AFRB.L Regulatory News (AFRB)

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18 March 2016

AFI DEVELOPMENT PLC

("AFI DEVELOPMENT" OR "THE COMPANY")PRELIMINARY STATEMENT OF RESULTS FOR THE YEAR ENDED 31 DECEMBER 2015VALUATION LOSSES OVERSHADOW SOUND OPERATIONAL PERFORMANCE

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 2015.

Financial highlights:

· Revenue for the year amounted to US$93.7 million, significantly less than the US$144.1 million recorded in 2014 due to continuous macroeconomic pressure affecting the Russian real estate market. Rental income (including hotel operating income) was US$92.9 million:

- AFIMALL City revenue contribution declined by 33% year-on-year to US$71.3 million versus US$106.9 million in 2014

· Despite the significant decrease in AFIMALL revenue, gross profit for 2015 was US$42.1 million, compared to US$49.9 million in 2014

· AFI Development incurred a net loss of US$466.7 million for the year, compared to a net loss of US$287.3 in 2014, mainly due to a valuation loss on investment properties of US$490.5 million recorded in Q4 2015

· Cash, cash equivalents and marketable securities amounted to US$42.4 million as at 31 December 2015, compared to US$93.3 million as at 31 December 2014

· Gross Asset Value declined to US$1.4 billion as at 31 December 2015 (compared to US$2.0 billion as at 31 December 2014), due to sharp downward revaluation in Q4 2015 across the portfolio as difficult macroeconomic conditions continued to prevail

Operational Highlights:

· Despite difficult market conditions, AFIMALL City retained the majority of its tenants and welcomed several new retailers to the Mall during 2015

- Average monthly footfall in December 2015 was 3% higher than in December 2014, reflecting the success of targeted sales promotions executed during the year

- NOI declined from US$83.0 million in 2014 to US$53.3 million in 2015

· The main construction phase and pre-sale of apartments at the Paveletskaya II residential development commenced in December 2015

· Apartment sales at Odinburg Building 1 are almost complete, while the construction of Building 2 is ongoing

- The number of sale contracts signed amounted to 706 in Building 1 and 132 in Building 2 as of 16 March 2016

- In March 2016, the Company met all formal requirements to start delivery of apartments in Building 1, which is planned to start by the end of the month

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

"As expected, our operating conditions remained challenging throughout 2015 driven by macroeconomic and geopolitical developments affecting our market. Continued deterioration in demand for real estate assets across Russia has served to not only reinforce our focus on maintaining a high level of efficiency at our yielding assets, but has resulted in further downward revision to the value of our portfolio. This has had a major effect on our profitability in 2015 and has overshadowed our operational achievements during the year. Given the high level of uncertainty in our market, we plan to continue with the development of selected residential projects and will adapt our strategy to any changes in our operating environment to ensure sustainable development of our business going forward."

FY 2015 Results Conference Call

AFI Development will hold a conference call for analysts and investors to discuss its full year 2015 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 Kutnov 

Citigate Dewe Rogerson, London +44 20 7638 9571

David Westover

Sandra NovakovMarina Zakharova de Calero

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.

Executive Chairman's Statement

As expected, 2015 was another difficult year for both AFI Development and the Russian market as a whole. With continued decline in oil prices and the consequent rouble devaluation trend, Bank of Russia maintained its key lending rate at historically high level of 11% due to significant inflation risks. Given the high cost and low availability of financing, there was little impetus for corporate development, which thwarted economic recovery in 2015.

In this environment, the real estate market in Russia remained under pressure with vacancy rates up across all asset classes and rental rates experiencing a significant decline in US dollar terms. The 'de-dollarisation' trend continued into 2015 with the transition of lease rates to roubles for many properties.

By year-end, the vacancy rate in Moscow shopping centres reached an average of 8.3% with average rental rates down by 15% year-on-year. Nevertheless, international retailers remain interested in the Moscow market as reflected in the market entry of 40 new international retailers during 2015. 

As a result of these trends, the value of our portfolio was revised downward during the fourth quarter of the year, from US$2.0 billion at the end of 2014 to US$1.4 billion at the end of 2015. The higher long term vacancy rates in both retail and office segments and lower estimated rental value (ERV) were among the key drivers of the revaluations.

Our continued focus on the development of selected residential projects is reflected in the progress achieved at our Odinburg development, where nearly all apartments in Building 1 have been sold with Building 2 under construction, as well the launch of construction and pre-sale of apartments at the Paveletskaya II residential development.

We are pleased to report that AFIMALL City remains among the most popular shopping malls in Moscow with increasing footfall, driven by successful sales promotions throughout 2015.

However, as a result of difficult market conditions, our rental revenue in 2015 declined to US$92.9 million, from US$141.4 million in 2014. This trend, in combination with the above-mentioned valuation loss, led to a net loss of US$466.7 million for the year.

Looking to 2016, we expect market conditions to remain challenging due to the continued economic downturn in Russia compounded by geopolitical risks driven by developments in Ukraine and Syria. Whilst demand across all classes of real estate remains subdued, we are encouraged by the level of interest from international retailers in the Moscow market and will continue to adapt our strategy to ensure sustainable growth of our business in the future.

Valuation

As at 31 December 2015, based on the Jones Lang LaSalle LLC ("JLL") independent appraisers' report, the value of AFI Development's portfolio of investment properties stood at US$0.93 billion, while the value of the portfolio of investment property under development stood at US$0.2 billion.

Consequently, the total value of the Company's assets, mainly based on independent valuation as of 31 December 2015, was US$1.4 billion, compared to US$2.0 million as at 31 December 2014.

The main reasons behind the decrease in the portfolio valuation were as follows:

1. Devaluation of the national currency during the year and a difficult macroeconomic situation driven by imposed economic sanctions

2. Increase in long-term vacancy rates and significant reductions of market rents in the retail and office segments, caused by the current macroeconomic pressures

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

Liquidity

We completed 2015 with approximately US$42.5 million of cash, cash equivalents and marketable securities on our balance sheet and a debt[1] to equity level of 77%. This 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.

The Company is looking to improve its liquidity position by negotiating with the VTB Bank to postpone the principal payments under both existing loan agreements and by careful scrutiny of all ongoing investments.

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

Key developments since financial year end

In March 2016, AFI Development's subsidiary Semprex LLC entered into a preliminary agreement regarding the disposal of the Aquamarine Hotel and 25 underground parking places located at the Ozerkovskaya II project for a total consideration of US$27.5 million. The prospective buyer is currently performing due diligence of the project, at the end of which the parties will negotiate the final sale-purchase agreement. The Company expects the net cash flow from the transaction, in the event of completion, to be circa US$5 million, following partial repayment of the loan facility of Bellgate Constructions Limited ("Bellgate") (as stipulated by the mortgage agreement of the Aquamarine Hotel premises for the Bellgate's loan).

Portfolio Update

AFIMALL City

During 2015, in a difficult environment for all shopping centres across Russia, AFIMALL managed to retain the occupancy levels, which were at the level of 78% in the end year. AFIMALL has firmly established itself as one of the most popular shopping centres located in central Moscow, with a quality tenant mix and comfortable leisure, dining and entertainment zones.

The Mall welcomed several new tenants during the year, most notably one of the leading Russian restaurant chains "Chaihona №1" and a well-known children's goods store "Detsky Mir". Recent openings include a Jo Malone London perfumery outlet, a Tschibo family store and British shoe retailer Clarks.  

In 2015, marketing programmes at AFIMALL City focused mainly on targeted sales promotions, which positively impact traffic to the Mall and sales activity in the short-term and expectedly in the longer term.

AQUAMARINE III (OZERKOVSKAYA III)

Following the disposal of Building 1 to diamond miner Alrosa, AFI Development retains title to the remaining three buildings of the complex, which have a combined GBA of 61,579 sq.m and GLA of 46,247 sq.m. The Company is currently in negotiations with potential buyers and tenants regarding lease or purchase transactions. Several new tenants leased space in the complex during 2015, most notably Brown-Forman, the Kentucky-based producer of premium spirits.

HOTELS 

AFI Development's hospitality portfolio, which consists of one Moscow city hotel (Aquamarine) and two resorts in the Caucasus mineral waters region (Plaza Spa Kislovodsk and Plaza Spa Zheleznovodsk), has produced strong results in 2015. The Caucasus resorts, in particular, benefited from the growing domestic tourism demand in Russia.

ODINBURG 

Construction works of Phase 1 ("Korona") of this development are currently underway. During Q4 2015, the final fit-out, engineering systems installations and landscaping works at Building 1 of the first phase of Odinburg were finalised. The apartments at Building 1 are almost fully sold, the marketing and sales activities have been focusing on the Building 2. As of the date of publication of this report, 706 out of 723 contracts for sales of apartments in Building 1 have been signed, while for Building 2 132 out of 706 contracts have been signed. In March 2016 the Company met all formal requirements to start the delivery of apartments in Building 1, which is planned to start by the end of the month.

AFI RESIDENCE PAVELETSKAYA (PAVELETSKAYA PHASE II) 

In December 2015, AFI Development successfully launched the main construction phase of the project. Flats and "apartments" pre-sales started simultaneously with the construction launch. The project is being marketed as "AFI Residence Paveletskaya". As of the date of publication of this report, 31 contracts for sales of flats and 3 for sales of "apartments" have been signed.

BOLSHAYA POCHTOVAYA  

Design works and preparations for construction at Bolshaya Pochtovaya continue. The Company plans to start construction of the project in H2 2016.

BOTANIC GARDEN

In light of the changing residential market environment, AFI Development is reviewing the planning and designs of the project.

Market Overview - General Moscow Real Estate

Macroeconomic Environment

The Russian economy continued to contract during 2015 with high inflation and low wages denting consumer purchasing power.

The country's macroeconomic environment was affected by the geopolitical situation in Ukraine and Syria, the continued decline in oil prices and the weak rouble. As a result, GDP contracted by 3.8% with industrial production down by 3.1%. The rate of inflation declined to 15.8% by year-end with the downward momentum expected to continue in 2016. Given the lower than expected oil price, the Russian government tightened its fiscal stance further, putting additional pressure on the economy. With the key lending rate of 11%, interest rates remain at historically high levels.

Despite the current market volatility, however, investor interest in Russian real estate remains relatively high, although lower than in previous years. The commercial real estate investment volume in 2015 reached US$2.8 billion, with the office segment leading.

(Sources: Russia Property Investment, Q4 2015, CBRE; Russian Investment Market, Q4 2015, JLL; Oxford Economics Russia Country Economic Forecast, 25 January 2016)

Moscow Office Market

2015 saw a record-breaking volume of renewals and renegotiations. Take-up increased by 18% compared to 2014, amounting to 870,400 sq.m, due to a number of major transactions closed by state agencies and state-owned companies.

Given the current market conditions of high vacancy, limited demand and rental rate decline, the volume of new office construction decreased further in 2015. The volume of new office delivery amounted to 721,500 sq.m for the year, down nearly 50% on 2014.

By end-2015, total vacancy rates decreased to 16%, from 17% seen in Q3 2015. A significant decline was recorded in Class A offices, from 27.4% in Q3 to 23.1% by year-end.

The main trend for 2015 is the final transition of lease rates to roubles across all asset classes. In US dollar terms, rental rates in 2015 decreased up to 50% due to the increasing rouble devaluation in the last quarter of 2015. Going forward, rental rates in rouble terms are expected to remain stable compared to 2015.

(Sources: The International Monetery Fund, Moscow Office Market, Q4 2015, JLL; Russian Investment Market, Q4 2015, JLL; CBRE Marketview, Moscow Office Market, Q4 2015)

Moscow Retail Market

At 560,000 sq.m, new supply to the Moscow retail market was 40% lower than forecast for 2015. By year-end, the vacancy rate in Moscow shopping centres reached an average of 8.3%, up 2.3 percentage points year-on-year. Based on the same level of new supply in 2016, the vacancy rate is expected to rise to 11% by the end of 2016.

Rental rates for Moscow shopping centres declined by 15% during 2015. Generally, rental rates are denominated in roubles or subject to a fixed exchange rate of 50-55 roubles per 1 USD. Prime rents for shopping gallery space stood between US$1,700 and US$3,220 per sq.m per annum. These indicators are not expected to improve during 2016 given the weaker economy and levels of expected completions in 2016.

Nevertheless, international retailers remain interested in the Moscow retail market as reflected in the market entry of 40 new international retailers in 2015.

(Sources: Moscow Retail, Q4 2015, CBRE Research; Moscow Office Market, Q4 2015, JLL; Moscow Shopping Centre Market, Q4 2015, JLL)

Moscow Residential Market

In 2015 the supply of primary residential housing in Moscow reached 3.8 million sq.m, 14.4% above the level delivered in 2014 and the highest since 2007.

The focus of development activity remains on "new Moscow" territories where around 2 million sq.m were delivered in 2015, up from circa 1.6 million sq.m commissioned in 2014. The "old Moscow" saw a moderate increase year-on-year of 0.2 million sq.m to around 1.8 million sq.m by year-end.

On a quarterly basis, the supply of Moscow primary residential housing in Q4 2015 was approximately 1.9 million sq.m (about 27,100 residential units), an increase of 32% compared to the previous quarter and 60% year-on-year.

While the growth of primary residential real estate in Moscow continued in 2015, the weighted average asking price per sq.m decreased significantly to US$2,967 per sq.m at the end of December 2015. This trend was driven primarily by the oversupply of primary residential real estate accompanied by the rapidly decreasing real income and weak consumer confidence in the current economic environment.

The level of mortgage application approval rates decreased by 45% during the first 11 months of 2015, representing a 46% drop in monetary terms. The state mortgage lending support programme introduced in March 2015 acted as a key driver of housing demand in 2015, preventing further deterioration in mortgage approval rates.

(Sources: Blackwood Q4 2015, Rosstat, Peresvet Invest Analytics, Russian Central Bank, Urban Planning Policy Department of Moscow)

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. Avraham Novogrocki, Non-Executive Director

Mr. Christakis Klerides, Senior Non-Executive Independent Director

Mr. Moshe Amit, Non-Executive Independent Director;

Mr. Panayiotis Demetriou, Non-Executive Independent Director

18 March 2016

MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Overview

As at 31 December 2015, the Company's portfolio consisted of 8 investment properties, 6 investment properties under development, 2 trading property under development, 1 inventory of real estate and 4 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 2015, was US$1.4 billion[2]. About 66% of the assets book value is attributed to yielding properties.

Revenues for 2015 decreased by 35% year-on-year to US$93.7 million mainly due to the fact that the 2015 revenue was influenced by USD depreciation. Average exchange rate of RUB to USD more than doubled during 2015. AFI Development recorded a 15.8% year-on-year decrease in gross profit to US$42.1 million due to the same reason. Cash, cash equivalents and marketable securities decreased by 54% to US$42.5 million as at 31 December 2015 due to the fact that debt service and financing of construction work partly performed by own capital.

In 2015 AFI Development incurred net loss of US$466.7 million, compared to net loss of US$287.3 in 2014, mainly due to valuation loss of US$490.5 million in Q4 2015.

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: The International Monetary Fund

Company Specific Factors

The following factors affected our performance in 2015:

· The rental income at AFIMALL City decreased by 34% in 2015 versus 2014, which had a negative impact on general revenues and profitability.

· During 2015 the Company had to make principal repayments and interest payments under the loan agreement at the Ozerkovskaya III project, which resulted in US$26.3 million cash outflow.

· Gross Asset Value reduced to US$1.4 billion as at 31 December 2015 (compared to US$2.0 billion as at 31 December 2014), due to sharp valuation decreases in Q4 2015 across the portfolio due to continuously depressed macroeconomic conditions

Key Portfolio Updates

YIELDING ASSETS

AFIMALL City

AFIMALL City is a major retail scheme located in the high-rise business district of Moscow, "the Moscow-City". With a total GBA of nearly 283,182[3] 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.

The 2015 marketing programmes at the Mall focused primarily on targeted sales promotion and included a series of prize draws for most active shoppers and sales events to mark AFIMALL's birthday in May and "Black Friday" in November.

The footfall at the mall continues to grow: average monthly footfall in December 2015 was 3% higher than as in December 2014.

The Moscow authorities have increasingly come to recognise the importance of providing a wide range of transportation options for projects such as Moscow City, as demonstrated by international experience at Canary Wharf and La Défence. As such, 2015 saw significant progress in the construction of the ambitious transportation hub, to be the largest in Russia, which will connect the new circular railroad (planned to be open for passenger traffic in 2016) with two metro stations at Moscow City (Mezhdunarodnaya and Delovoy Tsentr). The railway passenger terminal "City" is planned to open in September 2016.

As the transportation access and amenities in the business district gradually improve, the office space in the district becomes more attractive for quality tenants. According to CBRE, a record 163,000 sq.m were taken up in Moscow City during 2015. Half of this volume was driven by two large-scale transactions: the Moscow authorities leased around 50,000 sq.m in OKO Tower, while state-owned Transneft acquired the Evolution Tower (79,000 sq.m of office space). However, the vacancy rate in the district remains relatively high at 29% according to a CBRE estimate, due to a large volume of new deliveries.

According to independent appraisers JLL, the market value of AFIMALL City as of 31 December 2015 was US$685.2 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 three Class A buildings of 46,247 sq.m. of combined lettable space[4] and common underground parking for 446 cars . The project creates very attractive working conditions through state-of-the-art architecture, innovative design and efficient use of space. Due to these characteristics, "Aquamarine III" sets new standards for quality and an aspirational environment among Moscow's commercial developments.

AFI Development is in negotiations with potential buyers and tenants regarding selling or leasing the project either in full or in parts. Several tenants have already leased space in the complex. Most notably, Brown-Forman, the Kentucky-based producer of Jack Daniel's whiskey, Finlandia vodka and other well-known spirits, selected Aquamarine III for its Russian headquarters.

According to independent appraisers JLL, the market value of the remaining buildings of the Complex as of 31 December 2015 was US$199.3 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 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.

Despite slowdown in international business activity in Moscow and continuous rouble depreciation versus the US dollar, the hotel demonstrated strong performance in 2015, with average occupancy at 78%.

The balance sheet value of the project as of 31 December 2015 was US$13.1 million.

PLAZA SPA HOTEL ZHELEZNOVODSK

Plaza Spa Zheleznovodsk is a sanatorium project which was launched in the summer of 2012 and is located in 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.

During 2015 the hotel demonstrated excellent performance and growing occupancy, which reached an average of 75% for the year. The hotel benefited strongly from the growing domestic demand for quality resorts.

The balance sheet value of the project as of 31 December 2015 was US$9.1 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.

Similarly to Plaza Spa Zheleznovodsk, the hotel demonstrated excellent performance with average annual occupancy of 76%.

The balance sheet value of the Company share in the project (50%) as of 31 December 2015 was US$11.6 million.

DEVELOPMENT PROJECTS

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 150,873 sq.m. (2,569 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 311,244 sq.m (6,573 apartments). Each phase includes commercial premises on the ground floor that are planned to be sold to end users.

The construction works of Phase 1 ("Korona") are underway. Construction of Building 1 within this development is complete with the works now focused on Building 2. The apartments at Building 1 are almost fully sold and the focus of marketing and sales activities is currently on Building 2. As of the date of publication of this report, 706 out of 723 contracts for sales of apartments in Building 1 have been signed, while for Building 2 132 out of 706 contracts have been signed. In March 2016, the Company met all formal requirements for delivery of apartments in Building 1, which is planned to start by the end of the month.

The balance sheet value of the project as of 31 December 2015 was US$148.5 million.

PAVELETSKAYA II (AFI RESIDENCE PAVELETSKAYA)

Paveletskaya II is 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. The new business-class residential complex, marketed as "AFI Residence Paveletskaya" will be built on a land plot of 5.5 Ha and will feature several buildings of various height with a total GBA of 133,510 thousand sq.m AFI Residence Paveletskaya will include a sports complex and commercial areas. The project is to be constructed in three phases.

The main construction phase of the project was launched in December 2015 and pre-sales of apartments started at the same time. The preliminary construction works started already in Q3 2015, and the project was reclassified from Investment properties under development category to Trading properties under construction category of assets on the balance sheet as of 30 September 2015. As of the date of publication of this report, 31 contracts for sales of flats and 3 for sales of "apartments" have been signed.

Based on an independent valuation of the Company portfolio by JLL as of 31 December 2015, the fair value of Paveletskaya Phase II is US$55.9 million.

BOLSHAYA POCHTOVAYA (AFI RESIDENCE 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 construction of 170,350 sq.m. GBA, which includes a residential area of 56,952 sq.m., a commercial area of 34,208 sq.m. and 1,771 underground parking spaces. AFI Development is currently developing the design of the project and plans to start construction in H2 2016.

Based on an independent valuation of the Company portfolio by JLL as of 31 December 2015, the fair value of Bolshaya Pochtovaya is US$71.5 million.

BOTANIC GARDEN

Botanic Garden is a residential project, located in the North-Eastern Administrative District of Moscow, approximately 8 km from the Third Transportation Ring, near the major transportation route of the district Prospect Mira, within walking distance from Botanicheskuiy Sad and Sviblovo metro stations. The future residential complex has a land plot of 3.2 Ha and a gross building (GBA) of 217,605[5] sq.m. (including "city share"): 111,768 sqm of residential area, 14,927 sqm of commercial premises and 1,025 underground and above ground parking lots.

AFI Development has been reviewing the planning and designs of the project to meet the changing consumer demand.

Based on an independent valuation of the Company portfolio by JLL as of 31 December 2015, the fair value of Botanic Garden is US$18.6 million.

Tverskaya Plaza Ic

Tverskaya Plaza Ic is a Class A office complex located in the cultural and business quarter of the Tverskoy sub-district. The complex is located within a 4-minute walk of 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 61,810 sq.m. (including underground parking of approximately 467 parking spaces) and an estimated GLA of 37,035 sq.m.

Following the registration of a 10-year land lease agreement, the Company successfully finalised the development concept, received the necessary construction permit and completed all pre-construction works. AFI Developments plans to start construction of this project as soon as it has secured debt financing on favourable terms and the market situation improves.

Based on an independent valuation of the Company's portfolio by Jones Lang LaSalle as of 31 December 2015, the fair value of Tverskaya Plaza Ic is US$65.5 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 61,350 sq.m.

During 2015, the Company completed the steps for securing the land lease agreement with Moscow authorities.

Based on an independent valuation of the Company portfolio by Jones Lang LaSalle as of 31 December 2015, the fair value of Plaza IV was US$68.6 million.

KOSSINSKAYA

Kossinskaya is mixed-use building totalling 111,700 sqm with nine aboveground floors and a single underground level. The property was constructed in 2005. In November 2014, AFI Development's Board of Directors decided to place on hold and reconsider further implementation of the development concept of Kossinskaya as apparel and fashion wholesale trade centre "Expolon", in light of the current economic situation in Russia. The Company continues to explore various development options in light of the current economic situation.

Based on an independent valuation of the Company portfolio by JLL as of 31 December 2015, the fair value of Kossinskaya is US$27.8 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 2015

Following the year-end the following key events occurred:

In March 2016 the Company subsidiary, Semprex LLC, entered into a preliminary agreement on the disposal of the Aquamarine Hotel and 25 underground parking places located at the Ozerkovskaya II project for total consideration of US$27.5 million. The potential buyer is currently performing due diligence of the project, at the end of which the parties agreed to negotiate the final sale-purchase agreement. The Company expects the net cash flow from the transaction, should it be completed, to be circa US$5 million, following partial repayment of the loan facility of Bellgate Constructions Limited ("Bellgate") (as stipulated by the mortgage agreement of the Aquamarine Hotel premises for the Bellgate's loan).

Disposals and Acquisitions

During 2015, the Company did not make any disposals.

During 2015, the Company made the following acquisition:

On 19 August 2015 the Company acquired remaining 10% share in Bioka Investments Limited, company holding development rights in the Botanic Garden project, and became 100% owner of the project. Total consideration of the transaction amounted to US$1.6 million.

Presentation of Financial Information

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

Financial policies and practices

Revenue Recognition

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

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

Hotel operation income

Income from hotel operations comprises of accommodation, treatments and other services offered at the hotels operated by the group and sales of food and beverages and are recognised upon offering of the service and the acceptance by the client.

· 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.

· Construction Management fee. Revenue from construction management is recognised in profit or loss in proportion to the stage of completion of the transaction at the reporting date. The stage of completion is assessed by reference to surveys of work performed.

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.

Share of the after tax (loss)/profit of joint ventures

A joint venture is an arrangement in which the Group has joint control, whereby the Group has rights to the net assets of the arrangement, rather than rights to its assets and obligations for its liabilities.

Interests in joint ventures are accounted for using the equity method. They are initially recognised at cost, which includes transaction costs. Subsequent to initial recognition, the consolidated financial statements include the Group's share of the profit or loss and OCI of equity-accounted investees, until the date on which joint control ceases.

Gross Profit

Gross profit is the result of the Group's operations and comprises revenue and other income net of all cost for trading properties sold and operating, administrative and other expenses, recognised in profit or loss during the year.

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. Capitalisation of borrowing costs commences when the activities to prepare the asset are in process and expenditures and borrowing costs are being incurred. Capitalisation of borrowing costs may continue until the assets are substantially ready for their intended use.

Foreign currency gain or loss on financial assets and financial liabilities is reported on a net basis as either finance income or finance expense depending on whether foreign currency movements are in a net gain or net loss position.

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%.

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. If the volatility of the exchange rates is high for a given year or period the Company uses the average rate for shorter periods i.e. quarters or months for income and expense items. 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 disposed of in its entirety or partially such that control or joint control is lost, the cumulative amount in the translation reserve related to that foreign operation is reclassified to profit or loss as part of the gain or loss on disposal. 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

Deferred tax is recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes.

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. 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.

Measurement of fair values

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.

We have an established control framework with respect to the measurement of fair values. This includes a valuation team that has overall responsibility for overseeing all significant fair value measurements, including Level 3 fair values and reports directly to the CFO. The valuation team regularly reviews significant unobservable inputs and valuation adjustments. If third party information, such as broker quotes or pricing services, is used to measure fair values, then the valuation team assesses the evidence obtained from the third parties to support the conclusion that such valuations meet the requirements of IFRS, including the level in the fair value hierarchy in which such valuations should be classified.

Results of Operations

Description of Statement of comprehensive income Line Items

Summary of statement of comprehensive income for 2015 and 2014

Revenue - General Overview

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

Operating expenses. Our operating expenses decreased by US$22.0 million, from US$62.5 million in 2014 to US$40.5 million in 2015. The year-on-year decrease of 35.2% is attributable to cost saving and rouble devaluation versus the dollar.

Administrative expenses. Our administrative expenses decrease by US$11.7million or 52.3% year-on-year, from US$22.3 million in 2014 to US$10.6 million in 2015. The decrease is attributable to decrease in bad debt provision from US$4.6 of charge in 2014 to US$0.1 of reverse in 2015 and other cost saving process in the Company.

Net valuation gain/(losses) on properties. Net result of investment property valuation decreased from a loss of US$85.9 million in 2014 to a loss of US$434.4 million in 2015. For additional information, please refer to "Portfolio Valuation" section below.

Impairment loss on inventory of real estate. Net result of real estate impairment decreased from a loss of US$8.9 million in 2014 to a loss of US$12.7 million in 2015. For additional information, please refer to "Portfolio Valuation" section below.

Finance income. Our finance income decreased by US$2.8 million or 39.9% year-on-year, from US$7 million in 2014 to US$4.2million in 2015. The decrease was a result of the change in the Company financial investments portfolio.

Finance expense. Our finance expense decreased by US$14.7million or 24.1% year-on-year, from US$60.8 million in 2014 to US$46.2 million in 2015. The decrease is due to repayment of principal amount of loans by US$38.0 million and overall rouble devaluation versus the dollar.

FX Gain/(Loss). We recorded a foreign exchange loss of US$110.3million in 2015, against a loss of US$224.8 million in 2014. This was a result of Russian Rouble depreciation versus the US Dollar during 2015.

Income tax expense. Our current tax expense increased to US$0.8 million compared to US$0.6million in 2014.

Profit/Loss for the year. Due to the factors described above, we recorded a US$466.7 million net loss for 2015 compared to net loss of US$287.3 million for 2014.

Liquidity and Capital Resources

Cash flows

Summary of cash flows for 2015 and 2014

* Note: the cash and cash equivalents do not include US$15.9 million (2014: US$6.5 million) fair value of marketable securities.

Net cash from operating activities

Net cash from operating activities decreased to US$ 34.4 million in 2015, from US$64.5million in 2014. The decrease is attributable to the fact that sales of residential units in Odinburg, nominated in Russian rouble, created lower USD positive cash flow due to rouble depreciation.

Net cash from investing activities

Net cash outflow from investing activities amounted to US$ 14.8 million is attributable to payments for construction of investment property under development and acquisition of investments in marketable securities.

Net cash used in financing activities

Net cash used in financing activities increased to a negative US$80.0 million in 2015 from a negative US$42.2 million in 2014 due to the fact that the Company repaid part of principal amount and interests during 2015.

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 2015 with of approximately US$42.5 million cash, cash equivalents and marketable securities on our balance sheet and a debt[6] to equity level of 77%.

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, 2015 our debt portfolio was as follows:

* In January 2015 the loan was refinanced by VTB Bank JSC, please refer to Note 28 to the Consolidated Financial Statement

The total balance of secured Debt financing reached US$613.9 million as at 31 of December 2015, including US$613.5 million of Principal Debt and US$0.4 million of accrued interest with average interest rate 7.05% per annum as at 31.12.2015 (6.88% per annum as at 31.12.2014) (for more details see note 28 to our consolidated financial statements).

As at 31 December 2015, our loans and borrowings were payable as follows:

In November 2015, the Company received a notice from VTB Bank on decision of the bank to postpone the applicability of covenants in the loan agreement of Krown Investments Limited ("Krown") for the Ozerkovskaya III project. According to the decision, the Loan-To-Value covenant (previously applicable from Q1 2015 onwards) shall be applicable from Q2 2017, while the Debt Service Coverage Ratio covenant (previously applicable from Q4 2015 onwards), shall be applicable from Q2 2017 onwards (based on Q1 2017 financial results). AFI Development's subsidiary owning and operating AFIMALL City, Bellgate Construction Limited, will provide a guarantee for the full amount of the loan of Krown, and AFIMALL City premises will be mortgaged in a secondary mortgage as additional collateral for the loan by Krown. The decision of the Bank will become legally binding, following the execution of addendum to the loan agreement and related documents.

As of the date of publication of these Financial Statements, the addendum to the loan agreement and the related documents have not yet been signed, as the parties still negotiate some issues in the addenda.

Based on the latest independent valuation as at 31 December 2015, of the Ozerkovskaya III project, Krown, has not met the Loan to Value covenant and the Bank may require a partial repayment of the principal of the loan sufficient to rectify the breach of the covenants, within 90 calendar days from the date of the Bank notification. The DSCR ratio covenant of the Krown loan agreement has not been met either, based on the performance results of Q4 2015.

Krown is, therefore, in breach of both covenants in its loan facility agreement. Based on this, the total amount of the outstanding loan (US$193 million) was reclassified to current liabilities.

Portfolio Valuation

From the current reporting period and onwards AFI Development Plc has appointed Jones Lang LaSalle LLC ("JLL") as the Company independent appraisers. As at 31 December 2015, based on the JLL independent appraisers' report, the value of AFI Development's portfolio of investment properties stood at US$933.7 million, while the value of the portfolio of investment property under development stood at US$ 238.9 million.

Consequently, the total value of the Company's assets, based predominantly on independent valuation as of 31 December 2015, was US$1.4 billion, compared to US$2.0 billion as at 31 December 2014.

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.

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 33 to the Company's Audited Financial Statements for year 2014.

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 2015, there were two outstanding guarantees: one for the amount of US$1 million in favour of VTB Bank JSC under a loan facility agreement of Bellgate Construction Limited (AFIMALL City) and the second one for the amount of US$ 193.4 million in favour of VTB Bank JSC under a loan facility agreement of Krown Investments LLC (Ozerkovskaya III).

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 2014, 27% of our financial liabilities were fixed rate. For more detail see note 33 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 notes 3 and 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. For further details, please refer to Note 3 to our consolidated financial statements.

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 2015 or in the period since 31 December 2015.

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. 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.

(1) "Number of residential units sold" - based on signed contracts only[11]

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.

According to the investment agreement, the project should contain 462,815 sq.m. of residential areas after completion and social amenities (such as a school, and a kindergarten, both of which will be constructed in two stages, etc.). As at the date of this Periodic Report, the property company has received approval for the planning and design documents and a building permit in effect until May 30, 2017, regarding the first two stages of the first phase of the construction of one residential building in the project containing 2,569 housing units, pursuant to the revised project documents.

Average price RUR per square meter on company projects as December 31, 2015:

Expected information (000'$):

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, of which there is no certainty of full realisation. 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 is not realised, fully or partially.

Sensitivity Analysis

Following is a sensitivity analysis of gross profit of projects in which units sold are less than half of the inventory

Following are the details of projects not yet started (excluding contingent projects and excluding land reserves as detail below) as at December 31, 2015:

Land bank designated for Residence as at December 31, 2015:

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, 2015:

(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, 2015, the Company's group held (indirectly) property rights in 1 residential unit 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. For AFI Residence at Paveletskaya the target audience is represented by customers of medium 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 Economic 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 31.12.15 (sq.m.)

(b) Breakdown of the lettable property areas based on regions and uses as at 31.12.14 (sq.m.)

(c) Breakdown of the lettable property value based on regions and uses as at 31.12.15

(d) Breakdown of the lettable property value based on regions and uses as at 31.12.14

* Includes Sadovaya-Samotechnaya

(e) Breakdown of the group's yielding real estate in the CIS NOI based on regions and uses for the year ended 31.12.15

(f) Breakdown of the group's yielding real estate in the CIS NOI based on regions and uses for the year ended 31.12.14

(h) Breakdown of the revaluation income (losses) based on regions and uses for the year ended 31.12.15

* Includes Sadovaya-Samotechnaya

(i) Breakdown of the revaluation income (losses) based on regions and uses for the year ended 31.12.14

* Includes Sadovaya-Samotechnaya

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

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

(m) Breakdown of the average occupancy rates

* Presented in relation to total lettable areas

** Not Including Ozerkovskaya III project and Sadovaya-Samotechnaya

(n) Number of properties based on regions and uses

*** Not including Ozerkovskaya III project and Sadovaya-Samotechnaya

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

**** Not Including Ozerkovskaya III project and Sadovaya-Samotechnaya

(p) Expected revenues in respect of signed lease agreements

* Does not include revenue from parking 

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

* The change is due to disposal of the St.Petersburg project

3. 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: