AFRB.L Regulatory News (AFRB)

THIS ANNOUNCEMENT IS NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION

IN OR INTO THE RUSSIAN FEDERATION, THE UNITED STATES, CANADA, AUSTRALIA OR JAPAN

24 August 2011

AFI DEVELOPMENT PLC

RESULTS FOR THE SIX MONTHS TO 30 JUNE 2011

AFI Development PLC ("AFI Development" or "the Company"), a leading real estate company focused on developing property in Russia, has today announced its financial results for the first half of 2011 ended 30 June 2011.

Financial Highlights

·; Revenues for the six months to 30 June 2011,including net proceeds from the sale of trading properties, increased by 47% year-on-year to US$58.2 million driven by higher rental income, mainly due to the operation of AFIMALL City, which contributed US$22.27 million, and residential sales.

·; Profit before tax for the six months to 30 June 2011 was US$35.6 million compared with a loss of US$58.1 million for the for the six months to 30 June 2010, mainly driven by rental income, revaluations and finance income.

·; Net profit for the six months to 30 June 2011 was US$28.7 million compared to loss of US$63.0 million for six months to 30 June 2010.

·; Strong cash position with US$96.1 million in cash and cash equivalents as at 30 June 2011, is sufficient for maintaining high liquidity in view of further residential sales and improved rental income, deriving in particular from the operations of AFIMALL City.

·; In the six months to 30 June 2011 the Rouble appreciated by 7.8% against the US Dollar. This resulted in a net FX gain of approximately US$11.6 million.

·; As at 30 June 2011, the balance sheet value of the Company's assets totaled US$2,566 million compared with US$2,429 million as at 31 December 2010. This increase of approximately US$138 million was mainly due to the appreciation of the Rouble against the US Dollar, active investing in assets under development and revaluation of the portfolio.

Operational Highlights:

·; Following its "grand opening" on 22 May 2011, AFIMALL City is on track to reach full operational capacity with signed agreements for approximately 81% of the gross lettable area. The current daily average footfall is approaching 20,000 visitors and is constantly growing.

·; On 15 July 2011 the Company announced that its subsidiary Bellgate Construction Ltd, which is a party to the investment contract with the Moscow City Government in relation to AFIMALL City (the "Investment Contract"), had entered into a supplement to the Investment Contract (the "Supplement"), pursuant to which the Moscow City Government will assign its right to receive 25% of the areas of AFIMALL City to Bellgate for a total consideration of 5 billion Roubles, including VAT (approximately US$180 million), to be paid by the end of September 2011. On 3 August 2011 the Company further announced that the Supplement had been received, duly approved by the Moscow City Government and signed by its authorised representative, Deputy Mayor Mr. Andrey V. Sharonov.

·; The Company is in advanced discussions with various banks regarding the provision of financing for the abovementioned buy-out from the City of Moscow of its rights in AFIMALL City (the "Buy-Out Transaction"). The Company aims to have the financing in place by the end of September 2011.

·; The Company's management estimates, based also on the opinion of its professional advisers for this matter, that the price of the Buy-Out Transaction does not reflect the fair value of the asset, mainly because the Moscow City Government holds a minority interest in the asset (25% of the shares). According to real estate valuation practice, it is common to assume a certain discount for rights, which do not provide control over the management of the asset. In most cases, rights in an asset which do not provide control over the asset and its management are characterised by lack of liquidity, which, according to the real estate valuation practice, reflects an additional discount on the fair value of the asset.

·; Therefore, upon completion of the Buy-Out Transaction, based on the fair value of the asset as of 30 June 2011 (75% of the asset was evaluated at US$820 million by an independent valuer), the Company is expected to record a profit of approximately US$100 million before tax (approximately US$80 million after tax)

·; It should be noted that the Supplement does not deal with the parking under AFIMALL City. This matter is covered by a non-binding understanding, and the Company is continuing its negotiations with respect to this matter with the Moscow City Government. 

·; The Company has signed an additional agreement with VTB bank to reduce the interest rate on the current AFIMALL City loan (of approximately US$294 million) from 13.25% to 11.5% with a further reduction to 9.5% upon registration of mortgage (interest rates are quoted in Russian Rouble terms).

·; The Company, together with its partner, ZAO Snegiri Development, has successfully refinanced the existing loan facility at its 4 Winds project with Nordea Bank. Under the refinancing terms, the existing MDM Bank credit line of US$143 million is refinanced with a US$170 million facility, at a substantially lower interest rate for the whole facility, compared to the current 10.5% rate at MDM bank.

·; The Company is on track to complete its development of the Ozerkovskaya Embankment (Phase III) project by the end of 2011.

·; With respect to Ozerkovskaya Embankment (Phase III), the Company is exploring several disposal possibilities of completed office buildings, in whole or in part.

·; As announced on 23 March 2011, the Paveletskaya office complex was completed and leased to a single tenant, ZAO GREENATOM, a subsidiary of the State Atomic Energy Corporation ROSATOM. With a total lettable area of 13,130 sqm, the Paveletskaya complex is expected to yield a first year annualized revenue of approximately US$4.7 million (excluding VAT).

·; The development of the Kalinina Spa Hotel in the city of Zheleznovodsk is proceeding and the completion of this development is expected in the last quarter of 2011. The operation of the hotel is expected to start at the end of the first quarter of 2012. Full financing for the project (US$20 million) has been secured through a Russian Rouble loan from Sberbank which carries a nominal interest rate of 13.5%, out of which 6.75% is being subsidised by the Ministry for Economic Development of Stavropolsky Region.

·; On 25 March 2011, the Company reached a non-binding understanding with the Moscow City Government to transfer its development rights in the Tverskaya Zastava shopping centre to the City of Moscow, in exchange for the Company being fully compensated for development costs incurred with respect to the project. Such compensation may take the form of the City of Moscow granting additional building rights for the Company's other projects. The Company is still in negotiations with the Moscow authorities on this matter.

Management update

·; The sale and purchase transaction between Africa Israel Investments Ltd., the Company's main shareholder, and companies wholly-owned by Mr. Alexander Khaldey, of approximately 9.71% of Company's equity and voting rights, was completed on 30 June 2011. Africa Israel Investments Ltd. now holds approximately 64% of equity and voting rights in AFI Development PLC.

·; As announced on 14 July 2011, Mr. Alexander Khaldey, executive director of the Company and Chairman of AFI Rus and Stroyinkom-K, the Company's subsidiaries, ceased performing his executive positions with the Company and stepped down from his positions as Chairman of AFI Rus and Stroyinkom-K, effective as from 1 August 2011. Mr. Mark Groysman, CEO of AFI RUS since May 2011, has assumed Mr. Khaldey's executive functions. Mr. Groysman is a seasoned real estate professional, who joined AFI Rus from the Sawatzky Group, where he was a partner and the group's CEO. Mr. Groysman's rich experience in development and asset management in Russia will be of great value to AFI Development's Russian operations and will help it in retaining leading positions in this market.

·; Mr. Khaldey will continue to serve as a non-executive director of the Company until 31 December 2011. This transitional period will be used to ensure a smooth hand over between Mr. Khaldey and Mr. Groysman.

Commenting on today's announcement, Lev Leviev, Chairman of AFI Development, said:

"We are very pleased to report the progress made in H1 2011 with revenues and net profit both increasing, largely as a result of rental income from our properties. We are also delighted to have reached an agreement to take full ownership of AFIMALL City, which is showing a continued increase in the daily footfall and turnover, since our full ownership will enable us to ensure that it remains a benchmark retail project for Russia, unrivalled in the quality of customer experience and tenant mix.

Our other significant achievement in Q2 2011 has been the refinancing of the 4 Winds project, where we managed to increase the loan facility from US$143 million to US$170 million while securing a very attractive rate for the whole loan facility.

We remain focused on development at our key projects including Ozerkovskaya Embankment (Phase III) and Kalinina Spa, both of which remain on track for completion in 2011, and we look forward to delivering on our strategy to improve financial performance while progressing on development activities".

- ends -

For further information, please contact:

AFI Development +7 495 796 9988 

Alexander Adadurov

Citigate Dewe Rogerson, London +44 20 7638 9571

David Westover

Sean Bride

Chairman's Statement

During the first six months of 2011, we successfully opened our key retail project, AFIMALL City. Subsequently, in July 2011, the Company signed a binding agreement to purchase from the City of Moscow its 25% share in this project, thus bringing our ownership share to 100%. Upon completion of the transaction, the Company is expected to record a profit of approximately US$100 million, before tax (approximately US$80 million after tax). We are in the negotiations with the City of Moscow to purchase the parking areas under the AFIMALL City.

Together with our partner, ZAO Snegiri Development, we have also completed a major refinancing transaction with Nordea Bank on our 4 Winds office project. We have managed to increase the loan facility from US$143 to US$170 million whilst significantly reducing the interest rate on the total loan facility.

AFI Development also made important progress with respect to its other projects. We are currently finalising the revised architectural concept design for our pipeline projects of Odintsovo, Bolshaya Pochtovaya, Tverskaya and Paveletskaya Phase II.

Work is also progressing as planned at the Ozerkovskaya Embankment (Phase III) and the Kalinina project development.

Through the opening of AFIMALL City, AFI Development has confirmed its position as one of the leading developers in the Moscow market, delivering major projects that transform the districts in which they are located. We remain a trusted partner of the Moscow City authorities and a customer of choice for banks lending to the sector.

Management

I am very pleased that Mr. Mark Groysman has taken the lead at OOO AFI Rus as CEO. Mark brings a wealth of expertise in the Russian real estate and construction sector, having previously held CEO position at the Sawatzky Group. I strongly believe that Mark, with his rich experience in real estate development, asset management and operations is the right person to lead the Company's Russian operations.

I would like to thank Mr. Alexander Khaldey for his key role in establishing AFI Development's strong Russian presence and for leading AFI Rus from its inception to the current stage. The continuing service of Mr. Khaldey as a non-executive Board member will ensure smooth transition of management responsibilities to Mr. Groysman.

Results

As of 30 June 2011, we exercised a scheduled semi-annual revaluation process for all our projects relevant for financial reporting. The revaluation net gain, resulted in positive US$20.4 million driven by AFIMALL City, 4 Winds, Ozerkovskaya Embankment (Phase III) and Paveletskaya Phase II and Tverskaya Zastava Mall projects revaluations.

Revenues were US$58.2 million in the first half of 2011 compared to US$39.5 million for the same period of 2010. Revenues are attributable to the rental income from our completed yielding properties and to residential sales. Cash and cash equivalents as at 30 June 2011 were US$96.1 million compared to US$129.8 million as at 31 December 2010. Our cash position is expected to remain stable as a result of accumulation of rental income from AFIMALL City and other yielding assets and the proceeds from the sale of apartments at our Ozerkovskaya Embankment (Phase II) and Four Winds Plaza projects. The increased rental inflows will provide financing to service our debts and to further develop our pipeline developments. 

Strategy update

The Company is continuing to put its development projects into operation, with a balanced strategy to both sell and lease commercial space. With the opening of AFIMALL City and the expected delivery of Ozerkovskaya Embankment (Phase III), the Company expects to strengthen its cash position and improve overall profitability.

We see clear signs of sustained improvement in the Russian real estate market in the commercial segment; we are watching an increasing number of investment transactions with low yields and growing rental rates while we are seeing constantly improving demand in the residential sector. We believe these trends demonstrate that the Russian real estate is returning to growth.

Market Overview - General Moscow Real Estate

Russian Macro Economy Brief

Real GDP growth in Russia fell to 3.7% in Q2 2011 versus to 4.1% in Q1 2011 with growth driven by the manufacturing, transportation and retail sectors. For the full year, real GDP growth is expected to be around 4.4%.

The breakdown of first-quarter GDP by expenditure by the Federal State Statistics Service (RosStat) shows that domestic consumption was the main driver of GDP growth, while private consumption grew by 5.7% year-on-year, the fastest rate since the onset of the financial crisis in 2008.

In the labour markets, we have seen a continuation of the improving trends noted in Q1 2011. Unemployment has fallen from 7.9% at the beginning of the year to 6.4% in May while real wages have steadily improved, rising by 2.6% in May, with a forecast of a 3.5% increase in total for 2011.

The accelerating rates of inflation seen in Q1 2011 are expected to slow with inflation forecast to decline from 9.6% in May to 8.5% by the end of 2011, as the combined impact of the 2010 drought in Russia and higher global food prices continues to fade. 

Moscow Real Estate Market Brief

Continuing from Q1 2011 trends, appetite for investment in Russian real estate continues to gain momentum, buoyed in particular by healthy demand for commercial property. Overall, real estate investments in Russia amounted to US$2.5 billion (up 139% year-on-year) in Q2 2011, with investments in commercial real estate accounting for a significant US$2.4 billion (up 164% year-on-year) of this volume. This healthy growth is expected to continue for the remainder of the year with annual volumes forecast to reach US$7 billion for 2011.

Q2 2011 has also been characterised by the significant influx of foreign investment into the Russian real estate sector. Foreign investors accounted for 67% of total investment volumes in Q2 2011, the highest level since 2008.

 [Source: EIU, Aug-2011; Russian economic and investment market commentary: Q2 2011, Jones Lang LaSalle]

Moscow Office Real Estate

The recovery of the Moscow office market continued in Q2 2011 with the office segment accounting for 39% of all real estate transactions completed in the quarter. Demand for office space from the Services industry has been particularly strong. Q2 completion volume was approximately 0.1 million sqm, a slowdown on Q1 2011, bringing the total stock to 13.0 million sqm.

An improving economic situation again resulted in a confident demand recovery. Q2 2011 take-up was 471,614 sqm, a 27% increase on the Q1 2011 level.

During Q2 2011 the active demand for centrally located offices and the continued lack of adequate supply again lead to a considerable rise in prime rents: class A base rents increased 13% quarter-on-quarter and ended the quarter at US$850 per sqm per year while class B+ rates are stable quarter-on-quarter at US$400-600. Prime rents have increased to US$1,100-1,200 (per sqm per annum triple net for shell & core office space) compared to US$1,000 in Q1 2011. In several sub markets rents for new shell & core offices are now higher, than for fitted-out offices, a trend which has not previously been observed.

[Source: Marketbeat: An overview of the Russian property market: Q2 2011, Cushman & Wakefield; Moscow Office market Q2 2011, Jones Lang LaSalle]

Retail Real Estate

Several retailers have now re-started expansion plans which were put on hold during the financial crisis and occupier demand has continued to increase. Strong demand from foreign retailers looking to expand within the Russian retail market has continued.

The Moscow retail market continues to lack supply of prime retail premises which is supporting rents, and with the established shopping centres already being full, strong demand for space within Moscow's newly completed shopping centres is expected to continue. The vacancy rate in Moscow's existing shopping centres with clear catchment areas has been below 1% since late 2010.

Market experts believe that this situation is unlikely to change in the future, due to recent Moscow government initiatives, which will force developers to revise their project concepts and decrease retail components. Virtually no construction has commenced in the past two years and, if bans and restrictions for construction are implemented, we believe that development will be more constrained, thereby lowering the number of development completions compared with previous years.

[Source: Marketbeat: An overview of the Russian property market: Q2 2011, Cushman & Wakefield; Moscow Retail Market: Q2 2011, Jones Lang LaSalle; Russian Real Estate Investment Overview: Q2 2011; Jones Lang LaSalle]

Residential Real Estate

In June 2011 new-build sales of business-class apartments within the territory of Moscow were carried out in 31 complexes under construction (the total floor area of the property in the projects is 1.8 million sqm).

In H1 2011 the growth in buyer activity continued in the new-build business-class property segment. As compared to the same period in 2010, the number of completed sales went up by approximately 36% (on average up to 130 transactions a month).

The growth in the dollar price (for all new-build projects) as compared to the beginning of the year amounted to 10%, while in Roubles the weighted average price of a square meter went down by 2.5% as compared to the beginning of 2011.

[Source: Moscow Business Class Housing Market, IntermarkSavills, Q2 2011]

Lev Leviev

Chairman of the Board

30.6.11 - Very significant property disclosure

1. AFIMALL City

Comments:

* The "soft opening" of the Mall occurred on 10 March 2011 and an official grand opening event occurred

on 22 May 2011.

2. Tverskaya Zastava Shopping Center

Comments:

* The project is under development

3. Tverskaya Plaza I

Comments:

* The project is under development

4. Tverskaya Plaza IV

Comments:

* The project is under development

5. Ozerkovskaya Embankment III

Comments:

* The project is under development

CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

For the period from 1 January 2011 to 30 June 2011

C O N T E N T S

Page

Directors' responsibility statement 14

Independent auditors' report on review of condensed consolidated interim 15

Financial information

Condensed consolidated income statement 16

Condensed consolidated statement of comprehensive income 17

Condensed consolidated statement of changes in equity 18

Condensed consolidated statement of financial position 19

Condensed consolidated statement of cash flows 20

Notes to the condensed consolidated interim financial statements 21 - 32

DIRECTORS' RESPONSIBILITY STATEMENT

Each of the directors, whose names are listed below confirm that, to the best of their knowledge:

·; the condensed consolidated interim financial statements, which has been prepared in accordance with IAS34 Interim Financial Reporting as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation as a whole; and

·; the interim management report gives a fair view of the information required by DTR 4.2.7R and DTR 4.2.8R of the Disclosure Transparency Rules of the UK Financial Services Authority, to the extent those being applicable to the Company.

The Directors of the Company as at the date of this announcement are as set out below:

The Board of Directors

Executive directors

Lev Leviev - Chairman .............................................................

Izzy Cohen .............................................................

Non-executive directors

Alexander Khaldey .............................................................

Moshe Amit .............................................................

Christakis Klerides .............................................................

John Robert Camber Porter .............................................................

Panayiotis Demetriou .............................................................

Michalakis Sarris .............................................................

Independent auditors' report on review of condensed consolidated interim financial information to the members of AFI DEVELOPMENT PLC

Introduction

We have reviewed the accompanying condensed consolidated statement of financial position of AFI Development PLC as at 30 June 2011 and the related condensed consolidated statements of income, comprehensive income, changes in equity and cash flows for the six-month period then ended and a summary of significant accounting policies and other explanatory notes (interim financial information). The Company's Board of Directors is responsible for the preparation and fair presentation of this interim financial information in accordance with International Financial Reporting Standard IAS 34 "Interim Financial Reporting". Our responsibility is to express a conclusion on this interim financial information based on our review.

Scope of Review

We conducted our review in accordance with the International Standard on Review Engagements 2410, "Review of Interim Financial Information Performed by the Independent Auditor of the Entity". A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the accompanying interim financial information is not prepared, in all material respects, in accordance with International Financial Reporting Standard IAS 34 "Interim Financial Reporting".

Marios Gregoriades

Certified Public Accountant and Register Auditor

For and on behalf of

KPMG Limited

Certified Public Accountants and Register Auditors

Nicosia, 23 August 2011

CONDENSED CONSOLIDATED INCOME STATEMENT

For the period from 1 January 2011 to 30 June 2011

The notes on pages 7 to 18 form an integral part of the condensed consolidated interim financial statements.

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the period from 1 January 2011 to 30 June 2011

The notes on pages 7 to 18 form an integral part of the condensed consolidated interim financial statements.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the period from 1 January 2011 to 30 June 2011

The notes on pages 7 to 18 form an integral part of the condensed consolidated interim financial statements.

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 30 JUNE 2011

The condensed consolidated interim financial statements were approved by the Board of Directors on 23 August 2011.

The notes on pages 7 to 18 form an integral part of the condensed consolidated interim financial statements.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

For the period from 1 January 2011 to 30 June 2011

The notes on pages 7 to 18 form an integral part of the condensed consolidated interim financial statements.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

For the period from 1 January 2011 to 30 June 2011

1. INCORPORATION AND PRINCIPAL ACTIVITY

AFI Development PLC (the "Company") was incorporated in Cyprus on 13 February 2001 as a limited liability company under the name Donkamill Holdings Limited. In April 2007 the Company was transformed into public company and changed its name to AFI Development PLC. The address of the Company's registered office is 25 Olympion Street, Omiros & Araouzos Tower, 3035 Limassol, Cyprus. The Company is a 63.7% (31/12/10: 54%) subsidiary of Africa Israel Investments Ltd ("Africa-Israel"), which is listed in the Tel Aviv Stock Exchange ("TASE"). The increase in shareholding during the period was achieved through the acquisition of the shares representing 9.7%, held by Nirro Group S.A.. The remaining shareholding of "A" shares is held by a custodian bank in exchange for the GDRs issued and listed in the London Stock Exchange ("LSE"). On 5 July 2010 the Company issued by way of a bonus issue, 523,847,027 "B" shares, which were admitted to a premium listing on the Official List of the UK Listing Authority and to trading on the main market of LSE. On the same date, the ordinary shares of the Company were designated as "A" shares.

These condensed consolidated interim financial statements of the Company for the period from 1 January 2011 to 30 June 2011 comprise of the Company and its subsidiaries (together referred to as the "Group") and the Group's interest in jointly controlled entities. The principal activity of the Group is real estate investment and development.

The principal activity of the Company is the holding of investments in subsidiaries and joint ventures.

2. basis of preparation

Statement of compliance

These condensed consolidated interim financial statements have been prepared in accordance with IAS 34 "Interim Financial Reporting". They do not include all of the information required for the full annual financial statements.

 Estimates

The preparation of interim financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.

In preparing these condensed consolidated interim financial statements, the significant judgments made by management in applying the Group's accounting policies and the key sources of estimation uncertainty were the same as those that applied to the consolidated financial statements as at and for the year ended 31 December 2010, with an additional uncertainty estimation for the rental revenue of AFIMALL City. Due to the initial operation period of AFIMALL City and the uncertainty of receiving all contracted rental fees, the Company's management estimated that an amount of US$1.1 million will not be received and therefore was not recognised as rental revenue.

3. significant accounting policies

The accounting policies applied by the Group in these condensed consolidated interim financial statements are the same as those applied by the Group in its consolidated financial statements as at and for the year ended 31 December 2010.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

For the period from 1 January 2011 to 30 June 2011

4. OPERATING SEGMENTS

The Group has 4 reportable segments, as described below, which are the Group's strategic business units. The strategic business units offer different types of real estate products and services and are managed separately because they require different marketing strategies as they address different types of clients. For each strategic business unit the Group's management reviews internal management reports on at least a monthly basis. The following summary describes the operation in each of the Group's reportable segments:

·; Development Projects - Commercial projects: Include construction of property for future lease.

·; Development Projects - Residential projects: Include construction and selling of residential properties.

·; Asset Management: Includes the operation of investment property for lease.

·; Other - Land bank: Includes the investment and holding of property for future development.

Information regarding the results of each reportable segment is included below. Performance is measured based on segment profit before income tax, as included in the internal management reports that are reviewed by the Group's management team. Segment profit is used to measure performance as management believes that such information is the most relevant in evaluating the results of certain segments relative to other entities that operate within these industries. Inter-segment pricing is determined on an arm's length basis.

Note:

Development projects - all investment projects under construction, including construction of residential properties

Asset management - yielding property management (all commercial properties)

Reconciliation of reportable segment revenues and profit or loss

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

For the period from 1 January 2011 to 30 June 2011

4. OPERATING SEGMENTS (continued)

Reconciliation of reportable segment revenues and profit or loss (continued)

5. other expenses

6. FINANCE COST AND FINANCE INCOME

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

For the period from 1 January 2011 to 30 June 2011

7. tAX EXPENSE

8. INVESTMENT PROPERTY

The carrying amount of investment property is the fair value of the property as determined by a registered independent appraiser having an appropriate recognised professional qualification and recent experience in the location and category of the property being valued. Fair values were determined having regard to recent market transactions for similar properties in the same location as the Group's investment property. The same applies for investment property under development in note 9 below. The last valuation took place on 30 June 2011.

The increase due to the effect of the foreign exchange rates is a result of the strengthening of the Rouble compared to the US Dollar by 7.9% in the current period.

On 10 March 2011 AFIMALL City opened to the public. On that date it was reclassified from investment property under development to investment property. On the same date the fair value did not materially differ from its carrying amount, US$797,026 thousand, and therefore no fair value gain or loss was recognised. So as to ensure sufficient parking space is available for customers of the Mall while the main parking area is being completed, the Company rented the required amount of parking space from the owners of adjacent buildings. During the period, the Company reached a non-binding understanding with the Moscow City administration regarding the purchase from the City of Moscow of its 25% share in AFI MALL City and 2,700 parking lots adjacent to AFI MALL City, for a total consideration of approximately US$ 310 million. See more details in note 21 "Subsequent events".

During the period the Company also completed Paveletskaya phase I project and reclassified it to investment property. At the date of reclassification its fair value did not materially differ from its carrying amount, US$25,350 thousand, and therefore no fair value adjustment was recognised.

During 2010 the commercial area and fitness centre of the second building of Four Winds project was completed and was reclassified as Investment property.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

For the period from 1 January 2011 to 30 June 2011

9. INVESTMENT PROPERTY UNDER DEVELOPMENT

The transfer to investment property, which took place during the first quarter of 2011, comprises projects AFIMALL City and Paveletskaya phase I, which were completed during the period, see note 8 above.

During the period, the Company reached a non-binding understanding with the Moscow City administration to transfer its development rights in the Tverskaya Zastava shopping centre to the City of Moscow in exchange for being fully compensated for its development costs incurred in the project to date. Such compensation may take the form of the City of Moscow granting additional building rights for the Company's other projects. As part of the non-binding understanding reached with the City of Moscow it is intended that AFI Development will remain the owner of the projects surrounding Tverskaya, equating to nearly 350,000 sq.m. of commercial and residential space. It is also intended that such projects will retain their key development criteria and it is the Company's understanding that the current planning documentation will remain in place. The Management believes that the compensation will be not less than the book value.

During the second quarter, a wholly owned subsidiary of the Company recorded a revaluation gain at the amount of US$13,137 thousand for the Paveletskaya Phase II project. The cost of the project was written off in previous years due to the Moscow real estate market situation and the uncertainty of the project's development. With the improvement of the Moscow real estate market during the years 2010 and 2011, the Company reassessed the development of the project and it is now in the pre-development stage. Therefore a revaluation based on an independent appraiser's opinion was recorded.

For the year ended 31 December 2010 the fair value adjustment is presented net of a write-off of the cost of Kuntsevo project. The Company made a progress in promoting its Kuntsevo project vis-à-vis the Moscow city authorities, including certain progress in obtaining necessary permits for the planning of this project. However, in light of the recent change in the Moscow city government, AFI Development Plc estimates that there might be additional delays in promoting the project and obtaining the aforementioned permits. There is no certainty whether and when the necessary permits will be obtained, and therefore, the Company decided, for accounting purposes, to write-off this project until more certainty is reached in relation to the development of the project.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

For the period from 1 January 2011 to 30 June 2011

10. PROPERTY, PLANT AND EQUIPMENT

11. TRADING PROPERTIES

Trading properties comprise of Four Winds II complex and Ozerkovskaya emb. 26 residential building complex. The Group has sold during the period a number of the remaining residential flats.

12. TRADING PROPERTIES UNDER CONSTRUCTION

Trading properties under construction comprise of Botanic Garden and Otradnoye projects. Both projects involve primarily the construction of residential properties.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

For the period from 1 January 2011 to 30 June 2011

13. TRADE AND OTHER RECEIVABLES

Advances to builders

On 31 December 2010 Advances to builders included an amount of US$5,803 prepaid to Danya Cebus Rus LLC, related party of the Group, for the construction of the AFIMALL City. This amount is now zero after the completion of the Mall during the current period.

14. SHARE CAPITAL AND RESERVES

Share premium

It represents the share premium on the issued shares on 31 December 2006 for the conversion of the shareholders' loans to capital US$421,325 thousand. It also includes the share premium on the issued shares which were represented by GDRs listed in the LSE in 2007. It was the result of the difference between the offering price, US$14, and the nominal value of the shares, US$0.001, after deduction of all listing expenses. An amount of US$1,399,900 thousand less US$57,292 thousand transaction costs was recognised during the year 2007. On 5 July 2010 an amount of US$524 thousand was capitalised as a result of bonus issued.

Employee Share option plan

The Company has established an employee share option plan operated by the Board of Directors, which is responsible for granting options and administrating the employee share option plan. Eligible are employees and directors, excluding independent directors, of the Company and employees and directors of the ultimate holding company, Africa Israel Investments Ltd and its subsidiaries. The employees share option plan is discretionary and options will be granted only when the Board so determines at an exercise price derived from the closing middle market price preceding the date of grant. No payment will be required for the grant of the options. In any 10 year period not more than 10 per cent of the issued ordinary share capital may be issued or be issuable under the employee share option plan.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

For the period from 1 January 2011 to 30 June 2011

14. SHARE CAPITAL AND RESERVES (continued)

Employee Share option plan (continued)

Options over 974,855 GDRs and 974,855 class B shares were granted up to 30 June 2011 to Russian and Israeli employees and directors with an exercise price of US$14 vesting one-third on the second anniversary of the date of grant, a further one-third on the third anniversary and the remaining one-third, on the fourth anniversary of the date of grant provided that the participants remain in employment until the vesting date. The vesting is not subject to any performance conditions. The contractual life is ten years. 

If a participant ceases to be employed his options will normally lapse subject to certain exceptions. In the event of a takeover, reorganisation or winding up vested options may be exercised or exchanged for new equivalent options where appropriate. Shares/GDRs issued under the plan will rank equally with all other shares at the time of issue. The Board of Directors may satisfy (with the consent of the participant) an option by paying the participant in cash or other assets the gain as an alternative of issuing and transferring the shares/GDRs. The Board of Directors may amend the rules of the plan at any time.

Translation reserve

The translation reserve comprises all foreign currency differences arising from the translation of the financial statements of foreign operations to the Group presentation currency and the foreign exchange differences on loans designated as loans to an investee company which are accounted for as part of the investor's investment (IAS21.15) as their repayment is not planned or likely to occur in the foreseeable future. These foreign exchange differences are recognised directly to Translation Reserve.

Retained earnings

The amount at each reporting date is available for distribution. No dividends were proposed, declared or paid during the six-month period ended 30 June 2011.

15. LOANS AND BORROWINGS

There were no significant movements of loans and borrowings during the period apart for the following:

(i) A secured loan which was obtained from the non-related company, Quasar Capital Limited, for US$60 million on 13 February 2006 and carried interest of 2.4% above 6 months US$ LIBOR was repaid in full during the period.

(ii) The increase in secured bank loans is mostly due to increase of the US Dollar equivalent of the loans denominated in Roubles due to the change in the exchange rate between Rouble and US Dollar by approximately 7.9% in favour of the Rouble.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

For the period from 1 January 2011 to 30 June 2011

16. TRADE AND OTHER PAYABLES

Payables to related parties

Include an amount of US$12,356 thousand (31/12/10: US$NIL) payable to Danya Cebus Rus LLC, related party of the Group, for new contracts signed in relation to the completion of AFIMALL City.

Receipts in advance from sale of investment

Represents the amount refundable to the buyer of Kosinskaya project, for more details see note 17 below.

Other payables

Include an amount of US$50,268 thousand (31/12/10: US$51,869 thousand) payable to the 50% partner of the joint venture Krown Investments LLC.

17. CONTINGENCIES

On 6th of August 2009, the Group has entered into a sale and purchase agreement for the sale of Kosinskaya project, through the sale of OOO Titon, the subsidiary of Rognerstar Finance Limited, which is the subsidiary of AFI Development Plc. Under the original terms, sale proceeds of US$195 million were expected to be received within one year, by August 2010. By the expected date of receipt the Group had received US$72.5 million and was negotiating with the buyer an amended payment schedule, in order to extend the receipt of the total proceeds to the end of 2010. As of the expected dated of receipt the buyer has not paid the full amount and the title of the assets was still under the ownership of the Company. In addition, the Company also decided to derecognise US$25 million from "receipts in advance from sale of investment" as this amount represents the minimum amount that is not refundable according to the contract.

The buyer has served AFI Development Plc a warrant for indictment, submitted in the District Court of Nicosia, Cyprus, whereby the buyer demands, inter alia, repayment of the amount of approximately US$47 million and approximately US$25 million out of the purchase price, reimbursement in the amount of approximately US$17 million for damages and additional reimbursement of US$2.5 million per each month of delay in the aforementioned payments. As of the date of these financial statements, the buyer has submitted a statement of claim but has not yet submitted any supporting documentation in relation to these claims. AFI Development Plc intends to serve its response within the time frames set forth under the applicable law however, is currently negotiating with the buyer regarding possible settlement options. Management believes that the current provision in the financial statements will cover any future payments for the resolution of this matter.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

For the period from 1 January 2011 to 30 June 2011

18. FINANCIAL RISK MANAGEMENT

The Group's financial risk management objectives and policies are consistent with that disclosed in the consolidated financial statements as at and for the year ended 31 December 2010.

19. RELATED PARTIES

Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including any director (whether executive or otherwise) of that entity. The person is a member of the key management personnel of the entity or its parent (includes the immediate, intermediate or ultimate parent). Key management is not limited to directors; other members of the management team also may be key management.

20. GROUP ENTITIES

During the six-month period ended 30 June 2011 the Group did not acquire or dispose any material subsidiaries.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

For the period from 1 January 2011 to 30 June 2011

21. SUBSEQUENT EVENTS

Subsequent to 30 June 2011 there were no events that took place which have a bearing on the understanding of these financial statements except of the following:

·; On 25 March 2011 the Company announced that it had reached a non-binding understanding with the Moscow City Government regarding the purchase from the City of Moscow of its 25% share in AFIMALL City and 2,700 parking lots adjacent to AFIMALL City, for a total consideration of approximately US$310 million.

On 15th of July the Company provided an update that, pursuant to the said non-binding understanding, it has entered into a supplement to the Investment Contract (the "Supplement") with the Moscow City Government. Pursuant to the Supplement, the Moscow City Government will assign its right to receive 25% of the area of AFIMALL City for a total consideration of 5 billion Roubles, including VAT (approximately US$180 million, including VAT), to be paid by the end of September 2011. The Supplement was subject to internal approvals of various departments of the Government of the City of Moscow and on 3rd of August the Company provided an update that it has received the Supplement, duly approved by the Government of the City of Moscow and signed by its authorise representative.

As of the day of the financial statements, the Company is having advanced discussions with various banks regarding the provision of financing for the abovementioned buy-out from the City of Moscow of its rights in AFIMALL City. The Company aims to have the financing in place by the end of September 2011.

The Company's management estimates, based also on its professional advisers opinion on this matter, that the price of the above mentioned deal does not reflect the fair value estimation for the asset, due mainly to the following reasons:

·; Moscow City Government (25%) has minority shares in the asset. According to the valuation practice in the real estate sector, it is common to assume a certain discount for rights which do not provide a control over the management of the asset.

·; In most of the cases, rights in an asset which do not provide a control over the asset and its management are characterized with non-liquidity which according to the valuation practice in the real estate sector, reflects a discount on the fair value of the asset.

Due to the above mentioned, upon completion of the transaction, and based on the fair value of the assets as of 30 June 11 which was evaluated at US$820 million (75%) by an independent appraiser, the Company is expected to record a profit of approximately US$100 million, before tax (US$80 million after tax). It has to be noted that the Supplement does not deal with the parking lot adjacent to AFIMALL City. However, this is covered by the aforementioned non-binding understanding, and the Company is continuing its negotiations with respect to this matter with the Moscow City Government.

·; The Company has signed an additional agreement with VTB bank to reduce the interest rate on the current AFIMALL City loan from 13.25% to 11.5% with a further reduction to 9.5% upon receipt of the ownership certificate for the property.

·; The Company, together with its partner in the project, ZAO "Snegiri Development", has completed the refinancing transaction for its Four Winds office project through Nordea Bank. Under the refinancing terms, the credit line was increased from US$143 million to US$170 million at a lower interest rate, compared to the current interest rate of 10.5% under the agreement with MDM Bank.