AFRB.L Regulatory News (AFRB)

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18 March 2014

AFI DEVELOPMENT PLC

("AFI DEVELOPMENT" OR "THE COMPANY")PRELIMINARY STATEMENT OF RESULTS FOR THE YEAR ENDED 31 DECEMBER 2013Over US$100 million in net profit for 2013

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 2013.

Financial highlights:

· Revenues for 2013, including net proceeds from the sale of trading properties, up 61% year-on-year to US$202.3 million driven by higher rental income and the completion of sale of 643 parking spaces at AFIMALL City to VTB Bank JSC:

- Rental income and income from hotel operations increased by 24% year-on-year to US$144.7 million (compared to US$117.1 million for 2012)

- AFIMALL City contribution amounted to US$104.1 million (compared to US$81.4 million for 2012), 28% increase year-on-year

- Completion of the first phase of sale of 643 spaces at AFIMALL parking for US$54.5 million in Q2 2013

· Net profit for 2013 reached US$103.9 million versus net loss of US$275.5 million in 2012

· Gross profit for 2013 up by 29% year-on-year to US$76.3 million on stronger revenues, mainly attributed to AFIMALL City and sale of parking at the Mall

· Strong cash position with US$203.3 million in cash, cash equivalents and marketable securities as at 31 December 2013, compared to US$174.8 million as at 31 December 2012

- Increase in cash balance mainly attributed to sale of Building 1 at Aquamarine III

· Slight increase in Gross Asset Value to US$2.4 billion as at 31 December 2013 (compared to US$2.1 million as at 31 December 2012)

· Saving in interest expense of about US$5.0 million (annualised) resulting from more favourable terms on AFIMALL City loan

- Interest rate on the US Dollar portion of the AFIMALL City loan reduced from 3 months LIBOR+6.7% to 3 months LIBOR+5.02% in September 2013

Operational Highlights:

· Successful disposal of Building 1 at Aquamarine III to diamond miner Alrosa

· Construction at Odinburg launched and sales of apartments in the first phase initiated

· AFIMALL City retained its standing as one of Europe's leading retail developments throughout 2013

- NOI reached US$69 million, 43% increase compared to 2012

- Average daily footfall in December 2013 up 45% year-on-year

- New metro station "Delovoy Tsentr" completed and now open for public use, providing direct access to AFIMALL City

· A 6-year land lease agreement signed for further development and construction at Paveletskaya resulting in approximately US$81.0 million gross valuation gain

· Continued progress at Tverskaya Plaza Ic with design concept and pre-construction works finalised

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

"Our results for 2013 are largely marked by the successful disposal of completed property and the progress made in development projects. The sale of Building 1 in Aquamarine III to Russian diamond miner Alrosa was the result of a successful marketing strategy, while the start of construction and sales in Odinburg demonstrate our steady commitment to continue large scale urban projects. In addition, AFIMALL City, our key yielding project, showed a steady increase in footfall, supported by marketing initiatives and the opening of an additional metro station "Delovoy Tsentr" which provides direct access to The Mall.

We have had a strong start to 2014, and look ahead to the rest of the year with confidence. Despite a slowdown in Russia's overall economic growth during 2013, retail trade and the consumer market has recorded above average growth and we expect this to have a positive impact on footfall at AFIMALL City during 2014. We also look forward to progressing with our new developments and will continue to seek opportunities for AFI Development to increase its cash flow and to enhance its position in the Moscow real estate market".

FY 2013 Results Conference Call

AFI Development will hold a conference call for analysts and investors to discuss its full year 2013 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 NovakovShelly Chadda

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 of 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

Our results for 2013 are largely marked by the successful disposal of completed property and the progress made in development projects. The sale of Building 1 in Aquamarine III to Russian diamond miner and producer Alrosa JSC was the result of successful marketing efforts and in line with overall management strategy. In addition to being a successful transaction, the disposal is a strong benchmark for the entire Aquamarine complex and should assist it in attracting other high quality tenants similar to Alrosa.

The beginning of construction and sales at one of our largest residential projectsentitled "Odinburg" has helped to demonstrate our steady commitment to continue large scale development projects. The development will include multi-functional infrastructure and we look forward to further progress on Odinburg throughout 2014.

Our other developments continued to show progress throughout 2013. A 6-year land lease agreement was signed at Paveletskaya for further development and construction resulting in a gross valuation of approximately US$81.0 million. At Kossinskaya, revised plans to convert the development into a centre for the wholesale trade of apparel and fashion were well under way, while Tverskaya saw continued progress at Plaza 1c with the design concept and pre-construction works finalised during 2013.

Our biggest yielding property, AFIMALL City, continues to improve with average daily footfall in December 2013 up 45% year-on-year, further cementing its position as one of Europe's largest retail developments in recent years. Footfall levels are expected to continue to improve throughout 2014 following the opening of the new "Delovoy Tsentr" metro station which provides direct access to The Mall. Additionally, in 2013 AFIMALL became home to several new brands including TSUM Discount, Marc O'Polo and Enter which have helped to further strengthen the attractiveness of the Mall and we expect continued marketing activities to further attract both retailers and customers to the Mall throughout 2014.

Despite a slowdown in Russia's overall economic growth during 2013 to 1.3%[1], retail trade and the consumer market recorded above average growth in real terms at 4.5% year-on-year. Boosted by continued volatility in the Eurozone, demand from international retailers looking to extend their presence in Moscow remained healthy, supporting stable retail vacancy rate and rental levels. The level of vacant space in Moscow's quality retail shopping malls reached record lows at 1% - 1.5% during 2013, whilst Moscow's prime retail indicator[2] stood at US$ 4,000 per sq.m. per annum (before VAT and other expenses).

The Moscow office market also remained stable throughout 2013 with average annual rental rates for prime office space at a level of US$1,200 per sq.m. (excluding VAT and operational expenses).

Revenues for 2013 increased by 61% year-on-year to US$202 million driven predominantly by strong rental income and the completion of the disposal transaction of 643 parking places to VTB Bank JSC. Consequently, AFI Development recorded a significant 29% year-on-year increase in gross profit to US$76.3 million. At the same time, cash and cash equivalents increased by 11% to US$193 million as at 31 December 2013.

As a result of improvement in operation activities and successful disposal of assets, net profit for 2013 reached US$103.9 million, compared to a net loss of US$275.5 million in 2012.

We believe that our strategy of focusing on high quality projects in Moscow area will generate both strong cash-flow and significant capital returns for our shareholders in future years. In 2014 we intend to further strengthen our financial performance through successful rental or disposals of completed projects, whilst advancing the progress of our new developments.

Management Update

As previously announced, on 1 March 2013, Mr Michalis Sarris, non-executive director, resigned from the Board of Directors following his appointment as Minister of Finance in the Cyprus government.

Valuation

As at 31 December 2013, based on the Cushman & Wakefield LLC ("C&W") independent appraisers' report, the value of AFI Development's portfolio of investment properties stood at US$1.6 billion, while the value of the portfolio of investment property under development stood at US$0.6 billion.

Consequently, the total value of the Company's assets, based predominantly on independent valuation as of 31 December 2013, was US$2.4 billion, compared to US$2.1 million as at 31 December 2012.

Key drivers of the slight increase in the portfolio valuation were as follows:

1. Purchase of the remaining 50% interest in the Ozerkovskaya III project from the Company's joint venture partner in Q1 2013

2. Sale of the Building 1 in Ozerkovskaya III project to "Alrosa" JSC in Q4 2013

3. Revaluation of the Paveletskaya Phase II project in Q3 2013 following signing of a new land lease agreement, amending the permitted use of land from industrial to the construction of residential and commercial premises

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

Liquidity

We completed 2013 with a strong liquidity position of approximately US$203.3 million of cash, cash equivalents and marketable securities on our balance sheet and a debt[3] to equity level of 47%. This strong position reflects the Company's ability to successfully balance liquidity requirements from a number of sources.

Our financing strategy aims to maximise 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.

Update on change in calculation of Russian property tax

Russian Federal Law No. 307-FZ dated 2 November 2013 introduced changes in property tax calculation for office and retail premises and properties owned by foreign legal entities that do not operate in Russia via representative offices. The law entered into force on 1 January 2014.

Prior to 2014, the property tax was calculated at 2.2% of the property book value posted on the owner's balance sheet. From 2014 the cadastral values for given premises (excluding underlying land) will be set as the basis for property tax payments. The tax rate will be determined by local (regional) authorities under Federal laws. The Moscow Government announced final tax schedule for properties in Moscow as follows: 0.9% (2014), 1.2% (2015), 1.5% (2016), 1.8% (2017), 2.0% (2018).

According to the Federal valuation standard No. 4 "the cadastral value is the market value established as a result of state cadastral valuation, which is determined by means of mass valuation, or, if the market value cannot be determined via mass methods, the market value determined individually for a particular property in accordance with the valuation legislation".

The Moscow Government has already performed a mass valuation for some of the properties, and according to the preliminary information that is available, there is likely a divergence between the appraised cadastral value and what market participants would consider market value (i.e. in some cases the new cadastral values are higher). However, according to the new legislation, the property owners involved have a legal right to contest and challenge the new cadastral values through the special committee or the court (if they believe that the new cadastral values are not in line with the market values of respective properties).

The Company has received cadastral value for several of its properties. Based on the new cadastral values, the Company may face significant (more than twofold) increase in property tax expense in 2014. The Company intends to challenge these cadastral values based on the fact that they do not reflect the existing market values of these properties. In case the legal challenge of the new cadastral values by the Company fails, it may have significant negative influence on the company results.

Key developments since financial year end

1) In February 2014, the Company subsidiary, Bellgate Construction Ltd. ("Bellgate") paid the last fourth instalment of RUR1,333 million (approx. US$37.5 million) to Moscow municipal organisation GUP "Tsentr City" for the underground parking premises at AFIMALL City. According to the agreement between Bellgate and GUP "Tsentr City", the purchase price had to be paid in four instalments. The amount was paid by using the last tranche of the VTB loan.

2) During February-March 2014 Russia got involved in a conflict with Ukraine over Crimea, following the change of regime in the Ukraine, while the steps undertaken by the Russian government in Crimea are viewed negatively by the United States and some EU states. The consequences of this conflict may have a negative effect on the Russian economy, however it cannot be quantified or predicted at the current stage of events.

3) During January - March 2014 the Russian Rouble depreciated by about 12% against US Dollar. This depreciation may have a negative effect on the Company equity.

Portfolio Update

AFIMALL City

During 2013, AFIMALL City reported a strong increase in footfall with a significant 45% increase year-on-year. In 2013, AFIMALL also became home to several new brands including TSUM Discount, Marc O'Polo and Enter. These factors have helped to further strengthen the attractiveness of AFIMALL for retailers and customers alike. Construction of the new metro station "Delovoy Tsentr" progressed throughout 2013 leading to completion in January 2014, when the station opened for public use. Like "Vystavochnaya" station, this new station provides direct access to AFIMALL City and will over the next two years become the main connecting point for a new line, which will link the densely populated residential districts Ramenky, Horoshevskiy, Savyolovsky and Maryina Roscha.

The development environment of Moscow City continues to be a strong driver for the future of AFIMALL. According to CBRE, about 70,000 sq.m.(GLA) of new office space was delivered in Moscow City during 2013. A few large lease contracts were signed in the Mercury, Federation, Naberezhnaya and Northern Towers, with the 14,000 sq.m. lease in the Mercury Tower by Norilsk Nikel being the largest. About 120,000 workforce are expected to work in the Moscow City area by the time all planned office has been constructed. The scheduled completion of the entire "Moscow City" area is planned for 2018.

AQUAMARINE III (OZERKOVSKAYA III)

In 2013, AFI Development completed a disposal of Building 1 of the four Class A buildings belonging to the Aquamarine III Business Centre, along with part of the underground premises to Russian diamond miner "Alrosa". The transacted area corresponded to approximately 11,994 sq.m. and the Company was paid the equivalent of US$91.5 million plus applicable Russian VAT in cash for the property.

Following the transaction, AFI Development retains title to the remaining three buildings of the complex, which have a combined GBA of 61,772 sq.m. and GLA of 46,247 sq.m.

HOTELS

AFI Development's hospitality portfolio, consisting of one Moscow city-hotel Aquamarine and two resorts in the Caucasus mineral waters region, Plaza Spa Kislovodsk and Plaza Spa Zheleznovodsk, continued to meet their operational targets during 2013.

TVERSKAYA PLAZA Ic

During 2013, AFI Development's activities in the Tverskaya area were focused on the Plaza Ic project. The Company continued to progress with the development of this Class A office complex by successfully finalising the design concept and pre-construction works. The start of construction is planned for H1 2014.

KOSSINSKAYA - EXPOLON

AFI Development has decided to revise its development plan for the Kossinskaya project by converting it into a centre for the wholesale trade of apparel and fashion. The space will allow producers and distributors to lease showrooms to exhibit their collections, while allowing buyers and owners of fashion shops to make procurement transactions. The revised development concept envisages rentable showroom space, an office zone, a food-court and a small hotel for the convenience of visitors. The Company is now in the process of performing capital repair works on the property. The work involves installation of additional lifts, escalators, construction of additional ventilation shafts, fit-out works and an increase in common space. The project will be operated under the marketing name of "Expolon".

ODINBURG

In October 2013, AFI Development began construction of one of its largest residential projects entitled "Odinburg". The development is planned to include multi-functional infrastructure comprising of two schools, two kindergartens, a medical centre and other facilities. In Q3 2013, construction works were launched and the Company began initial sales of the first phase of the development.

PAVELETSKAYA PHASE II

During 2013, AFI Development made significant progress in securing development rights for the Paveletskaya II project. In November 2013, the Company signed a 6-year land lease agreement with the Moscow City Government for further development and construction of the residential and commercial space at Paveletskaya which resulted in a gross valuation gain of approximately US$81.0 million (US$64.8 million net of taxation).

BOLSHAYA POCHTOVAYA

During 2013, AFI Development made significant progress in obtaining development rights for the Bolshaya Pochtovaya project. Currently, 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

Despite a slowdown in Russia's overall economic growth during 2013 to 1.4%[4], retail trade and the consumer market recorded above average growth in real terms at 4.5% year-on-year.

At 0.5% of GDP, Russia's budget deficit was lower than originally planned. At the same time, inflation remained under control and largely unchanged year-on-year at 6.5%, whilst the country enjoyed close to full employment. Once again, oil prices continued to drive Russian budget revenues with the share of oil and gas revenues at 46.1% in 2013, against 50.2% in 2012. In the 2014-2016 budget, the Ministry of Finance set out its oil price estimates with US$93 per barrel of Urals forecast for 2014 and US$95 for 2015-2016.

In 2013, Russia had the third-highest foreign direct investment inflows in the world, supported by a number of recently adopted foreign investor friendly laws. High investment flows into Russia are expected to continue over the coming years.

The recent uncertainty related to the outcome of involvement of Russia in Crimea in the Ukraine may, however, have negative influence on the Russian economy in 2014.

[Source: Commercial Real Estate Report, JLL; Cushman & Wakefield Report; Ministry of Economic Development; Economist Intelligence Unit Report]

Moscow office market

Whilst the overall volume of project completions in 2013 increased by 57% year-on-year to 888,270 sq.m., only 25% of new office schemes met Class A requirements, with the majority classified as Class B. In addition, close to half of all new construction was located outside the Third Transportation Ring.

Driven by the considerable volume of new supply, the average vacancy rate increased slightly to 13.7%, whilst rental rates continued to grow by 7-12% year-on-year, subject to building class and location.

The average asking rental rate for Class A buildings amounted to US$870 while for Class B, the average asking rental rate was stable at US$530. Average annual rental rates for prime office space were at the level of US$1,200 per sq.m. (excluding VAT and on a triple net basis).

Looking to 2014, 70% of the announced pipeline is located outside of central Moscow, with overall completion volumes estimated at slightly below 2013 levels. Rental rates are expected to remain largely stable.

[Source: Moscow Office Market View Q4 2013, JLL; Marketbeat Office Snapshot Q4 2013, Cushman & Wakefield]

Moscow Retail Market

During 2013, the Russian market received 1.65 million sq.m. of new quality retail space, slightly below the completion volumes seen in 2012 (1.7 million). A total of 63 new retail complexes were constructed across 40 Russian cities, with 9 quality shopping centres totalling 231,850 sq.m. opening in Moscow.

Demand from international retailers looking to extend their presence in Moscow remained healthy, boosted by continued volatility in the Eurozone. With stock per 1,000 inhabitants at 306 sq.m. as at end-2013 - compared to 690 sq.m. in Warsaw and 627 sq.m. in Paris - Moscow's retail market penetration continues to offer significant growth opportunities.

Throughout 2013, the average vacancy rate and rental levels remained stable across all sub-sectors. The level of vacant space in quality retail shopping malls reached record lows at 1% - 1.5%, driven by the low level of new construction in Moscow.

Moscow retail gallery rental rates are in the range of US$500-4,000 (per sq.m. per annum excluding VAT and other expenses). Moscow's "prime retail indicator"[5] is US$ 4,000 per sq.m. per annum (excluding VAT and other expenses).

[Source: Marketbeat Retail Snapshot Q4 2013, Cushman & Wakefield; Moscow Retail Overview - Q4 2013, Jones Lang LaSalle]

Moscow and Moscow Region Residential Market

According to Rosstat, 69.4 million sq.m. of housing was commissioned in Russia during 2013, which is 5.5% more than during 2012. The Moscow region continued to witness the highest levels of construction with 6.9 million sq.m. introduced across the Moscow suburbs.

The volume of new supply in the business segment in Moscow is estimated at 82,000 sq.m. At end-2013, the average market price for business class apartments stood at US$ 6,851 per sq.m.

The supply levels of new residential housing in the Moscow region declined in 2013 compared to 2012, driven mainly by a policy change of the Moscow regional government and the extension of approval documents' terms. Of a total of 434 new buildings constructed, the majority represented comfort class housing.

At end-2013, the average market price for apartments in the Moscow region stood at RUR74,830 or US$2,276 per sq.m., up 6% year-on-year.

[Source: Report by Blackwood End of 2013, 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

18 March 2014

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Overview

As at 31 December 2013, the Company's portfolio consisted of 7 investment properties, 8 investment properties under development, 1 trading property under development and 5 hotel projects. 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 2013, was US$2.4 billion[6]. About 65% of the assets book value is attributed to yielding properties.

Revenues for 2013 increased by 61% year-on-year to US$202 million driven predominantly by strong rental income and the completion of the disposal transaction of 643 parking places to VTB Bank JSC. Consequently, AFI Development recorded a significant 29% year-on-year increase in gross profit to US$76.3 million. At the same time, cash, cash equivalents and marketable securities increased by 16% to US$203 million as at 31 December 2013.

As a result of improvement in operation activities and successful disposal of assets, net profit for 2013 reached US$103.9 million, compared to a net loss of US$275.5 million in 2012.

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: State Statistics Agency of the Russian Federation

Company Specific Factors

The following factors affected our performance in 2013:

· On 28 January 2013, the Company's subsidiary Krown Investments LLC refinanced its construction costs for Ozerkovskaya III project with a credit line from JSC VTB Bank. The credit line totalling US$220.0 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. The outstanding balance of the loan at 31 December 2013 was US$205.4 million.

· In February 2013, AFI Development completed the purchase of the remaining 50% interest in the Ozerkovskaya project from its joint venture partner, Super Passion Limited, for a total cash consideration of US$227.5 million and settled all outstanding liabilities to its partner in Krown Investments LLC (the holding company with the rights to the project). As a consequence of the acquisition, the Company became the sole owner of Ozerkovskaya III project.

· In January 2013, the Company completed the disposal of its 50% of stake in Westec Four Winds Limited, with total consideration received of circa US$103.4 million. The total profit on disposal was US$50.7 million, US$32.1 million of which were recognised as a gain in Q1 2013. The corresponding translation reserve was reclassified to profit or loss upon the disposal of the joint venture in the same quarter. An amount of US$30.3 million was reclassified as realised foreign exchange loss in financing expenses.

· In June 2013, the Company completed the first stage of the disposal transaction of 643 parking spaces at AFIMALL City to VTB Bank JSC (which was signed in November 2012), incurring revenue from disposal of US$ US$54.5 million in Q2 2013.

· In November 2013, the Company signed a 6-year land lease agreement with the Moscow City Government for further development and construction of the residential and commercial space at Paveletskaya which resulted in a US$81.0 million gross valuation gain (US$64.8 million net of taxation).

· In December 2013, AFI Development completed the disposal of Building 1 of Ozerkovskaya III Business Centre, along with part of the underground premises. The consideration paid to the Company was the equivalent of US$91.5 million plus applicable Russian VAT.

Key Portfolio Updates

YIELDING ASSETS

AFIMALL City

AFIMALL City is a major retail scheme located in the high-rise business district of Moscow, "Moscow-City". With a total GBA of nearly 283,182[7] 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 2013, despite ongoing construction work in its surrounding area, AFIMALL City reported a strong increase in footfall with average daily footfall for December 2013 reaching 56,000 visitors, compared to 38,600 in December 2012, a significant 45% increase year-on-year.

In the course of the year, over 60 new tenants signed leases with AFIMALL City including Samsung, TSUM Discount, H&M Home, Gant, Desigual, Marc O'Polo and New Balance. In order to further increase awareness levels of the Mall, the Company continued its marketing campaign through a variety of media channels including TV, radio, Internet, and outdoor advertising media.

We are also pleased to announce that at the start of 2014 a new metro station named "Delovoy Tsentr" was opened which, similar to "Vistavochnaya" station, provides direct access to AFIMALL. Over the next two years, this station will become the main connecting point for a new line which will link the densely populated residential districts Ramenky, Horoshevskiy, Savyolovsky and Maryina Roscha.

The development environment of Moscow City continues to be a strong driver for the future of AFIMALL. According to CBRE, about 70,000 sq.m. of new office space was delivered in Moscow City during 2013. A few large lease contracts were signed in the Mercury, Federation, Naberezhnaya and Northern Towers, with the 14,000 sq.m. lease in the Mercury Tower by Norilsk Nikel being the largest. About 120,000 workforce are expected to work in the Moscow City area once all planned office space has been constructed. The scheduled completion of the entire "Moscow City" area is planned for 2018.

According to independent appraisers Cushman & Wakefield, the market value of AFIMALL City as of 31 December 2013 was US$1,160 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 55,421 sq.m. of combined lettable space and common underground parking for 551 cars[8]. 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.

In accordance with overall management strategy, the Company completed a transaction to sell one of the four Class A buildings in the Complex, along with part of the underground premises to Russian diamond miner Alrosa in December 2013. The transaction consisted of a gross office area of 10,985.8 sq.m., a terrace of 418.9 sq.m. and a 15.8% share title to common areas of the Complex, which totalled 3,728.6 sq.m. The total transacted area corresponded to approximately 11,994 sq.m. The consideration was paid in cash and amounted to an equivalent of US$91.5 million and applicable Russian VAT.

Following the transaction, the Company retains title to the remaining three buildings of the Complex, which have a combined area of 61,772 sq.m. (GLA 46,247 sq.m.).

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

According to independent appraisers Cushman & Wakefield, the market value of the remaining buildings of the Complex as of 31 December 2013 was US$323.7 million.

HOTELS

The Company's portfolio includes three hospitality projects, one located in Moscow and the remaining two located in the Caucasus Mineral Waters region.

AQUAMARINE HOTEL

The Aquamarine Hotel is a modern, 4 star hotel located in the heart of Moscow. It is part of the company's mixed-use Aquamarine development, which also houses an A-class office centre Aquamarine III and completed elite residential complex Aquamarine II.

The Hotel provides high level services at reasonable pricing and offers 159 spacious rooms, a fitness-centre, spa-centre, bar, restaurant, and conference rooms. It is located in the Zamoskvorechie district which is a 20 minute walk from both the Kremlin and the Tretyakov Gallery and a 5 minute walk from the Novokuznetskaya and Tretyakovskaya metro stations. The Hotel has added to the infrastructure of the historical district and is convenient for both business travellers and tourists.

The Hotel's performance in 2013 was similar to 2012, with an ADR (average daily room rate) of US$231.

The balance sheet value of the project as of 31 December 2013 was US$30.9 million.

PLAZA SPA HOTEL ZHELEZNOVODSK

Plaza Spa Zheleznovodsk is a new sanatorium project which was launched in the summer of 2012 and is located in the Zheleznovodsk, in the Caucasus mineral waters region. The hotel comprises 134 guest rooms on 9,526 sq.m. of gross buildable area. The spa provides diagnostic assessment and treatment of urological diseases.

The balance sheet value of the project as of 31 December 2013 was US$22.4 million.

PLAZA SPA KISLOVODSK

The Plaza Spa is located in the city centre of Kislovodsk, in the Caucasus mineral waters region. The facility was put into operation in 2008 after a full reconstruction and now has a total of 275 rooms spread over 25,000 sq.m.

Today, the Plaza Spa Kislovodsk is a popular spa hotel which has established new standards of quality and hospitality for the entire region. It offers an extensive range of medical services focused on the treatment of cardiac diseases. Diagnostic and treatment equipment is continually updated and the staff regularly attend training sessions for new methods of treatment to aid rehabilitation of patients.

The balance sheet value of the Company share in the project (50%) as of 31 December 2013 was US$24.8 million.

DEVELOPMENT PROJECTS

Tverskaya Plaza Ic

During 2013, AFI Development progressed with the development of the most advanced office project in the Tverskaya Zastava area - the office complex Plaza Ic, which is a Class A office complex located in the cultural and business quarter of the Tverskoy sub-district. The building is located within a 4-minute walk of the circle line of the Belorusskaya metro station, which serves as the main transport hub linking the city centre with one of Moscow's main airports - Sheremetievo International Airport. The project has a GBA of 51,200 sq.m. (including underground parking of approximately 519 parking spaces) and an estimated GLA of 32,454 sq.m.

Following the registration of a 10-year land lease agreement, the Company successfully finalised the development concept and is in the final stages of pre-construction works. Start of construction is scheduled for H1 2014 and the Company is currently in the process of selection and appointment of the general contractor.

On March 7, 2014 the Company has received the construction permit.

Based on an independent valuation of the Company's portfolio by Cushman & Wakefield as of 31 December 2013, the fair value of Plaza Ic is US$110.6 million.

Tverskaya Plaza IIa

Plaza IIa is a Class A office complex located on a plot of land that faces the Belorussky railway station on the opposite side of Tverskaya Zastava Square. The project has a GBA of 10,500 sq.m. (including underground parking) and an estimated GLA of 7,600 sq.m.

Following a review by the Moscow City authorities of the transportation scheme at Tverskaya Zastava Square, the exact borders of the land plot of Tverskaya IIa will need to be aligned with the new transportation scheme. However, the Company has been notified by the authorities that the development of the transportation scheme has been postponed. The Company will begin the planning process of this project once land plot borders have been fully defined.

Based on an independent valuation of the Company's portfolio by Cushman & Wakefield as of 31 December 2013, the fair value of Plaza IIa is US$12.4 million.

Tverskaya Plaza IV

Plaza IV is a Class A office complex with supporting ground level retail zones, located at 11, Gruzinky Val. The project has a GBA of 108,000 sq.m. (including underground parking) and an estimated GLA of 61,350sq.m.

During 2013, the Company progressed with securing the land lease agreement with Moscow authorities, having finalised the borders of the land plot.

Based on an independent valuation of the Company portfolio by Cushman & Wakefield as of 31 December 2013, the fair value of Plaza IV was US$168.4 million.

KOSSINSKAYA - EXPOLON

The Company has decided to revise its development plan for the Kossinskaya project, converting it into a centre for the wholesale trade of apparel and fashion. The space will allow producers and distributors to lease show rooms to exhibit their collections, while allowing buyers and owners of fashion shops to make procurement transactions. While these business-to-business fashion complexes are new to Russia, they successfully operate in Italy, Germany, the Netherlands and the US. The revised development concept envisages lettable showroom space, an office zone, a food court and a small hotel for the convenience of visitors. The project will be operated under the marketing name "Expolon".

The change of development concept did not have a significant influence on the project value. Based on an independent valuation of the Company portfolio by Cushman & Wakefield as of 31 December 2013, the fair value of Kossinskaya is US$106.7 million.

ODINBURG

In October 2013, AFI Development began construction at "Odinburg", one of the Company's largest residential projects with a total area of over 33 hectares located 11 km west of Moscow in the town Odintsovo.

The development is planned to include multi-functional infrastructure comprising of two schools, two kindergartens, a medical centre and other facilities.

The project involves construction of a multi-storey residential micro district consisting of two phases:

• Phase I - Construction of a 22-section residential building named Korona (Crown) and of the infrastructure for the kindergartens and schools. This will have a total sellable area of 149,432 sq.m. (2,652 apartments);

• Phase II - Construction of 8 residential buildings and of infrastructure for the kindergartens, schools and outdoor multi-level parking. This will have a 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 sold to end users.

Initial construction works, allocated to the first stage of Phase I, were launched during Q3 2013, and in December 2013 the Company began initial sales of apartments in the Korona residential building. As of the date of publication of this report, 107 contracts for sales of apartments have been signed.

For the convenience of customers, the Company has constructed a sales office with an area of about 600 sq.m. Within this office, potential buyers can receive comprehensive consultation on the project, available apartments as well as apply for a mortgage loan from various banks.

To market the project, AFI Development has appointed two exclusive marketing brokers, Est-a-Tet and BEST Real Estate, both having significant experience in residential sales.

The balance sheet value of the project as of 31 December 2013 was US$127.2 million.

PAVELETSKAYA II

Paveletskaya Phase II is planned as a modern residential complex located on the Paveletskaya Embankment close to Moscow City centre. The project is located in the Danilovsky Subdistrict (the south administrative district of Moscow) and can be easily accessed by private or public transport.

Following the decision of the town-planning land committee ("GZK") and the land plot master-plan ("GPZU") the GBA of the project was determined to be 151,373 sq.m., which includes 61,401 sq.m of residential area, circa 29,828 sq.m. of commercial area and 50,785 sq.m. of underground space.

During the third quarter of 2013, AFI Development finalised negotiations with the Moscow City authorities to change the permitted usage of the land plot. In November 2013, the Company signed a 6-year land lease agreement for further development and construction of the residential and commercial space. This resulted in a US$81.0 million gross valuation gain (US$64.8 million net of taxation).

Based on an independent valuation of the Company portfolio by Cushman & Wakefield as of 31 December 2013, the fair value of Paveletskaya Phase II is US$92.7 million.

BOLSHAYA POCHTOVAYA

Bolshaya Pochtovaya is a mixed-use project with predominantly residential use. It is located in an attractive neighbourhood in the central administrative district of Moscow. The area benefits from a developed infrastructure: transport, shops and cultural/leisure amenities as well as a nearby river which significantly enhances the views from the project. It boasts a GBA of 170,350 sq.m. on a land area of 5.65 hectares.

The development plan for the property anticipates the development of a GBA of 170,350 sq.m., which includes 67,800 sq.m. of residential area, 39,150 sq.m. of commercial area and 62,200 sq.m. of underground area.

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

Based on an independent valuation of the Company portfolio by Cushman & Wakefield as of 31 December 2013, the fair value of Bolshaya Pochtovaya is US$139.4 million.

LAND BANK

In addition to multiple yielding properties and projects under development, AFI Development also has a land bank which consists of projects that are not currently under development.

By 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.

AFI Development's strategy with respect to its land bank is to activate projects only upon securing necessary financing and having full confidence in the demand levels of prospective tenants or buyers.

Key Events Subsequent to 31 December 2013

Following the year-end the following key events occurred:

1) In February 2014, the Company subsidiary, Bellgate Construction Ltd. ("Bellgate") paid the last fourth instalment of RUR1,333 million (approx. US$37.5 million) to Moscow municipal organisation GUP "Tsentr City" for the underground parking premises at AFIMALL City. According to the agreement between Bellgate and GUP "Tsentr City", the purchase price had to be paid in four instalments.

2) During February-March 2014 Russia got involved in a conflict with Ukraine over Crimea, following the change of regime in the Ukraine, while the steps undertaken by the Russian government in Crimea are viewed negatively by the United States and some EU states. The consequences of this this conflict may have a negative effect on the Russian economy, however it cannot be quantified or predicted at the current stage of events.

3) During January - March 2014 the Russian Rouble depreciated by about 12% against US Dollar. This depreciation may have a negative effect on the Company equity.

Disposals and Acquisitions

During 2013, the Company made the following disposal:

In November 2013 AFI Development reached binding agreement to dispose of Building 1 in the Aquamarine III office complex in Moscow (also known as Ozerkovskaya III), which consists of four separate buildings and underground parking ("the Complex"), to Russian diamonds miner and producer "Alrosa" JSC. Under the transaction, Krown Investments LLC, the subsidiary holding rights to Aquamarine III, sold premises of the first building in the Complex and part of underground premises with gross area of 10,985.8 sq.m., a terrace of 418.9 sq.m. and approximately a 15.8% share in the title to common areas of the Complex, which total 3,728.6 sq.m. (total transacted area corresponds to approximately 11,994 sq.m.), to "Alrosa" JSC. The consideration was paid in cash and amounted to Russian rouble equivalent of US$91.5 million and applicable Russian VAT. The transaction was successfully completed in December 2013.

During 2013, the Company made the following acquisition:

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 III project) from its joint venture partner, Super Passion Limited, for a total cash consideration of US$227.5 million. The transaction was successfully completed in February 2013.

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 Russian Rouble. Our interest income is derived primarily from interest on our bank deposits and interest on loans to our joint ventures.

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 Russian 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 12.5% 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 Russian 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 Russian Roubles are initially recorded by our subsidiaries at the exchange rate between the Russian Rouble and such foreign currency prevailing at such date. Such monetary assets and liabilities are then retranslated into Russian 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 2013 and 2012

Revenue - General Overview

To date, we have derived revenues from three sources: rental income, 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

On 3 June 2013 the Company completed the first stage of the sale of 643 parking spaces of AFIMALL City to VTB Bank and therefore recognised revenue of US$54.5 million in the income statement. For additional information, please refer to "Company Specific Factors" section above.

Operating expenses. Our operating expenses increased with a net change of US$11.3 million, from US$65.2million in 2012 to US$76.5 million in 2013. The year-on-year increase of 17.4% is attributable to increased property tax and property management expenses at AFIMALL City (following full operation of the parking), overall increased utilities expenses at yielding properties, full annual operation of Plaza Spa Zheleznovodsk, and overall market inflation of expenses.

Administrative expenses. Our administrative expenses decreased by US$3.3 million or 16.2% year-on-year, from US$20.2 million in 2012 to US$16.9 million in 2013. 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 reverse of bad debt provision for 2013 was US$0.9 million compared to a bad debt provision expense of US$4.1 million in 2012.

Profit on sale of investment properties. In December 2013, the Company successfully completed the sale of Building 1 in the Aquamarine III office complex (also known as Ozerkovskaya III) to Russian diamonds miner and producer "Alrosa" JSC. The total profit on disposal was US$27.8 million, including the consideration paid in cash and amounted to US$91.5 million. For additional information, please refer to "Disposals and acquisitions" section above.

Profit on sale/disposal of properties/investment. In January 2013, the Company completed the disposal of its 50% of stake in Westec Four Winds Limited (along with its partner, Snegiri Development), which had developed and operated Four Winds. The resulting profit on sale amounting to US$32.1 million was recognised in the income statement and a translation reserve of US$30.3 million was reclassified as a realised exchange loss in financing expenses of the income statement (please refer to "Translation reserve reclassification due to disposal of subsidiary" line in the Summary of statement of comprehensive income for 2013 and 2012 table above). The total profit on disposal was US$50.7 million, US$18.6 million of which were recognised as a fair value gain in 2012. For additional information, please refer to "Company Specific Factors" section above.

Net valuation gain/(losses) on properties. Net result of investment property valuation increased from a loss of US$265.9 million in 2012 to a gain of US$106.2 million in 2013. For additional information, please refer to "Portfolio Valuation" section below.

Finance income. Our finance income increased by US$2.5 million or 13.3% year-on-year, from US$18.5 million in 2012 to US$21.0 million in 2013. The increase was achieved by successful management of available cash balances during 2013. As a result, the Company earned US$3.3 million of additional income compared to US$2.1 million in 2012.

Finance expense. Our finance expense increased by US$9.6 million or 16.7% year-on-year, from US$57.3 million in 2012 to US$66.9 million in 2013. This was a result of a new loan facility drawn down by Krown Investments LLC from VTB Bank JSC in the amount of US$220 million (for additional information, please refer to "Company Specific Factors" section above). However, the effect of increased balances of debt financing was reduced by a saving in interest payments due to decrease in the average interest rate from 8.07% as of December 31, 2012 to 6.97% as of December 31, 2013.

FX Gain/(Loss). We recorded a foreign exchange loss of US$28.9 million in 2013, against a gain of US$16.6 million in 2012. This was a result of Russian Rouble depreciation versus the US Dollar during 2013.

Income tax expense. Our current tax expense increased to US$8.9 million compared to US$2.0 million in 2012 mainly due to tax obligations incurred as a result of sale of the office building in Ozerkovskaya III.

Profit/Loss for the year. Due to the factors described above, we recorded a US$103.9 million net gain for 2013 compared to net loss of US$275.5 million for 2012.

Liquidity and Capital Resources

Cash flows

Summary of cash flows for 2013 and 2012

* Note: the cash and cash equivalents do not include US$10.0 million fair value of marketable securities.

Net cash from operating activities

Net cash from operating activities decreased to US$19.1 million in 2013, from US$41.0 million in 2012. This decrease was attributable to the advance payment of US$51.4 million on the first phase of the disposal of 643 parking spaces at AFIMALL City in 2012. The Company obtained advance payments from respective buyers at the end of 2012 which were closed upon completion of both transactions Q1 and Q2 of 2013 respectively.  

Net cash from investing activities

Net cash outflow from investing activities amounted to US$202.9 million, including US$202.5 million of cash outflow due to acquisition of the remaining 50% of the assets and liabilities of Krown Investments LLC and inflow of US$91.5 million related to the disposal of Building 1 in Ozerkovskya III.

Net cash used in financing activities

Net cash from financing activities increased to a positive US$198.8 million in 2013 from a negative US$62.8 million in 2012 as a result of increased debt financing and the new loan facility of US$220 million obtained by Krown Investments LLC (please refer to "Capital Resources" section below for more information).

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 2013 with a strong liquidity position of approximately US$203 million cash, cash equivalents and marketable securities on our balance sheet and a debt[9] to equity level of 47%. 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.

As of December 31, 2013 our debt portfolio was as follows:

The total balance of Debt financing reached US$805.3 million as at 31 of December 2013, including US$804.9 million of Principal Debt and US$0.4 million of Accrued Interest with Average Interest Rate 6.97% per annum as at 31.12.2013 (8.07% respectively as at 31.12.2012) (for more details see notes 29 to our consolidated financial statements).

As at 31 December 2013, our loans and borrowings were payable as follows:

Portfolio Valuation

As at 31 December 2013, based on the Cushman & Wakefield LLC ("C&W") independent appraisers' report, the value of AFI Development's portfolio of investment properties stood at US$1.6 billion, while the value of the portfolio of investment property under development stood at US$0.6 billion.

Consequently, the total value of the Company assets, based predominantly on independent valuation as of 31 December 2013, was US$2.4 billion. Although there were revaluations in certain projects in 2013, the total value of the portfolio did not change relative to the value as of 31 December 2012.

Major drivers of the portfolio revaluation were as follows:

1. Significant increase in value:

Paveletskaya Phase II

In November 2013, the Company subsidiary MKPK JSC and the Moscow City authorities signed an addendum to the land lease agreement for the Paveletskaya Phase II project, amending the permitted use of land from industrial to the construction of residential and commercial premises. The addendum was in line with the previous decisions of the Moscow authorities on development rights of the Company in this project. However, the addendum provided the level of certainty required to change the fair value of the project to market value on the Company's balance sheet: the market value of the project confirmed by Cushman & Wakefield, the Company's independent valuers, was US$92.6 million (as at 30 September 2013) as opposed to the previous book value of US$11.6 million. The resulting US$81.0 million gross valuation gain (US$64.8 million net of taxation) was included in AFI Development Q3 2013 results.

As at 31 December, 2013, the value of the Paveletskaya Phase II project based on Cushman & Wakefield LLC ("C&W") independent appraisers' report stood at US$92.7 million.

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 oversees 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 24 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 2013, there were two outstanding guarantees: one for the amount of US$1 million in favour of VTB Bank JSC under a loan facility agreement of Bellgate Construction Limited and the second one for the amount of US$205 million in favour of VTB Bank JSC under a loan facility agreement of Krown Investments LLC.

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 2013, 41% of our financial liabilities were fixed rate. For more detail see note 34 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 the Board of Directors.

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 5 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 share 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 (as defined in UK Listing Rules) in the financial year ended 31 December 2013 or in the period since 31 December 2013.

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). 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 information on residential projects under development as December 31, 2013:

(1) "Start of the project" - date of construction start;

(2) "Number of residential units sold" - based on signed contracts only[10]

The information in the table below regarding expected completion date of the project is forward looking information which is based on Company's information as at the date of this report. It may be that due to reasons which are external to the Company, the project will not be completed on these dates.

Expected information (000'$)[13]:

The information in the table regarding total expected income; total expected costs; gross profit and its ratio is based on assumptions; forecast and/or business plans of the Company, in which there is no certainty of full realization. It should be clarified that the estimation of the expected income is based on sale prices in the project and the expected cost (except of the land cost which is known in total or partially) is based mainly on signed contracts with constructors and advisors. Total expected income; total expected costs; gross profit and its ratio may differ from the information in the table in case that the Company's forecast or its business plan will not be realized, in full or partially.

C. Set forth below are the details in connection with projects the Company has executed in CIS, which include residential areas, and which were completed as at December 31, 2013:

(1) As at the date of this statement, the Company's group has completed the projects Four Winds Residential 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, 2013, the Company's group holds (indirectly) property rights in 1 residential unit in the Four Winds Residential project and in 3 residential units in the 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. For the Odinburg project the target customers are of medium to low socio-economic background.

In this area of activities, the Group markets its projects through independent agents as well as by own marketing and sales workforce.

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 field of lettable properties 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 rent of the group's lettable 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 presented in the tables includes estimates and forecasts relating to projects in 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 lettable property areas based on regions and uses as at 31.12.13 (sq.m.)

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

(c) Breakdown of the lettable property value based on regions and uses as at 31.12.13

(d) Breakdown of the lettable property value based on regions and uses as at 31.12.12

(e) Breakdown of the group's yielding real estate in the CIS NOI based on regions and uses for the year ended 31.12.13

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

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

(h) Breakdown of the revaluation income (losses) based on regions and uses for the year ended 31.12.13

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

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

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

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

 (m) Breakdown of the average occupancy rates

* In previous reports the occupancy rate was calculated in relation to shops areas, in this table it is presented in relation to total lettable areas

** Not Including Ozerkovskaya III project

(n) Number of properties based on regions and uses

* The decrease is due to the disposal of the Four Winds project

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

* Not Including Ozerkovskaya III project

(p) Expected revenues in respect of signed lease 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 - Tverskaya Plaza II

4. Significant Investment Properties - Ozerkovskaya III

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

(a) Presentation of property:

(b) Significant Data:

(c) Breakdown of Structure of Revenues and Expenses:

 (d) Major Tenants in the Property: