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The second quarter of 2012 saw continued strong demand for high quality assets from tenants and investors, despite increasing caution driven by the volatility of European markets and the slowdown in Russian economic growth. At the same time, the lowest level of completions in over 10 years at only 23,000 sq.m delivered to the market during the quarter meant that rents for prime class A buildings remained stable at US$ 1,200 per sq.m. In line with this trend, office vacancy rates also registered a slight decline to 11%. Meanwhile, investment volumes showed no signs of slowing at US$ 2.8 billion for the quarter, of which US$ 1 billion was related to office real estate. With continued low construction levels, the outlook for the office market remains positive with stable rental rates and investment activity expected for the remainder of 2012.
Moscow Retail Market As its middle class continues to grow, Russia is recording the highest retail sales across Europe. With consumer confidence at the highest level since 2008, the market remains favourable for international retailers, as evidenced by the market entry of several new brands during the quarter. On the other hand, only two small shopping centres opened in Moscow during the second quarter, this low supply further supporting stable prime rental rates for the fourth consecutive quarter. At the same time, current vacancy rates of just 3% for the city's shopping centres are expected to come under further pressure during 2012.
[Source: Marketbeat Office Snapshot Q2 2012, Cushman&Wakefield; Moscow Retail Overview - Q2 2012, Jones Lang LaSalle]
Moscow and Moscow Region Residential Market In June 2012, the average price for business-class residential real estate reached US$ 6,850 per sq.m, with the elite residential segment recording an average price of US$ 18,000 per sq.m. Outside of Moscow, Odintsovo currently represents one of the most attractive regions with an average price of US$ 3,300 per sq.m. A positive trend in demand for economy and business-class segments is expected in the forthcoming years, driven by continued growth in the Russian middle class.
Macroeconomic environment Despite a slight slowdown in GDP growth in the second quarter (3.9% year-on-year), the Russian economy recorded the highest growth rate in Europe for the second half of 2012, with a 4.4% increase year-on-year. Strong domestic demand was supported by high investment rates and stable growth in industrial production. The significant downward pressure on oil prices during the second quarter contributed to a decrease in the current account surplus from US$ 39.3 billion in Q1 2012 to US$ 19.2 billion in Q2 2012, leading to a depreciation in the Russian rouble against the US dollar of approximately 12%. Nevertheless, Russian sovereign debt to GDP ratio of 8.5% remained among the lowest in Europe. Following a post-Soviet low of 3.6% recorded in May, consumer price inflation increased to 4.3% year-on-year in June 2012. However, stable money supply growth and positive interest rates in real terms indicate lower inflationary pressure going forward
The impairment loss on inventory of real estate reflects the Company's decision to write-off its Botanic Garden project. A subsidiary of the Company is a "co-investor" in the project together with a company fully owned by the City of Moscow, which is the main investor and beneficiary of land lease rights for Botanic Garden project. A claim filed with a Moscow court on 2 August 2012 by a third party creditor is seeking to declare the main investor bankrupt, while its assets were previously arrested for the benefit of the same creditor. The Company asked for a third party legal opinion on this matter. As of today, the Company considers, based on preliminary opinion of its internal legal advisers, that any recovery of the Company's costs relating to its investments in the project is unlikely. Given the current circumstances, the Company has decided to write-off its rights in the project in Q2 2012 Financial Statements. Notwithstanding, the Company will continue its efforts to recover its costs and/or receive the development rights to the project.
The Company is expecting that the Gross Value of the portfolio of properties will be reduced from circa US$2.8 billion to circa US$2.4 billion due to the valuation loss on investment properties under development and impairment loss on inventory of real estate as well as depreciation of the Russian rouble versus the US dollar in Q2 2012.
The estimated impairment and the loss figures are preliminary and remain subject to a review by KPMG, the Company auditor.
London, 13 August 2012 - AFI Development, a leading real estate company focused on developing property in Russia, today provides the following profit warning.
Based on preliminary indications of valuation results received from an independent appraiser (Jones Lang LaSalle) and information about a claim relating to the Company's rights in inventory of real estate (as described below), the Company is expecting to record a net valuation loss on investment properties under development and impairment loss on inventory of real estate during the second quarter 2012 of circa US$240 million before taxes.
The valuation loss on investment properties under development reflects a decrease in the value of the Company's four projects, which are classified as investment property under development - Pochtovaya, Kossinskaya, Tverskaya Plaza Ib and Tverskaya Plaza II. The projects are currently being valued by the independent appraiser. The valuation loss results from changes in master planning and development policies of the Moscow government: the Company received information/confirmation of these changes and made revisions in its relevant projects during the period June - August 2012. The valuations of Tverskaya Plaza Ic, Tverskaya Plaza IIa and Tverskaya Plaza IV, the three projects forming part of the non-binding agreement with the Moscow government, remain unchanged and the Company is progressing in securing development rights and leasehold rights to respective land plots.