European Convergence Development Co Plc : Shareholder Update

ECDC plc

Shareholder Update

1st February 2013

European Convergence Development Company PLC ("ECDC" or "The Company")

The Manager presents its latest Shareholder Update report covering the three month period 1st October 2012 to 31st December 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

Property Market Overview

Detailed Project Reports Bulgaria

Development Projects Romania

Bulgaria

It has been reported that Bulgaria's economy will stagnate in 2013 before returning to 2%- 3% expansion. This forecast comes on the heels of local analysts warning that Bulgaria's economy will be struggling to survive another difficult year after stagnating for three successive years. Bulgaria's gross domestic product marked an anaemic growth of 0.4% (2010), 1.7% (2011) and 0.5% (2012) in the wake of the slump in the Euro Zone. Growth below 3% will not sustain the employment rate and is practically stagnated, according to experts' estimates. Standard & Poor's Ratings Services stated in mid December 2012 that it expects real GDP growth of about 1.7% in 2013 and an average of 2.0% from 2013-2015, supported by a recovery in both domestic and external demand. The agency expects the current account deficit to remain close to balance in 2012, before slipping back into a deficit as domestic demand gradually recovers and the trade deficit widens over the next three years.

Gross Domestic Product (GDP) in Bulgaria was 0.5% higher in the third quarter of 2012 compared to the same quarter of the previous year and grew by 0.1% over the previous quarter, according to preliminary data released in early December. On a quarterly basis GDP growth over the same period in 2011 has been stable at 0.5%, whilst quarterly growth has been positive for the last two quarters.

Inflation, measured by the Consumer Price Index (CPI) in Bulgaria increased 0.3% to 4.2% in December following a two month decline of 1% to 3.9% in November. Month on month prices rose 0.4% in December driven by a 0.9% increase in Food and Non Alcoholic beverage. Annual average inflation during 2012 was 3.0%. The Harmonized Index of Consumer Prices (HICP) increased 2.8% year-on-year in December, a 0.1% increase on the November figure of 2.7%.

Average monthly wages in September increased to BGN 768 (?384) from BGN 744 (?372) recorded in August. September also represented a reversal of five months of continuing decline that had seen average monthly wages drop from BGN 760 (?380) in April to the August figure.

The unemployment rate at the end of quarter 3 stood at 11.5% a continuation of the falls recorded in quarter 1 and 2. The unemployment rate has fallen 1.4% since quarter 1 In December monthly unemployment was recorded at 11.4%, an increase of 0.1% on the 11.3% recorded in November which in turn was up on the 11.0% registered in October. The reversal of the downward trend is due mainly to the continuing process of costs restructuring and the fall in seasonal activities.

Consumer Confidence in Bulgaria fell 4.3 points in the final quarter of 2012 to -42.3 from -38 in the third quarter.

Following the limited global appetite for investment risk and the problems within the EU, Foreign Direct Investments (FDI) for the first ten months of 2012 remained low at EUR 1,335.7 million or 3.4% of GDP; however this represented a EUR 569.2 million increase over the same period in 2011.

At the end of November 2012, the consolidated budget deficit stood at BGN 105.3 million (?53.8 million) on a cash basis (-0.1% of GDP). At the end of October 2012 general Government debt, including Government guaranteed debt, amounted to 19.1% of GDP.

Romania

The parliamentary elections brought a clarification on the political stage with the USL coalition gaining a comfortable majority with more than 60% of the available seats in both the Chamber of Deputies and the Senate. Victor Ponta was nominated by the President and ratified by Parliament as the new Prime Minister of Romania.

The annualised Gross Domestic Product (GDP) in Romania contracted by 0.5% quarter on quarter and by 0.6% year on year in the third quarter of 2012 mainly due to the reduction of the agricultural output caused by the severe drought earlier in the year. When adjusting for the impact of the agricultural sector, the activity in quarter 3 was mainly flat. The year-end GDP forecast has been further reduced to just 0.1% growth year on year, the slowdown spilling over in 2013 with a reduction of the forecasted growth to 1.5%. The World Bank has revised down its forecast for GDP growth in 2013 to 1.6% from a mid-year forecast of 2.8% growth.

The Budget deficit increased to 1.8% of GDP as at the end of November, with an expected year end figure of 2.2% of GDP. Recent data suggests the economy started quarter 4 on a weak note. According to initial estimates, both retail sales and construction output fell in October. Retail sales (in real terms) were almost flat in quarter 3, after they expanded in the previous three quarters. Moreover retail sales declined in both September and October, which paved the way for a poor performance in quarter 4. Construction output also decreased both in September and October after contraction in quarter 3. Poor performance for retail sales and construction output suggest a weak domestic demand in quarter 4. Domestic demand (consumption and investment) was on an upward trend in the last two years and it was also the main driver of GDP growth for this year.

Romania recorded a trade deficit of ?409m in November, a big improvement on the October deficit of ?1,111m driven by a ?700m reduction in imports. Over 70% of Romania's trade is with the European Union, with France, Germany and Italy being the biggest contributors. With the German economy slowing, the forecasts are not favourable.

The annual inflation rate increased from 4.6% in November to 5.0% in December, slightly below the Central Bank's forecast but above market expectations. The National Statistics Board reported that consumer prices rose 0.6% in December. . Food and non-food prices were up 0.7% and 0.9%, respectively, while services fell 0.2% from November. The fastest growth was in power prices, which rose 7.3% on the month. The Central Bank forecasted inflation at 5.1% in December, above its 2-4% target, mostly due to food prices. A Reuter's poll of 14 analysts expected inflation at 4.6% year-on-year in December. Some analysts are expecting further increases in the first quarter of 2013 as scheduled increases in administration prices take effect, however throughout the year inflation is expected to be flat.

At the last NBR monetary policy meeting the Central Bank kept the monetary policy rate at the record low of 5.25 %. The Central Bank halted its rate cutting cycle in May 2012 and political issues meant that the country did not follow its neighbours in reducing rates. There is no expectation of rate cuts, however the Central Bank may ease the control over the liquidity conditions in order to accommodate the lower risk premium of foreign investors looking at RON denominated assets.

Bulgaria

Retail

The Bulgarian retail market is awaiting the third generation of shopping malls which are leisure led. Following the successful opening of Bulgaria Mall (Gross Lettable Area (GLA) 33,000 sqm) in December 2012, there are another four shopping centres scheduled to be completed by the end of 2013 three in Sofia - Paradise Center (GLA 80,000 sqm), South Ring Mall (GLA 72,000 sqm) and Mega Mall (GLA 24 00 sqm) and one in Bourgas - the Strand (GLA 30,500). With the opening of these malls the average leasable area per 1,000 inhabitants will have increased to approximately 115 sqm compared to 247 sqm for Europe as a whole.

Occupier demand remains very selective and limited with international retailers focusing on Sofia and major regional centres. In quarter 3, the overall vacancy rate in shopping centres was around 18% of lettable area down from 20% in quarter 2. In Sofia, the vacancy level was approximately 8%, however this is forecast to rise considerably as 176,000 sqm of the new space comes on to the market during this year. Vacancy rates in the country, excluding Sofia, dropped from 27% to 24%. In some secondary cities vacancy rates were reported to be as high as 40%, examples being cities like Plovdiv and Rousse. (Source: MBL CBRE, Colliers).

The major factor in the overall decline in vacancy rates has been the constant decrease in rental levels. In quarter 3 rental levels remained virtually unchanged but it is not clear if rents have reached sustainable levels. Average rental levels in Bulgaria are around ?12.20 per sqm per month, a decline of 10% year on year. Outside of Sofia the average monthly rental has declined by almost 20% to ?10.30 per sqm per month.

The level of activity in the Bulgarian commercial property market during quarter 3 remained unchanged with no property investment deals announced. With lending terms remaining far from competitive, liquidity in the commercial property sector remained at record low levels. CBRE/MBL have also started to notice a divergence in the yield expectations between buyers and sellers of as much as 150 basis points which is going to have an effect on the speed with which the investment market will start to return.

Romania

The investment activity for the third quarter was similar to the previous two quarters with a few transactions taking place. Among the most notable was the take over of Tower Center International Office Building by Ioannis Papalekas and Dragos Balteanu, the developers of the Upground Office and Residential projects. Several other smaller deals have taken place with the Greek investment fund Zeus buying the headquarter Victoria Office Building for an estimated EUR 12million. On the retail market, Auchan purchased the Auchan Pitesti.

Although not being a real estate transaction, the purchase of the Real Hypermarket operations in Eastern Europe by Auchan will have a significant impact on the local retail market. Real currently has around 20 hypermarkets trading across the country with some of the locations such as Constanta directly competing against Auchan. It is expected that a consolidation process will take place before Auchan start to expand into new developments.

Office

In quarter 3, 3 new office buildings accounting for c. 20,000 sqm were delivered to the market: AFI Business Park 1(13,700sqm); Aviatorilor Plaza (3,300sqm); and Monolit Square (2,100sqm). These do not include the reactivation of TCI which is another 25,000sqm of Gross Lettable Area (GLA). According to JLL, new stock delivered to the market in the first nine months of the year was 44,000 sqm, a decrease of 14% compared to the same period in 2011. Surprisingly, larger projects such as TCI, Hermes Business Campus and Green Gate have resumed construction activity which will increase the supply pipeline this year.

The quarter 3 office take up was estimated by JLL at 40,000sqm with about 8,900sqm representing renewals. Leases for existing buildings were c.17,000sqm while pre-leases were almost 10,000sqm. The cumulative take up, excluding renewals, reached 140,000sqm for the first three quarters of 2012, a 21% decrease from the previous year. In quarter 3, prime rents softened further to about ?18.50sqm per month, however there is evidence that the incentive packages offered by landlords have started to soften.

As a change from previous quarters a number of new developments totalling up to c. 170,000 sqm have been announced in the Barbu Vacarescu sub-market, all aiming to be delivered within a 18-24 months period. Only Portland Trust is actually building Floreasca Park, however developers such as Skanska, Ioanis Papalekas, and Nusco have secured building sites and are currently going through the building approval process.

In quarter 3, vacancy rates were forecast by JLL at 17.2% whilst CBRE reported a vacancy rate of 15.1%. CBRE is also reporting that CBD vacancy rates have increased 8% to approximately 13%, however CBRE are including the 25,000 sqm of TCI. Vacancy rates are expected to decrease given the supply gap coming up within the next 12 months.

Retail

No new projects were completed in quarter 3. By the end of the year three new hypermarket schemes with galleries attached will have been delivered in Bucharest: Auchan City in Giulesti; Cora on Soseaua Alexandriei; and Kaufland on Soseaua Mihai Bravu, all developed by in house development arms of the above mentioned retailers. Also the more notable opening before Christmas was the Ploiesti Shopping City development by NEPI in collaboration with Carrefour.

Food and fashion 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. As previously mentioned, the purchase of the Real operations by Auchan will bring a new dynamic into the market. Fashion retailers are concentrating on existing schemes given the scarcity of new pipeline being developed. Prime shopping centre rents are quoted between ?60-70 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.

After significant openings during the last few years the estimated delivery for 2012 is only set to reach about 187,000sqm according to JLL, with an even lower figure of around 150,000sqm for 2013 forecast. The main projects looking to be developed in the near future are: Promenada Mall (part of the Raiffeisen Evolution Sky Tower complex), AFI Palace Ploiesti, the extension of the Anchor Group projects (Bucuresti Mall and Plaza Romania) and the NEPI and Cora projects in Brasov.

Bulgarian Assets

Galleria Plovdiv

In December, 3,800 sqm, representing approximately 7% of the retail area, opened for trading, while around 4% of the areas closed during quarter 4. This had a net positive effect on overall occupancy increasing it to 64% of the leasable area from previous 61%. During the quarter, Galleria Plovdiv managed to sign new lease agreements totalling 4,200 sqm of retail area which will open to the public during January, driving occupancy close to 75% of the leasable area. The importance of this threshold is that it will trigger certain thresholds for the three major tenants in the scheme in respect of rent payment.

The company continues to negotiate with the bank to restructure the banking facility, which is presently in default and there appears to be a consensus to find a solution. The Directors, on behalf of the Company have committed to inject further loans, alongside our partners once a solution has been found to the restructuring. Any further equity injection by the Company will be subject to strict conditions and will be require advance approval of the Directors of the Company.

The shareholders have provided 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 until the end of the year.

Mega Mall Rousse

During quarter 4 2012, occupancy increased to approximately 60% of the GLA with the reopening of the supermarket, the opening of 1,650 sqm of retail space and the first unit in the food court area.

Despite the achieved increase in occupancy additional leasing is still proving to be difficult. At the moment an additional 1,200 sqm or 6% of the GLA is under detailed negotiation but, as previously announced is highly dependent upon fit-out contributions.

The Company continues to negotiate with the bank to restructure the banking facility, which is presently in default.

Trade Centre Sliven

The company's cash is still deposited in three banks to achieve security but at the expense of higher interest revenue. It is the intention of the operating company to make a distribution of retained profits in quarter 1 which will enable our partner to repay the outstanding loan to ECDC.

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.

Romanian Assets

Cascade

During quarter 4, another 355 sqm was let, which took the occupancy levels to 98.6%. Rental levels achieved were in the range quoted above for central districts and the company is able to meet all of its current banking obligations. All operational expenses are fully serviced from the cash flow of the company. Out of the increased ?1.25m loan facility taken out to meet the additional cost of the arbitration award, ?0,9m was outstanding at December 2012. The outstanding amount should be repaid by April 2014 at the latest however, it is forecasted that excess funds will allow for an earlier repayment.

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. Argo requested a rescheduling of payments and an interest rate reduction. In addition the availability period for the standby facility of ?1.3m required for tenant fit out works needs to be extended. Although the majority of terms are accepted by the lenders, the interest rate reduction seems to be the main issue in resolving the restructuring.

Mobexpert, Naturlich and other furniture stores opened this year and are trading above expectations. This part of the scheme has been branded as ERA Home Centre and now offers the largest selection of home decoration and furnishings in the region.  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. Negotiations are on-going with Decathlon for a 1,800 sqm unit in Phase 3 of the Mall.

Marketing activities have been successful in 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.

Iasi Shopping Centre

Competition in the City has increased with the opening of the 45,000 sqm Palas scheme in the city centre. This attracted a number of new retailers to the city and reduced traffic and sales in the other shopping centres in the city. Although traffic at ERA has now returned to pre Palas opening, it is clear that sales for the 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%, after the manager had secured a further 21 lettings in 2012.

Construction of the 28,000 sqm Mall extension has been delayed pending finalisation of the debt facility. There is a further 8 hectares of land available for sale or development of further retail units. BMW have offered attractive terms to lease 6,000 sqm of land to develop a showroom and approval is awaited approval from the lenders. Discussions with IKEA are on-going with a positive outlook for 2013.

The restructuring of the existing facility has received credit committee approvals, although the lenders have delayed finalisation until completion of the Oradea re-structuring. The Mall currently has all permits necessary to commence construction and negotiations are progressing with a number of contractors. Assuming finalisation of the facility in March, the current construction program envisages delivery of Phase 1, 15,000 sqm by March of 2014 and Phase 2 of 13,000 sqm by November 2014.

Reducing rental concessions throughout 2013 is unlikely as most retailers are experiencing a 15-20% sales decline following the Palas opening.

Argo Real Estate Opportunities Fund

In June 2012 the Fund announced a new facility of ?29.3m with Proton Bank with an interest rate of Euribor plus a margin of 4.6%. The first interest period was 31st December, 2012. The Fund has subsequently announced that because of difficulties it has experienced in up-streaming excess cash from its development in Odessa, Ukraine, it has requested a two month deferral to 28th February, 2013 of the interest payment which was due on 31st December, 2012. The Manager has consulted with the Fund and has been reassured that this will have no impact on the investments of NEFF3.

Asmita Gardens

The insolvency plan proposed by the main creditor, Alpha Bank, has been submitted and approved given Alpha Bank's control over the creditor 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.

Investor Relations

Issued by Charlemagne Capital (UK) Limited, 39 St James's Street, London SW1A 1JD
A company authorised and regulated by the Financial Services Authority

The information in this document 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 is not intended for public use or distribution. 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. 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. 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 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 of the Company which contains significant 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 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.