EUROPEAN CONVERGENCE DEVELOPMENT CO PLC 
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ECDC plc | |||
Shareholder Update | 3rd May 2013 | ||
European Convergence Development Company PLC ("ECDC" or "The Company") | |||
The Manager presents its latest Shareholder Update report covering the three month period 1st January 2013 to 31st March 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 The Bulgarian government resigned in February, four months before the end of its term, after mass protests against high power prices and falling living standards following the introduction of austerity measures including the freezing of wages and pensions. Half of the population is perceived to be at risk of being in poverty. The President has appointed an interim government and early elections have been scheduled for 12th May. The political uncertainty has led to difficulties in governing the country and poses more challenges to a struggling economy. The new Finance Minister of Bulgaria revised down the official forecast for GDP growth in 2013 from 1.9 per cent to 1.0 per cent. As a result of the downgrading of the 2013 forecasts, the Bulgarian Ministry of Finance has had to reduce both its revenue and expenditure forecasts in order to achieve the planned budget deficit. The IMF forecast GDP growth of 1.5 per cent against an inflation rate of 2.3 per cent for 2013 In quarter 4 GDP growth was 0.1 per cent quarter on quarter and 0.5 per cent year on year, virtual stagnation. Similar to the previous three quarters of the year, growth was driven by domestic demand, though it has decelerated each quarter as household expenditure weakened on account of slower real wage growth, increasing unemployment and arguably negative consumer sentiment. The unemployment rate at the end of quarter 4 stood at 12.4 per cent and increased from 11.5 per cent in quarter 3. The stronger pace of job contraction was broadly visible in the majority of economic industries. This is the highest unemployment registered over the last 9 months and the second highest since quarter 2 2004. The Ministry of Finance is forecasting further increases in unemployment during 2013. This expectation is reflected in February retail sales which were 3.3 per cent down year on year retail and 0.9 per cent down on the previous month. The inflation rate in March fell to 2.7 per cent from a year earlier, compared with 3.6 per cent in February as spending on electricity and heating fell following milder weather and consumption shrank on high unemployment. Food prices were up by 0.4 per cent and non-food prices fell by 0.4 per cent, while services prices were 2.1 per cent lower compared to February. The harmonised consumer price index, calculated by the Statistics Board for comparison with European Union data, fell by 0.4 per cent in March. On an annual basis, harmonised inflation was 1.6 per cent. At the end of 2012 net FDI amounted to meagre EUR 1 398 million (3.5% per cent of GDP), worse than the EUR 1 746.3 million for the same period for 2011 (4.5 per cent of GDP). The low FDI trend over recent years adds another major concern for the recovery of the economy. Given limited global appetite for risk, the stagnating Bulgarian economy, and the political uncertainty, it is unlikely that FDI will approach pre-crisis level again for some time. At the end of February 2013, the consolidated budget deficit stood at BGN 732.0 million (EUR366 million) on a cash basis (-0.9 per cent of GDP), while general government debt, including government guaranteed debt, amounted to 17.5 per cent of GDP. Both the deficit and the government debt compare favourably to other EU countries. Imports in February increased by BGN 300 million (EUR150 million) to BNG 3,868 million (EUR1,934 million) whilst exports declined BGN 240 million (EUR120 million) to BNG 3,239 million (EUR1,620 million) compared to January. Industrial Production in February increased by 5.1 per cent when compared to the same month in 2012 and represented the third month in a row when production increased year on year. Romania The nationalization and dismantling of Bank of Cyprus and the closing of Cyprus Bank Popular (Laiki Bank), as part of the bail out of Cyprus by the European Union and the IMF had limited direct effect on Romania as together both banks control 1.3 per cent of assets according to Reuters. Nevertheless statements made by both European and local high ranking Central Bank officials sent out unsettling messages to larger depositors with deposits above the EUR 100,000 guaranteed threshold. The events in Cyprus brought added pressure to a banking system that last year is estimated to have accumulated a total loss of EUR 476 million. This is the largest loss recorded since the beginning of the crisis in 2008. Non-performing loans (NPLs) remained on a clear upward trajectory during 2012 (18.2 per cent at the end of the year, up from 14.3 per cent at the end of 2011). The pace in the growth in NPLs accelerated during 2012 which was consistent with other statistics that showed an increasing number of companies entering the insolvency procedure in 2012 when compared with 2011. Romanian GDP expanded 0.4 per cent in quarter 4, 2012 compared to the previous quarter and by 1.1 per cent compared to the same quarter in 2011. The IMF predicts real GDP growth of 1.6 per cent this year and 2.0 per cent in 2014. The estimate is the same as the Romanian government's 2013 prediction. No visible improvement in economic activity is expected in quarter 1 this year but improvement is anticipated in the second half of this year. In March, consumer prices were virtually unchanged over the previous month, following a 0.3per cent increase in February mainly because service price increase were offset by reductions in food and non-food items. Annual inflation climbed to 6.0 per cent year on year in January, however it has fallen in both February and March to 5.3 per cent. The annual inflation rate is expected to stabilize towards the end of the year to an estimated 4.0 per cent which, nevertheless, is still above the Central Bank's tolerance margin of 2.5 per cent plus or minus 1.0 per cent. At its recent monetary policy meeting on 5 February the Central Bank kept the benchmark interest rate at 5.25 per cent. The rate has remained unchanged since March 2012. No major changes can be seen in the Central Bank's rhetoric on inflation and economic developments compared with the previous meeting on 7 January. In February, Romanian Industrial Production increased 5.4 per cent when compared to the same month in 2011. Imports in February were marginally higher than the previous month whilst exports grew 4.7 per cent to EUR 3.873 million. Romania recorded a Balance of Trade deficit of EUR 208 million in February. Total Government debt represented 37.8 per cent of GDP in 2012, up from 34.7 per cent at the end of 2011. Romania borrowed USD 1.5bn in a 10-year Eurobond in February. Demand for debt papers was strong while pricing was relatively good (average yield at 4.5 per cent), reflecting a positive attitude of foreign investors' for Romanian and Emerging Markets' debt as well as ample liquidity in the global financial markets. | ||
Property Market Overview | Bulgaria Retail Modern shopping centre stock growth was 11 per cent in the first quarter of 2013 with the opening of the Paradise Center (Gross Leasable Area (GLA) 80,000 sqm) in March 2013. This brought the country's shopping centre stock to 704,000 sqm. As previously reported, there are three other shopping centres with a total GLA of over 120,000 sqm, which are scheduled for completion by the end of 2013 and early 2014; two are in Sofia and one is in the provinces. With the opening of these malls the average lettable area per 1,000 inhabitants will increase to approximately 115 sqm compared to 247 sqm for Europe as a whole and 200 sqm for CEE. In quarter 1 2013, the shopping centre stock per capita in Plovdiv, where Galleria Plovdiv is located, was less than 200 sqm per 1000 inhabitants, while the comparable figure for Rousse, where Mega Mall Rousse is located, was approximately 300 sqm per 1,000 inhabitants. The overall growth of supply has influenced demand behaviour. Retailers remained extremely cautious and selective especially with over supplied second-tier cities. Most retailers have limited expansion plans, with international brands focusing mainly on Sofia and less on major regional centres. As it was previously reported in 2012 the overall vacancy rate in shopping centres was around 18% of lettable area. As a consequence of the increasing supply of organized retail stock, rental levels are expected to experience some downward pressure, further assisted by the negative trend in retail sales. The investment market remained stagnant with no property investments undertaken in the last two quarters. Romania During first quarter of 2013 the most notable transaction was the purchase by NEPI of the Lakeview Office building in Bucharest, which was developed and owned by AIG Lincoln in a joint venture with Dinu Patriciu Global Services. The deal was estimated to be worth around EUR 60 million which represented an effective transaction yield close to 8.7 per cent. Office In quarter 4 only two small office buildings totalling c. 4,800 sqm were delivered to the market which took the total annual office supply to 49,000sqm. According to JLL this represents 54 per cent of the 2011 supply and only 17 per cent of the supply in 2010. A number of deliveries and completions were postponed during 2012 which affected the annual supply. Total take up reached 77,000sqm in quarter 4, with renewals representing 60 per cent. New leases contributed approximately 20,000 sqm and the average area per lease was only around 800 sqm. Only 5 out of 25 deals were more than 1,000sqm. For the full year, take up reached 240,000sqm, slightly below take up activity in 2011. There was a significant shift in the nature of the space occupied with 26 per cent represented by new leases in 2012 against 50 per cent in 2011, while lease renewals increased from 22 per cent in 2011 to 30 per cent in 2012. Prime headline rent remained unchanged over the final quarter of 2012 at EUR 18.5 per sqm per month. These levels are expected to soften slightly during the first half of this year. 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 per cent but with significant variations depending on submarket and even by property. Currently the 2013 office pipeline is estimated at 130,000 - 150,000 sqm with approximately 50,000sqm already preleased. For 2014, the supply is estimated to increase by a further 70,000sqm - 90,000sqm. 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 In the fourth quarter of 2012 the main activity was provided by the hypermarket operators with three new openings in Bucharest: Kaufland on Soseaua Mihai Bravu, Cora on Soseaua Alexandriei and Auchan City in Giulesti. Another two new openings: Ploiesti Shopping City and Cora Bacau were registered country wide. Including these openings the shopping centre stock increased to 0.83 million sqm in Bucharest and to 1.53 million sqm for the rest of the country. International retailers continued their aggressive expansion, taking advantage of the availability of prime space and current market conditions. Fashion retailers such as H&M, Inditex, Takko, Deichman, C&A and food retailers such as Mega Image, Profi and Carrefour were among the most active during this period. The take over by Auchan of the Real operations in Eastern Europe will create the 3rd largest retailer in the market after Metro and Kaufland, with 31 units across the country. The merger is currently awaiting the Competition Council's green light for completion. Prime shopping centre rents were quoted at EUR 60-70 per sqm per month and high street units around EUR60-65 per sqm per month. Rents are expected to soften during 2013 especially for high street units. The supply pipeline is estimated at 132,000sqm in 2013 and 166,000 sqm in 2014. The low estimated supply compared with previous years is materially affected by the lack of adequate financing facilities. | ||
Detailed Project Reports Bulgaria | Bulgarian Assets Galleria Plovdiv At the beginning of 2013, the overall occupancy of the Mall had increased to 76 per cent of the lettable area from 64 per cent in December. The higher occupancy levels are expected to trigger certain thresholds for major tenants to start making rental payments. The project company is currently negotiating with the majority of these tenants. Despite the achieved increase in occupancy, additional leasing is still proving difficult and is highly dependent upon the successful implementation of the leasing strategy, developed by the international consultant. To this end, a new long term asset management contract which will aim to secure the implementation of the strategy, is presently being negotiated with the international consultant and will be one of the conditions for the overall restructuring of the bank facility and the provision of additional funds by the shareholders of the project company. In line with the strategy, the leasing team is in initial negotiations with several international fashion brands, which have indicated interest to enter the scheme. The signing of such tenants will heavily depend on the availability of the company to make contributions to the fitting out cost of the 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 company continues to negotiate with the bank to restructure the banking facility, which is presently in default and any further equity injection by the 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 project in quarter 1 mainly for the temporary extension of the interim asset manager until the end of April. Unless the bank restructuring is resolved quickly, and fresh cash injected to cover operational needs, the project company faces potential operational risk which will threaten the operation of the Mall. Mega Mall Rousse During quarter 1 2013, occupancy remained stable but is expected to drop from 60 per cent to 56 per cent of the GLA in April due to closing of the anchor children's toy operator, Hippoland. The management team immediately started initial talks with another operator in order to secure an adequate replacement. Leasing is still proving to be extremely difficult and as previously announced is highly dependent upon fit-out contributions. The Bank unexpectedly started partial foreclosure against receivables under lease contracts in the last weeks of March, followed by notarized call for debt repayment in mid-April. Such action has not only been perceived with concerns by existing tenants but is also expected to create difficulties in the attracting of new retailers, thus creating uncertainty about the viability of the project. The initial result of this action was a substantial drop in the rent and service charge collection rate, which in addition to the low levels of occupancy is expected to pose serious liquidity challenges to the project company. The shareholders are seeking to agree terms with the Bank, as otherwise the viability of the Project will be severely undermined. Trade Centre Sliven The project company's cash is still deposited in three banks to achieve security but at the expense of higher interest revenue. At the annual shareholders meeting on 16th April 2013 it was agreed that the project company will make a distribution of retained profits which will enable our partner to significantly repay the outstanding loan to ECDC. In total ECDC will receive BGN 876K (c.EUR 450K) of which c. BGN 485K (c. EUR250K) 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 | Romanian Assets During the first quarter of 2013 the remainder of 200sqm were leased at a rent in line with the buildings current average figures. This has led to a 100% occupancy of the building. Rental levels achieved were in the range quoted above for central districts and the project company is able to meet all its current banking obligations. All operational expenses are fully serviced from the cash flow of the company. The Manager and the joint venture partner are actively looking to improve the profile of the asset through various asset management initiatives. Oradea and Iasi Shopping Centres The major area of concern for the projects is the potential fallout from the Cyprus banking bailout. As most investors will be aware the Cyprus Government requested a financial bailout of its banks from the EU and IMF. The full impact of the bailout is not fully known but at least one bank, Cyprus Bank Popular (Laiki Bank), the second largest in the country has been closed and effectively taken over by Bank of Cyprus, which in turn has seen large deposits of over 100,000 euros frozen and may be subject to an impairment at a later date if it is deemed necessary to meet capital adequacy requirements. A significant portion of secured debt in Bank of Cyprus is also expected to be written off. The original emergency funding request to the EU/IMF was for total funding of approximately EUR17.5 billion, with EUR10.0 billion provided by the EU/IMF and Cyprus funding EUR7.5 billion. However, on 11th April it became evident that the amount required had increased to a total of EUR23.0 billion which means that Cyprus needs to raise a total of EUR13.0 billion. As a result the restructuring is, in practical terms not definite. One of the main members of the banking syndicate financing both Iasi and Oradea is the Bank of Cyprus, via a branch operation in Romania. As the Romanian operation was not a registered subsidiary, on 1st April the Central Bank of Cyprus imposed a 7 day freeze on the Romania business to see if it could be sold. The operations have now remained suspended until a buyer can be found for the operation. The daily operation of the banking facility whilst this situation remains unresolved is proving to be difficult for Argo but the other banks in the syndicate are providing support for the daily expenditure however, further development financing for tenant fit-outs or to undertake the development in Iasi will take longer to secure and will be reliant upon a resolution on the position of the Bank of Cyprus. Oradea Shopping Centre The Oradea construction bank loan facility is fully drawn. Argo has requested a rescheduling of payments and an interest rate reduction as part of a restructuring package. 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 appeared to be the main issue to resolving the restructuring. This is now overtaken by the Bank of Cyprus situation. 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. Marketing activities have been successful in increasing the foot fall 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 increased with the opening of the 45,000 sqm Palas scheme in the centre of Iasi. The Palas development attracted a number of new retailers to the city but reduced footfall and sales in the other shopping centres in the city. Although footfall at the ERA development has now returned to levels pre the Palas opening, it is clear that sales for 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 per cent, after the manager has secured a further 21 lettings during 2012. The Mall currently has all necessary permits necessary to commence construction and negotiations had been progressing with a number of contractors. However, until the position of the Bank of Cyprus in the syndicate is resolved, construction is unlikely to be undertaken. Argo Real Estate Opportunities Fund No changes to be reported with regards to the Proton loan status compared to the previous update. On 12th April 2013, NEF 3 (Cayman) 1 Limited and NEF 3 (Cayman) 3 Limited issued Put notices to Argo Real Estate Opportunities Fund (AREOF) requiring AREOF to purchase all of the respective NEF shares and make payment of a preferred return at the expiration of the notice period. The Put option period expires 6 months from the date of the notice. | ||
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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