Eastern European Property Fund : Final Results

By 31 December 2016, EEP's property holdings had reduced to the Markiz Passage on Istiklal Street, Istanbul and George Washington Street, Sofia. This followed the sale of the remaining units at Nil Passage, in Beyoglu, Istanbul in April 2016, and Gara Progresului, Business and Logistics Centre in Bucharest at the end of the year. The Romanian property was sold for a total consideration of €1.5 million. The initial payment was €1.16 million with deferred consideration in the form of a secured loan for the remainder, of which, €40,000 had been received by 31 March 2017.

Economic and market conditions have remained subdued and slow in Istanbul following the attempted coup in July 2016. More recently, the referendum on the proposed transition to an executive presidency, held on 16 April 2017, added to the political uncertainty which, together with substantially reduced footfall and tourism, has meant that overall business confidence remained low with limited property transactions taking place.

In Sofia, Bulgaria, although there are indications that the overall economy is improving (albeit at a slow pace), the level of commercial property activity is very limited.

The properties held at 31 December 2016 were as follows:

The Markiz, Istanbul, Turkey

There have been fewer enquiries to buy the property during 2016 and while all interest from buyers has been and continues to be considered, it's a reality that prospective buyers' expectations of price have reduced from previous periods and the position deteriorated leading up to the referendum. This reflects the opportunistic nature of the current buyers in the property market and their wish to exploit the recent political uncertainty.

EEP has explored rental options but, as with sale opportunities, there has been less letting activity on Istiklal Street due to its location and the impact of terrorist activity last year with the resultant reduction in tourism. The one remaining tenant, Food Club, went into administration in the autumn and had its lease formally brought to an end by the courts in March 2017. Therefore, the property is currently unoccupied and is available with vacant possession. The Property Manager and Investment Adviser continue to consider and implement procedures to remove conservation and historic planning issues.

Overall, the commercial property market has been quieter than usual, particularly in the months immediately prior to the referendum, with only bargain hunters around, but most sellers have been resistant to price reductions as they fail to see fair value being achieved for their assets. However, the Vastned portfolio (which is predominantly retail orientated property located on or around Istiklal Street) has reportedly been sold for €100 million in February 2017.

The Atrium, George Washington Street, Sofia, Bulgaria

In December 2016 it was announced that the Belgian bank, KBC, had acquired UBB Bank (EEP's main tenant in Bulgaria). There are currently no indications as to whether this will impact UBB's occupation of the property.

Although the property has been on the market for sale, there has been very limited interest shown in it. It remains difficult for buyers to obtain commercial loans, a key enabler in the sale of the EEP's property in Bucharest. Other options to improve the potential liquidity of the property are being explored.

Turkey - Economic and Political Commentary

The Turkish economy recorded a better than expected fourth quarter 2016 GDP growth of +3.5%. This follows a contraction of -1.8% in the third quarter of 2016, according to data released by the Turkish Statistical Institute, Turkstat, and is a bounce back after the failed coup. This was mainly due to a significant rise in consumption, with auto sales up strongly, along with construction activity, which came ahead of planned tax increases.

GDP growth for 2016 as a whole was 2.9%, as reported by the Turkish Statistics Institute. This was ahead of the 2.4% forecast for 2016 in the Economist poll of forecasters. For 2017, the Economist poll is again forecasting GDP growth of 2.4%. Government finances and debt levels appear to be at reasonable levels, although there are concerns over private sector US Dollar debt. However, the Turkish Lira has been relatively stable against the US Dollar to date this year. Inflation rose to 11.3% in March 2017 and is forecast to average 8.8% this year.

The current account deficit has improved to -4.5% in March 2017 but is expected to deteriorate again. Tourist arrivals appear to be increasing from a low level and the number of visitors increased by 18% in April 2017. The reduction in numbers of Western European visitors is partly offset by increased arrivals from neighbouring countries and Russia.