ECPC European Conv.

TIDMECPC

RNS Number : 7460A

European Convergence Property CoPLC

07 February 2011

07 February 2011

European Convergence Property Company plc

("ECPC" OR "THE COMPANY")

Shareholder Update from 1st October 2010 to 31st December 2010

The purpose of this document is to update shareholders with new developments since the Company's last report dated 2 November 2010. This update should be read in conjunction with all prior reports, which provides commentary on the historical evolution of the Company's business, and the associated detailed background information.

This Shareholder Update only deals with Bulgaria as it remains the only country to which the Company has operating asset exposure.

Economic Overview

The fourth quarter information on the Bulgarian economy indicated a continuation of the improvements from previous quarters. Not all indicators were positive but the latest forecast by the IMF indicates GDP growth for 2010 should be between 0% and 0.4%, however the IMF did warn that the economy relies on only one engine for growth: exports.

Exports gradually increased, recording EUR12.70 billion in October 2010 against EUR9.65 billion for the same period in 2009. After a negative GDP growth in Quarter 1 2010, the GDP rose by 0.5% quarter on quarter (seasonally adjusted data) during Quarter 2 and further increased in Quarter 3 to 1%. However, FDI continued to decline during the first ten months of the year representing only 2.3% of GDP as opposed to 7.2% of GDP in 2009. Unemployment continued its downward trend and registered an eighth consecutive month of decline, falling from a peak of 10.3% in February to 8.9% in October.

The Government's finances continue to compare favourably to most European countries. In the first ten months of the year Bulgaria generated a budget deficit of 2.6% of GDP. In October Government debt stood at approximately 16.2% of GDP and foreign currency reserves were over 44% of GDP.

Meanwhile, retail sees no respite to the downward trend. Preliminary figures issued by the Bulgarian National Statistical Institute (NSI) indicate that in November turnover in the retail trade, calculated based on calendar adjusted data, decreased by 5.2% compared to the same month last year.

Bulgarian Retail Property

Modern retail floor space continued to increase during the period. In provincial cities, four retail centres partially or fully opened to the public but suffered from high vacancy levels.

Brokers report that in Quarter 3 2010 there was an annual rent decrease of approximately 25% compared with the third quarter of 2009. Although conditions in the retail market continue to be generally unstable there is evidence of a slight stabilisation and a resurgence of retailers' interest in opportunities is expected in the near future. Brokers further report that the mid-term outlook for the sector is positive for Sofia and slowly improving for the larger provincial cities. The previously reported introduction of stepped rents, longer rent-free periods, turnover rent only periods and landlords' fit-out contributions or a combination of these are still prevalent. Rent collection is generally proving problematic.

Rents and capital values are not expected to recover in the near term and it is difficult to see a change to the current market conditions until there is a significant change in sentiment.

Mall Veliko Turnovo

Asset Overview

The Company's one remaining property asset is a wholly owned interest in a single shopping centre, Mall Veliko Turnovo ('MVT') in central Bulgaria.

MVT continued to face the extremely demanding retail trading environment and provide tenant support by offering further rental concessions in order to maintain acceptable levels of occupancy, which further decreased the rental income during the quarter.

At the end of December 2010 occupancy levels were at c 91% or 14,423 sqm of the total lettable space.

While the use of rental concessions is helping to maintain occupancy levels, the fall in rental income has impacted MVT's cashflow which is now negative and even with the planned makeover it is anticipated that rents will remain low at least until 2012. The negative cashflow is currently being funded from MVT's cash reserves with Alpha Bank.

The Manager is in detailed discussions with its senior lender about how best to take the Mall forward.

The difficult trading conditions will have had a negative impact on the carrying value of the investment. The Manager has therefore appointed Smith & Williamson to undertake a full property valuation as at 31st December 2010.

General Fund Matters

The Directors of the Company adjourned the shareholder meeting to consider the possible delisting of ECPC whilst all options were being explored with the senior lender of its subsidiary.

In July 2010 the Bulgarian tax authorities issued an assessment against European Convergence Property Company Bulgaria EOOD ("ECPC Bulgaria"), the company which directly owns MVT, for withholding tax on the interest accrued and payable to its parent. The company appealed to the Higher Tax Office against the assessment and was informed on 13th September 2010 that the Higher Tax Office had upheld the original assessment. The company then appealed this decision in the Administrative Court and a hearing has been scheduled to take place on 15th February 2011.

In parallel, a tax audit report covering the years from 2006 to 2008 was issued by the Revenue Authorities and handed to ECPC Bulgaria on 20th September 2010, which stated that for the audited period ECPC Bulgaria had to pay EUR135,000 withholding tax and EUR47,000 in penalties. An objection against the tax audit report was prepared by KPMG and submitted to the Revenue Authorities on 1st October 2010. The Manager is currently in discussions with the Bank on how best to proceed with the objection.

If the appeal fails and the 2009 and 2010 accounts are included, the total assessment including penalties will be in the region of EUR290 000.

This information is provided by RNS

The company news service from the London Stock Exchange

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