AFRB.L Regulatory News (AFRB)

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19 March 2013

AFI DEVELOPMENT PLC

("AFI DEVELOPMENT" OR "THE COMPANY")PRELIMINARY STATEMENT OF RESULTS FOR THE YEAR ENDED 31 DECEMBER 2012Strong operational results, with increased cash flow from completed projects and disposals

AFI Development, a leading real estate company focused on developing property in Russia, has today announced its preliminary audited financial results for the year ended 31 December 2012.

Financial highlights:

·; Revenues for 2012, including net proceeds from the sale of trading properties, up 21% year-on-year to US$163 million driven by higher rental income

- AFIMALL City contribution at US$81.4 million

·; Gross profit for 2012 up by 203% year-on-year to US$59 million on stronger revenues, mainly attributed to AFIMALL City

·; Strong cash position with US$178 million in cash and cash equivalents as at 31 December 2012, compared to US$85 million as at 31 December 2011

- Increase in cash balance attributed to the disposal of Westec Four Winds Ltd. and parking areas at AFIMALL City to JSC VTB Bank

·; Gross Asset Value, based partially on the valuation of our projects portfolio independently verified by Cushman & Wakefield and partially on book cost, at US$2.5 billion as at 31 December 2012, compared to US$2.7 billion as at 31 December 2011

·; Successful refinancing of AFIMALL City project loans (circa US$449 million), maturing in August 2013, with a new credit line from VTB Group totalling RUB21 billion (US$666 million ), maturing in April 2018

Operational Highlights:

·; AFIMALL City firmly established as one of the most attractive retail centres in Moscow

- Growing footfall and tenant turnover

- Integrated parking fully constructed and operational

- Successful disposal of part of the parking space to VTB Bank for US$57.1 million

·; Successful disposal of 50% interest in Westec Four Winds Limited ("Westec") for US$103.4 million

·; In negotiations with potential buyers and tenants of class A office project, Ozerkovskaya III, in central Moscow, following receipt of operations permit

·; Significant progress in development projects, securing land lease in Tverskaya Plaza Ic and obtaining town-planning and zoning documentation (GPZU) for Bolshaya Pochtovaya and Paveletskaya II projects

·; AFIMALL City and Aquamarine III (Ozerkovskaya III) recognised at the prestigious "International Property Awards Europe" for excellence in development quality and highest level of customer experience

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

"Our strong operational results for 2012 demonstrate the significant progress we have made in our key projects during the year. AFIMALL City, our flagship project, showed a steady increase in footfall and tenant turnover during its first year of operation, supported by our marketing initiatives and the successful completion of the underground parking. Our efforts have been recognised with AFIMALL City receiving an award at the "International Property Awards Europe", alongside our Aquamarine III project. We believe that the Mall is now able to fully capitalise on its position as one of the most attractive retail establishments in Moscow.

During 2012, we successfully put into operation our Ozerkovskaya project and subsequently acquired the 50% share held by our JV partner Super Passion, allowing us to become the sole owner of this project. We also put into operation the Plaza Spa Hotel Zheleznovodsk, which successfully completed its maiden summer season.

The disposal of our 50% stake in Westec Four Winds Limited will allow us to realise a US$50 million capital gain on the project and serves to highlight our commitment to disposing of assets at opportune moments, to maximise profit. We will continue to seek such opportunities in the future.

We have had a good start to 2013, and look forward to the rest of the year with confidence. The Russian economy is performing well compared to other European nations and we expect the demand for high quality real estate in attractive Moscow locations to continue through 2013. We look forward to progressing with our new developments as well as building upon the successful foundations we created for AFIMALL City during 2012. We will seek opportunities for AFI Development to increase its cash flow, to enhance its position in the Moscow real estate market and to generate positive returns for shareholders".

FY 2012 Results Conference Call

AFI Development will hold a conference call for analysts and investors to discuss its full year 2012 results, following their publication.

The details for the conference call are as follows:

Please dial in 5/10 minutes prior to the commencement time giving your name, company and stating that you are dialling into the AFI Development conference call quoting the reference AFI.

For further information, please contact:

AFI Development +7 495 796 9988

Ilya KutnovEkaterina Shubina

Citigate Dewe Rogerson, London +44 20 7638 9571

David Westover

Sandra NovakovReena Mavjee

About AFI Development

AFI Development is one of the leading real estate development companies operating in Russia. Established in 2001, AFI Development is a publicly traded subsidiary of Africa Israel Investments Ltd.

AFI Development is listed on the Main Market of the London Stock Exchange and aims to deliver shareholder value through a commitment to innovation and continuous project development, coupled with the highest standards of design, construction, and quality and customer service.

AFI Development focuses on developing and redeveloping high quality commercial and residential real estate assets across Russia, with Moscow being its main market. The Company's existing portfolio comprises commercial projects focused on offices, shopping centres, hotels and mixed-use properties, and residential projects. AFI Development's strategy is to sell the residential properties it develops and to either lease the commercial properties or sell them for a favourable return.

AFI Development is a leading force in urban regeneration, breathing new life into city squares and neighbourhoods and transforming congested and underdeveloped areas into thriving new communities. The Company's long-term, large-scale regeneration and city infrastructure projects establish the necessary groundwork for the successful launch of commercial and residential properties, providing a strong base for future.

Forward-looking Statements

This document and the documents following may contain certain "forward-looking statements" with respect to the Company's financial condition, results of operations and business, and certain of the Company's plans and objectives with respect to these items.

Forward-looking statements are sometimes, but not always, identified by their use of a date in the future or such words as "anticipates", "aims", "due", "could", "may", "should", "expects", "believes", "intends", "plans", "targets", "goal" or "estimates." By their very nature forward-looking statements are inherently unpredictable, speculative and involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future.

There are a number of factors that could cause actual results and developments to differ materially from those expressed or implied by these forward-looking statements. These factors include, but are not limited to, changes in the economies and markets in which the Company operates; changes in the regulatory and competition frameworks in which the Company operates; changes in the markets from which the Company raises finance; the impact of legal or other proceedings against or which affect the Company; and changes in interest and exchange rates.

Any written or verbal forward-looking statements, made in this document or made subsequently, which are attributable to the Company or persons acting on their behalf are expressly qualified in their entirety by the factors referred to above. The Company does not intend to update any forward-looking statements.

Chairman and Executive Director's Joint Statement

The year 2012 has been one of major achievements for AFI Development. Most notably, AFIMALL City, our flagship project, has become firmly established as one of the leading retail schemes in Moscow. Our operational initiatives to increase footfall to the Mall have borne fruit and we have seen an increase in footfall levels. At the same time, we restructured our financing arrangements as part of our long-standing commitment to reducing costs.

In line with our strategy, the Company has continued to dispose of mature yielding properties, where appropriate, in order to realize a capital gain. In 2012, the Company sold its 50% holding in the Westec Four Winds Limited (holding company of the Four Winds project), for a total consideration of US$103.4 million, expecting to realise a net profit of around US$50 million. The improvement in our operational results during 2012 is evidenced by the threefold increase in gross profit for 2012 to US$59 million compared to approximately US$20 million in 2011.

During 2012 we also completed and put into operation two other projects within our development portfolio - Ozerkovskaya III, an office complex forming part of the "Aquamarine" mixed-use development, and Plaza Spa Hotel Zheleznovodsk.

The Company currently has several projects in various stages of development. The Otradnoe (Odintsovo) project is scheduled to begin construction in Q2 2013 and the development process continues for the Kossinskaya, Bolshaya Pochtovaya and Paveletskaya II projects. Significant progress was made at the Tverskaya Zastava projects, where the Company signed a land lease agreement with the Moscow city authorities for the Tverskaya Plaza IC development.

The Russian economy continues to perform well in a European context, with 2012 GDP growth of 3.4%[1], although inflation has remained high at 6.6%[2]. Although GDP growth presented slight slowdown, the Russian market has continued to perform well with further expansion in private consumption and investments.  The consumer sector continues to be a major economic driver, while solid growth in real incomes and consumer loans translated into an increase in real retail sales of 6.3% year-on-year in 2012[3]. As a result, the trends of domestic and international retail brand expansion in Moscow's malls have continued, leading vacancy rates at quality shopping malls in Moscow to remain close to zero. Moscow remains the preferred location for real estate investors and prime yields here remained at 9%[4] for both prime retail and offices during 2012. Prime office rents reached US$1,000-1,150[5] sq.m. per annum in the fourth quarter, slightly below that of the previous year.

Thanks to strong growth in rental income, our revenues for 2012 recorded a 21% year-on-year increase to US$163 million. This trend was further supported by successful sales of properties, including the above-mentioned 50% holding in the Four Winds project. We were consequently able to achieve a significant, three-fold year-on-year increase in gross profit to US$59 million, whilst further building on our strong cash position with cash and cash equivalents up by 109% to US$178 million as at 31 December 2012.

Our progress during 2012 has shown that the demand for high quality projects in attractive Moscow locations remains strong. The Company maintained its commitment throughout the year to excellence in development quality and the highest level of customer satisfaction. We are very pleased that recognition of this commitment has been expressed not only in the interest in our properties but also in the form of two of the prestigious "International Property Awards Europe" for the AFIMALL City and Aquamarine III (Ozerkovskaya III) projects.

We believe that our strategy of focusing on high quality projects in Moscow is producing good results that will generate both strong cash-flow and significant capital returns over future years. In 2013 we intend to continue implementing this strategy, benefiting from our completed projects and advancing the progress of our new developments.

Management Update

Mr Izzy Cohen, non-executive director, resigned from the Company Board of Directors on 17 July 2012 (effective as of 22 July 2012). Mr Cohen's resignation followed his stepping down as CEO of Africa Israel Investments Ltd, the Company's majority shareholder.

On 21 August 2012, the Board of Directors of AFI Development, following recommendation by the Nomination Committee, appointed Mr Avraham Novogrocki, the new CEO of Africa Israel Investments Ltd, as Company non-executive director to replace Mr Cohen.

On 22 November 2012, the Board of Directors of AFI Development, following the recommendation of the Nomination Committee, appointed Mr Lev Leviev, previously non-executive director and Chairman, to the position of Executive Chairman of the Company.

The appointment of Mr Leviev has no impact on the functions and responsibilities of the Executive Director of the Company and CEO of OOO AFI RUS, Mr Mark Groysman. Mr Groysman remains responsible for the on-going operations of AFI Development, while Mr Leviev concentrates on managing government relations of the Company, leading strategic transactions and originating and managing strategic international partnerships.

On 28 February, the Board of Directors received a resignation notice (effective as of 1 March 2013) from Mr Michalis Sarris, non-executive director, following his appointment as Minister of Finance in the new government of the Republic of Cyprus. The Company intends to seek a new non-executive director to replace Mr Sarris, and will update the market as and when a replacement has been found.

Valuation

As at 31 December 2012, based on Cushman & Wakefield LLC ("C&W") independent appraisers' report, the value of AFI Development's portfolio of investment properties stood at US$1.5 billion, while the value of the portfolio of investment property under development stood at US$0.7 billion. Additionally, C&W's combined valuation of Westec Four Winds Limited office and retail projects was US$176.5 million (based on the 50% share of AFI Development).

Consequently, the total value of the Company assets, based predominantly on independent valuation as of 31 December 2012, was US$2.5 billion. This figure represents an 8% decrease in the value of the portfolio compared to the balance value as of 31 December 2011.

The decrease in the value of the Company's assets is mainly attributable to a reduction in value of the Company's Bolshaya Pochtovaya, Kossinskaya, Tverskaya Plaza Ib and Tverskaya Plaza II investment projects under development as a result of changes in master planning and development policies of the Moscow government. As a result of these changes, a reduction in the value of the Company's assets of US$179 million was recognised in Q2 2012. The Company also recognised an impairment loss on real estate inventory of US$65 million as a result of its decision to write off the Botanic Garden project in Q2 2012.

For additional information, please refer to the "Portfolio Valuation" section in the Management Discussion and Analysis (the "MD&A").

Liquidity

We completed 2012 with a strong liquidity position of approximately US$178 million cash and cash equivalents on our balance sheet and a debt[6] to equity level of 35%. This strong position reflects the Company's ability to successfully balance liquidity requirements from a number of sources.

Our financing strategy aims to maximize the amount of debt financing for projects under construction while maintaining healthy loan-to-value levels. After delivery and commissioning we aim to refinance the properties at more favourable terms, including longer amortisation periods, lower interest rates and higher principal balloon payments. Property rights and shares of property holding companies are mainly used as collateral for the debt. We strongly prefer, whenever possible, to use non-recourse project level financing.

For additional information, please refer to the "Liquidity" section of the MD&A.

Key developments since financial year end

In January 2013, AFI Development entered into an agreement to purchase the remaining 50% interest and to settle all outstanding liabilities of AFI Development to its partner in Krown Investments LLC (the holding company with the rights to the Ozerkovskaya project) from its joint venture partner, Super Passion Limited, for a total cash consideration of US$227.5 million. As a consequence of the acquisition, the Company became the sole owner of the Ozerkovskaya project at completion of the transaction.

On 28 January 2013, the Company's subsidiary Krown Investments Ltd refinanced its construction costs for Ozerkovskaya III project with a credit line from JSC VTB Bank. The credit line totalling US$220 million carries an annual interest rate of 3 months LIBOR + 5.7%. The credit line was fully drawn down in two tranches in February and in March 2013.

As a result of negotiations with the Moscow city authorities, the Company's development rights to the Botanic Garden project were recognised on 4 February 2013. After thorough assessment of risks to the Company's development rights in respect of the project, AFI Development agreed to make payments to the City of Moscow in return for additional development rights. The total aggregate amount of the payments for additional development rights is approximately US$18.5 million, which will be paid in several instalments.

Portfolio Update

AFIMALL City

In 2012, AFIMALL City passed the milestone of 12 months of operation. During this time the Mall has continued to see increases in footfall, growing at the rate of 5% per month, with average daily footfall reaching 40,000 visitors in December 2012. The underground parking space, purchased by the Company in December 2011 has supported this momentum, creating an integrated parking area serving the shopping centre with a total of 2,075 parking spaces.

During 2012, we streamlined operations of AFIMALL City by improving the quality of the tenant mix, rent collections and overall profitability of the centre. Though the occupancy remained stable at 77% throughout the year, the revenues, NOI and rent collections demonstrated growth. The increased customer footfall ensures AFIMALL City is well placed to sustain high levels of rental income over the coming years.

While these factors have led to increased revenues from the Mall, we have maintained our commitment to reducing costs. We have refinanced the project with a total credit line of RUR21 billion (around US$666 million), reducing the average interest rate from 9.62% to around 8.22%. This refinancing was provided by VTB Group. The large size and favourable terms of the lending arrangement are strong evidence of confidence of leading Russian lenders in AFI Development and in AFIMALL City in particular.

OZERKOVSKAYA III

At the start of 2013, AFI Development acquired the 50% share held by its joint venture partner, Super Passion Limited, in the Ozerkovskaya III (Aquamarine III) project, for a total cash consideration of US$230 million. The transaction was completed in February 2013, when AFI Development exercised its right under the agreement with Super Passion Limited to pay the consideration ahead of schedule applying a discount, which resulted in total consideration paid under the transaction in the amount of US$227.5 million.

During 2012, the Company received the operations permit for the property and it continues negotiations with potential purchasers and tenants for the project. In Q4 2012, Ozerkovskaya III was reclassified from Investment Property under Development to Investment Property in the Company's projects portfolio.

HOTELS

During 2012, the Company put into operation the Plaza Spa Hotel Zheleznovodsk (former Kalinina hotel), adding a second operating property in the Caucasus Mineral Waters region in southern Russia. The two operating hotels, Plaza Spa Hotel Kislovodsk and Plaza Spa Hotel Zheleznovodsk now operate under a single brand.

Plaza Spa Hotel Zheleznovodsk successfully completed its first summer season. The hotel won the "Best Resort Hotel 2012" award in the Russian "My planet" hotel awards competition.

The Aquamarine Hotel in Moscow and the Plaza Spa Hotel in Kislovodsk continued to achieve their operational targets for the year.

FOUR WINDS

In December 2012, AFI Development announced the sale of its 50% stake in Westec Four Winds Limited, the developer and operator of the Four Winds Office and residential project in Moscow. The deal was completed in January 2013 for a total consideration of approximately US$103 million. The Company's profit from the transaction is expected to amount approximately US$50 million, which was partially booked in Q4 2012 with the remainder to be booked in Q1 2013. The underlying gross enterprise value of Westec Four Winds Limited, based on which the transaction consideration was calculated, was circa US$370 million (for 100%), while the last valuation by JLL stood at US$310 million.

This transaction is in line with our strategy to dispose of our completed developments, at an opportune time and for favourable consideration.

TVERSKAYA ZASTAVA PROJECTS

During 2012, the Moscow authorities progressed with the implementation of the non-binding agreement with AFI Development, reached in November 2011.

The focus of the Company's activities at the Tverskaya Zastava is represented by the Plaza Ic project. Following the issue of the land plot master plan ("GPZU") by the Moscow city authorities, in November 2012 the Company registered a 10 year land lease for construction of the project, a major milestone in the progress of the project.

BOTANIC GARDEN

In August 2012, AFI Development wrote-off its rights to the project following initiation of bankruptcy proceedings against the "main investor" under the investment contract, OAO "Novoe Koltso Moskvy" ("NKM"), while continuing its efforts to recover its costs and/or receive development rights to the project.

As a result of negotiations with the Moscow city authorities, the Company's development rights to the project have been recognized through an addendum to the investment contract for the Botanic Garden project. According to this addendum, NKM shall not have any claims to the investments made by AFI Development in the Botanic Garden project and its subsidiary, OOO "Nordservice", will become the only investor under the investment contract. In line with its decision on the investment contract, the city authorities have agreed to change the lessee in the short term land lease agreement from "NKM" to OOO "Nordservice".

The addendum to the investment contract of 4 February 2013 granted the Company development rights to gross buildable area of 247,705 sq.m. of office, residential and parking space (including 165,578 sq.m. of gross residential space) and to 21,120 sq.m. of on-ground parking space.

After thorough assessment of risks to the Company's development rights in respect of the project, the Company has agreed to make payments to the City of Moscow under the addendum to the investment contract in return for additional development rights. The total aggregate amount of the payments for additional development rights is approximately US$14.2 million plus Nordservice is to compensate the indebtedness of NKM under the investment contract in the amount of approximately US$4.3 million. Both will be paid in several instalments. The decision was based on the opinion of external legal advisers of the Company that, in the event that the addendum is declared void or is cancelled (following a claim by the creditors of NKM), the amounts paid would be repayable back to the Company. It should be noted that the provision to write-off the Botanic Garden (made in August 2012) will not be cancelled at this stage.

BOLSHAYA POCHTOVAYA

The Company is currently working on design and planning of the project and aiming to secure the land lease for construction in accordance with the new permitting documentation from the Moscow architectural authorities, issued in the second quarter of 2012, which stipulated that the construction density of the project must be reduced, compared to previous development plan.

Despite the reduction of total buildable area, the city authorities approved the predominant residential use of the areas in this mixed-use development (versus the previously predominant office component), thus improving the potential profitability profile of the project.

PAVELETSKAYA PHASE II

During 2012, the Company made significant progress in further securing the development rights for this project. Permitting documentation for the project was received during the second half of the year from the town-planning land committee ("GZK") and the land plot master-plan ("GPZU") with new parameters for the future development of the project.

The Company is working on securing the land lease agreement to allow construction in accordance with the new development documentation as well as on the planning and design of the project.

Market Overview - General Moscow Real Estate

Macroeconomic environment

According to the Ministry of Economic Development, Russia enjoyed a real GDP growth rate of 3.4% in 2012, driven by strong domestic demand supported by revenues from oil exports. This compares favourably to the average Eurozone GDP growth where continued economic uncertainties continued to dampen growth.

At an average price of US$111 per barrel of Urals in 2012, the strong oil price contributed positively to the stable Russian economy. At year-end, the country's negative balance on its financial account was 10 times lower than at the same time in 2011, at US$3 billion. At the same time, the rouble appreciated by 2.4% on average versus the US dollar.

The consumer sector, which has traditionally been a key driver of Russian economic development, continued to drive growth in retail sales, which were up by 6% year-on-year. At the same time, inflation increased to 6.6% by December 2012, driven by food price growth and higher utility tariffs.

[Source: Commercial Real Estate Report, JLL; Cushman & Wakefield Report; EIU Russia, Rosstat]

Moscow office market

At approximately 567,000 sq.m., 2012 was characterised by record low new completions of office buildings over the past 10 years. Limited supply, caused by the 2011 construction restrictions and an increase in developers' constructions cycles, led to a continued decline in vacancy rates to 13.5% overall, or 10.6% for Moscow's Central Business District.

Robust demand for high quality space coupled with limited supply also supported stable prime rental rates at US$1,000 - US$1,200 per sq.m., ranking Moscow as the second most expensive office market in Europe. Depending on building class, sales prices for sq.m. of gross building area (excluding VAT) ranged up to US$12,000 (for prime assets).

In line with these trends, prime capitalisation rates for Moscow-based office buildings remained unchanged at 9% for prime assets.

[Source: Moscow Office MarketView Q4 2012, CBRE; Marketbeat Office Snapshot Q4 2012, Cushman & Wakefield]

Moscow Retail Market

The Moscow retail market saw the opening of two shopping centres (GLA of 58,000 sq.m.) and four classical shopping centres (GLA of 102,000 sq.m.) in 2012.

Demand from international brands, looking to extend their presence in Moscow remained healthy, boosted by continued volatility in the Eurozone.

As a result, by year-end average vacancy rates declined to one of the lowest among cities in Europe at just 2.5%, or between 1% and zero at the most successful properties. At the same time, average rental rates in shopping centres remained stable throughout the year at a level of US$3,000 - US$4,500 per sq.m. per year (for smaller galleria areas).

Capitalisation rates for the Moscow prime retail sector also remained unchanged year-on-year at 9%.

[Source: Marketbeat Retail Snapshot Q4 2012, Cushman & Wakefield; Moscow Retail Overview - Q4 2012, Jones Lang LaSalle]

Moscow and Moscow Region Residential Market

The supply of primary market business class housing doubled in 2012 to 335,000 sq.m. compared to 2011 while demand increased by 12% compared to 2011, reaching 148 primary deals per month.

In 2012, the area weighted average price for primary business-class residential real estate reached US$7,400 per sq.m., with prices in the Central Administrative district of Moscow up by almost 30% to US $8,770 per sq.m.

[Commercial Real Estate Report, JLL; Cushman & Wakefield Report; EIU Russia, Rosstat]

Board of Directors

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

Mr. Lev Leviev, Executive Chairman of the Board

Mr. Mark Groysman, Executive Director

Mr. Avraham Novogrocki, Non-Executive Director

Mr. Christakis Klerides, Senior Non-Executive Independent Director

Mr. Moshe Amit, Non-Executive Independent Director;

Mr. John Porter, Non-Executive Independent Director

Mr. Panayiotis Demetriou, Non-Executive Independent Director

19 March 2013

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Overview

As at 31 December 2012, the Company's portfolio consisted of 7 investment properties, 8 investment properties under development, 2 trading properties, 5 hotel projects, 2 trading properties under development/non-current inventory and 2 assets for sale at various stages of development. The portfolio comprises commercial projects focused on offices, shopping centres, hotels, mixed-use properties and residential projects in prime locations in Moscow. The total value of the Company's assets, based predominantly on independent valuation as of 31 December 2012, was US$2.5 billion[7]. About 60% of the assets book value is attributed to yielding properties.

Revenues for 2012 increased by 21% year-on-year to US$163 million driven predominantly by strong rental income. Successful sales of properties, including the disposal of the 50% holding in the Four Winds project, also contributed to the positive revenue trend. Consequently, AFI Development recorded a significant, 203% year-on-year increase in gross profit to US$59 million. At the same time, cash and cash equivalents increased by 109% to US$178 million as at 31 December 2012.

However, primarily as a result of a revaluation loss of US$246.1 million on our investment portfolio, the Company recognized a net loss of US$275.5 million in 2012, compared to a profit of US$171.5 million in 2011. The decrease in the value of AFI Development's assets is mainly attributable to a reduction in value of the Company's Bolshaya Pochtovaya, Kossinskaya, Tverskaya Plaza Ib and Tverskaya Plaza II projects as a result of changes in master planning and development policies of the Moscow government. As a result of these changes, a reduction in the value of the Company's assets of US$173.5 million was recognized in Q2 2012. The Company also recognized an impairment loss on real estate inventory of US$65 million as a result of its decision to write off the Botanic Garden project.

Key Factors Affecting our Financial Results

Our results have been affected, and are expected to be affected in the future, by a variety of factors, including, but not limited to, the following:

Macroeconomic Factors

Our properties and projects are mainly located in Russia. As a result, Russian macroeconomic trends and country-specific risks significantly influence our performance.

The following table sets out certain macroeconomic information for Russia as of and for the dates indicated:

Source: European Intelligence Unit, State Statistics Agency of the Russian Federation

Company Specific Factors

The following factors affected our performance in 2012:

·; In 2012, AFIMALL City completed its first full year of operations. As the main yielding asset of AFI Development, the mall was the largest contributor to operating revenue and cash flow from operations for the Company.

·; During the year, construction work to finalise the underground parking space at AFIMALL City resulted in additional incurred capital expenditures.

·; In Q2 2012, the Company recognised a valuation loss on investment properties under development in the amount of US$173.5 million, mainly due to a decrease in the value of the Company's four projects: Bolshaya Pochtovaya, Kossinskaya, Tverskaya Plaza Ib and Tverskaya Plaza II. The decrease in value resulted from changes in master planning and development policies of the Moscow government.

·; In Q2 2012, AFI Development recorded an impairment loss on inventory of real estate amounting to US$65 million due to its decision to write-off the Botanic Garden project.

·; During Q4 2012, the Company disposed of part of parking space in the AFIMALL City to JSC VTB Bank, receiving consideration of US$57.1 million. The consideration was partially used to finance the construction of the parking.

·; The disposal of 50% stake in Westec Four Winds Limited in Q4 2012 contributed US$100 million to the 31.12.2012 cash balance.

·; Plaza Spa Hotel Zheleznovodsk (former Kalinina Hotel) began operations in Q2 2012.

Key Portfolio Updates

YEILDING ASSETS:

AFIMALL City:

AFIMALL City is a retail and entertainment development, located in the high-rise business district of Moscow, "Moscow-City". With a total GBA of nearly 304,205 sq.m. (including parking), and GLA of nearly 107,000 sq.m., the project has a shopping gallery of nearly 400 shops and an 11-screen movie theatre with a number of additional outstanding leisure facilities. AFIMALL City is one of Europe's largest and most ambitious retail developments in recent years. The Mall introduces a new standard of quality to the Russian retail sector and offers visitors a combined shopping, dining and entertainment experience unmatched in any other retail development in Moscow.

During 2012, AFIMALL City reported a strong increase in footfall with average daily footfall for December 2012 reaching approximately 40,000 visitors, compared to 28,000 in December 2011, a significant 36% increase year-on-year. This success was driven by our substantial marketing campaign, the launch of our integrated parking lot and increasing awareness of the Mall amongst our target customers.

During 2012, the Company made special efforts to increase weekend footfall to the Mall, by focusing on advertising and organizing special weekend events. As a result, the monthly average daily week-end footfall in December 2012 was approximately 36,000, compared to approximately 23,000 in December 2011, a 57% increase year-on-year.

In June 2012, AFIMALL City loans were refinanced by a bank of the VTB Group. The total credit line of RUR21 billion (around US$666 million), reduced the average interest rate from 9.62% to around 8.22% and extended the maturity of the facility to April 2018.

In November 2012, Bellgate Construction Limited ("Bellgate"), the Company subsidiary owning and operating AFIMALL City, disposed of approximately 643 parking lots to JSC VTB Bank, which will use this parking space for its office headquarters located next to AFIMALL City. The transaction is structured in two stages. The first stage entailed a sale-purchase transaction between Bellgate and VTB Bank on 21,354 sq.m. of parking space. During the second stage 9,247 sq.m. owned (at completion) by VTB Bank will be exchanged for 7,847 sq.m. owned by Bellgate. This two-tier transaction structure stemmed from the fact that part of the parking space that VTB Bank is interested in purchasing is located on a land plot to which Bellgate has not yet registered leasehold rights. The resulting estimated total net cash flow for AFI Development is US$54.5 million and net profit is circa US$20 million. As of 31 December.2012, the Company received 90% of the total consideration in the amount of US$51.4 million (net of VAT), while the remaining 10% are expected to be received at completion, when Bellgate registers the title to the parking to VTB Bank.

During 2012, Bellgate finalised the construction and put into operation all the three phases of integrated underground parking of the shopping centre, acquired in November 2011. All parking lots are now fully constructed and operational. The amount of parking (more than 2,000 lots) is sufficient for smooth and convenient operations of the centre.

During 2012, the City of Moscow progressed with the construction of the new metro station "Delovoi Center" on the "Kalininsko-Sontsevskaya" line, which will be connected to the existing "Vystavochnaya" station. The new station will have direct access to AFIMALL City. The "Kalininsko-Sontsevskaya" line (which is currently only partially operational) is planned to connect the eastern and south-western areas of Moscow and, according to officially published information of the Moscow Metro, the new station is planned to become operational by the end of 2013. The new station will further improve the accessibility of AFIMALL City by the most popular method of public transportation in Moscow and will increase the catchment area of the Mall.

The general construction of high-rise towers of Moscow-City has also seen progress. By the end of 2012, almost 500,000 sq.m. of office space was completed. According to a report prepared by Jones Lang LaSalle, the following buildings are expected to be completed by the end of 2013 (308,000 sq.m. of office leasable area in total): CityPoint, Mercury City Tower, Federation Tower (Vostok) and Eurasia Tower. Employees of office tenants within Moscow City represent a significant percentage of the Mall's footfall and these further completions and let office space in Moscow City is expected to further enhance footfall at AFIMALL City.

Based on the independent valuation of the Company portfolio by Cushman & Wakefield as of 31 December 2012, the fair value of AFIMALL City was US$1,160 million.

FOUR WINDS:

The Four Winds project is a completed development in central Moscow consisting of a residential building, fully let class A office centre and fully let retail and fitness zones. Four Winds is a modern class A office centre with lettable area of 21,495 sq.m. leased to well-known international tenants, such as Barclays Capital, Morgan Stanley and Total SA. The project was co-developed by AFI Development (50%) and Snegiri Development (50%). 

In December 2012, the Company disposed of its 50% of stake in Westec Four Winds Limited (along with its partner, Snegiri Development), which had developed and operated Four Winds. The deal was completed in January 2013 with total consideration received by the Company of circa US$103.4 million. The transaction also resulted in reduction of overall debt of AFI Development following the removal of the project loan by Nordea Bank from its consolidated balance sheet.  

Based on the disposal transaction, the fair value of the Company share in Four Winds (including the office building, retail/fitness zone and remaining unsold apartments and parking lots) as of 31 December 2012 was US$178.3 million.

OZERKOVSKAYA III:

Ozerkovskaya (Aquamarine) III is an office complex forming part of the "Aquamarine" mixed-use development, located on the Ozerkovskaya embankment in the very heart of the historical Zamoskvorechie district of Moscow. The project consists of four Class A buildings of 55,422 sq.m. of combined lettable space and common underground parking for 557 cars. The project creates very attractive working conditions through state-of-the-art architecture, innovative design and efficient use of space. Due to these characteristics "Aquamarine III" sets new standards for quality and an aspirational environment among Moscow's commercial developments. The project was designated as "Highly Commended Office Development Russia" by International Property Awards in 2012.  

In January 2013, the Company agreed to purchase the remaining 50% interest and to settle all outstanding liabilities from its joint venture partner, Super Passion Limited, for a total cash consideration of US$227.5 million (the transaction was completed in February 2013). As a result of the acquisition, the Company became the sole owner of the project.   

AFI Development is negotiating with potential buyers and tenants on selling/leasing the project either in full or in parts.  

Based on the independent valuation of the Company portfolio by Cushman & Wakefield as of 31 December 2012, the fair value of Ozerkovskaya III was US$389 million (for the 100% share).

PLAZA SPA HOTEL ZHELEZNOVODSK (FORMER KALININA HOTEL): 

The project involves the renovation of an existing building to a modern hotel with sanatorium facilities on a site of approximately 0.1 hectares with 134 guest rooms, of which 14% are suites. A spa area occupies approximately 1,100 sq.m., which includes 45 treatment rooms, saunas, jacuzzi, an indoor swimming pool and extensive medical and diagnostic facilities. 

During Q2 2012, the development of the Plaza Spa Hotel Zheleznovodsk was successfully completed and the hotel was put into operation in June 2012. During the first months of operation, the hotel experienced significant demand from customers and has already obtained positive feedback from its guests. Plaza Spa Hotel Zheleznovodsk is on track to establish itself as one of the leading hotels in its region. 

The project's value on the Company balance sheet was US$24.3 million as of 31 December 2012.

DEVELOPMENT PROJECTS

TVERSKAYA PROJECTS:

Following the non-binding agreement between AFI Development and the City of Moscow, the City is progressing with renewing and re-approving the Company's development rights and leasehold interests in land plots at the Plaza Ic (part of Plaza I), Plaza IIa and Plaza IV projects. In Q2 2012, the Company reclassified Tverskaya Plaza Ib and Tverskaya Plaza II from "investment properties under development" to "investment properties". This was also reflected in a change of valuation approach, implemented by the independent appraiser (Jones Lang LaSalle) by valuing the assets as yielding properties, rather than as development projects.  

Plaza Ic

The project is a class A office complex with a Gross Building Area of 51,200 sq.m. (including underground parking of approximately 519 parking spaces) located at 50/2, 2nd Brestskaya street. The estimated gross lettable area is expected to amount to 32,454 sq.m. One key attraction of this project is the excellent access both by public and private transport, and its location in a well-developed and established business district.  

The Company is progressing with planning works and approval of the project with City authorities. The registration of the 10 year land lease for construction in November 2012 represents a significant milestone in the development process.  

Plaza Ic is the most advanced among the three Tverskaya Zastava projects, which were part of the non-binding agreement with the Moscow authorities in November 2012.  

Based on the independent valuation of the Company portfolio by Cushman & Wakefield as of 31 December 2012, the fair value of Plaza Ic was US$106.6 million.  

Plaza IIa

The project is class A office complex with a Gross Building Area of 10,500 sq.m (including underground parking), located at 1, Butyrsky Val. The estimated gross lettable area is 7,600 sq.m. The project is located on the land plot facing the Belorussky railway station on the opposite side of the Tverskaya Zastava Square.  

Following the review of general transportation scheme of the Tverskaya Zastava Square, the exact borders of the land plot of Tverskaya IIa have to be aligned with the new transportation scheme, which is currently being developed by the Moscow authorities. 

Based on the independent valuation of the Company portfolio by Cushman & Wakefield as of 31 December 2012, the fair value of Plaza IIa was US$32 million.

Plaza IV

The project is a class A office complex with supporting ground level retail zones, having a Gross Building Area of 108,000 sq.m. (including underground parking), located at 11, Gruzinsky Val. The estimated gross lettable area is 61,350 sq.m. Plaza IV is the largest of the three Tverskaya Zastava projects.  

According to the non-binding agreement with the Moscow authorities of November 2011, in order to receive the land plot master plan ("GPZU") for Plaza IV, the Company has to waive its ownership to seven land plots with a total area of 2,145 sq.m. The Company is in discussions with the city regarding the technicalities of waiving its rights to the land plots while trying to secure its development rights in line with the agreement.  

Based on the independent valuation of the Company portfolio by Cushman & Wakefield as of 31 December 2012, the fair value of Plaza IV was US$168 million

KOSSINSKAYA:

Kossinskaya project is planned as a mixed-use complex with a unique concept for accommodation of small DIY shops and offices (architecture and engineering bureaus etc.). The immediate proximity to a dense residential area and convenient access to the main motorways and metro station make this project attractive to retailers and convenient for office employees. Active construction of residential properties in the Southeast region of Moscow region creates significant regional demand for quality construction services and products. 

Following the decision of the Russian Parliament to extend the borders of Moscow to the South-West in June 2012 and the gradual move of development interest to the Western parts of Moscow, the Company had to re-visit the development concept of the project to sustain its competitiveness and to build a property of higher quality. As a result, the fair value of the project was reduced from US$146.1 million in December 2011 to US$102.7 million in December 2012. 

The Company is now performing capital repair works on the property. The works entail the installation of additional lifts, escalators, construction of additional ventilation shafts and an increase in common space, which makes the property more attractive for customers. However, it results in a reduction of the gross leasable area and higher projected costs.  

Based on the independent valuation of the Company portfolio by Cushman & Wakefield as of 31 December 2012, the fair value of Kossinskaya was US$102.7 million.

OTRADNOE (ODINTSOVO):  

The Otradnoe residential district is located in the town of Odintsovo, a modern area considered to be one of the best and most environmentally clean towns in the Moscow region. The entire residential district takes up an area of 33.14 hectares, which will host eight 8-to-25 story buildings. The residential element will offer almost 9,000 Economy-Plus class apartments and a total sellable area of 450,208 sq.m. (Company share). The development of the residential district will include multi-functional infrastructure comprising of 2 schools, 2 kindergartens, a medical centre, a library equipped with a computer lab, sport centres, a beauty salon, a club for teenagers, and a children's sport school amongst other facilities.  

According to the development strategy, the project involves a construction of a multi-storey residential micro district consisting of two phases:

• Phase I - construction of a 22-section residential building, named Korona (Crown), construction of infrastructure (Kindergarten, School) with total sellable area of 149,432 sq.m. (2,620 apartments);

• Phase II - construction of 8 residential buildings, construction of infrastructure (Kindergarten, school, outdoor multi-level parking) with total sellable area of 319,775 sq.m. (6,247 apartments):

Each phase includes commercial premises on the ground floor that are planned to be disposed to end users. 

The design of the "Otradnoe" micro district has been approved by the government of the Moscow region. During 2012, the Company received approval for the design documentation and the construction permit for phase I which is valid until May 30 2017.  

Since the project involves significant amounts of space to be offered to the market, the construction of Phase I is planned to be carried out in four stages. The Company is planning to start the construction of the first stage of Phase I in Q2 2013. 

The Company is planning to finance the construction partially through a bank loan. The negotiations with potential financing banks are in process. 

The balance sheet value of the project as of 31 December 2012 amounted to US$112 million.

BOLSHAYA POCHTOVAYA: 

Bolshaya Pochtovaya is a mixed-use project with dominant residential use and a total gross building space of 170,350 sq.m. on a land area of 5.65 hectares. The future development is located in the Central Administrative district of Moscow. The land plot borders a river which will significantly enhance the views from the project. The project is located in an attractive neighbourhood, which benefits from developed social infrastructure: transport, shops and cultural/leisure amenities.  

During the second quarter of 2012, the Moscow architectural authorities had a series of internal discussions relating to the new master-planning policy in the area of Bolshaya Pochtovaya. The Company initiated discussions with the authorities to influence the decision relating to the planned construction density for the project, however, the city indicated that the construction density of the project should be reduced. The development permitting documentation, obtained by the Company as a result of the policy change (the decision of the town-planning land committee "GZK" and the land plot master-plan "GPZU") in respect to the property, anticipates the development of a total gross building area of 170,350 sq.m., including 67,800 sq.m of residential area, 39,150 sq.m of commercial area and 62,200 sq.m. of underground area.  

The Company is currently working on the design and planning of the project as well as on securing the land lease for construction in accordance with the new permitting documentation.  

Based on the independent valuation of the Company portfolio by Cushman & Wakefield as of 31 December 2012, the fair value of Bolshaya Pochtovaya was US$141.3 million.

PAVELETSKAYA PHASE II:

Paveletskaya Phase II is planned as an ultramodern residential complex in proximity to the Moscow city centre on Paveletskaya Embankment, with the total gross building area of 151,373 sq.m. The project is located in Danilovsky Subdistrict (the South Administrative district of Moscow), between the Garden ring and the Third Transportation Ring and can be easily accessed by private or public transport.

During the second half of 2012, the Company obtained permitting documentation for the project, namely the decision of the town-planning land committee ("GZK") and the land plot master-plan ("GPZU") with new parameters for future development. The gross building area of the project is 151,373 sq.m, including 61,401 sq.m of residential area, circa 15,000 sq.m. of commercial area and 57,310 sq.m. of underground space. 

During the course of 2012, the Company made significant progress in further securing the development rights for this project and is currently working on obtaining a land lease agreement for construction in accordance with the development plan.  

The balance sheet value of the project as of 31 December 2012 amounts to US$11.6 million, which is based on the project's cadastral value and it is now classified as Investment Property under Development.

LAND BANK

In addition to yielding assets and projects under development, AFI Development has an extensive land bank, or projects that the Company is currently not developing.

Whilst retaining full flexibility regarding future development of these projects, the Company remains well placed to benefit from further recovery in the regional real estate markets. Given its strong track record in bringing projects to completion, this represents a significant competitive advantage for AFI Development. 

The Company's strategy with respect to its land bank is to activate projects upon securing necessary financing and gaining full confidence in the levels of demand from prospective tenants or buyers.

Key Events Subsequent to 31 December 2012

Following the year-end the following key events occurred:

·; In January 2013, AFI Development entered into an agreement to purchase the remaining 50% interest and to settle all outstanding liabilities of AFI Development to its partner in Krown Investments LLC (the holding company with the rights to the Ozerkovskaya project) from its joint venture partner, Super Passion Limited, for a total cash consideration of US$230 million. The transaction was completed in February 2013, when AFI Development exercised its right under the agreement with Super Passion Limited to pay the consideration ahead of agreed schedule of payments applying a discount. Total consideration paid in this transaction was US$227.5 million. Following the transaction completion, the Company became the sole owner of the Ozerkovskaya project.

·; On 28 January 2013, the Company's subsidiary Krown Investments Ltd signed a loan facility agreement with JSC VTB Bank to refinance its construction costs related to the development of Ozerkovskaya III, which were initially financed by intra-group loans provided by companies within the AFI Development group. The new loan facility offers a credit line totalling US$220 million and carries an annual interest rate of 3 months LIBOR + 5.7%. The credit line can be drawn down in US Dollars in two tranches: the first tranche of US$150 million can be drawn down within 14 days from execution of the loan facility agreement, while the second tranche of US$70 million can be drawn down between 1 March 2013 and 14 March 2013. Both tranches of the loan were drawn down in February and March 2013.

·; As a result of negotiations with the Moscow city authorities, the Company's development rights to the project were recognized through an addendum to the investment contract for the Botanic Garden project dated 4 February 2013. According to this addendum, NKM shall not have any claims to the investments made by AFI Development in the Botanic Garden project and its subsidiary, OOO "Nordservice", became the only investor under the investment contract. After thorough assessment of risks to the Company's development rights in respect of the project, AFI Development agreed to make payments to the City of Moscow under the addendum to the investment contract in return for additional development rights. The total aggregate amount of the payments for additional development rights is approximately US$18.5 million, which will be paid in several instalments. It should be noted that the provision to write-off the Botanic Garden (made in August 2012) was not cancelled at this stage, due to remaining legal risks related to the on-going bankruptcy proceedings of NKM.

Disposals and Acquisitions

During 2012 the Company made the following disposals:

In March 2012, the Company disposed of its subsidiary Roppler Engineering Inc. and its Russian subsidiary Tsentr Dosuga Molodezhi LLC, which were part of the "Kuntsevo" project, for nominal value, to unrelated third party. The disposal was driven by cost cutting considerations, as the Russian subsidiary was party to an expensive lease contract of a building in the "Kuntsevo" area of Moscow. Following the decision of the Moscow government dated 20 September, 2011 to cancel the reconstruction programme of the transportation hub near the "Kuntsevskaya" metro station, the Company did not see further possibilities to secure any development rights to the disposed subsidiaries.

In March 2012, the Company completed the disposal of the "Ozerkovskaya Phase IV" project for a total consideration of US$6 million. The project, consisting of a freehold title to an office building with a total area of 1,864.3 sq.m. and leasehold rights to underlying land plot, located at 3, Ozerkovsky Lane, Moscow, had a book value of US$3.16 million as at the date of disposal.

In December 2012, the Company disposed of its 50% interest in the subsidiary Westec Four Winds Limited ("Westec") to an unrelated third party, Capricornus Investments Limited. Westec has developed and is currently operating the Four Winds office and residential project in Moscow. The Four Winds Project was co-developed by AFI Development and S&T Equity (Overseas) Limited (of the "Snegiri Development" Group), with each holding a 50% stake in Westec. Both AFI Development and S&T Equity (Overseas) Limited agreed to dispose of their respective shares in Westec to Capricornus Investments Limited. The transaction was successfully completed on 16 January 2013. The total consideration received by the Company was US$103.4 million.

During 2012, the Company did not make any acquisitions.

The following acquisition was made after the end of financial year 2012:

In January 2013, AFI Development entered into an agreement to purchase the remaining 50% interest and to settle all outstanding liabilities of AFI Development to its partner in Krown Investments LLC (the holding company with the rights to the Ozerkovskaya project) from its joint venture partner, Super Passion Limited, for a total cash consideration of US$227.5 million.

Presentation of Financial Information

Our consolidated financial statements were prepared in accordance with International Financial Reporting Standards ("IFRS"), as adopted by the European Union ("EU"), which were in effect at the time of preparing our consolidated financial statements, and the requirements of the Companies Law of Cyprus, Cap. 113. IFRS differs in various material respects from US GAAP and UK GAAP.

Financial policies and practices

Revenue Recognition

The key elements of our revenue recognition policies are as follows:

·; Rental income. We recognise rental income from investment properties leased out under operating leases in our statement of comprehensive income on a straight line basis over the term of the lease.

·; Construction consulting and construction management fees. We recognise revenues from construction consulting and construction management services in our statement of comprehensive income, in proportion to the stage of the project as at the relevant reporting date. We assess the stage of completion by reference to the amount of work performed.

·; Sales of trading properties. We recognise revenue from the sale of trading properties in our statement of comprehensive income when the risks and rewards of ownership of the property are transferred to the buyer. When we receive down payments in connection with the sale of trading property that is under construction, we record this figure in the current liabilities on our balance sheet at the time of sale.

Operating expenses

Operating expenses consist mainly of employee wages, social benefits and property operating expenses, including property tax, which are directly attributable to revenues. We recognise as expenses in our statement of comprehensive income the costs of those employees who have provided construction consulting and construction management services with respect to our investment and trading property. We also recognise property operating costs (including outsourced building maintenance), utilities, security and other tenant services related to our properties that generate rental income, as expenses on our statement of comprehensive income.

Administrative expenses

Our administrative expenses comprise primarily of general and administrative expenses such as, audit and consulting, marketing costs, charity, travelling and entertainment, office equipment as well as depreciation expenses related to our office use motor vehicles, bad debt provisions and other provisions.

Profit on disposal of investment in subsidiaries

We recognise profit or loss from the sale of interests in our subsidiaries when the risks and rewards of ownership are transferred to the buyer in the transaction.

Revaluation of investment property

An external, independent valuation company, having appropriate recognised professional qualifications and recent experience in the location and categories of properties being valued, values the Company's investment property portfolio every six months. The fair values are based on market values, being the estimated amount for which a property could be exchanged on the date of the valuation in a transaction between a willing buyer and a willing seller after proper marketing, wherein the parties had each acted knowledgeably, prudently and without compulsion. The difference between revalued fair value of investment property and its book value is recognised as gain or loss in the statement of comprehensive income.

Operating profit before net finance costs

Operating profit before net finance costs is calculated by adding revenue, other income, profit on disposal of investment in subsidiaries and valuation gains on investment property, and subtracting operating expenses, administrative expenses and other expenses.

Finance income

Our finance income comprises net foreign exchange gain, if any, and interest income. We recognise foreign exchange gains and losses, principally in connection with US Dollar or other foreign currency denominated payables and receivables of our Russian subsidiaries, whose functional currency is the Rouble. Our interest income is derived primarily from interest on our bank deposits and interest on loans to our joint ventures, including Crown Investments LLC.

Finance expenses

Our finance expense comprises net foreign exchange loss, if any, and interest expense on outstanding loans less interest capitalised. We recognise foreign exchange gains and losses principally in connection with US Dollar denominated payables and receivables of our Russian subsidiaries, whose functional currency is the Rouble. We capitalise our interest expense with respect to our development projects that are under construction, for which amounts are not reflected as expenses in our statement of comprehensive income. When funds are borrowed specifically for a particular project, we capitalize all actual borrowing costs related to the project less income earned on the temporary investment of such borrowings and when funding for a project is obtained from our general funds, we capitalise only funding costs related to the particular project based on the weighted average of the borrowing costs applicable to our general funds.

Income tax expense

Income taxes are calculated based on tax legislation applicable to the country of residence of each of our subsidiaries and, as a company based and organised in Cyprus, we are subject to income tax in Cyprus. We and our Cypriot subsidiaries are currently subject to a statutory corporate income tax rate of 10% in Cyprus. Our Russian subsidiaries were subject to corporate income tax at a rate of 20%. Profits on revaluation gains of investment property in companies based in Russia, from which we have derived the vast majority of our profits to date, are subject to deferred income tax at a rate of 20%.

Capitalisation of Costs for Properties under Development 

We capitalise all costs directly related to the purchase and construction of properties being developed as both investment properties and trading properties, including costs to acquire land rights and premises, design costs, permit costs, costs of general contractors, costs relating to the lease of the underlying land and the majority of our employee costs related to such projects.

In addition, we capitalise financing costs related to development projects only during the period of construction of the projects. We do not, however, commence the capitalising of financing costs related to expenditures on a project until construction on each project begins. Since the Company's adoption of IAS 40 from 1 January 2009, upon completion of construction works, property classified as investment property under development (which are those properties that are being constructed or developed for future use to earn rental income or for capital appreciation) is appraised to market value and reclassified as an investment property and any gain or loss on appraisal is recognised in our statement of comprehensive income. Trading properties, which include those projects where we intend to sell the entire project as a whole or in part (this principally includes our residential development projects), are represented on our balance sheet at the lower of cost and net realizable value, which is the estimated selling price in the ordinary course of business, less the estimated costs of completion and sale.

Exchange Rates

Our consolidated financial statements are presented in US Dollars, which is our functional currency. The functional currency of our Russian subsidiaries and joint ventures and one Cyprus company is the Rouble. The balance sheets of our Russian subsidiaries are translated into US Dollars in accordance with IAS 21, whereby assets and liabilities are translated into US Dollars at the rate of exchange prevailing at the balance sheet date and income and expense items are translated into US Dollars at the average exchange rate for the period. All resulting foreign currency exchange rate differences are recognised directly in our shareholders' equity under the line item "translation reserve." When a foreign operation is sold, the cumulative amount of the exchange differences deferred in the separate component of equity relating to that foreign operation is recognised in our statement of comprehensive income when the gain or loss on disposal of the foreign operation is recognised. The monetary assets and liabilities of our Russian subsidiaries that are denominated in currencies other than Roubles are initially recorded by our subsidiaries at the exchange rate between the Rouble and such foreign currency prevailing at such date. Such monetary assets and liabilities are then retranslated into Roubles at the exchange rate prevailing at each subsequent balance sheet date. We recognise the resulting exchange rate differences between the dates at which such assets or liabilities were originally recorded and at subsequent balance sheet dates as foreign exchange losses and gains in our statement of comprehensive income. In particular, during the period under review, we have recognised foreign exchange rate gains and losses in connection with US Dollar denominated payables and receivables of our Russian subsidiaries.

Recovery of VAT

We pay VAT to the Russian authorities with respect to construction costs and expenses incurred in connection with our projects, which, according to Russian tax law, can be recovered upon completion of construction. Under a revised Russian VAT legislation, VAT can also be claimed during the period of construction provided that all required documentation is presented to the VAT authorities. We have accordingly included recoverable VAT as an asset on our balance sheet, the size of which we expect will slightly decrease as the development of our projects advances and necessary documents will be obtained. 

Deferred Taxation

As we continue to advance the development of our projects, we also expect to record higher deferred tax liabilities and assets. Under Russian tax law, we are not allowed to capitalise certain of the costs in relation to the design, construction and financing of projects that we capitalise for the purposes of our consolidated financial statements under IFRS. As a result, our tax bases in the related assets may be lower than our accounting bases for IFRS purposes, which would result in deferred tax liabilities. However, the recognition of such costs as expenses may result in accumulated tax losses for Russian tax purposes that we may be able to carry forward against estimated future profits, resulting in deferred tax assets. We expect these deferred tax liabilities and assets to grow as our major projects reach more advanced stages. However, such tax losses may only be carried forward to offset gains for a ten-year period under Russian tax law and they may only be utilised in the Russian subsidiary/branch in which such tax losses were generated.

Fair Value Calculation  

Our future results of operations may be affected by our measurement of the fair value of our investment properties and changes in the fair value of such properties. Upon completion of construction, the projects that we have classified as investment property under development are reassessed at fair value and reclassified as investment property, and any gain or loss as a result of reassessment is recognised in our statement of comprehensive income.

Any change in fair value of the investment property under development is thereafter recognised as a gain or loss in the statement of comprehensive income. Accordingly, fair value measurements of investment properties under development may significantly affect results of operations even if the Company does not dispose of such assets.

Results of Operations

Description of Statement of comprehensive income Line Items

Summary of statement of comprehensive income for 2012 and 2011

Revenue - General Overview

To date, we have derived revenues from three sources: rental income, sale of investment property, sale of residential properties and construction consulting and construction management fees.

Rental income

We derive rental income from our investment properties and hotels that we acquired or developed in the past.

Sale of residential properties

Operating expenses. Our operating expenses increased with a net change of US$2.3 million from US$72.1 million in 2011 to US$74.4 million in 2012. The increase of 3.2% year-on-year is attributable to overall market inflation of expenses.

Administrative expenses. Our administrative expenses decreased by US$10.5 million, 34.7% year-on-year, from US$30.3 million in 2011 to US$19.8 million in 2012. The decrease was achieved by significant improvement in rent collections at AFIMALL City and other yielding assets, which resulted in decreased bad debt provision. The bad debt provision for 2012 was US$3.6 million compared to US$13.3 million in 2011.

Other expenses.Other expenses increased by US$1.0 million, or 43.4% year-on-year, from US$2.3 million in 2011 to US$3.3 million in 2012 mainly due to write-off of overdue non-recoverable VAT and accounts receivable, which were not accounted for in previous periods.

Net valuation gain/(losses) on investment property. Net result of investment property valuation decreased from a gain of US$268.0 million in 2011 to a loss of US$246.1 million in 2012. For additional information, please refer to "Portfolio Valuation".

Net finance costs. Net finance costs are finance income less finance expense. Our net finance costs decreased by US$6.8 million, or 16.3% year-on-year, from US$40.7 million in 2011 to US$34.0 million in 2012. On one hand, our finance expenses increased in respect of interests accrued on outstanding loans (new loan facility drown down by Bellgate Constructions Limited), however on the other hand this loan gave us a foreign exchange gain for 2012 due to Rouble appreciation in Q2 2012.

Income tax expense. Our current tax expense decreased to US$5.3 million compared to US$13.6 million in 2011 - the main driver for decreased current tax expenses was group financing restructuring completed in 2012.

Profit/Loss for the year. Due to the factors described above we recorded a US$275.5 million net loss for 2012 compared to net profit of US$171.5 million for 2011.

Liquidity and Capital Resources

Cash flows

Summary of cash flows for 2012 and 2011

Net cash from operating activities

Net cash from operating activities increased to US$58 million in 2012 from US$27.8 million in 2011. This increase was primarily attributable to the increase of gross profit to US$59.2 for 2012 from US$19.6 million for 2011.

Net cash from investing activities

Net cash from investing activities amounted to US$78.4 million reflecting the advance payment US$100.0 million for disposal of our share in Westec Four Winds Limited. Additionally, a part of the investment activities cash outflows were ongoing investments into Ozerkovskaya III and construction of parking at AFIMALL City.

Net cash used in financing activities

Net cash sourced from financing activities decreased to negative US$36.7 million in 2012 from positive US$118.2 million in 2011. The Company decreased its net borrowings to US$22.1 million in 2012 as opposed to US$179.0 million upturn in 2011. The prevailing part of debt decrease relates to the repayment of loan from JSC VTB Bank for 25% city share acquisition at AFIMALL City project RUR1,333 million principal plus RUR 7.9 million interest. All necessary funds for the AFIMALL Parking acquisition and construction works financing have been provided for in the new loan facility provided by the VTB Group. The remainder relates to repayment in full of loans taken from Sberbank to finance construction of Ozerkovskaya III and Tverskaya Zastava Shopping Centre project.

Capital Resources

Capital Requirements

We require capital to finance capital expenditures, consisting of cash outlays for capital investments in active real estate development projects; repayment of debt; changes in working capital; and general corporate activities. 

Real estate development is a capital-intensive business, and we expect to have significant ongoing liquidity and capital requirements in order to finance our active development projects.

For the foreseeable future, we expect that we will continue to rely on our financing activities to support our investing and operating activities. We also expect that our capital expenditures in connection with the development of real estate properties will comprise the majority of our cash outflows for the foreseeable future.

We completed 2012 with a strong liquidity position comprising US$178.2 million cash and cash equivalents on our balance sheet as at 31 December 2012.

Our financing strategy is to balance the amount of debt financing for projects under construction while maintaining healthy loan-to-value levels. After delivery and commissioning, we refinance the properties at more favourable terms including longer amortisation periods and lower interest rates.

Generally, the collateral for this project level debt are property title and shares of property holding companies.

As of December 31, 2012 our debt portfolio was as follows:

The total balance of Debt financing reached US$555.9 million as at 31 of December 2012, including US$ 555.7 million for the Principal Debt and US$ 0.2 million for Accrued Interest with Average Interest Rate 8.07% per annum as at 31.12.2012 (10.67% respectively as at 31.12.2011) (for more details see notes 23 and 24 to our consolidated financial statements). 

As at 31 December 2012, our loans and borrowings were payable as follows:

Portfolio Valuation

As at 31 December 2012, based on Cushman & Wakefield LLC ("C&W") independent appraisers' report, the value of portfolio of investment property stood at US$1.5 billion and our portfolio of investment property under development - at US$0.7 billion. Additionally, C&W estimated the value of Four Winds office and retail projects as US$176.5 million (50% AFI Development share).

Consequently, the total value of Company assets, based mostly on independent valuation, as of 31 December 2012, was US$2.5 billion. This figure represents an 8% decrease in the value of portfolio compared to the balance value for 31 December 2011.

Major drivers of the portfolio revaluation were the following:

1. Significant decrease in value:

Tverskaya Plazas

In Q2 2012, the Company reclassified Tverskaya Plaza Ib and Tverskaya Plaza II from "investment properties under development" to "investment properties". This was also reflected in the change of valuation approach, implemented by the independent appraiser (Jones Lang LaSalle) by valuing the assets as yielding properties, rather than as development projects. As a result, the value of these two projects decreased by US$59 million during Q2 2012. Based on valuation as of 31 December 2012, the fair value of Tverskaya Plaza Ib was US$10.0 million and the fair value of Tverskaya Plaza IIwas US$30.6

Kossinskaya

Following the decision of the Russian Parliament to extend the borders of Moscow to the South-West and the gradual move of development interest to the Western parts of Moscow, the Company had to re-visit development concept of the project to sustain its competitiveness and to build a property of higher quality.

The capital repairs concept envisages installation of additional lifts, construction of additional ventilation shafts and an increase in communal space, resulting in a reduction of the gross leasable area and higher projected costs. While the independent appraiser, Jones Lang LaSalle, assumed the same level in rental income as in previous valuations, the value of Kossinskaya decreased from US$152.6 million as at 31 March 2012 to US$ 102.3 million as at 30 June 2012. Based on valuation as of 31 December 2012, the fair value of Kosinskaya was US$102.7 million.

Bolshaya Pochtovaya

During the second quarter of 2012, the Moscow architectural authorities had a series of internal discussions relating to the new master-planning policy in the area of Bolshaya Pochtovaya. AFI Development initiated discussions with the authorities to influence the decision relating to the planned construction density for the project, while the city indicated that the construction density of the project would be reduced.

Based on the new projected gross buildable area of the project, the independent appraiser, Jones Lang LaSalle, decreased the project value from US$ 213.6 million as at 31 March 2012 to US$ 140.5 million as at 30 June 2012. Based on valuation as of 31 December 2012, the fair value of Bolshaya Pochtovaya was US$141.3 million.

2. Significant write-off:

Botanic Garden

Having consulted its legal advisers, AFI Development took the decision to write-off its Botanic Garden project in Q2 2012, which resulted in the impairment loss on inventory of real estate. A subsidiary of the Company, Nordservice LLC, is a "co-investor" in the project together with a company fully owned by the City of Moscow (Novoe Koltso Moskvy OJSC), which is the main investor and beneficiary of land lease rights for the 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 arrested for the benefit of the same creditor. AFI Development has concluded, based on the opinion of its legal advisers, that the 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. Notwithstanding this, AFI Development continues its efforts to recover its costs and/or receive the development rights to the project.

Principal Risks and Uncertainties Affecting the Company

This section presents information about the Company's exposure to each of the risks listed below, the Group's objectives, policies and processes for measuring and managing risks.

Risk management framework

The Board of Directors has overall responsibility for the establishment and oversight of the Company's risk management framework and is responsible for developing and monitoring the Company's risk management policies.

The Company's risk management policies are established to identify and analyse the risks faced by the Company, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Company's activities. The Company, through its training and management standards and procedures, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations.

The Company's Audit Committee overseas how management monitors compliance with the Company's risk management policies and procedures, and reviews the adequacy of the risk management framework in relation to the risks faced by the Group. The Company's Audit Committee is assisted in its oversight role by Internal Audit. Internal Audit undertakes both regular and ad hoc reviews of risk management controls and procedures, the results of which are reported to the Audit Committee and the whole Board of Directors. The Board of Directors requests the management to take corrective actions as necessary and make follow up reports to the Audit Committee and to the Board on addressing deficiencies found.

Credit risk

Credit risk is the risk of financial loss to AFI Development if a customer or counterparty to a financial instrument fails to meet its contractual obligations and arises principally from the Company's receivables from customers and investment securities.

Trade and other receivables

Financial assets that are potentially subject to credit risk consist principally of trade and other receivables. The carrying amount of trade and other receivables represents the maximum amount exposed to credit risk. Credit risk arises from cash and cash equivalents as well as credit exposures with respect to rental customers, including outstanding receivables. The Company has policies in place to ensure that, where possible, rental contracts are made with customers with an appropriate credit history. Cash transactions are limited to high-credit-quality financial institutions. The utilisation of credit limits is regularly monitored.

AFI Development has no other significant concentrations of credit risk. Although collection of receivables could be influenced by economic factors, the management team believes that there is no significant risk of loss to the Company.

Investments

The Company limits its exposure to credit risk by investing only in liquid securities and only with counterparties that have a high credit rating. Management actively monitors credit ratings and given that the Group only has invested in securities with high credit ratings, management does not expect any existing counterparty to fail to meet its obligations, except as disclosed in note 29 to the Company's Audited Financial Statements for year 2012.

Guarantees

The Company's policy is to provide financial guarantees only to wholly-owned subsidiaries in exceptional cases. In negotiations with lending banks the Company is aiming to avoid recourse to AFI Development on loans taken by subsidiaries. As at 31 December 2012, there were three outstanding guarantees: one of AFI Development Plc for the amount of US$1 million in favour of a bank of the VTB Group under a loan facility agreement of Bellgate Construction Limited and two solidary guarantees by Stroyinkom-K LLC and AFI RUS LLC. for the amount of RUR606.77 million (circa US$19.98 million) under a loan facility agreement of Eitan-K LLC. As at 31 December 2011, there was one guarantee outstanding under two separate non-revolving credit lines from JSC VTB Bank for a total value of RUR 13.448 billion.

Liquidity risk

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. AFI Development's approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Company's reputation. Prudent liquidity risk management implies maintaining sufficient cash, the availability of funding through an adequate amount of committed credit facilities and the ability to close out market positions. Due to the dynamic nature of the underlying businesses, the Company aims to maintain flexibility in its funding requirements by keeping cash and committed credit lines available.

AFI Development's liquidity position is monitored on a daily basis by the management, which takes necessary actions if required. The Company structures its assets and liabilities in such a way that liquidity risk is minimised.

Market risk

Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect the Company's income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the available returns for shareholders. We are exposed to market risks from changes in both foreign currency exchange rates and interest rates. We do not use financial instruments, such as foreign exchange forward contracts, foreign currency options and forward rate agreements, to manage these market risks. To date, we have not utilised any derivative or other financial instruments for trading purposes.

Interest rate risk

We are subject to market risk deriving from changes in interest rates, which may affect the cost of our current floating rate indebtedness and future financing. As of 31 December 2012, 44% of our financial liabilities were fixed rate. For more detail see note 30 to our consolidated financial statements.

Currency risk

The Company is exposed to currency risk on future commercial transactions, recognised monetary assets and liabilities and net investments in foreign operations that are denominated in a currency other than the respective functional currencies of AFI Development's entities, primarily the US Dollar and Russian Rouble.

Operational risk

Operational risk is the risk of direct or indirect loss arising from a wide variety of causes associated with the Company's processes, personnel, technology and infrastructure, and from external factors other than credit, market and liquidity risks such as those arising from legal and regulatory requirements and generally accepted standards of corporate behaviour. Operational risks arise from all of the Group's operations.

The Company's objective is to manage operational risk so as to balance the need to avoid financial losses and damage to the Group's reputation with overall cost effectiveness.

The primary responsibility for the development and implementation of controls to address operational risk is assigned to senior management within each business unit. This responsibility is supported by the development of overall Company standards for the management of operational risk. Compliance with Company standards is supported by a programme of periodic reviews undertaken by way of internal audits. The results of the internal audit reviews are discussed with the management of the business unit to which they relate, with summaries submitted to the Audit Committee and senior management of the Company.

Critical Accounting Policies

Critical accounting policies are those policies that require the application of our management's most challenging, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Critical accounting policies involve judgments and uncertainties that are sufficiently sensitive to result in materially different results under different assumptions and conditions. We believe that our most critical accounting policies are those described below.

A detailed description of certain of the main accounting policies we use in preparing our consolidated financial statements is set forth in note 3 to our consolidated financial statements.

Estimates regarding fair value

We make estimates and assumptions regarding the fair value of our investment properties that have a significant risk of causing a material adjustment to the amounts of assets and liabilities on our balance sheet. In particular, our investment properties under development (which currently comprise the majority of our projects) are remeasured at fair value upon completion of construction and the gain or loss on remeasurement is recognised in our income statement, as appropriate. In forming an opinion on fair value, we consider information from a variety of sources including, among others, the current prices in an active market, third party valuations and internal management estimates.

The principal assumptions underlying our estimates of fair value are those related to the receipt of contractual rentals, expected future market rentals, void/vacancy periods, maintenance requirements and discount rates that we deem appropriate. We regularly compare these valuations to our actual market yield data and actual transactions and those reported by the market. We determine expected future market rents on the basis of current market rents for similar properties in the same location and condition.

Impairment of financial assets

We recognise impairment losses with respect to financial assets, including loans receivable and trade and other receivables, in our income statement if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset. We test significant financial assets for impairment on an individual basis and assess our remaining financial assets collectively in groups that share similar credit characteristics. Impairment losses with respect to financial assets are calculated as the difference between the asset's carrying amount and the present value of the estimated future cash flows of the asset discounted at the original effective interest rate of that asset.

Estimating the discounted present value of the estimated future cash flows of a financial asset is inherently uncertain and requires us both to make an estimate of the expected future cash flows from the asset and also to choose a suitable discount rate in order to calculate the present value of those cash flows. Changes in one or more of these estimates can lead us to either recognizing or avoiding impairment charges

Impairment of non-financial assets

We recognise impairment loss with respect to non-financial assets, including investment property under development and trading properties under construction, if the carrying amount of the asset exceeds its recoverable amount. The recoverable amount of an asset is the greater of its value in use and its fair value less costs to sell. In assessing value in use, we discount estimated future cash flows of the asset to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. The carrying amounts of impaired non-financial assets are reduced to their estimated recoverable amount either directly or through the use of an allowance account and we include the amount of such loss in our income statement for the period.

We assess at each reporting date whether there is any indication that a non-financial asset may be impaired. If any such indication exists, we then estimate the recoverable amount of the asset. Estimating the value in use requires us to make an estimate of the expected future cash flows from the asset and also to choose a suitable discount rate in order to calculate the present value of those cash flows. The development of the value in use amount requires us to estimate the life of the asset, its expected cash flows over that life and the appropriate discount rate, which is primarily based on our weighted average cost of capital, itself subject to additional estimates and assumptions. Changes in one or all of these assumptions can lead to us either recognizing or avoiding impairment charges

Deferred income taxes

We are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves a jurisdiction-by-jurisdiction estimation of actual current tax exposure and the assessment of the temporary differences resulting from differing treatment of items, such as capitalization of expenses, among others, for tax and financial reporting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must assess, in the course of our tax planning process, our ability and the ability of our subsidiaries to obtain the benefit of deferred tax assets based on expected future taxable profit and available tax planning strategies. If, in our management's judgment, the deferred tax assets recorded will not be recovered, a valuation allowance is recorded to reduce the deferred tax asset.

Significant management judgment is required in determining our provision for income taxes, deferred tax assets, deferred tax liabilities and valuation allowances to reflect the potential inability to fully recover deferred tax assets. In our consolidated financial statements the analysis is based on the estimates of taxable income in the jurisdictions in which we operate and the period over which the deferred tax assets and liabilities will be recoverable.

If actual results differ from these estimates, or we adjust these estimates in future periods, we may need to establish an additional valuation allowance which could adversely affect our financial position and results of operations.

Share-based payment transactions

The fair value of employee stock options is measured using a binomial lattice model. The fair value of share appreciation rights is measured using the Black-Scholes formula. Measurement inputs include share price on the measurement date, exercise price of the instrument, expected volatility (based on weighted average historic volatility adjusted for changes expected due to publicly available information), weighted average expected life of the instruments (based on historic experience and general option holder behaviour), expected dividends and the risk-free interest rate (based on government bonds). Service and non-market performance conditions attached to the transactions are not taken into account in determining fair value.

Related Party transactions

There were no related party transactions in the financial year ended 31 December 2012 or in the period since 31 December 2012.

A. General - the projects the Group plans and constructs in CIS are mostly zoned for mixed uses and/or commercial use, while some also include residential units intended for sale. The following tables present the Group's projects including, among others, construction for residential purposes. During the fourth quarter of 2008, the Company decided to change its strategy in light of the economic situation. The Company is focusing on the construction and completion of a number of projects and it will decide on the construction of additional projects out of its inventory of projects based on the situation prevailing in the market. With respect to these projects, the Company will formulate a business plan including a forecast relating to the project budget and its completion date (and obviously relating to additional project components) when a decision to begin its construction is made. Therefore, the tables do not include any forecasts in connection with these projects.

It is noted that based on Russian law, upon completion of the construction of projects, the owner of the building (the construction of which was completed) is permitted to receive lease (including long-term lease), generally for 49 years, or ownership rights for the state or municipality-owned land on which the said building stands and that is needed for purposes of its use. In order to realize the ownership or lease right as stated, the owner of the building must submit a request to the relevant authority including the required documents, and within about one month from the submission date of the said request, the relevant authority will make a decision regarding provision of the lease or ownership rights.. It is noted that under the new long‑term lease agreement to be signed between the parties, the lessee of the land (who up until now had been merely the owner of the building) to pay the City lease fees (generally on a quarterly basis)[11]. Should the owner acquire ownership right to the land, it becomes payer of the land tax calculated based on the cadastral value of the land plots.

B. Set forth below are details in connection with the Company's projects in CIS, which include residential areas, the execution of which had not yet been started as at December 31, 2012:

C. Set forth below are details in connection with projects the Company has executed in CIS, which include residential areas, and which were completed as at December 31, 2012:

(1) As at the date of this statement, the Company's group has completed the projects "Four Winds II" and Ozerkovskaya Phase II. The Company's group has sold the majority of residential units in the both of the residential complexes.

(2) As at December 31, 2012, the Company's group holds (indirectly) all the rights in 2 residential units in "The Four Winds II" project and in 4 residential units in "Ozerkovskaya Phase II" project.

In its residential real estate development activities in Russia, the Group targets mainly private customers with a high socio‑economic background.

In this area of activities, the Group markets its projects through independent agents as well as by means of Company employees.

General Information regarding the Activity Segment

The Company's group plans, develops and constructs commercial properties held for rent. The group's revenues from its activities in the rental property area in Russia derive mainly from the development, re‑development and sale of commercial properties, alone or together with partners in joint ventures, as well as from rental of the group's rental properties. In addition, in the past the Company's group had insignificant revenues from management of projects not owned by it.

General Parameters Regarding the Russian Market:

Products and Services

The following tables present information in connection with the Group's projects included in its property portfolio. Certain information included in the tables includes estimates and forecasts relating to projects in the advanced stages of development, that is, the concept or design stages. Such information is "forward looking" information based on the existing data and facts in the Company's possession as of the date of this statement. It is hereby clarified that the estimates and forecasts in connection with each of the Group's projects may change in the future.

1. Summary of Aggregate Results of the Investment Properties Activity made by the group in the CIS (sums are in US dollars unless otherwise specified):

(a) Breakdown of the rental property areas based on regions and uses as at 31.12.12 (sq.m.)

 (b) Breakdown of the rental property areas based on regions and uses as at 31.12.11 (sq.m.)

(c) Breakdown of the rental property value based on regions and uses as at 31.12.12

(d) Breakdown of the rental property value based on regions and uses as at 31.12.11

(e) Breakdown of the group's yielding real estate in the CIS NOI based on regions and uses for the year ended 31.12.12

(f) Breakdown of the NOI based on regions and uses for the year ended 31.12.11

(g) Breakdown of the NOI based on regions and uses for the year ended 31.12.10

(h) Breakdown of the revaluation income (losses) based on regions and uses for the year ended 31.12.12

(i) Breakdown of the revaluation income (losses) based on regions and uses for the year ended 31.12.11

(j) Breakdown of the revaluation income (losses) based on regions and uses for the year ended 31.12.10

(k) Breakdown of the actual average rent per sq.m. per month/year in the functional currency

(l) Range of annual rent per square meter offices in USD

(m) Breakdown of the actual average rent per sq.m. with respect to contracts signed in the below period, in the functional currency, based on regions and uses

(n) Breakdown of the average occupancy rates

* Not Including newly introduced Ozerkovskaya III project

(o) Number of properties based on regions and uses

(p) Breakdown of the actual average rates of return (based on year-end value) for regions and uses

* Not Including newly introduced Ozerkovskaya III project

(q) Expected revenues in respect of signed rental agreements

2. Summary of aggregate assets designated for development of income yielding properties

(a) Investment projects under development

(b) Data on land of the company in the CIS designated for the construction of yielding property

3. Significant Investment Properties

4. Information Regarding a Very Substantial Investment Property - AFIMALL City

(a) Presentation of property:

(b) Significant Data: