European Convergence Develop. CoPLC Shareholder Update (4762Z)
06 Febrero 2014 - 7:32AM
UK Regulatory
TIDMECDC
RNS Number : 4762Z
European Convergence Develop. CoPLC
06 February 2014
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 EUR4.0 billion available. The plan
will include the introduction of new taxes and a raising
of the minimum wage in two stages to ROM 900 (EUR200)
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 Romania
Overview 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 EUR18.00 to EUR18.50 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 EUR55-65/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 Cascade
Romania 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 EUR70,000
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 EUR77m 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 Plovdiv
Bulgaria 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: marketing@charlemagnecapital.com Website: 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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