TIDMECDC
RNS Number : 0439P
European Convergence Develop. CoPLC
19 October 2012
19 October 2012
EUROPEAN CONVERGENCE DEVELOPMENT COMPANY PLC
("ECDC" OR "THE COMPANY")
Shareholder Update: 1st July 2012 to 30th September 2012
The Manager presents its latest Shareholder Update report
covering the three month period from 1st July 2012 to 30th
September 2012. 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 Gross Domestic Product (GDP) in Bulgaria was 0.5% higher in
the second quarter of 2012 compared to the same quarter of the
previous year and grew by 0.3% over the previous quarter, according
to NSI preliminary data released in early September. Forecast 2012
out-turn GDP growth has been reduced by UniCredit to 0.5% from 1.5%
because of the crisis in the Eurozone which takes almost 60% of
Bulgaria's exports. However, UniCredit does believe that as the
debt crisis fades and the Government raises minimum wages and
pensions, Bulgaria's consumption should increase and their 2013
forecast is for GDP to grow by 1.5%.
Consumer Confidence in Bulgaria improved to -38 in July 2012
from -45.8 in April of 2012. This is the highest result since
quarter one 2008. Household consumption was up 3.9% year on year
whilst retail sales increased by 0.9% in August compared to the
previous year but on a monthly basis recorded no increase over
July. This is the third consecutive month of year on year growth
after twelve months of negative performance.
According to recent data, the harmonised Index for Consumer
Prices (HICP) in September indicated inflation was 0.3% higher
compared to August and the annualised rate in September was 3.4%.
The main driver for the monthly increase was an increase in food
and non-alcoholic beverages. On the more widely used RPI measure
monthly inflation in September was 1.1% higher compared to August
and annual inflation was 4.9%, up from 1.6% in June and the result
of energy price increases as well as the previously mentioned food
and beverage price increases.
According to Bulgaria's Employment Agency, unemployment
decreased 0.1% in September to 10.6% whilst EuroStat estimates
unemployment to be 12.6% in August. Any decrease in unemployment is
likely to have been driven by seasonality factors leading to
temporary reductions in the rate.
Following the limited global appetite for investment risk and
the problems within the EU, Foreign Direct Investments (FDI) for
the first seven months of 2012 remained low at EUR 846.2 million or
2.1% of GDP, though this represents almost a EUR 500 million
increase over the same period in 2011.The majority of this increase
was derived from investments in real estate and the largest
contributor country was the Netherlands.
At the end of August 2012, the consolidated budget surplus stood
at BGN 107.6 million (EUR55 million) on a cash basis (0.1% of GDP).
At the end of August 2012 general Government debt, including
Government guaranteed debt amounted to 19% of GDP.
Romania
The annualised Gross Domestic Product (GDP) in Romania expanded
1.70% in the second quarter of 2012 over the same quarter of the
previous year whilst on a quarterly basis GDP expanded 0.50% in the
second quarter over the previous quarter. The Government has
reduced its full year 2012 GDP forecast by 0.3% to 1.2% growth
whilst the IMF is forecasting 0.9% for 2012 and 3.0% for 2013.
Quarter 2 growth was driven mainly by domestic demand and is
reflected in consistently improving, if moderately, consumption
figures since quarter 3 2010. Retail sales grew 4.7% in August
compared to the previous year and 0.7% month on month.
Exports fell to almost EUR 3,500 million in August, one of the
lowest levels recorded in 2012. At the same time imports were
roughly the same in August as July contributing to Romania having
one of the highest foreign trade deficits in the new EU, at 5.5% of
GDP in H1 2012.
As a result of the sharp decrease in foreign capital inflows and
also the decrease of the remittances from the Romanian individuals
working abroad there is a funding gap that is being covered partly
by Government borrowings and partly by the usage of the National
Bank of Romania external reserves.
Romania maintained its Investment Grade rating, with stable
outlooks from S&P and Fitch and negative outlook from Moody's.
It is expected that developments within the EU will have further
impact on the Romanian economic situation.
The annual inflation rate rose to 5.3% at the end of September,
its highest level since June 2011 and well above the analysts and
Central Bank's estimates. Prices increased 1.2% from August which
was fueled by food costs which rose 6.9% in September from a year
earlier, compared with a 3.3% growth in August, and non-food items
quickened to 4.3%, compared with 3.9% in August, after the country
raised natural-gas prices to meet pledges to its international
lenders. Current year end estimates have been also increased due to
recent developments to values closer to 4.5 to 5.0%. The upcoming
elections and the poor agricultural output will put additional
pressure on both food and administered prices.
At the last NBR monetary policy meeting the Central Bank kept
the monetary policy rate at the record low of 5.25%. Increasing
inflation is putting significant pressure on the Central Bank and
reducing its ability for further reductions in the rate. However
the Central Bank's view is that the inflationary pressures are
present on the short term while the negative output gap will
further exert disinflationary effects. It is expected that while
keeping the policy rate fixed, the Central Bank is carefully
managing the liquidity in the market.
Following the local elections victory, a conflict arose between
the new ruling coalition and President Basescu which resulted in
Parliament voting for the impeachment of the President on 6th July
2012. This action, together with other measures taken by the ruling
coalition has given rise to major concerns over the continuation of
a functioning democracy in Romania. Following a national vote the
validation of the president's impeachment rested on the shoulders
of the Constitutional Court of Romania as there was deemed to not
be a quorum. After more than a month the Constitutional Court
decided to invalidate the results of the public vote. As a result
President Basescu returned in office at the beginning of September.
The turmoil proved to be very damaging on the image of the country
in front of the international media, western governments and most
importantly in front of the money markets on which Romania is
currently dependent.
The Government continues to meet the targets set by the IMF and
the European Commission. Technical missions from both the IMF and
the EU visited and gave a favourable assessment at the end of their
visit. The pressure on the Central Bank reserves is continuing to
build up as Romania has started repaying its IMF loan.
Property Market Overview
Bulgaria
Retail
The most notable event for the first half of 2012 was the
opening of Galleria Burgas shopping mall (GLA 35,000 sqm), which
increased modern shopping centre stock in Bulgaria to 594,410 sqm.
Even with this most recent opening the retail lettable area per
1,000 residents in Bulgaria amounts to 81 sqm and is still among
the lowest levels in the EU.
At the end of June 2012, the total shopping mall space under
construction was 239,500 sqm of Gross Leaseable Area (GLA). Four
shopping centres are scheduled to be completed by the end of 2013,
of which three are in Sofia: Paradise Center (GLA 80,000 sqm),
Bulgaria Mall (GLA 33,000 sqm) and South Ring Mall (GLA 72,000 sqm)
and the fourth is in Bourgas: the Strand (GLA 30,500).
Generally, rental levels are remaining flat despite some
downward pressures due to the increasing supply and stagnant
consumer expenditure.
Occupancy in shopping centres continues to be at less than
satisfactory levels with 23% of lettable area in the shopping
centres vacant. Although the vacancy in the Sofia has decreased
slightly, the vacancy rates in the secondary cities is reported to
be over 30%.
No commercial property transactions were realised in the first
half of 2012.
Romania
The investment activity for the quarter was comprised mainly of
joint venture agreements and land acquisition deals for retail
development. NEPI, a South African London listed fund, has
announced a joint venture with Benevo to develop a big box retail
scheme in Bucharest and NEPI has managed to secure the financing
for the finalisation of the Ploiesti Shopping City developed in a
joint venture with Carrefour. Portland Trust has started
construction on their Floreasca Park development with more than 60%
pre let to Oracle. Financing remains difficult to secure, with
loan-to-value requirements and lending margins proving prohibitive
most of the time.
Office
In the first half of 2012 only 24,600 sqm of office space were
delivered on the Bucharest market, with another 68,000 sqm to be
delivered by year end. The Unicredit Tiriac Bank's headquarters was
completed and delivered in quarter 2, accounting for 14,000 sqm of
the new deliveries. The quarter 2 office take up was estimated by
JLL at 72,700sqm including renewals and renegotiations. The new
take up was estimated at 58,700sqm with pre-leases capturing about
42.3% of the space. In Quarter 2 prime rents remained stable at
EUR19.00 to EUR19.50 sqm/month, but there is evidence that the
incentive packages offered by landlords have started to soften. For
2012 the delivery pipeline is estimated at c. 90,000-100,000 sqm in
already announced projects. Looking forward in 2013 pipeline is
estimated at c. 130,000 sqm 34% of which are pre-let. The demand
will be driven mainly by the consolidation process of larger
multinational occupiers.
Vacancy is forecast to continue to decrease as new supply is
exceeded by demand. However, rents are estimated to remain stable
but the lack of supply is expected to shift the negotiating
position back towards the landlord resulting in less generous
incentive packages. The vacancy rate has been significantly
influenced by the start of the leasing process for TCI (c. 26,000
sqm GLA) and is reported to close to 17% by JLL as compared with
the 13% reported by CBRE.
Retail
The total shopping centre stock in Romania stands at 2.31
million sqm, with no new completions recorded during the summer
months. Bucharest's stock, the largest retail market in the
country, remains unchanged at c. 775,000 sqm. For 2012 it is
estimated that between 5 and 7 projects might be completed at the
country level, totaling around 130,000 sqm. The most representative
and the largest retail scheme, Palais Iasi, opened in May. In
Bucharest only 2 hypermarkets with attached galleries are expected
to be delivered totaling around 32,000 sqm GLA.
Food 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. This is driven by the consumption profile of the
Romanian consumer, where 41% of the monthly expenditure budget goes
towards food and food related products. The increase in retail
sales in the first half of 2012 was about 5% compared with the same
period of 2011. Fashion retailers are currently very careful with
their expansion process focusing on the optimisation of their
existing operations. The selection of new locations is based on the
performance of the existing centres, which are the main targets for
expansion given the lack of expected deliveries.
Prime shopping centre rents are quoted between EUR65-70 per sqm
per month as rental levels continue to be stable. Prime high street
units are in the same range, but a softening in the next 6-12
months would not be surprising considering the availability of
numerous units along main retail streets.
Bulgarian Assets
Galleria Plovdiv
At the end of quarter 3, there are no significant changes in the
tenant's occupancy level, which remain at 61% of the lettable
area.
During the period the company has started the implementation of
the initial part of the strategy delivered by the international
consultant. Due to the efforts of the local leasing team and the
consultant, Galleria Plovdiv is in advance negotiations with and,
subject to successful completion of the discussions and funding
availability for fit-out contributions, expects to open to the
public over 7,000 sqm of retail area before the end of 2012, which
will drive occupancy up to over 75% of the GLA.
The company continues to negotiate with the bank to restructure
the banking facility, which is presently in default.
The shareholders are reviewing the opportunity to provide
limited temporary funding to support the project in terms of
necessary capital investment for the fit-out works related to the
new retail space as well as to cover the operational shortfall till
the end of November.
Mega Mall Rousse
During quarter 3 Piccadilly vacated their space but the
management team have secured a new tenant on similar terms and the
new supermarket will open for trading during October. In addition,
a lease agreement for 1,600 sqm has been entered into with a retail
operator who is also scheduled to open in October. The Manager is
therefore confident that over 4,500 sqm of retail area will be
trading before the end of 2012, which will take the occupancy to
approximately 60% of the GLA.
Despite the expected increase in occupancy additional leasing is
still proving to be difficult. At the moment an additional 1,500
sqm or 8% of the GLA is under detailed negotiation but, as
previously announced is highly dependent upon fit-out
contributions. To this end, the company will enter into detailed
discussions with the bank and is hopeful that, despite the fact
that the bank facility is in default, a satisfactory solution will
be found in the near future.
Trade Centre Sliven
The company's cash is still deposited in three banks to achieve
security but at the expense of lower interest revenue.
As previously announced, there has been no change in the
position regarding the development itself and the Manager
considering various alternatives for the site.
Bourgas Retail Park
There has been no further progress made with this
development.
Romanian Assets
Cascade
Vacancy levels are at 3.5% of the building's GLA. Rental levels
achieved were in the range quoted above for central districts and
the company is able to meet all its current banking obligations and
all operational expenses are fully serviced from the cash flow of
the company. The Manager and the partner are actively looking to
improve the profile of the asset through various asset management
initiatives.
Oradea Shopping Centre
The Oradea construction bank loan facility is fully drawn. The
construction of phase 2 of the Shopping Mall, 16,000 sqm, is now
fully complete.
Mobexpert, Elvila and Naturlich are now open, with another four
units in the pipeline having leases signed and waiting for the
financing banks to release the necessary amounts for the fit out of
the units. Two further tenants Zoomania and Libraille Alexandria
will occupy a total of 800 sqm in the Carrefour Gallery. There is
another 4,000 sqm to be completed in the third phase of the Mall's
construction, but this phase is dependent upon tenant requirements
for this space.
Marketing activities have been successful with increasing the
footfall at the site and the centre has been positioned as a family
oriented venue with an increasing profile and visibility in the
local community.
Even though the leasing market in Oradea is challenging, the
size of the operator, Argo Real Estate Opportunities Fund, provides
significant traction for attracting new tenants.
Iasi Shopping Centre
The term sheet for the Iasi bank loan facility is signed with
the financing documentation pending formalisation. It is expected
that the documentation will be finalised and completed in the near
future.
Construction of the new 28,000 sqm extension will be undertaken
in two phases with phase one, 15,000 sqm planned for completion in
the summer of 2013 and the second phase, 13,000 sqm in quarter 4 of
the same year. There is significant interest in the first phase
with around one third of the available space under negotiation.
The opening of the town centre Palas Shopping Centre has
increased competition though the impact on ERA Iasi, an out of town
retail park appears to be limited as footfall has fully recovered
since the opening.
Asmita Gardens
The insolvency plan proposed by the main creditor, Alpha Bank,
has been submitted and approved giving Alpha Bank control over the
creditor's pool voting for the plan. The Company is not expected to
recover any of its investment following the insolvency process.
Baneasa
There have been no significant developments in this project
since the last shareholders report.
Enquiries:
European Convergence Development Company
plc +44 (0)1624 640200
Anderson Whamond
+44 (0)207 518
Charlemagne Capital 2100
Varda Lotan
Galileo Fund Services Limited +44 (0)1624 692600
Ian Dungate, Company Secretary
+44 (0)207 886
Panmure Gordon 2500
Hugh Morgan
Grishma Patel
+44 (0)20 7360
Smithfield Consultants 4900
John Kiely
Ged Brumby
Website: www.europeanconvergencedevelopment.com
This information is provided by RNS
The company news service from the London Stock Exchange
END
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