging and somewhat uncertain. The discussions with the bank to restructure the banking facility have slowed but it is hoped that they will be resumed in the next quarter as any further delays may negatively impact the project. The facility continues to be in default and any further equity injection by the project company will be subject to strict conditions and will require the formal sanction by the Directors of ECDC. The shareholders have provided very limited temporary funding to support the international consultant in quarter 2. At the end of the reported period the centre manager left the project and the shareholders are considering various options to address this issue. The day to day operations are presently carried out by the technical manager. The Mall has been unable to meet all of its operational obligations from the collected rental and service charge income, which has led to increasing overdue payments to service providers and the fiscal authorities. Unless the bank restructuring is resolved quickly and fresh cash made available to cover operational needs, the company faces serious liquidity problems and even foreclosure risks, which threaten its operations. Mega Mall Rousse During quarter 2, occupancy dropped from 60% to 56% following the closure of the anchor children's toy operator Hippoland. As reported, the management team immediately started initial talks with another operator in order to secure an adequate replacement. Advanced negotiations with a bank and café operator on the ground floor are in progress, with lease agreements under discussions. During quarter 2 the management team secured a replacement café operator for the first floor which is expected to improve the rent collection. Leasing is still proving to be extremely difficult and as previously announced, is highly dependent upon the provision of fit-out contributions. As previously reported, the bank has initiated a series of aggressive actions culminating in making of the whole facility payable end of April 2013. The Manager and representatives of the partner have held meetings with the Bank and discussed various options going forward. Agreeing terms with the Bank is paramount, as otherwise the viability of the Project will be severely undermined, especially given overdue liabilities which pose some foreclosure risks. Trade Centre Sliven During the quarter the operating company distributed the retained profits enabling our Partner to repay the majority of his outstanding loan. In total ECDC received BGN 876K (c. EUR 438K) of which c. BGN 485K (c. EUR 243K) represented loan repayment and the balance - a distribution. 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. | ||
Development Projects Romania | Cascade The building is fully leased and generating income in line with the budget. All the financial obligations of the company are up to date with there are no outstanding debtors. With the completion of the leasing process the partner has managed to position the building as one of the premier office products in the Bucharest real estate market. There is continued interest in the building by potential tenants, with inquiries being addressed and managed by the building's management team. In accordance with the most recent loan agreement the company has made use of its option and paid down some additional debt on the first anniversary. Oradea and Iasi Shopping Centres Further to the Cypriot crisis reported in the last shareholder update, the restructuring of the loans for both Iasi and Oradea is still pending. It is expected that the current situation will continue for a few more months until a solution is found for the current loan book of Bank of Cyprus Romania. The other banks in the syndicate are providing support for daily operations although the banks are often prioritizing repayments of interest and bank related fees in front of service charge related expenses. AREOF has announced at the beginning of June that the Oradea loan facility is in default and that pending remedy of the default, the banks will continue to sweep the accounts at the expense of service charge which will put pressure on the cash flow. An additional threat to the operations of AREOF came with the announcement made by NEPI that it is in advanced negotiations for the purchase of part of the bank debt in another shopping centre owned by AREOF, namely Sibiu Shopping City. Given the debt facility expiry in November this year, it is anticipated that NEPI wish to push for the full purchase of the debt and attempt to take over the asset. Although not directly impacting the investments in Iasi and Oradea, if NEPI are successful in achieving its objective it could significantly weaken AREOF's position thereby threatening the security of ECDC's investment. Various solutions and courses of action are currently evaluated by AREOF in finding a favourable outcome to this threat including a legal claim through the Romanian courts against NEPI as to the practices used in seeking to acquire part of the bank debt. AREOF has remedied the default occurred under the Sibiu 2 loan agreement by making a EUR 1m cash injection in the company in the beginning of May. Oradea Shopping Centre ERA Oradea has consistently increased traffic every month this year recording a 40% increase in traffic for May year on year. Carrefour reported a 20% increase in sales year on year in May following a 6% decline for April. The late Easter accounted for most of this increase, together with a range of attractive marketing events designed to generate traffic and sales growth. As Easter is traditionally a time for purchasing new clothes, it is not surprising that fashion and footwear retailers traded higher for May. The increased expenditure for food, electrical and fashion was at the expense of furniture retailers, where sales declined significantly. Another large furniture tenant was secured and there are ongoing negotiations with a large fashion retailer following Sprider's recent closure of their store due to the company's insolvency in Greece. Letting activity remains competitive given the existence of the three other shopping centres in the city. The absence of available tenant fit out facility is significantly limiting possible transactions, as this remains an important influencing factor under the current tenant favourable market conditions. Iasi Shopping Centre Monthly traffic remains consistently lower year on year, due mainly to the retail competition within Iasi. The City council has embarked on a number of major road improvement works simultaneously throughout the city which has reduced the number of people willing to drive to the centre. April's marketing activities and promotions repeated March's success and produced a 20% month on month traffic increase. This was also true for the first half of May for the Easter campaign period. The improved weather from early April has also helped. Retailer sales increased with the improved footfall but the late Easter delayed the peak sales period. The very warm weather in early May helped drive sales for shoes, accessories, cosmetic, toys and children's clothes. New and interesting sales promotions, gifts, prizes and giveaways are largely driving the increased customer traffic and sales. Marketing budgets have increased to ensure that campaigns are being extensively marketed throughout the city. Surprisingly after the Easter campaigns finished, traffic and sales declined for the second half of May producing an overall monthly footfall decline against April. Clearly increased marketing activities and increased expenditure will have to be maintained for the next 12 months to maintain and increase visitor numbers. Sprider closed their store in May, for the reason mentioned above and will be replaced by a discount fashion tenant trading as San Francisco. This unit will be selling end of range items at discounted prices and it is anticipated that this will be an attractive draw for customers. Further lettings to Tiffany (tailors 98 sqm), Dry Cleaners (98 sqm), Schneider (fashion 129 sqm), were signed and Divanissimi (furniture 284 sqm) is opening next month. | ||
Investor Relations Tel: + 44 (0)20 7518 2100 Fax: + 44 (0)20 7518 2199 Email:marketing@charlemagnecapital.comWebsite:www.charlemagnecapital.com
Issued by Charlemagne Capital (UK) Limited, 39 St James's Street, London SW1A 1JD The purpose of this document is to provide a mere legal and tax outline of the structure proposed. This document cannot be regarded as a fully comprehensive report or as a binding legal and tax opinion since it has been prepared solely for information purposes. Therefore, investors willing to obtain the comfort they may deem necessary as to the application of the above-mentioned tax advantages in order to invest into this structure should seek and rely on its own independent advice. 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 to be issued by the Company which contains significant additional 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 information in this document/financial promotion 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 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 is not intended for public use or distribution. 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. 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. 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. | |||
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