European Convergence Development Co Plc : Shareholder Update

European Convergence Develop. CoPLC



		ECDC plc
		Shareholder Update	January 2014
		European Convergence Development Company PLC ("ECDC" or "The Company")
		The Manager presents its latest Shareholder Update report covering the three month period 1st September 2013 to 31st December 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		ROMANIA Annualised third quarter GDP growth in Romania was 4.1%, the highest growth rate since quarter 4 2008.  On a quarterly basis GDP growth was 1.6% and represented the fourth consecutive quarter of growth.  For the first nine months of 2013 GDP growth stood at 1.9%, excluding agriculture which enjoyed a bumper harvest and distorted the figures.  All sectors (industry, construction, services) are estimated to have made a positive contribution to GDP in quarter 4. The forthcoming year is forecast to continue the upward momentum with the EBRD and World bank forecasting GDP growth of 2.4% to 2.5% based upon improving domestic demand and stronger exports. In January the Central Bank reduced the monetary policy rate from 4.0% at the end of 2013 to 3.75% with a similar 25 bps reduction in the deposit rate and the lending rate.  The rate has declined 1.5% since the beginning of July 2013 and is currently at historically low rates.  Rates are forecast to reduce further during quarter 1 2014 as the Central Bank forecast falling inflation and expressed concerns over the "negative growth of lending to the private sector". In December the annual inflation rate fell 0.2% to 1.6% mainly as a result of a favourable statistical base effect.  Inflation should continue its downward trajectory during quarter 1 2014 although some forecasters are anticipating a pick up over the remainder of the year ending 2014 within the range of 3.0% to 3.5%, The consolidated budget deficit for the first eleven months of 2013 amounted to 1.6% of GDP. It is expected that the government will be able to keep the full year's budget deficit within the agreed target of 2.5% of GDP. The government has agreed with both the IMF and the EU as part of an aid plan, a 2.2% budget deficit for 2014 but confirmed that it does not intend drawing down the €4.0 billion available. The plan will include the introduction of new taxes and a raising of the minimum wage in two stages to ROM 900 (€200) whilst most government employees will receive minor salary increases and pensions will be indexed at 3.75%. The unemployment rate in Romania remained unchanged for the last five months at 7.3% but was up from 6.7% in the same month in 2012. BULGARIA As previously reported, the government continues to work under the daily pressure of protests which started in June 2013. With more than six months of continuous daily protests in front of the Parliament, students barricaded in Sofia's main university since October and a rising tide of ultra-nationalism and intolerance, many fear that the European Union's poorest member will collapse. The underperforming economy has continued to take a beating and the spectre of deflation hangs over the country. GDP in quarter 3 returned to positive territory, up 0.5% on a quarterly basis after a small decline in quarter 2.  The main driver behind the positive growth stemmed from a rebound in EU demand and strong export of agricultural production.  Total export increased 1.8% quarter on quarter while consumption and fixed capital investment increased only slightly and kept import growth at 0.1% quarter on quarter.   The unemployment rate in quarter 3 declined  0.9% quarter on quarter to 12.0%  and represented a third quarter of decline from a recent high of 13.8% in quarter 1, 2013.  The decline was a direct result of seasonal factors such as agriculture, tourism and trade.  Against the same period last year, unemployment was 0.5% higher in 2013. Industrial Production increased 2.8% in November compared to the same month in 2012 and represented the third straight month of growth. Manufacturing output in November rose 4.7% year on year driven mainly by export industries.  November industrial production was down 0.9% when compared to the same figure in October. The surprise was a 28.4% year on year increase in mining and quarrying output which was driven by a 25.4% annual rise in coal production and a 43% jump in iron ore output. Inflation in December was -1.6% reflecting a deflationary cycle whilst the monthly inflationary rate between November and December was 0.3%.  General government debt stood at 17.7% of GDP at the end October. Domestic debt was 7.6%, external debt 9.1%, and government guaranteed debt of 1% of GDP.
Property Market Overview		Romania NEPI remained the most active player in the market acquiring four assets in the period, a 70% stake in Mega Mall, a 70,000sqm Gross Leaseable Area (GLA) shopping mall in the central-east area of Bucharest; the acquisitions of Deva Shopping Centre and Severin Shopping Centre and in late December the closing of an EUR 81 million transaction for the purchase of City Mall in Constanta. Additional transactions were recorded as part of the AIM float of the Romanian based Global Worth Fund controlled by Ioannis Papalekas.  As part of the listing the fund has acquired a controlling stake in the BOB and BOC office buildings located in Pipera, the Tower Centre International (TCI) office building located in Bucharest's Central Business District (CBD) and the remaining apartments stock of the Up Ground Residential development. The main funds actively monitoring Romania is as before, the value-add and opportunistic funds, who's aggressive return requirements prevent aggressive bidding for assets. Target assets have also shifted more towards secondary assets allowing for asset management opportunities and higher investment yields. Office Only one small office building of 1,840 sqm was completed in quarter 3 which took the new office supply in the first three quarters of the year to approximately 81,000 sqm and the total modern office stock in Bucharest to an estimated 2.04 million sqm, with class A stock accounting for 51%. The Floreasca/Barbu Vacarescu corridor remains the most active, with  Floreasca Park (37,500 sqm) nearing completion, Skanska starting the development of the first phase of their project Green Court, and Global Worth clearing the site for their announced building, Bucharest One. The overall vacancy rate in quarter 3 for Bucharest is estimated to be approximately 15.06%, representing a slight quarter-on-quarter decrease of 60 bps. The highest vacancy rates were recorded in the northern locations such as Baneasa and Pipera North, with vacancy rates exceeding 35%. In the central submarket the vacancy rate is below 10%, the area closest to Euro Tower and below 5% in the center west submarket. Prime headline rent remained unchanged over the last 12 months at €18.00 to €18.50 per sqm per month.  During quarter 3 a generous increase in the incentive packages offered, in both rent free periods and fit out contributions, was noticed. These are applicable to lease requirements exceeding 2,000-3,000 sqm for existing buildings where previously the packages would have been applicable to much larger pre-leases. Prime yields remained in the region of 8.00% to 8.25%. In quarter 3 the total gross take-up of space reached 91,000 sqm, a quarterly increase of 50%. New demand generated 47,000 sqm of new leases with renegotiations and renewals accounting for 43,000 sqm.   By geography, Pipera North attracted 39% of the gross take up activity, followed by North and CBD locations with 20% and 11% respectively. By industry; financial services, IT&C and manufacturing were the most active.  The number of companies considering opening offices in Romania is reported to have increased, with Deutsche Bank hiring 500 employees and leasing 7,500sqm is the most recent example. The 2014-2015 pipeline remained stable over the period, with the 2014 pipeline estimated at 120,000sqm-135,000 sqm. Take-up is expected to increase slightly from previous years driven mainly by new leases. Retail Cora Constanta was delivered into the market in quarter 3, with 18,000 sqm GLA anchored by a Cora Hypermarket. In quarter 4 a number of schemes were completed both in Bucharest and around the country, the most notable being the Promenada Mall developed by Raiffeisen Evolution that opened in Bucharest in late October. Other projects were the AFI Palace Ploiesti a direct competitor for the Carrefour-NEPI joint venture opened earlier in 2013 and the Galati Shopping City developed by NEPI. As mentioned in the half year financial statements for the Company, Kingfisher acquired the 15 unit Bricostore business and has plans to increase the network to 50 stores in the medium term, most likely through another acquisition on the local DIY operator. Retailers remain cautious in expanding their networks and focus mainly on prime projects. Mass market retailers who are already present in most of the well performing shopping centres in the country are starting to assess the new retail projects, but the conditions they are prepared to offer make it difficult to justify new developments. The rebranding process of the Real supermarket units acquired by Auchan has started and it is expected to be finished within a one year period. Rent for both prime shopping centres and prime high street units remains at €55-65/sqm/month. The highest rents are achieved in Baneasa Shopping City and AFI Palace Cotroceni which are considered the two dominant retail schemes in Romania. Prime yields remained in the region of 8.5%. Residential Two major developments are moving this segment of the market. First the banks have become more aggressive in their liquidation process of both foreclosed residential units in old communist apartment buildings and the bulk sale of distressed new developments in various stages of completion.  Secondly a significant shift was recorded this summer with the cancellation of the Prima Casa, the Government backed mortgage lending scheme. The Government, in close cooperation with the Central Bank has stopped the backing of the EUR denominated lending scheme and replaced it instead with a new format where it supports a RON denominated programme. This measure together with the decision of the largest commercial bank, BCR, (20% of the market by assets) to only finance RON denominated mortgages is putting significant pressure on current market prices. Following the reduction in the monetary policy rate, BCR announced comparable mortgage rates for both its EUR and RON denominated mortgages, with an effective interest rate of around 5.5% p.a. At 5.5% it is the cheapest RON denominated mortgage seen in the Romanian market and is hoped will act as a strong stimulus for the market. Transaction volumes have stabilized at fairly low levels suggesting a reluctance of sellers who are not pressured to dispose of their assets, to adjust to further price decreases. Bulgaria Retail No modern shopping centres opened in Bulgaria during quarter 4.  Presently the GLA of all the operational shopping malls is about 735,000 sqm, with GLA per 1,000 residents standing at 101 sqm.  Three projects in Sofia are currently under construction and will provide an additional 120,000 sqm when opened. Occupancy in shopping centres is not satisfactory and continued the downward trend during the period.  Replacements of tenants are more frequent than opening of new stores.  There has been little movement in rental levels which remain similar to those of quarter 3. The investment market remained stagnant with no investment transactions during the reported period.
Development Projects Romania		Cascade Currently the building is fully leased generating positive cash flow after meeting all its financial obligations from an operational and banking point of view.  All financial obligations are up to date with no collection delays on the revenues side.  With the completion of the leasing process the partner has managed to position the building as one of the prime office products on the Bucharest market. There is continued interest in the building by potential tenants, with enquiries being addressed and managed by the building's management team. A small extension has been completed at the ground floor of the building allowing for further improvement in the income profile of the building. Oradea and Iasi Shopping Centres Following the notice for repayment issued by the Company with respect to the investments in Oradea and Iasi, the Manager is currently in advanced negotiations over the possible restructuring of the investment. Argo Real Estate Opportunities Fund (AREOF) AREOF has announced that it is in negotiations with Proton for the restructuring of the loan. In order to underpin the negotiation process Argo has paid c. EUR 0.4m worth of outstanding interest to Proton Bank. Negotiations with Proton Bank are currently ongoing but it is expected that restructured terms will be agreed in the next couple of months.  Proton Bank has served a termination notice to AREOF for its EUR 27.5 million loan but any enforcement action has been put on hold to allow for the renegotiations to be completed. In parallel AREOF is currently in advanced negotiations with KBC, the leading bank in the syndicate, for the restructuring of the Sibiu 1 debt. Oradea Shopping Centre Following the loss of a court case initiated by the general contractor that built the asset, Constructii Bihor, and following aggressive action by Contructii Bihor in order to secure their claims against the local SPV, AREOF decided that the best course of action was to seek protection from its creditors and filed for insolvency in November 2013. The case was admitted and a judicial administrator was appointed for the company in agreement with the senior lenders of the project. It is expected that a restructuring plan will be put forward allowing for the improvement of the company's financial position. There were no significant tenant movements following this action. The first creditor meeting is due to be held in February. Footfall has increased consistently year on year and sales have also recovered during the most recent period.  Several new local tenants have opened stores, although demand from strong nationals or international brands remain subdued.  Terms  were agreed with a new discount retailer called Stockhouse which has opened its first store in Phase 3 The Era Home Centre area of the Mall offers the largest selection of home decoration and furnishings in the region and continues to perform in line with tenants' expectations.   A lease was signed with LEMS for a new 2,000 sqm furniture store, which opened for trading in September.   The Manager has finalized the lease with RDS to install photovoltaic panels on the roof which will reduce the electricity costs for the centre by around €70,000 per annum however Lenders' approval is still outstanding. Iasi Shopping Centre Competition from 3 other centres within the city has continued to impact footfall and sales for the gallery tenants.  The significant road works being undertaken within the city have also deterred customers from travelling to the shopping centre.  Retailers in other schemes have reported declining sales which would indicate a general decline in consumption within the city.  The drop in customers visiting ERA is especially noticeable Monday to Wednesday however, Carrefour has registered a small increase in turnover.  Marketing activities are largely focused on sales promotions to drive traffic to the gallery tenants, which is a reasonable defensive strategy and it is hoped that on completion of the road works in late 2014 the situation will improve. Construction of the 28,000 sqm Mall extension and negotiations to sell land plots has been delayed until the situation with Bank of Cyprus has been resolved.  A €77m development facility provided by EFG, Banca Romanesca, Bancpost and Bank of Cyprus is in place for the construction finance of the total project however, the restructuring of the existing facility is delayed until the reorganisation of Bank of Cyprus has been completed. Upon finalisation of the restructuring the current construction program is expected to deliver Phase 1 of 15,000 sqm within 15 months and Phase 2 within 18 months of starting. A Romanian Insolvency house has been appointed to dispose of the Romanian Praktiker business, which has a big unit on the site.  Negotiations are ongoing for a restructuring of their lease agreement and recovery of the outstanding rental and service charge debts. Leasing has been slow due to the current retail climate. Several negotiations are ongoing with local retailers for small units.
Development Projects Bulgaria		Plovdiv In quarter 4 the occupancy levels dropped from 64% to 62% of the GLA.  Replacing these tenants with new tenants continues to be challenging as it requires a reputable property manager, a credible strategy, and above all - an injection of new funds to pay for fitting out contributions. During quarter 4 the contract with the international property consultant was terminated because of lack of support by one of the project partners.   As a result there is now no coordinated leasing strategy for the Mall which has a direct impact on prospective tenant motivation.  No agreement has been reached with Carrefour and the initial negotiations with several prospective international tenants have, in effect been frozen as there is no credible operator able to take forward the discussions. The discussions with the bank to restructure the banking facility continued, with the local partner being appointed by the shareholders to lead the negotiations.  However, no progress could be made on reaching mutually acceptable restructuring terms and at the beginning of 2014 the bank nominated a property investment company to undertake full due diligence of the scheme.  The Manager is extremely disappointed by this development as it had previously negotiated the key terms to underlie an agreement where the Shareholders and the Bank would support the development with additional funding.  Unfortunately circumstances were such that not all of the shareholders could provide enough evidence to fulfil their financial obligations which rendered the strategy unachievable and resulted in the leasing consultant contract being terminated. As previously reported, there is no property manager and the technical manager continues to carry out the day to day activities.  The Mall still has operational cash deficit on a monthly basis and is unable to meet all of its obligations from the collected rental and service charge revenue.  This has led to increasing overdue payments to service providers and to the fiscal authorities.  Unless the business restructuring is resolved quickly and fresh cash made available to cover operational needs, the company faces serious liquidity problems which obviously threaten its operations.  The Manager is also of the opinion that the market value of the asset is considerably less than the current bank debt and without the ongoing support of the bank the Mall would be unable to continue its business. Mega Mall Rousse During quarter 4 the occupancy level dropped from 51% to 48% with the departure of the key sportswear operator.  As reported, the management team immediately started initial talks with prospect tenants in order to secure adequate replacements.  Negotiations with a new children's centre operator were successfully closed and the premises were opened to the public.  Despite the partial success in replacing tenants, leasing is still proving to be extremely difficult and as previously reported, is highly dependent upon the provision of fit-out contributions. The Project continues to face liquidity problems with payments to key service providers in delay.  Despite the ongoing negotiations there is still a risk that some of the key service providers will stop the provision of services.  The company experiences constant challenges in paying for key consumables, which is a continuous threat to its operations.  In addition, the local authorities and some of the suppliers have initiated foreclosure procedures for unpaid liabilities. As previously reported the Bank has initiated a series of aggressive actions and defaulted the entire loan in April 2013.  The Manager and the partner unsuccessfully tried to restructure the loan facility.  At the last meeting, it was agreed that restructuring terms are difficult to agree on but rather, the Bank requested that the shareholder seek a fresh equity injection from a third party as the existing shareholders were not willing to invest further equity.  With the debt currently exceeding the market value of the asset any new equity injection will need to be accompanied by a more realistic valuation of the debt to enable the necessary returns to be achieved.  The manager has been in negotiations with some interested parties and discussions continue. Trade Centre Sliven There has been no change in the position regarding the development itself since the last report and the Manager is discussing with the partner how best to take the development of the site forward. All options are being considered including an exit from the development and splitting the assets of the company between the shareholders. Bourgas Retail Park There has been no further progress made with this site as it is very much linked to the developments in Plovdiv. Corporate update In January, Charlemagne Global Opportunities Limited (CGOL) sold its entire holding of 7,441,320 ordinary shares in the Company.  The reason for the disposal was due to the fact that the mandate of CGOL changed and the profile of the Company no longer fits within its portfolio.  An existing shareholder of the Company offered CGOL the opportunity to sell, resulting in the removal of CGOL as an investor and a new significant shareholder in the Company, Sacisa Limited, now holding 8,941,320 Ordinary Shares in the Company (10%). The continuing economic malaise in both Bulgaria and Romania make it difficult to predict when a suitable exit from the remaining assets is likely to occur. On realisation, it is the intention of the directors to seek shareholder opinion as to the most efficient means of distributing any proceeds. In the meantime the Company does not intend to commit any further capital to new projects and is looking at ways of reducing costs.
		Investor Relations Tel: + 44 (0)20 7518 2100 Fax: + 44 (0)20 7518 2199 Email:[e-mail] :www.charlemagnecapital.com Issued by Charlemagne Capital (UK) Limited, 39 St James's Street, London SW1A 1JD A company authorised and regulated by the Financial Conduct Authority 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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