Not for release, distribution or publication in whole or part in or into the
United States, Canada, Japan or Australia
Lewis Charles Sofia Property Fund Limited (the "Fund")
Publication of admission document
Placing of 48,345,000 shares at a price of 80 pence per share
Lewis Charles Sofia Property Fund Limited, the residential property investment
fund specialising in Bulgarian properties, is pleased to announce the
publication of its admission document ("Admission Document") today. Dealings
in the Fund's shares are expected to begin on 27 September 2005 under the ticker
symbol LCSS.
The Fund has raised £38.7 million to invest in early stage residential
developments in Bulgaria primarily, although not exclusively, in and around the
capital city of Sofia and adjacent ski resorts.
Panmure Gordon is acting as nominated adviser and broker to the Fund.
Stavros Loizou, Managing Director of Lewis Charles said:
"We are delighted with the market's response to the launch of the Fund. We have
had some excellent feedback from investors who recognise the potential for the
Bulgarian residential property market.
The prospects for the Fund are excellent and the team can now set to work
investing in the schemes that we have earmarked."
Enquiries:
Lewis Charles + 44 (0)20 7065 1150
Stavros Loizou, Managing Director
Andy Charalambous, Deputy Managing Director
Loraine Pinel, Fund Manager
Panmure Gordon + 44 (0)20 7614 8388
Dominic Morley, Executive Director
Stuart Gledhill
cityPROFILE + 44 (0)20 7448 3244
Simon Courtenay
Oliver Winters
General
Lewis Charles Sofia Property Fund Limited is pleased to announce the publication
of its Admission Document today. Definitions used in the Admission Document bear
the same meanings in this press release.
The Fund is structured as a closed ended, Guernsey registered company.
Application will be made for the Shares to be issued pursuant to the Placing to
be admitted to trading on AIM, a market operated by the London Stock Exchange.
The Fund has been set up with the aim of generating capital gains by investing
in residential property in Bulgaria, primarily, although not exclusively, in and
around the capital city of Sofia and adjacent ski resorts.
The Fund has secured options to purchase an extensive initial property portfolio
in Sofia at a 56 per cent. discount to Open Market Value. Working in conjunction
with the Project Adviser, the Manager will seek to maximise the Fund's capital
gain on the initial portfolio, while identifying further investment
opportunities that offer the possibility of attractive gains during the lifetime
of the Fund, which is intended to be 6 years.
The Manager believes that residential property in Bulgaria is an attractive
investment because of the very considerable amount of inward investment that is
likely to be directed to the country as a consequence of the liberalisation of
the economy; this has been largely triggered by Bulgaria's expected accession to
the EU on 1st April 2007. Bulgarian economic prospects are very good in the
short to medium term, and the country is experiencing an influx of capital from
returning and expatriate professionals and tourists. The Bulgarian economy is
growing from a low base relative to the rest of the EU; convergence with the EU
therefore improves prospects for Bulgarian investments. Investing in residential
property is, in the Manager's opinion, a very good way of participating in
Bulgarian economic growth during the next 7 years.
Fund Structure
The Fund is a Guernsey closed ended investment company with a single class of
shares. The net proceeds of the issue of the Shares will be held, either
directly by the Fund or through wholly owned subsidiaries.
Sofia
Approximately 1.4 million people live in and around Sofia, the capital city of
Bulgaria. The city has an attractive and lively centre, largely built in the
late 19th century, and it is situated at an elevation of 545m, making it the
highest capital city in Europe. Just beyond the city centre are the desirable
residential areas of Lozenets, Ivan Vazov and Iztok, all of which are adjacent
to large parks. Outside these areas is a rather ugly, sprawling area dominated
by Stalinist-era tower blocks. Mount Vitosha rises from the southern edge of the
city, but is visible from just about any part of Sofia, and the rich commuter
villages of Boyana, Dragalevtsi and Simeonovo lie on its lower slopes. These
areas are becoming steadily more attractive to developers and homeowners as the
city expands southwards. Sizes of houses on the sales market usually range
between 300 and 450 square metres, situated on land plots of between 500 and
1,000 square metres. There is a serious undersupply of smaller houses with an
area of between 200 and 250 square metres; much of the property in the Fund's
initial property portfolio will be of this size. Demand for property in Sofia is
driven by: an estimated shortage of apartments which the Manager believes could
be as high as 80,000, an influx of expatriate professionals, returning Bulgarian
professionals attracted by Bulgaria's improving prospects and the burgeoning
domestic mortgage market.
Residential apartments at the high end of the market sell for between €800 and
€1,200 per square metre depending on quality, location and the package of
management services. Prices of detached houses in the prestigious areas of
Boyana, Dragalevtsi and Simeonovo vary according to the quality of construction,
size of plot and accessibility. Quality houses command 13 prices of between
€200,000 and €500,000. Rental yields exceed the average levels in the EU, and
currently range between 7 per cent. and 12 per cent. for single residential
properties. Large development projects aim to achieve rental yields of over 15
per cent..
Investment in the residential sector continues to be the dominant factor in the
Bulgarian property market as investors and developers perceive its high yield
potential. Demand for properties at the upper end of the market should remain
firm driven by steady economic growth and increasing consumer purchasing power.
Tourism
The tourist market in Bulgaria has been growing between 10 per cent. and 15 per
cent. for the past few years (source: someplaceelse.co.uk). Nearly 4.4 million
foreign tourists visited Bulgaria in 2004, an increase of 15 per cent. over
2003. Greeks (631,569), Germans (562,346) and Britons (250,863) comprised the
main tourist groups by nationality. The number of tourists from the EU increased
in 2004 by 25.03 per cent. year on year (source: Sofia News Agency, 27 December
2004). Tourism revenue in Bulgaria grew by more than 20 per cent. year on year
to a figure of €1.7 billion, and the number of British tourists to Bulgaria in
January 2005 increased by 60 per cent. as compared to January 2004 (source:
Sofia News Agency, 26 February 2005). The World Tourism Organisation ranked
Bulgaria among the most rapidly developing destinations in Europe in 2004.
Tourism is concentrated in the ski resorts and the Black Sea coast. The US
Department of State reported in February 2004 that "Bulgaria's location and
natural beauty makes it a clear winner for becoming a major international
tourist destination".
Ski resorts
Bulgaria's ski resorts are located to the south and south east of Sofia. The
main resorts are Borovets, Bansko and Pamporovo, respectively 1, 2 and 3.5 hours
drive from Sofia. With peaks reaching 3,000m and pistes above 2,500m these
resorts attract a growing number of visitors each year, particularly from the
UK, and offer good skiing at prices far cheaper than western European resorts
although facilities and access are still relatively underdeveloped. The number
of visitors to Bulgarian resorts is growing at over 20 per cent. per year, with
the Pamporovo resort reporting 100 per cent. occupancy for the 2004/5 season.
Newsweek recently reported that the Bulgarian resorts of Borovets, Bansko and
Pamporovo are the most fashionable ski resorts in Eastern Europe (source:
someplaceelse.co.uk). Sofia is a candidate city for the 2014 Winter Olympic
Games, and the resorts of Borovets and Bansko will be developed to support the
Olympic bid. The Bulgarian cabinet approved the Super Borovets project in April
2005 and this project provides for an overall modernisation and development of
the resort in order to improve Sofia's profile in the Olympic bidding process.
Construction of entertainment sites, shopping centres, winter sports facilities,
golf and tennis courts are included in the project.
The Black Sea Coast
The Bulgarian Black Sea coast is experiencing a boom in tourist demand. Its
resorts have received, and continue to receive, significant investment
participation by some of Europe's biggest travel and tourism companies. The
coast has a pleasant climate: the average summer air temperatures vary between
23C and 27C, and water temperatures between 17C and 25C. There are usually more
than 240 hours of sunshine in May and September, and more than 300 hours in July
and August (source: www.bulgariantour.com). Rainfall is low and the beaches are
clean (10 Blue Flag beaches). The Black Sea coast is approximately 5 hours'
drive from Sofia. The principal cities on the coast are Varna (population
350,000) and Bourgas (population 225,000).
Transport Infrastructure
International airports are located at Sofia, Varna and Bourgas. Sofia Airport is
now in the third and final phase of its current development plan and its
capacity will be expanded over the next five years to 5 million passengers per
year, up from today's capacity of 3.5 million. Varna and Bourgas Airports are
presently managed by state owned operating companies. The Bulgarian government
is inviting tenders from international airport operators to bid for a master 14
concession of up to 35 years to develop and manage Varna and Bourgas Airports.
By increasing runway and passenger terminal capacity these plans will enable
Varna and Bourgas to handle direct tourist flights on modern aircraft from the
rest of Europe. This improvement in accessibility should provide a significant
support to property prices on the coast.
The European Commission established the Instrument for Structural Policies for
Pre-accession (ISPA) in 1999 to provide financial assistance to applicant
countries for transport and environmental infrastructure projects to ensure
their alignment to EU standards. Bulgaria's indicative allocation from ISPA,
based on the criteria of population, surface area and GDP per capita, is between
€83 million and €124 million per annum over the period 2000 - 2006. Of this
total around half will be allocated to transport infrastructure.
Investment Strategy
General
The Fund will invest in residential developments mainly, but not exclusively, in
and around Sofia and its adjacent ski resorts. The Fund's preferred method of
investment will be through partnerships with developers. In these partnerships
the Fund will pay an initial deposit to the developer, leaving the developer
responsible for the balance of the costs of the development. This deposit will
be used by the developer to commence construction of the properties to be
purchased by the Fund. The Fund will contract to pay the balance of costs to the
developer on completion of the project. It is intended that all property in the
development will be sold by the Fund "off-plan" prior to completion. The
developer will participate in any "super" profits achieved by the "off-plan"
sale through an overage agreement. Selling "off-plan" means selling property at
some stage following the completion of the architectural drawings but before
development is completed, often before construction has started and sometimes
before construction consent has been obtained. In an off-plan transaction the
purchaser contracts to pay the developer an agreed price at a future date when
the properties have been completed.
Partnerships with Developers and Discounted Purchase Prices
When investing in developments, the agreed price will be at a discount to the
expected "off-plan" sale value to reflect both the reduction in the developer's
risk and, consequently, the developer's ability to reduce his cost of borrowing.
The Fund pays the developer a percentage of the estimated development cost as a
deposit. The developer can borrow against the deposit, thus reducing its overall
cost as well as gearing its development. The discounted price provides an
element of protection against downside market risk (because property prices
would have to fall below the discounted level for the Fund to suffer a loss on a
project). The fact that the Fund has paid only a proportion of the agreed price
as a deposit means that the purchase can take advantage of a rising market on a
debt free basis. The Fund will seek to sell on all of the developed property
prior to completion. In the event that it is successful in doing so the Fund
will have realised a capital gain while not actually having owned any completed
property.
The Fund will seek to pay deposits of between 20 per cent. to 30 per cent. of
the estimated land and build costs. As a result, the Fund should have a debt
free exposure to the eventual performance of its property portfolio provided it
is not obliged to complete on any properties (when borrowings may be utilised).
The domestic mortgage market has grown rapidly from a very low base during the
last three years. At the same time the Bulgarian economy has expanded quickly
for reasons which have been set out above. As a consequence of these
circumstances the level of demand for residential property has risen and, in the
Manager's opinion, should continue to rise strongly. Although the ability and
willingness of Bulgarian financial institutions to lend money to property
development companies has increased greatly during the last three years, the
market is still relatively underdeveloped. As a result many developers are
constrained in their plans due to lack of access to reasonably priced capital.
By selling the right to buy the whole or part of completed developments to the
Fund, in exchange for a deposit, developers are able to obtain better financing
terms from the banks than they would otherwise be able to arrange. This affords
an important strategic advantage to the Fund when negotiating with developers.
The "off-plan" property market in Bulgaria is still underdeveloped by comparison
to Western Europe. The deposit required upon exchange of contracts in Bulgaria
is typically between 10 per cent. and 30 per cent. whereas in the UK, for
example, deposits are usually between 5 per cent. and 10 per cent. These large
deposits reduce the magnitude of cash outflows for developers. The most
important difference between Western Europe and Bulgarian property markets lies
in the size of normal developers' profit margins: in Bulgaria profit margins are
commonly between 100 per cent. and 150 per cent., whereas in the UK profit
margins tend to be between 10 per cent. and 30 per cent. The size of the profit
margins and the large deposits paid by "off-plan" buyers make this property
market an attractive proposition for the Fund.
Overage
The Fund will offer developers a share in the eventual profit from the sale of
the properties over which the Fund has secured the right to buy by virtue of
entering into purchase options. This share in any eventual upside is called
`overage' and details of the overage arrangements will be contained in the
purchase options. By negotiating overage deals with developers the Fund will aim
to secure a conjunction of the interests of both the Fund and the developer in
achieving a successful and timely completion of construction projects.
Investment Policy
The Fund will work in conjunction with selected developers to obtain attractive
capital gains for the Fund while reducing the developer's risk. The Fund will
aim to create this outcome by implementing the following policy when investing
in development projects.
Developments should be located in areas that are most likely to attract
Bulgarian, expatriate or foreign resident professional, upper and middle class
buyers of completed houses or apartments. The Manager, working in conjunction
with the Project Adviser will seek to identify suitable developments within one
hour's travel time from Sofia airport. The Fund may invest in developments
elsewhere in Bulgaria where the Manager believes that the particular
circumstances are attractive and provide the Fund with a good opportunity of
making a gain on its investment.
The type of properties to be built will be of an appropriate size and design to
facilitate sales to the Fund's target market. The Manager will work with the
Project Adviser to ensure that appropriate market research is carried out to
check that the developer's product should match the Fund's target market. The
Fund's preferred method of investment will be through partnerships with
developers. In these partnerships the Fund will pay an initial deposit to the
developer, leaving the developer responsible for the balance of the costs of the
development. This deposit will be used by the developer to commence construction
of the properties to be purchased by the Fund. The Fund will contract to pay the
balance of costs to the developer on completion of the project. However, it is
intended that all property in the development will be sold by the Fund "off-
plan" prior to completion. The developer will participate in any `super' profits
achieved by the off-plan sale through an `overage' agreement. Selling "off-plan"
means selling property at some stage following the completion of the
architectural drawings but before development is completed, often before
construction has started and sometimes before construction consent has been
obtained. In an "off-plan" transaction the purchaser contracts to pay the seller
an agreed price at a future date when the properties have been completed.
The Fund will also seek to acquire a strategic land bank in areas where the
Manager and the Project Adviser believe that a profitable development could be
undertaken.
By buying the land on which a development is to be constructed the Fund both
secures the site for possible future use and acquires a real asset, thereby
reducing the Fund's dependence on the value of its purchase options to acquire
completed developments.
Procedure and Operations: Proposals, Sales and Letting
The Project Adviser will be a primary introducer of property investment
opportunities to the Manager, and will make recommendations on opportunities
introduced by other persons. However, the Manager will appoint other consultants
to assist it in identifying suitable investment opportunities. The Manager will
decide whether the proposed project meets the Fund's investment mandate and, if
it does so, the Manager will instruct the Property Valuation Adviser to provide
a valuation. In the event that such a recommendation is agreed by the Manager,
the Property Valuation Adviser, the Project Adviser and selected developer will
work together to draw up a detailed investment proposal for each individual
project for approval by the Manager. The investment proposal will contain
details of the discount offered, an analysis of the anticipated return on the
investment, the likelihood of an off-plan sale and a risk assessment to include
market trends, the letting potential of the property and the reliability of the
selected developer. If it approves a proposal the Manager will then instruct
local lawyers to carry out the necessary conveyancing transaction. The relevant
law firm will be paid a conveyancing fee by the Fund at market rates.
The Option Agreements provide that Buysell Real Estate Agent Ltd ("Buysell")
will offer the Fund the right of first refusal in relation to any investment
opportunity which it has sourced and is developing.
Sales will be conducted primarily through agents in Sofia, Ireland and the large
international property agencies. The Manager will seek to ensure that sales are
planned in such a way as to provide a reasonable level of capital gain for the
Fund without exposing the Fund to an excessive level of risk relative to market
circumstances at the time of sale.
It will not be the normal policy of the Fund to let properties on completion. In
certain circumstances, however, it may be preferable to do so rather than to
realise a capital loss for the Fund. The most likely situation in which the
Manager could consider letting would be one of temporary weakness in the
property market, when it might be more advantageous to the Fund to use rental
income to cover borrowing costs until a subsequent market recovery would enable
the Manager to sell the property at a profit. In these circumstances the Manager
could decide to release the Fund's equity in the property and complete by
borrowing 100 per cent. of the purchase price.
The Initial Property Portfolio
The Fund has secured purchase options over 954 properties (out of which 63
represent luxury villas, and 891 represent luxury apartments) to be built over
12 separate sites in central Sofia and its southern suburbs (the "Central Sofia
Purchase Options"). These sites cover 61,940 square metres and have a total
possible build area of 142,294 square metres. The aggregate deposit payable on
exercise of the Central Sofia Purchase Options would be €12,361,262 million and
the total balance payable on completion is €49,445,050.
Under the terms of the Central Sofia Purchase Options the deposit payable on
exercise of the Central Sofia Purchase Options and the total balance payable on
completion will be increased in line with any increase in the Index.
The Manager is also in advance stages of negotiation with a developer to secure
purchase options for the Fund over a plot of land covering 100,000 square metres
with a total possible build area of 72,000 to 75,000 square metres located in
the south eastern part of Sofia, at the foot of the Vitosha mountain, in the
same region where the expansion of Sofia is projected (the "Bistritsa Purchase
Option"). The land plot is envisaged as a residential area and the developer is
in the process of obtaining a visa design. The aggregate deposit payable on
exercise of this option would be €6,411,000, representing 11.8 per cent. of the
gross proceeds of the Placing and the total balance payable on completion is
€25,644,000. Both the deposit and balance payable on completion would be
increased in line with any increase in the Index.
The Manager is also in advanced stages of negotiation with a developer to secure
purchase options for the Fund over a site in the area of Varvara, in the
southern part of the Black Sea coast (between the tourist towns of Tsarevo and
Ahtopol) (the "Varvara Purchase Option"). The site comprises three neighbouring
land plots covering 46,196 square metres with a total possible build area of
34,850 square metres. The aggregate deposit payable on exercise of the Varvara
Purchase Option would be €3,118,987, representing 5.8 per cent. of the gross
proceeds of the Placing and the total balance payable on completion is
€12,475,949. Both the deposit and balance payable on completion would be
increased in line with any increase in the Index.
The developer of all of these properties is Buysell Real Estate Agent Ltd, a
Bulgarian incorporated property development company. Andreas Drakou, who will
principally source developments for the Fund, is a 50 per cent. shareholder of
Buysell. Under the terms of the Central Sofia Purchase Options the Fund will
retain all of the first 20 per cent. of any profit generated above the Fund's
purchase price. Any profit generated above this amount will be split, 30 per
cent. for the Fund and 70 per cent. for the developer, Buysell.
The Option Agreements provide that Buysell will offer the Fund the right of
first refusal in relation to any investment opportunity which it has sourced and
is developing and Buysell shall be given a right of first refusal over any
investment opportunities which the Fund sources.
Assuming that negotiations are successful in relation to the Bistritsa Purchase
Option and the Varvara Purchase Option the Fund intends to use the same
partnership model as the Central Sofia Purchase Options with the Fund retaining
the first 20 per cent. of any profit generated above the Fund's purchase price
and any profit generated above this amount would be split, 30 per cent. for the
Fund and 70 per cent. for the developer.
The Fund may also seek to enter into other purchase options with Buysell and/or
other developers following launch of the Fund. Such options will have similar
terms to the Central Sofia Purchase Options with the Fund typically retaining
the first 20 per cent. of any profit generated above the Fund's purchase price
and 25 to 35 per cent. of any profit generated thereafter with the balance being
paid to the developer.
The Initial Purchase Options
Central Sofia Purchase Options
The Central Sofia Purchase Options that have already been secured are in respect
of the following 12 sites. The 12 sites are in the wealthy suburbs of
Dragalevtsi, Vitoshavvets-Simeonovo and Krustovat. All three of these suburbs
are to the South East of Sofia and are rapidly becoming exclusive highly sought
after locations. They are within a 15 minute drive to the centre of Sofia (3-
4km) and a ten minute drive (3-4km) to the bottom of the Vitosha cable car (the
Vitosha ski slopes are situated at c2100m). The three suburbs are also very
close to the newly constructed Sofia business park (3-4km) and 15 km from the
airport.
Dragalevtsi
The Dragalevtsi suburb lies at the foot of the Vitosha mountain and is a suburb
which is exclusively made up of villas (the building of apartments is not
permitted). 7 of the 12 sites are situated here and the plans are to build 47
luxury villas and 15 semi detached houses. All of the villas will be located in
gated compounds. Visa plans have been obtained on all 7 sites and investment
designs (architect drawings) are completed for 4 of the sites and are in the
process of completion for the remaining 3 sites. All of the villas will be built
to luxury specifications on two floors with lofts, underground car park,
swimming pool and jacuzzi. The semi detached houses will also be built to luxury
specifications with underground parking and lofts. The build areas of the luxury
villas vary and are approximately 250 square metres and 200 square metres for
the semi detached houses. Both the villas and the semi detached houses will have
underground parking of around 100 square metres which could be used for purposes
other than parking and some of the luxury villas will have outside parking.
Expected selling prices are between €800 to €1200 per square metre.
The Fund's aggregate deposit payable on exercise of the Dragalevtsi properties
in the Central Sofia Purchase Options would be €2,320,318, and were the Fund to
sell the properties prior to completion for the target prices (between €800 and
€1200 per square metre), it would generate a gross profit to the Fund (before
tax and selling costs) of €2,972,428.
Vitoshavvets-Simeonovo
The Vitoshavvets-Simeonovo suburb lies close to the foot of the Vitosha mountain
and is a suburb which is made up of a mixture of luxury villas and small
apartment blocks. 4 of the 12 sites are situated here and the plans are to build
around 827 luxury apartments. Visa plans have been obtained on all 4 sites and
investment design plans have been completed. The apartment blocks will be small
(4-5 floors) with around four to six apartments on each floor. One of the
apartment blocks will have c9660 square metres of commercial space. It is
expected that this commercial space could be rented out for around €25 per
square metre (per month). All the apartments will be built to luxury
specifications. The size of the apartments will vary from 79 square metres to
130 square metres. Expected selling prices are between €800 to €840 (per square
metre).
The Fund's aggregate deposit payable on exercise of the Vitoshavvets-Simeonovo
properties in the Central Sofia Purchase Options would be €9,347,465, and were
the Fund to sell the properties prior to completion for the target prices
(between €800 and €840 per square metre), it would generate a gross profit to
the Fund (before tax and selling costs) of €20,870,570.
Krustovat
The Krustovat suburb lies close to the foot of the Vitosha mountain and is a
suburb which contains a mixture of luxury villas and small apartment blocks. 1
of the 12 sites is situated here and the plans are to build 64 luxury
apartments. Visa plans have been obtained and investment design plans have been
completed. The construction permit is expected upon approval of the investment
design for the site by the Fund. The apartment blocks will be small (4-5 floors)
with around four to six apartments on each floor. All the apartments will be
built to luxury specifications. The size of the apartments will vary from 79
square metres to 130 square metres. Expected selling prices are €800 per square
metre.
The Fund's aggregate deposit payable on exercise of the Krustovat properties in
the Central Sofia Purchase Options would be €693,480, and were the Fund to sell
the properties prior to completion for the target prices (€800 per square
metre), it would generate a gross profit to the Fund (before tax and selling
costs) of €1,365,216.
The statements made above regarding the sales prices of properties in the
Central Sofia Purchase Options should not be taken as an indication that the
properties will be sold at the stated price or at all. The stated discounts are
taken from the Property Valuation Adviser's assessment of residential property
values in September 2005. Those valuations may not be achievable on sale.
Current Projects in the Pipeline
Bistritsa Purchase Option
The Bistritsa site is located in the south eastern part of Sofia, at the foot of
the Vitosha Mountain and overlooking the city. It is near the Sofia ring road
and has easy access from all parts of the city. On the other side of the road is
the newly constructed Sofia Business Park, a fairly modern commercial
development accommodating a large amount of the foreign business in Bulgaria and
a second phase is currently under construction. Also close to the Bistritsa site
and under construction is a large retail hypermarket being constructed by a
German investor, a large cinema centre (16 screens) and a large electrical
appliances shopping mall.
Recently a large Spanish developer purchased 180,000 square metres of land close
to the Bistritsa site and the Sofia Business Park for commercial development.
This makes the Bistritsa site even more strategically located and attractive as
it is the only one in the area suitable for residential development.
Although the Bistritsa site currently has agricultural status, it is designated
for residential development under the master urban plan ("MUP") of the city of
Sofia. The new MUP has been finalised and its endorsement by Parliament is
pending in the next few months and according to the new MUP the Bistritsa site
is the only site in the area with the unique residential category II. In terms
of parameters this means: 25 to 30 per cent. density of construction, ie 250 to
300 square metres of constructed space and 800 square metres of built up area
per one thousand square metres. In terms of height, houses of two storeys plus
roof space will be permitted for construction with total heights of 7 metres
from the ground. In addition other residential facilities such as swimming
pools, tennis courts etc may be constructed.
The Bistritsa site is the largest available site in Sofia and represents a
unique consolidation of 57 smaller plots of land.
The Manager believes that the Bistritsa site represents an excellent investment
opportunity in view of: the lack of large and competitive residential
development in Bulgaria; its location which is close to the Sofia Business Park
and has good access to the downtown Sofia area and is in the heart of the area
designated for the residential expansion of the city.
Using the same partnership model as the Central Sofia Purchase Options and
assuming that negotiations are successful the aggregate deposit payable on
exercise of the Bistritsa Purchase Option would be €6,411,000 and were the Fund
to sell the properties prior to completion for the target prices shown below
(between €800 and €900 per square metre), it would generate a gross profit to
the Fund (before tax and selling costs) of €13,613,700.
The statements made above regarding the sales prices of properties in the
Bistritsa Purchase Option should not be taken as an indication that the
properties will be sold at the stated price or at all. The stated discounts are
taken from the Property Valuation Adviser's assessment of residential property
values in September 2005. Those valuations may not be achievable on sale.
Varvara Purchase Option
The Varvara site is in the area of Varvara, in the southern part of the Black
Sea coast (between the tourist towns of Tsarevo and Ahtopol). The site comprises
three neighbouring land plots covering 46,196 square metres with a total
possible build area of 34,850 square metres. The developer is in the process of
uniting the three plots into one, thus allowing a better opportunity from an
architectural layout standpoint. The permitted height of the storey construction
is limited to 7 metres, however this does not include additional attic space
which could be used.
There are plans for a wide variety of buildings within this site; villas, an
administrative building, swimming pools, parking lots etc.
A design visa in respect of the land is in the process of issuance and is
expected by the end of July 2005.
Using the same partnership model as the Central Sofia Purchase Options and
assuming that negotiations are successful, the Fund's aggregate deposit payable
on exercise of the Varvara Purchase Option would be €3,118,987, and were the
Fund to sell the properties prior to completion for the target prices shown
below (between €800 and €1,000 per square metre), it would generate a gross
profit to the Fund (before tax and selling costs) of €6,914,310.
The statements made above regarding the sales prices of properties in the
Varvara Purchase Option should not be taken as an indication that the properties
will be sold at the stated price or at all. The stated discounts are taken from
the Property Valuation Adviser's assessment of residential property values in
September 2005. Those valuations may not be achievable on sale.
Construction Process
Receipt of a Construction Permit is a mandatory prerequisite for the de facto
initiation of the construction process pursuant to Bulgarian law. Its issuance
is preceded by certain other statutory regulated procedures and the necessity to
accomplish some or all of these (listed below) depends on the specifics of the
construction itself and the legal status of the land where the construction is
to be effected. The pre-requisites to a Construction Permit being issued are as
follows:
(a) change of land status from agricultural land into land with industrial
designation (if appropriate);
(b) environmental impact assessment ("EIA") of the construction;
(c) Zoning Plan amendment;
(d) Design Visa;
(e) Construction Designs approval;
(f) EIA regarding construction designs; and
(g) Construction Permit.
Change of land designation status
Generally, the land designation in Bulgaria is formally determined based on its
historical utilisation and/or ownership, for example: agricultural land,
forestry, industrial land. Construction activities on agricultural land are
prohibited, save for specific exemptions subject to a specific procedural
regime. If a specific land plot has agricultural land status a special procedure
must be carried out to change the land status before a potential construction is
permissible. The successful accomplishment of the change-of-status procedure is
an irrevocable prerequisite for the issuance of Construction Permit. The
procedure involves the Ministry of Agriculture and Forestry ("MAF") and its
territorial departments, sitting with the territorial municipalities ("MAFTD").
EIA regarding Zoning Plan
Whether or not an EIA procedure with regard to amendments of the Zoning Plan
should be carried out is determined according to the provisions of the
Environmental Protection Act ("EPA") and the Ordinance for Preparation of EIA
regarding Plans and Programmes.
The Minister for Environment and Waters or the Director of the respective
territorial Inspectorate for Environment and Water ("IEW") are competent to
evaluate and decide on the necessity of an EIA preparation, depending on the
specifics of each separate project. The party who is interested in Zoning Plan
amendments should submit an application in this regard to the competent
authority. A decision from the authority must be issued within three months'
after the application is submitted.
Zoning Plan (Urban Development Plan)
Pursuant to the Bulgarian Territorial Development Act ("TDA") construction
development is regulated by means of Zoning Plans approved by the competent
Bulgarian authorities. There are several types of statutory provided Zoning
Plans (e.g. general, detailed, working, etc.). The main construction parameters
such as admissible construction height, density and intensity of construction as
well as any other requirements, if any are indicated on the detailed Zoning
Plan.
If there is no Zoning Plan for a particular land area, or the existing one does
not allow the construction of planned units/facilities, a procedure should be
initiated in order for such a plan to be prepared or amended. The Mayor of the
respective administrative unit, or the land plot owner/holder of in rem
construction rights, is empowered by law to initiate the procedure.
According to Bulgarian law the procedure for adoption (i.e. approval) of a new
Zoning Plan or the introduction of an amendment to the existing one requires the
following steps:
(a) application to the Mayor for initiating the procedure, if the amendment
procedure does not fall within the ones that the Major ex officio is bound to
initiate (please refer to the section on construction process above);
(b) within 14 days after submission of the application to the Mayor, the latter
should allow an initiation procedure. An announcement in this regard is to be
published in the city hall;
(c) a draft Zoning Plan/amendment to the Zoning Plan should be prepared by a
licensed architectural company;
(d) notification to the interested parties that the draft Zoning Plan has been
prepared should be made. Within 14 days after the notification, the interested
parties can submit their written objections to the draft Zoning Plan;
(e) within one month after the expiry of the said 14 day term, the draft Zoning
Plan will be adopted by the municipal expert council with the Municipality;
(f) after the draft Zoning Plan has been adopted by the municipal expert
council, it should be approved by the Major of the municipality by means of an
official order. A 14-day term is provided for the order to be issued; and
(g) notification to the interested parties on the issuance of the order which
approves the Zoning Plan should then be made. Such parties are granted 14 days
after their receipt of the notification to file an appeal against the order with
the Mayor. In the event that no legal action has been taken within the said
period, the order and the Zoning Plan respectively enter into effect. If appeals
are filed, the procedure is taken to court for settlement and the effect of the
Mayor's order is postponed until such court settlement is accomplished.
Design Visa
Pursuant to the provisions of Art 140 of DTA the design visa ("Design Visa") is
an official document issued by the Chief Architect of the Municipality where
construction activity is to commence. The Design Visa represents an official
copy of the Zoning Plan which includes the land plot (where construction is to
be carried out) and the neighbouring land plots, with indications of
existing/planned buildings/construction, the admissible construction height,
density and intensity of construction as well as any other requirements. The
Design Visa is not a mandatory prerequisite for the Construction Permit as per
the effective Bulgarian legislation. It is often used in practice by real estate
developers, however, as a tool to obtain official clarification on the allowed
construction parameters in a specific land plot. The Design Visa should be
issued within 14 days after an application to this effect before the Chief
Architect of the Municipality is made by the land plot owner/the person to whom
the in rem right of construction on the land plot is granted.
Construction Designs
As per the statutory provisions the constructions are performed in accordance
with construction design(s) coordinated with and approved by the Chief Architect
of the Municipality where construction is to be performed. A valid and final
Construction Permit can only be issued on the basis of such designs.
Construction designs themselves can be worked out at the following stages:
(a) preliminary design;
(b) technical design; and
(c) working design (working drawings and details).
Depending on the specific characteristics and complexity of the units/facilities
to be built, the construction designs can be worked out in one stage (e.g. as
technical design), two stages (e.g. as preliminary design plus working design)
or three stages (as listed above). However, no final Construction Permit can be
issued only on the basis of preliminary design.
Pursuant to the provisions of Ordinance _4 for the Content and Scope of the
Construction Designs all construction designs should comprise certain legally
determined sections: e.g. architectural section, constructional section,
vertical planning, planning of the internal infrastructure, etc.
No time-frame is legally provided for the preparation of the construction
designs.
EIA regarding construction designs
As an obligatory prerequisite for the coordination and approval of the
construction designs the environmental impact of the project should be assessed
by the competent authorities according to the provisions of EPA.
In the event that the complex to be built has an utilizable area of more than
10,000 sq. m. or it is estimated that an EIA should be carried out (if the
utilizable area is less than 10,000 sq. m.), the following steps are to be
undertaken as per Bulgarian law:
(a) an EIA report regarding the construction designs should be presented by the
investor to the competent authorities;
(b) within 14 days after the EIA report has been presented, it should be
reviewed by the competent authorities;
(c) if the EIA report is reviewed positively, a public discussion on the matter
shall be organized. The discussion could be carried out at least one month after
an announcement in this regard has been made;
(d) within 7 days after the discussion has been carried out, the interested
parties express and submit in writing their opinion on the matter; and
(e) within 3 months after the discussion has been carried out, the competent
authorities shall issue a final decision on the environmental impact of the
construction designs.
Construction Permit
Pursuant to Art 148 of TDA, the Construction Permit is a valid and final
administrative act, issued by the competent Bulgarian authorities, which enables
the construction on the land plot to be implemented. The Construction Permit is
to be issued within 7 days after an application in this regard has been
submitted by the interested party-investor, only if the respective construction
design(s) have been coordinated and approved (see above).
The Chief Architect could decline the Construction Permit request. Irrespective
of whether the Construction Permit has been issued or not, the interested
parties should be notified on the matter. The issuance of the Construction
Permit as well as the refusal for such issuance can be appealed before a court
within 14 days after the notification. Within 14 days after the notification
receipt, it is possible to appeal against the respective administrative act
(i.e. the issued Construction Permit or the refusal of issuance of such act).
After the expiry of the appeal term, the Construction Permit enters into force.
Capital Management
The Fund may purchase the right to buy some or all of the completed property
developments at a discount to current Open Market Value, and will pay a deposit
of, typically, between 20 per cent. and 30 per cent. of the agreed discounted
value to the developer. Although the Fund will not normally complete on
properties, but will seek to sell them prior to completion, the Manager will
nevertheless ensure that the Fund has sufficient capital available to enable it
to complete on all investment properties, having taken into account the expected
borrowing terms if the Fund were to complete. The Manager will monitor
constantly the Fund's liabilities relative to its available capital. The amount
of capital required to complete on the Fund's investment property will vary
depending on the gains retained by the Fund, the movement in capital values
between exchange of contracts and completion and the probable cost of borrowing.
In the event that it is obliged to complete on a property where the property has
not been sold on an off-plan basis prior to completion and where the capital
value has risen between exchange and completion, the Manager may decide to have
the property revalued in order to withdraw some or all of the Fund's deposit and
borrow the entire amount required to complete. If the capital value has fallen
below the agreed completion price the Fund will have to finance the difference
between the amount by which the capital value has fallen and the amount which
may be borrowed. The Manager will make prudent assumptions as to the amount by
which the capital value of the Property Portfolio may fall between exchange and
completion.
The Directors, on the advice of the Manager will decide on the terms of any bank
borrowings to complete on the purchase of property. Save in exceptional
circumstances, mortgage borrowings will be limited to no more than 100 per cent.
of the Fund's net asset value at the time of borrowing.
The Fund will not use financial derivatives.
Cash Management
The Fund's investments will be made in Euros (because the Bulgarian Lev is
pegged to the Euro). Accordingly, the proceeds of the issue of Shares will be
converted into Euros shortly after launch. Any distributions made to holders of
Shares will be made in Sterling, having been converted at the exchange rate
prevailing at the time of such conversion, and net of costs. The base currency
of the Fund for accounting purposes will be the Euro, but the report and
accounts presented to Shareholders will be in Euros and converted to Sterling in
accordance with International Financial Reporting Standards for information
purposes only. The Fund will not hedge the exchange rate risk between Euros and
Sterling.
Any cash held by the Fund may be held in Euro denominated government bonds with
maximum maturities of the lesser of two years or the remaining life of the Fund
and/or invested in AAA rated liquidity funds.
Initial Expenses and Management Fees
The Fund will pay the Manager a structuring fee equal to 1 per cent. of the
gross proceeds of the Placing in return for the structuring advice provided in
connection with the Fund's launch. In addition, the Fund will pay the Manager an
amount equal to 3 per cent. of the gross proceeds of the Placing. The Manager
has, in return, agreed to meet all of the costs of the launch of the Fund
including the costs of Admission, and legal, taxation, property consultancy and
accountancy advice (but excluding the Manager's structuring fee). These fees
payable to the Manager (amounting to 4 per cent. of the gross proceeds of the
Placing) shall be amortised over the expected six year life of the Fund.
The Manager will receive an annual management fee payable quarterly in advance
of 2 per cent. per annum of the net amount placed on the placing of Shares plus
undistributed capital gains retained by the Fund for reinvestment in the
Property Portfolio. The fees of the Project Adviser will be met by the Manager.
The Manager will also be paid a performance fee of 20 per cent. of any gains
generated by the Property Portfolio in excess of a 7 per cent. per annum
compound hurdle rate plus 5 per cent. of any gains in excess of a 23 per cent.
per annum compound hurdle rate.
Interim payments of the performance fee will be made during the life of the Fund
based on cash proceeds of the sale of investment properties. In these
circumstances, only 80 per cent. of the performance fee calculated will be paid,
with the balance held pending the calculation of the overall returns on the
Property Portfolio at the end of the planned 6 year life.
The Manager has entered into an agreement with the developer Buysell whereby, in
relation to the Central Sofia Purchase Options, to the extent the Manager is
paid a performance fee in respect of any gains over the 23 per cent. per annum
compound hurdle rate, the 5 per cent. performance fee will be divided between
Buysell 60 per cent. and the Manager 40 per cent. as an incentive for the
developer and it is intended that similar arrangements will be entered into with
other developers.
The Board
The Directors of the Fund, all of whom are non-executive, will be responsible
for supervising the Manager and the overall investment activities of the Fund.
The Directors are:
Lord Howard of Penrith (Chairman) (U.K. resident)
Philip joined Tarchon Capital Management in 1998 and is the current Chairman and
Portfolio Manager. He was Head of the Fixed Income, Derivatives and Prime
Brokerage businesses in Europe and Deputy Chairman of Lehman Europe. Previously,
he worked at Phillips & Drew where he was a Partner in charge of International
Fixed Income. He began his career as a journalist ultimately working with the
Daily Mail and EuroMoney before joining Deltec Trading Company to head its Euro
Bond trading operations. Philip was educated at Ampleforth College and Christ
Church College, Oxford.
Daniela Bobeva (Bulgarian resident)
Daniela Bobeva has a Master's degree from the Sofia Institute of Economics and a
PhD in Economics. She started her career as an economic analyst and adviser to
the Prime Minister of Bulgaria and then in 1995-1996 became the President of the
Bulgarian Foreign Investment Agency. In 1997, she became Minister of Trade and
Foreign Economic Co-operation. From 1998 to 2001, she was elected as the first
vice-president of "Banking" in the newly established multilateral development
bank. She is currently Director of European Integration and International
Relations at the Bulgarian National Bank. She has more than 30 international
publications in the area of macro-economics.
Desmond Swayne (U.K. resident)
Desmond Swayne is the sitting Conservative Member of Parliament for New Forest
West. He holds a Master's degree from St Andrew's University. Prior to entering
Parliament in 1987 he spent eight years working for Royal Bank of Scotland
including four years as manager for Royal Bank of Scotland Risk Management
Systems. Mr Swayne has held a number of front bench positions including Shadow
Health Minister, Shadow Defence Minister, Shadow Northern Ireland Minister and
senior whip. He is currently Parliamentary Private Secretary to the Leader of
the Opposition, Michael Howard.
Gerald Williams (Guernsey resident)
Gerald Williams is Chief Executive of The Bachmann Group Limited, Managing
Director of Bachmann Fund Administration Limited, and was previously a director
of Coutts Fund Managers and head of private banking for Coutts offshore private
bank. Mr Williams has worked in most major offshore jurisdictions including the
Bahamas, Cayman Islands, Isle of Man, and Jersey. Mr Williams has a wealth of
experience in the trust field and is an associate of the Chartered Institute of
Bankers.
Clive Simon (Guernsey resident)
Clive Simon is the chairman of Bachmann Fund Administration Limited and a
director of The Bachmann Group Limited. Before joining the Bachmann group of
companies in 1998, he was a senior partner with Coopers and Lybrand (now
PricewaterhouseCoopers), working in London, Africa, and the Channel Islands. His
business background is predominantly in the financial services sector.
The Placing
£38.7 million has been raised by the Fund for investment in the Property
Portfolio.
The minimum subscription amount payable under the Placing by any underlying
beneficial Shareholder for Shares is the greater of £30,000 or such Sterling sum
as represents the equivalent of €50,000.
The Fund will pay commission to distributors of 5 per cent. of the Placing Price
per Share.
Unless otherwise agreed by the Directors the Placing is conditional upon a
minimum of £10 million being raised on the issue of Shares. The Placing Price is
80 pence per Share.
Philip Howard has opted to subscribe for £40,000 of Shares and Andreas Drakou
has opted to subscribe for £1,000,000 of Shares.
Stavros Loizou and Peter Yallup have each opted to subscribe for €50,000 of
Shares (or the Sterling equivalent thereof).
Loraine Pinel and Mark Anderson have each opted to subscribe for €30,000 of
Shares (or the Sterling equivalent thereof).
The Fund has applied for the Shares to be admitted to CREST with effect from the
date of Admission. It is expected that Admission will take place and dealings in
the Shares will commence on or around 27 September 2005. The settlement of
transactions in the Shares will take place within the CREST system. The Shares
will be subject to the rules, regulations and procedures governing CREST and its
system members. Any scaling back of Shares will be at the Directors' discretion.
Life of the Fund
The Fund will have a maximum life of seven years expiring on 27 September 2012.
The Manager intends to arrange the Property Portfolio so that it can be realised
in an orderly way by the end of six years. If this is achieved the Fund will be
liquidated at the end of the six year period. The life of the Fund may be
extended by up to a year (to seven years in total) at the discretion of the
Directors, on the advice of the Manager, if it is necessary for an orderly
realisation of the Fund's assets. The life of the Fund may be extended beyond
seven years by a special resolution carried by a two thirds majority of those
Shareholders that vote on it. The termination of the Fund may involve liability
for taxation for some Shareholders.
The proceeds realised from the Property Portfolio may be reinvested into further
property investments by the Manager, net of any performance fee due. The
Directors will, however, consider the distribution of profits on the Shares
after the first three years of the Fund's life, and at any time if the Manager
so recommends, subject in each case to market conditions prevailing at the time.
Following the end of the sixth or seventh (if the life is extended) year of the
Fund's life the proceeds of sale of the Property Portfolio will be returned to
Shareholders as determined by the Directors.
In the event that the Fund completes on an investment property, any rental
income deriving from the property may, at the Directors' discretion, be returned
to Shareholders as a dividend on the Shares. Distributions may be made by way of
a dividend or repurchase of Shares at the Directors' discretion. Distributions
may give rise to a liability to tax on income or capital gains.
If the Shares are trading at a discount to net asset value the Fund may purchase
Shares for cancellation if, in the Directors' opinion such a repurchase would be
beneficial to the value of the remaining Shares.
Conflicts of Interest
The Manager and the Project Adviser may provide investment management, advisory
and other services to other clients (including investment companies) and, in
providing such services, may use information obtained by them which is used in
managing the Fund's investments. In the event of a conflict of interest arising,
the Manager and the Project Adviser will ensure that investment opportunities
are fairly allocated to their respective clients. Furthermore, the activities of
the Manager in its capacity as the Fund's investment manager are subject to the
overall direction and review of the Directors.
Andreas Drakou is a 50 per cent. shareholder of the Bulgarian developer Buysell
which owns the land over which the Central Sofia Purchase Options have been
granted. Andreas Drakou is a non-executive director of the Manager and has a
4.07 per cent. shareholding in the Manager. Andreas has opted to subscribe for
£1,000,000 of Shares.
The Manager
The Fund will be managed by Lewis Charles Securities Limited, a fund management
company incorporated on 3 February 2000 which is a member of the London Stock
Exchange and based and regulated in London by the FSA. The Manager is a niche
financial services boutique and its activities include institutional and retail
broking, research, corporate finance and fund management. The Manager has
entered into a Management Agreement pursuant to which it will be responsible for
the management of the Fund's investment portfolio and the general oversight of
the Fund's affairs. The Management Agreement will be subject to termination by
the Fund on six months notice expiring no earlier than the second anniversary of
Admission. The key executives of the Manager who shall be managing the Fund are
listed below.
Stavros Loizou
Having graduated from City University in Banking & International Finance in 1987
Stavros trained in New York with DLJ before joining the company in London. He
joined Fuji Bank (London) in 1989 where he remained for 11 years. During his
time there he became Head of the Strategic Trading Group with responsibility for
managing approximately $100 million in positions. He left to set up the Manager
in 2000 where he is now Managing Director. Stavros has numerous years experience
in trading proprietary positions and hedge funds and has been a regular guest on
Reuters and Bloomberg Television analysing the financial markets. Stavros has
opted to subscribe for €50,000 of Shares (or the Sterling equivalent thereof)
of Shares and has entered into lock in arrangements whereby he has agreed not to
dispose of his securities for a period of one year from the date of Admission.
Andy Charalambous
Andy began his career in 1990 at CIBC World Markets PLC, training in their
Toronto and New York offices before establishing himself in London on the
institutional fixed income sales desk. In 1993 Andy was promoted to Director and
given the responsibility of covering all major Benelux institutions, Greece,
Cyprus and their respective central banks. In 1997 Andy joined Tokyo Mitsubishi
International PLC taking on the role of Senior Manager and became a general
representative of the International Securities and Marketing Association. In
June 2000 Andy left to set up Lewis Charles Securities where he is currently
Deputy Managing Director and Head of Brokerage. Andy will not subscribe for any
Shares on Admission, however he has reserved the right to subscribe for Shares
in the 12 months following Admission and accordingly has entered into lock in
arrangements whereby he has agreed not to dispose of any securities acquired for
a period of one year from the date of Admission.
George Christodoulou
George obtained a BA (Hons.) Degree in London and became a member of the
Association of Chartered Certified Accountants in 1991. From 1986 until
establishing his own practice, George gained invaluable experience in audit,
business development, tax and accountancy for SME's and in 1994 he established
Gilchrists which has flourished into a thriving accountancy practice. In 2000 he
assisted Stavros Loizou, Andy Charalambous and Sharelink Financial Services
Limited in setting up the Manager (previously known as SFS International
Securities Limited). George is the part-time Finance Director of the Manager and
has been a shareholder since the Manager's inception in 2000.
Loraine Pinel
Loraine has been managing funds since 1977 when she joined L'Abeille (Groupe
Victoire) in Paris as a fixed income fund manager. Loraine then moved to the
Canadian insurance company, Manufacturers Life Insurance, where she spent 15
years managing their global fixed income funds. Loraine also ran their European
equity portfolios and was a Director of MIIM UK. Loraine moved to Royal Bank of
Canada in 1997 where she headed up the Private Client Department in London
(Loraine was a Director of both RBCIM UK and RBCIM USA) until moving to Theodoor
Gilissen at the end of 2001 to head up the hedge fund/private client team.
Loraine moved to Lewis Charles Securities Limited in September 2004. Loraine has
opted to subscribe for €30,000 of Shares (or the Sterling equivalent thereof)
and has entered into lock in arrangements whereby she has agreed not to dispose
of her securities for a period of one year from the date of Admission.
Mark Anderson
Mark has a Law degree from Oxford University and spent several years as a
professional officer in the British Army's Royal Armoured Corps. He joined the
Royal Bank of Canada's investment management team in London in early 1996, and
during the subsequent five years managed large private client portfolios in
several different base currencies and jurisdictions. Mark moved to Theodoor
Gilissen at the end of 2001 with Loraine Pinel in order to develop the bank's
London-based international investment management and hedge fund advisory
business. Mark is also a graduate of the Canadian Forces Command and Staff
College. Mark moved to Lewis Charles Securities Limited in September 2004. Mark
has opted to subscribe for €30,000 of Shares (or the Sterling equivalent
thereof) and has entered into lock in arrangements whereby he has agreed not to
dispose of his securities for a period of one year from the date of Admission.
Peter Yallup
Peter has a bachelors and masters degree in Management Science from Manchester
University and began his career as a lecturer in Finance and Accounting at
Manchester Business School. He was then appointed as Senior Fixed Income Analyst
at Shearson Lehman Brothers starting a period of sixteen years in the London
Eurobond market in research, sales and origination roles. Most recently Peter
spent five years at Shinkin International where he initiated the origination of
Yen denominated structured medium term notes which were sold to the Shinkin
(mutual savings) banks in Japan. Peter moved to Lewis Charles Securities Limited
in May 2005. Peter has opted to subscribe for €50,000 of Shares (or the Sterling
equivalent thereof) and has entered into lock in arrangements whereby he has
agreed not to dispose of his securities for a period of one year from the date
of Admission.
The Project Adviser
Viva Consult Limited was established in 1996 in Sofia by Mrs Veneta Todorova. It
focuses on the needs of property owners, investors and tenants by providing a
complete package of property management services including tenant assistance and
services, maintenance management, buying and selling real estate, houses,
apartments, parcels of land and industrial areas in Sofia and throughout
Bulgaria. Viva Consult Limited provides a comprehensive range of real estate
services to both private and institutional clients in Bulgaria and outside
Bulgaria through its affiliates. Clients of Viva Consult Limited include the US
Embassy in Sofia, Moeller Electrotechnika of Germany, the United Nations
Development Programme, the Verila factory in Sofia and the Bulgarian Orthodox
Church.
Risk Factors
Shares
Investment in the Shares will involve risks due to its debt free gearing and the
inherent illiquidity of its underlying assets and should be viewed as long term.
In particular, prospective investors should consider the following factors
before making any decision to purchase Shares, and should consult their
stockbrokers, bank manager, solicitor, accountant or other independent financial
adviser before investing.
General
An investment in the Shares is only suitable for financially sophisticated
investors who are capable of evaluating the merits and risks of such an
investment and who have sufficient resources to be able to bear any losses which
may arise therefrom (which may be equal to the whole amount invested). Such an
investment should be seen as complementary to existing investments in a wide
spread of other financial assets and should not form a major part of an
investment portfolio. Investors should not consider investing in the Shares
unless they already have a diversified investment portfolio.
Liquidity of Property Portfolio
Investors should note that the Property Portfolio represents an illiquid
investment since there is no established market for trading of investment
property.
Off-plan Sale
Investors should note that there is a risk that the Fund may not be able to sell
all or any of the properties in the Property Portfolio on an off-plan basis
prior to their completion. In this case the Fund will have to complete on their
acquisition and may have to borrow to do so. This will mean that the Fund is
geared.
Property Valuation Adviser
Investors should note that the Property Valuation Adviser holds professional
indemnity insurance not exceeding BGN300,000 or €150,000 which is currently in
the process of being increased to €1,000,000. This may not be sufficient to
cover any losses to the Property Portfolio and the potential exposure of the
Fund and there is no guarantee that the Property Valuation Adviser will be able
to obtain this increased insurance cover.
Developer Risk
The developer of the Initial Purchase Options is Buysell Real Estate Agent Ltd,
a Bulgarian incorporated development company. Although the Fund will aim to
invest in other developments and enter into purchase options with other
developers there is no guarantee that the Fund will be able to do so. Andreas
Drakou, a 50 per cent. shareholder in Buysell Real Estate Agent Ltd, is also the
Executive Chairman of Helios Airways, which recently suffered the tragic loss of
one of its aircraft, and all on board, in a crash near Grammatiko in Greece.
Save for Mr Drakou's personal involvement, there is no connection whatsoever
between Helios Airways and Buysell Real Estate Agent Ltd or the Company.
Investors should note that any liability which is personally attributed to
Andreas Drakou as a result of the investigation into the plane crash, may have
an impact on his personal assets.
Share price volatility and liquidity
Investors should recognise that the price of securities and the income from them
can go down as well as up. The market price of the Shares may not always reflect
their underlying net asset value. The price performance of the Shares is
expected to represent an amplification of any upward or downward market movement
affecting the value of the Property Portfolio, due to the effect of debt free
gearing described under the heading "Partnerships with Developers and Discounted
Purchase Prices" above. Investors will have no right to redeem Shares. Prior to
the end of the Fund's planned life, the only way to realise Shares will be by
sale in the market. The price at which the Shares may trade and the price which
investors may realise for their Shares will be influenced by a large number of
factors, some specific to the Fund and some which may affect quoted companies
generally. These factors could include the performance of the Fund's operations,
large purchases or sales of Shares, liquidity (or absence of liquidity) in the
Shares, currency fluctuations, legislative or regulatory changes and general
economic conditions. The value of the Shares will therefore fluctuate and may
not reflect their underlying asset value.
Possible adverse economic conditions and emerging market risk
The financial operations of the Fund may be adversely affected by general
economic conditions, by conditions within the Bulgarian property market or by
the particular financial condition of the developers and other parties doing
business with the Fund. The returns that are likely to be achieved on an
investment in a fund which has its assets invested solely in Bulgaria will be
materially affected by the political and economic climate in Bulgaria. In
particular, changes in the rates of inflation and interest may affect the Fund's
income and capital value or the value of an investment property. The performance
of the Shares can be expected to be adversely affected by any failure or delay
in Bulgaria joining the EU. Bulgaria has many characteristics of an emerging
market and should be regarded as carrying associated risks of political and
economic instability. Corruption is perceived as a problem in Bulgaria. However,
the issue is high on the political agenda and the Bulgarian government has
adopted measures to combat corruption.
Risks of property ownership
Investments in Bulgarian property may be difficult, slow or impossible to
realise. The Shares will be subject to the general risks incidental to the
ownership of real or heritable property, including changes in the supply of or
demand for competing investment properties in an area, changes in interest rates
and the availability of mortgage funds, changes in property tax rates and
landlord/tenant or planning laws, credit risks of tenants and borrowers and
environmental factors. The marketability and value of any investment properties
owned by the Fund will, therefore, depend on many factors beyond the control of
the Fund and there is no assurance that there will be either a ready market for
any investment properties of the Fund or that such investment properties will be
sold at a profit or will yield a positive cash flow. Changes in Bulgarian law
relating to foreign ownership of property might have an adverse effect on the
net returns from the Property Portfolio.
Currency exchange risk
The Shares are denominated in Sterling however the assets of the Fund will be
invested in investments which are denominated in other currencies; largely
Sterling and Euros as the Bulgarian Lev is pegged to the Euro. Accordingly the
value of such assets may be affected favourably or unfavourably by fluctuations
in currency rates.
Development risk
The returns on the Shares will be subject to the risks associated with the
development of real estate projects. These risks include:
· The risk that the developer of a site may become insolvent and be unable to
complete the project. It is expected that developments in which the Fund will
invest will be financed by a mixture of equity, deposits on pre-sales and bank
financing. The release of bank financing will be staged and conditional on
milestones in the development being reached. In the event that the development
does not proceed as expected (due to unexpected factors such as landslip,
accident, supplier default, planning or title disputes etc.), the bank may
refuse to provide further financing. If the developer is unable to arrange
alternative financing, it may not be possible to complete the development. This
may result in the loss of a deposit paid by the Fund;
· The risk that planning consents are not obtained, or are delayed
significantly, or are granted subject to uneconomic conditions;
· The risk that laws are introduced, which may be retrospective and affect
existing building consents, which restrict development in Sofia or elsewhere;
· The risk that a development is significantly delayed or costs exceed budget
due to unforeseen factors. The risk of cost over run can be mitigated through
fixed price contract arrangements;
· The risk of unforeseen construction constraints (including geological and
archaeological factors);
· The risk of title disputes, legal disputes with neighbouring land owners
and legal disputes with architects, project managers and suppliers;
· The risk that building methods or materials prove to be defective. If a
construction company used on a development becomes insolvent, it may prove
impossible to recover compensation; and
· The risk of fraud on the part of service providers or suppliers used on a
development.
Substantial loss
If property prices in the Bulgarian property market fall by more than the
discounts to current market value achieved by the Fund when it exchanges
contracts, investment properties held in the Property Portfolio may only be
realisable at a loss and may prove difficult to sell at all. In these
circumstances, the Fund may complete on the purchase of investment properties
and let them. The ability of the Fund to complete on purchases is dependent on
the amount of equity available to the Fund, and on the borrowing terms available
at the time, which may not be the same as are available today. A combination of
higher interest rates, a deteriorating economy (with higher unemployment) and
prolonged deflationary conditions, may result in falling capital values combined
with falling rents and/or void periods.
Potential environmental liability
Under various state and local laws, ordinances and regulations, an owner of real
property may be liable for the costs of removal or remediation of certain
hazardous or toxic substances on or in such property. Such laws often impose
such liability without regard to whether the owner knew of, or was responsible
for removal of these substances. The owner's liability as to any property is
generally not limited under such laws and could exceed the value of the property
and/or the aggregate assets of the owner. The presence of such substances, or
the failure to properly remediate contamination from such substances, may
adversely affect the owner's ability to sell the real estate or to borrow funds
using such property as collateral, which could have an adverse effect on the
Fund's return from such investment.
Gearing
The Property Portfolio will be highly geared on a debt free basis by virtue of
acquiring investment properties on deposit. The Fund will be highly geared
through exposure to the current market value of investment properties on the
making of a deposit and might also be geared through mortgage borrowings in the
event that it is not possible to sell investment properties on an off-plan basis
prior to completion. The Fund's borrowings, if any, will be secured on assets in
the Property Portfolio. Where the cost of the Fund's borrowings exceeds the
return on the Fund's assets, the borrowings will have a negative effect on the
Fund's performance. A relatively small movement in the value of the Property
Portfolio or the amount of income derived from it may result in a
disproportionately large movement, unfavourable as well as favourable, in the
value of a Share or the amount of income received in respect thereof. In the
event that the Fund enters into a bank facility agreement, such agreement may
contain financial covenants. In particular, the agreement may require that the
Fund has assets exceeding a fixed percentage of the value of any loan drawn
down. If the value of the Fund's assets falls such that any such financial
covenant is breached, or if any other covenant is breached, the Fund may be
required to repay the borrowings in whole or in part. In such circumstances the
Fund may be required to sell, in a limited time, part or all of the Property
Portfolio, potentially in circumstances where there has been a downturn in
property values generally, such that the realisation proceeds do not reflect the
valuation of the investment properties.
Developer and counterparty risk
If projected returns on investment properties are not met or if development
companies become insolvent, the Fund may lose some or all of its investment.
Developers may become insolvent and fail to complete a development in which the
Fund has invested. Although deposit amounts are generally held in escrow, they
might not be in all cases and developer insolvency may result in loss to the
Fund. Counterparties to whom the Fund sells investment properties may default on
payment of the purchase price and tenants to whom the Fund rents investment
properties may default on rental obligations.
Bulgarian legal system and enforcement
The Bulgarian legal system may not afford to the Fund the same level of
certainty in relation to issues such as title to property-related rights as may
be achieved in more developed markets. Enforcement of legal rights in Bulgaria
may prove expensive and difficult to achieve.
Impact of law and governmental regulation
The Fund and developers with whom the Fund deals will need to comply with
Bulgarian regulations relating to planning, land use and development standards.
The institution and enforcement of such regulations could have the effect of
increasing the expense and lowering the income or rate of return from, as well
as adversely affecting the value of, the Fund's assets. Changes in law relating
to ownership of land could have an adverse effect on the value of the Shares.
New laws may be introduced, which may be retrospective and affect existing
building consents, which restrict development in Sofia and elsewhere.
Valuation risk
Property assets are inherently difficult to value as there is no liquid market
or pricing mechanism. As a result, valuations are subject to substantial
uncertainty. There is no assurance that the estimates resulting from the
valuation process will reflect the actual sales price even where such sales
occur shortly after the date of the valuation.
Bulgarian property related taxes
The returns on the Shares will be affected by Bulgarian taxation of property
transactions, which may change. There is no assurance that the expected tax
efficiencies of the Fund will be achieved or will continue into the future.
Tax
The tax rules and their interpretation relating to an investment in the Fund may
change during the life of the Fund. Any change in the Fund's tax status or in
taxation legislation or its interpretation, could affect the value of the
investments held by the Fund, affect the Fund's ability to provide returns to
Shareholders or alter the post-tax returns to Shareholders. Representations in
the Admission Document concerning the taxation of the Fund and its investors are
based upon current tax law and practice which is, in principle, subject to
change.
General
Application will be made for all of the Shares to be issued pursuant to the
Placing to be admitted to trading on AIM. It is expected that admission will
become effective and that dealings in the Shares will commence on or around 27
September 2005.
AIM is a market designed primarily for emerging or smaller companies to which a
higher investment risk tends to be attached than to larger or more established
companies. AIM securities are not admitted to the official list of the United
Kingdom Listing Authority. A prospective investor should be aware of the risks
of investing in such companies and should make the decision to invest only after
careful consideration and, if appropriate consultation with an independent
financial adviser.
No public offering of the Shares in any jurisdiction is being made. No action
has been taken or will be taken in any jurisdiction that would permit a public
offer of the Shares in any such jurisdiction where action for that purpose is
required, nor has any such action been taken with respect to the possession or
distribution of the Admission Document.
Investment in the Shares will involve significant risks due to its debt free
gearing and the inherent illiquidity of its underlying assets and should be
viewed as long term. Shares may not be suitable for all recipients or be
appropriate for their personal circumstances. You should carefully consider in
the light of your financial resources whether investing in the Fund is suitable
for you. An investment in the Shares is only suitable for financially
sophisticated investors who are capable of evaluating the merits and risks of
such an investment and who have sufficient resources to be able to bear any
losses which may arise (which may be equal to the whole amount invested).
The Fund is a Qualifying Investor Fund as defined in the Guidance Document.
Shares or any interests therein may only be held by Qualifying Investors.
Further information on Qualifying Investors may be found in the Admission
Document. The Fund is not registered with the US Securities Exchange Commission
under the US Investment Companies Act of 1940, as amended (the "1940 Act"). In
addition, the Shares are not registered under the US Securities Act of 1933, as
amended (the "1933 Act"). Therefore, the Shares may not be offered or sold or
otherwise transferred in the US or directly or indirectly to or for the benefit
of a "US Person" as defined herein. A "US Person" as used herein means a "US
Person" as defined under Regulation S of the 1933 Act, as well as the following
(1) a citizen or resident of the US; (2) a partnership or corporation organised
or incorporated under the laws of any state, territory or possession of the US;
(3) any estate or trust, other than an estate or trust which is not subject to
US income tax on its income derived from sources outside the US and not
effectively connected with the conduct of a trade or business within the US; or
(4) any estate or trust which has a US person as its executor, administrator or
trustee.
The Placing is only being promoted in or from within the Bailiwick of Guernsey
to either persons licensed under the Protection of Investors (Bailiwick of
Guernsey) Law, 1997 (as amended), the Insurance Business (Guernsey) Law, 1986
(as amended), the Banking Supervision (Bailiwick of Guernsey) Law, 1994 or the
Regulation of Fiduciaries, Administration Businesses and Company Directors, etc
(Bailiwick of Guernsey) Law, 2000. Promotion is not being made in any other way.
Application will be made to the Guernsey Financial Services Commission for
consent under the Control of Borrowing (Bailiwick of Guernsey) Ordinances 1959
to 1989 for the Company to raise up to £50 million by the issue of the Shares
and for the circulation of the Admission Document. In giving its consent,
neither the Guernsey Financial Services Commission nor the States of Guernsey
Policy Council accept responsibility for the financial soundness of the Company
or for the correctness of any of the statements made or opinions expressed with
regard thereto.
Panmure Gordon, which is the Fund's nominated adviser for the purposes of the
AIM Rules and broker and is authorised and regulated by the Financial Services
Authority, is acting exclusively for the Fund in connection with the matters set
out in this press release. Panmure Gordon will not be responsible to anyone
other than the Fund for providing the protections afforded to customers of
Panmure Gordon nor for advising any other person on the arrangements described
in this press release. The responsibilities on Panmure Gordon as the Fund's
nominated adviser for the purposes of the AIM Rules are owed solely to the
London Stock Exchange and are not owed to the Fund or any Director or proposed
Director or to any other person in respect of their decision to acquire Shares.
No representation or warranty, express or implied, is made by Panmure Gordon as
to the contents of the Admission Document (without limiting the statutory rights
of any person to whom that document is issued).
For the purposes of UK legislation, the Admission Document is directed only at
and may only be communicated to the following types of persons: (i) persons
outside the United Kingdom, (ii) persons who have professional experience in
matters relating to investments who fall within the definition of investment
professionals in Article 19(5) Financial Services and Markets Act (Financial
Promotion) Order 2001 (as amended) ("FPO"), (iii) persons who fall within
Article 49(2)(a) to (d) FPO (high net worth companies, unincorporated
associations etc.), (iv) where the Admission Document is communicated by an
authorised person within the meaning of section 31 of the Financial Services and
markets Act 2000, persons who are market counterparties or intermediate
customers of that authorized person in accordance with the FSA Handbook of Rules
and Guidance and (v) any other persons to whom it may otherwise lawfully be
communicated (together, "Relevant Persons"). The contents of the Admission
Document must not be acted on or relied upon by any persons who are not Relevant
Persons. Any investment or investment activity to which the Admission Document
relates is available only to Relevant Persons, and will be engaged in only with
Relevant Persons.
Definitions
Unless the context otherwise requires, the expressions set out below bear the
following meanings:
"Admission" means the date of admission of the Shares to trading on AIM in
accordance with the AIM Rules;
"AIM" means the market of that name operated by the London Stock
Exchange;
"AIM Rules" means the amended rules of the London Stock Exchange for AIM
companies and their nominated advisers governing admission to
and operation of AIM;
"BGN" means the lawful currency of Bulgaria;
"Bulgarian Subsidiary" means Lewis Charles Sofia Property Fund Bulgaria LLC;
"CREST" the computerised settlement system (being the relevant system as
defined in the Uncertified Securities Regulations 2001 (S.I.
2001/3755)) to facilitate the transfer of title of shares in
uncertified form operated by CRESTCo Limited;
"CRESTCo" CRESTCo Limited;
"CREST Guernsey Requirements" Rule 8 and such other rules and requirements of CRESTCo as may
be applicable to issuers from time to time specified in the
CREST Manual;
"CREST Manual" the compendium of documents entitled CREST Manual issued by
CRESTCo from time to time and comprising the CREST Reference
Manual, the CREST Central Counterparty Service Manual, the CREST
International Manual, CREST Rules, CCSS Operations Manual and
the CREST Glossary of terms;
"Directors" or "Board" means the Directors of the Fund;
"Eligible Investor" means a person able to acquire Shares without violating
applicable laws, including those concerning money laundering,
and at the time of making the investment that (i) has knowledge,
expertise and experience in financial matters to evaluate the
risks of investing in the Fund; (ii) is aware of the risks
inherent in investing in the Shares and the method by which the
assets of the Fund are held and/or traded; (iii) can bear the
risk of loss of their entire investment; (iv) holds Shares
having a value equivalent to or greater than the Minimum
Holding; (v) is a Qualifying Investor and (vi) meets any
additional suitability standards as the Directors may, in their
absolute discretion, impose from time to time in order to comply
with applicable laws and regulation;
"Fund" or "Company" means Lewis Charles Sofia Property Fund Limited;
"GFSC" means the Guernsey Financial Services Commission;
"Group" means the Fund and its subsidiaries;
"Guidance Document" means the Guidance Document on Qualifying Investor Funds issued
by the GFSC in February 2005;
"Index" means the Bulgarian Real Estate Market Index compiled by the
National Real Property Association of Bulgaria;
"Initial Purchase Options" means the Central Sofia Purchase Options, the Bistritsa Purchase
Option and the Varvara Purchase Option;
"Law" means the Companies (Guernsey) Laws 1994 to 1996 (as amended);
"Lev" means the lawful currency of Bulgaria;
"Lewis Charles" means Lewis Charles Securities Limited;
"Management Agreement" means the management agreement between the Fund and the Manager,
a summary of which is set out in the Admission Document;
"Manager" means Lewis Charles Securities Limited;
"Open Market Value" means the estimated, "as-if-built", open market value of a
property;
"off-plan" means the term used to describe the purchase of a property still
in the process of construction or conversion;
"Option Agreements" means the option agreements between the Bulgarian Subsidiary,
the Fund and Buysell as described in the Admission Document
"Panmure Gordon" means Panmure Gordon (Broking) Limited;
"Placing" means the conditional placing by Panmure Gordon as described in
the Admission Document;
"Placing Price" means 80 pence per share;
"Project Adviser" means Viva Consult Limited or such other project adviser as the
Manager may appoint from time to time;
"Property Portfolio" means the rights in respect of property held directly or
indirectly by the Bulgarian Subsidiary;
"Property Valuation Adviser" means Yulia Dimitrova or such other property valuation adviser
as the Manager may appoint from time to time;
"Qualifying Investor Fund" shall have the meaning ascribed in the Guidance Document;
"Qualifying Investor" shall have the meaning ascribed in the Guidance Document;
"Shares" means the sterling shares in the share capital of the Fund;
"Shareholders" means the holders of the Shares;
"£" or "sterling" or "pence" means the lawful currency of the UK; and
"€" or "euro" or "cent (Euro)" means the lawful single currency of the European Union
Sums expressed in Euros have been converted into Sterling at the rate of £1 =
€1.4.