AFRB.L Regulatory News (AFRB)

THIS ANNOUNCEMENT IS NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION

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

16 April 2019

AFI DEVELOPMENT PLC

("AFI DEVELOPMENT" OR "THE COMPANY" OR "THE GROUP")PRELIMINARY STATEMENT OF RESULTS FOR THE YEAR ENDED 31 DECEMBER 2018 

solid growth in revenue and profit supported by residential sales

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 2018.

Financial highlights:

Operational highlights

Commenting on today's announcement, Eli Avrahampour, Chairman of AFI Development, said:

"We are pleased to report another year of growth in revenue and gross profit, driven primarily by a continued strong performance in residential sales, the successful delivery of apartments in AFI Residence Paveletskaya in the first half of the year and the adoption of IFRS 15.

As we enter the new financial year, we are mindful of the ongoing uncertainty in Russia, in terms of the evolving legal, business and economic environment, which is expected to place downward pressure on the profitability of the Company's yielding properties and residential projects. In particular, high rouble volatility, recent tax increases and inflation will increase construction costs, while the implementation of the new escrow schemes and increased lending rates pose further challenges for the property development market. We also face rising competition stemming from the launch of the state-funded housing program.

That said, we remain cautiously optimistic and believe that AFI Development will meet the challenges in both the residential and commercial segments, supported by our market experience and competitive projects."

FY 2018 Results Conference Call

AFI Development will hold a conference call for analysts and investors to discuss its full year 2018 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.

The FY 2018 investor presentation will be published on the Company's website: http://www.afi-development.com/en/investor-relations/reports-presentations at 11.00 UK (13.00 Moscow) on 17 April 2019.

For further information, please contact:

This announcement contains inside information.

About AFI Development

Established in 2001, AFI Development is one of the leading real estate development companies operating in Russia.

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's Statement

For the Russian economy in general, 2018 was marked by the negative influence of US sanctions introduced in April, which were targeted against specific commodity producers and state-owned banks. The sanctions caused a weakening of the rouble, particularly towards the year-end, and triggered a rise in inflation. In response, the Central Bank of Russia ("CBR") raised its key lending rate by 25bps in September and December 2018 (currently at 7.75%). Inflation remains low, by Russian standards (4.3%, CBR), while the GDP grew modestly by 1.63% (OECD).

AFI Development performed steadily during the year due to continued progress at our four ongoing residential projects in Moscow and the Moscow region under construction and marketing, and our yielding properties under operation. The sale of residential properties and parking units continued to play a significant role in our revenue generation, alongside revenue earned from rent and hotel operations.

Revenue for the Company in 2018 grew 65% year-on-year to US$296.0 million, supported by strong residential sales which contributed US$169.6 million to total revenue. This is largely due to the implementation of IFRS 15[2].

Yielding properties performed well throughout 2018, with strong contribution from our flagship project, the AFIMALL City, which generated US$86.8 million in revenue, up 5% from the prior year. Overall, rental and hotel operating income for the year was US$125.5 million, a 7% increase year-on-year.

The Company recorded a gross profit of US$89.4 million in 2018, while net profit was US$31.5 million.

Valuation

As at 31 December 2018, based on the Jones Lang LaSalle LLC ("JLL") independent appraisers' reports and on accounting book value of properties, the value of AFI Development's portfolio of investment properties stood at US$742.6 million, while the value of the portfolio of investment property under development stood at US$141.9 million.

The total value of the Company's assets, mainly based on independent valuation as of 31 December 2018 and book values of residential development projects, was US$1.25 billion, compared to US$1.42 billion as at 31 December 2017. The drop in values was triggered by the exchange rate fluctuation effect (the rouble depreciated by 20.61% YoY) and reduction in the book values of residential projects due to delivery of apartments in AFI Residence Paveletskaya in Q2 2018 and the implementation of IFRS 15.

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

Liquidity

We ended 2018 with approximately US$100.2 million of cash, cash equivalents and marketable securities on our balance sheet (-5% YoY), and a debt[3] to equity level of 68%. This position reflects the Company's ability to continue balancing liquidity requirements from a number of sources.

For commercial projects, our financing strategy aims to maximise the level 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 residential projects, our financing strategy is to finance the ongoing construction from pre-sales, while for the new phases of our projects, which will be developed under the newly introduced mandatory escrow-schemes, the construction will be financed by bank project finance at market terms.

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

Key Events Subsequent to 31 December 2018

The Company did not have any significant events subsequent to 31 December 2018.

Portfolio Update

AFIMALL City

During 2018, AFIMALL City continued to demonstrate growth in footfall, revenue and NOI.

Average daily footfall in December 2018 was 21% higher compared to December 2017, reflecting the development of the Moscow City area (such as improving transportation infrastructure, and opening of new office space).

Revenue grew 5% year-on-year to US$ 86.8 million and NOI increased 1% year-on-year to US$63.7. Occupancy stood at 93% at the end of the year.

In January 2019, the Russian government announced that three federal ministries, namely the Ministry of Economic Development, the Ministry of Communications and the Ministry of Industry and Trade will relocate to Moscow City in 2019, occupying about 70,000-80,000 sq.m of office space.

AQUAMARINE III (OZERKOVSKAYA III)

In February 2018, AFI Development successfully completed the disposal transaction of two buildings in the complex for RUR7.89 billion (circa US$135 million). The Company currently owns one remaining building in the complex (GBA 18,759 sq.m including underground parking), which is leased to Deutsche Bank, Brown-Forman and other tenants.

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), performed well in 2018. Notably, the Aquamarine hotel benefited from the football World Cup held in Russia in the summer of 2018.

ODINBURG

At Odinburg, construction work and marketing continued throughout the year. The construction and sales of Building 3 (phase II) have commenced, while Building 3 (Phase I) and Building 6 (Phase II) are under construction and currently being marketed to customers.

As of 31 March 2019, 697 apartments (99% of total) were sold in Building 2, 680 (74% of total) in Building 3 (Phase I) and 206 (92% of total) in Building 6.

AFI RESIDENCE PAVELETSKAYA

In December 2015, AFI Development successfully launched the main construction phase of the project. The pre-sale of apartments and "special units"[4] began simultaneously with the onset of construction.

In 2018, construction and marketing of AFI Residence Paveletskaya proceeded according to schedule. Delivery of Phase I apartments to customers was completed while construction of Phase II and Phase III apartments remains ongoing. As of 31 March 2019, 558 contracts for pre-sales of both apartments and "special units" have been signed (88% of Phase I and Phase II combined).

BOLSHAYA POCHTOVAYA

The main construction phase and pre-sale of apartments was launched in Q1 2017 at Bolshaya Pochtovaya. During 2018, construction and marketing of the apartments progressed to schedule and as of 31 March 2019, 251 apartments (62% of Phase I and Phase II combined) had been pre-sold to customers.

BOTANIC GARDEN

The main construction phase and pre-sale of apartments at Botanic Garden, which began in Q1 2017, continues to progress as expected. As of 31 March 2019, 348 apartments (43% of Phase I) have been pre-sold to customers.

TVERSKAYA PLAZA Ic

The project, located in 2nd Brestskaya street in the office district near the Belorussky Railway station, is planned as a grade A office building. Construction of the building commenced in Q1 2019.

TVERSKAYA PLAZA II

In Q2 2017, the Company obtained development rights for a project at Tverskaya Plaza II. This has been approved for development by the Moscow construction authorities as a "recreational centre", with a gross buildable area of 22,000 sq.m.

Outlook

A weaker rouble and additional taxation are expected to place downward pressure on the profitability of both the Company's yielding properties, AFIMALL City in particular, and the residential projects. The impact of these two factors is already reflected in the valuation of our portfolio with a valuation loss on properties of US$11.5 million for 2018.

Broadly speaking, the tax increases introduced in 2019 will drive up the investment cost for all projects under development. The introduction of new escrow schemes for residential development poses uncertainty as to the magnitude of its effects on costs and cash flows. For details on taxation increases and the new mandatory escrow schemes please refer to the Market Update section below.

We see that sanctions have caused the CBR to increase its key lending rate in 2018 and we believe further increases in 2019 are likely. The CBR key lending rate, in turn, will drive the cost of mortgage finance higher. Approximately 55-65% of our residential sales are mortgage financed and therefore, we expect the demand for our residential units to decline. Furthermore, if the CBR further increases its key lending rates, our cost of rouble financing will also increase.

New competition in residential segment from the state renovation programme will most probably affect future sales. We remain cautiously optimistic and believe that AFI Development will meet the challenges in both residential and commercial segments, supported by our market experience and competitive projects.

BOARD OF DIRECTORS

The Directors of AFI Development, as at the date of publication of this report, are as set out below:

Mr Elias Ebrahimpour (Eli Avrahampour), Non-Executive Chairman of the Board

Mr Panayiotis Demetriou, Senior Non-Executive Independent Director

Mr Avraham Noach Novogrocki, Non-Executive Independent Director

Elias Ebrahimpour (Eli Avrahampour), Chairman

15 April 2019

MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Overview

As at 31 December 2018, the Company's portfolio consisted of 7 investment properties, 4 investment properties under development, 4 trading properties under development and 4 hotel projects (3 of them are active and 1 is frozen). The portfolio comprises commercial projects focused on offices, shopping centres, hotels and mixed-use properties, as well as residential projects, in Moscow and other regions of Russia. The total value of the Company's assets, based predominantly on independent valuation as of 31 December 2018, was US$1.25 billion[5], compared to US$1.42 billion as at 31 December 2017. Revenues for 2018 increased by 65.3% year-on-year to US$296.0 million, mainly as a result of initial application of IFRS 15 Revenue from Contracts with Customers from 1 January 2018. The average exchange rate of the Russian rouble to US dollar increased by 7.5% during 2018. Mainly due to these two factors, AFI Development recorded a 46.6% year-on-year increase in gross profit to US$89.4 million. Cash, cash equivalents and marketable securities decreased by 5.5% to US$100.2 million as at 31 December 2018.

In 2018, AFI Development incurred a net profit of US$31.5 million, compared to net loss of US$4.7 million in 2017.

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 the Russian Federation. As a result, Russian macroeconomic trends and country-specific risks significantly influence our performance.

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

Source: The International Monetary Fund

Company Specific Factors 

The following factors affected our performance in 2018:

· From 1 January 2018 the Company has adopted and applied IFRS 15 Revenue from Contracts with Customers. The effect of this is mainly attributed to the earlier recognition of revenue from sales of residential properties under the "DDU" (pre-sales) contracts which contributed US$154.9 million to revenue for 2018 (for details on IFRS 15 please refer to note 5 to the consolidated financial statements);

· At the AFI Residence Paveletskaya project, Phase I was delivered to customers in H1 2018, which enabled the Company to recognise revenue from sales of trading properties in the amount of US$23.9 million for 2018.

· In December 2017 the Company refinanced the AFIMALL City loan and repaid the Ozerkovskaya III loan in January 2018. For further details please see note 27 to the consolidated financial statements.

Key Portfolio Updates

YIELDING ASSETS

AFIMALL City

AFIMALL City is a major retail centre located in the high-rise business district of Moscow, "Moscow-City". With a total GBA of nearly 274,877 sq.m (including parking), and GLA of nearly 107,036 sq.m,, the project has a shopping gallery of around 460 shops, an 11-screen movie theatre and 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 average daily footfall in December 2018 was up 21% from December 2017, reflecting further development of the Moscow City area such as improving transportation infrastructure, and the opening of new office space.

Revenue grew 5% year-on-year to US$ 86.8 million in 2018, while NOI increased 1% year-on-year to US$63.7. Occupancy stood at 93% at the end of 2018.

According to independent appraisers JLL, the market value of AFIMALL City as of 31 December 2018 was US$637.3 million.

AQUAMARINE III (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 and common underground parking. 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 creates an aspirational environment among Moscow's commercial developments.

At the end of 2017, the Company agreed to dispose of buildings 2 and 4 to one of the leading Russian banks for RUR7.89 billion (circa US$135 million). The transaction was successfully completed in February 2018.

The Company currently owns one remaining building in the complex with a GBA of 18,759 sq.m including underground parking, which is leased to Deutsche Bank, Brown-Forman and other tenants.

Following the restructuring of the loans of Aquamarine III and of AFIMALL City with VTB Bank PJSC, the loan for Aquamarine III was fully repaid in January 2018.

According to independent appraisers JLL, the market value of the remaining building of the Complex as of 31 December 2018 was US$57.4 million.

HOTELS

The Company's portfolio includes three hospitality projects, one located in Moscow and the remaining two 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 a Class A office centre, Aquamarine III, and the 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.

In July 2018, the Company concluded a franchising agreement with Intercontinental Hotel Group to allow the Aquamarine Hotel to be rebranded as Crowne Plaza. The Company believes that, in light of increasing competition in central Moscow, branding is crucial to successful long-term competitiveness of the Hotel and its financial performance. The Hotel will be renamed "Crowne Plaza Tretyakovskaya".

Due to the 2018 Football World Cup in Russia, the Hotel performed very well in 2018, with average occupancy of 79%.

The balance sheet value of the project as of 31 December 2018 was US$13.0 million.

PLAZA SPA HOTEL (ZHELEZNOVODSK)

Plaza Spa Zheleznovodsk is a sanatorium project launched in the summer of 2012 and is located in Zheleznovodsk, in the Caucasus mineral waters region. The hotel comprises 134 guest rooms over 11,701 sq.mof gross buildable area. The spa provides diagnostic assessment and treatment of urological diseases.

During 2018, the hotel performed in line with expectations with average occupancy levels at 69%.

The balance sheet value of the project as of 31 December 2018 was US$9.6 million.

PLAZA SPA HOTEL (KISLOVODSK)

The Plaza Spa is located in the city centre of Kislovodsk, in the Caucasus mineral waters region. The facility began operations in 2008 after a full reconstruction and now has a total of 275 rooms across 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 staff regularly attend training sessions for new methods of treatment to aid patient rehabilitation.

In 2018, the hotel performed well with average annual occupancy at 68% for the year.

The balance sheet value of the project as of 31 December 2018 stood at US$40.8 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 more than 33 hectares, located 11 km west of Moscow in the town Odintsovo.

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

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

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

The construction of Phases I and II are currently underway. The construction and sales of Building 3 (phase II) have recently commenced. Building 3 (Phase I) and Building 6 (Phase II) are under construction and currently being marketed to customers.

The balance sheet value of the project as of 31 December 2018 amounted to US$90.3 million.

PAVELETSKAYA II (AFI RESIDENCE PAVELETSKAYA)

AFI Residence Paveletskaya is a modern residential complex in proximity to Moscow city centre on Paveletskaya Embankment. The project is located in Danilovsky Subdistrict (the South Administrative district of Moscow), between the Garden Ring and the Third Transportation Ring and is easily accessible by private or public transport. The property is currently under construction.

The project consists of three phases:

In December 2015, AFI Development successfully launched the main construction phase of the project. The pre-sale of apartments and "special units"[6] began, alongside the launch of construction.

In 2018, construction work and marketing at AFI Residence Paveletskaya proceeded according to schedule. Phase I apartments were fully delivered to customers and the construction of Phase II and Phase III is currently ongoing.

The balance sheet value of the project as of 31 December 2018 was US$53.2 million.

BOLSHAYA POCHTOVAYA

Bolshaya Pochtovaya is a mixed-use project (predominantly residential) located in an attractive neighbourhood in the central administrative district of Moscow. The area benefits from developed infrastructure including 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 136,581 sq.m on a land area of 5.65 hectares. The construction will be realised in four phases:

The main construction phase and pre-sale of apartments was launched in Q1 2017 at Bolshaya Pochtovaya. During 2018, the construction and marketing of the projected progressed according to plan.

The balance sheet value of the project as of 31 December 2018 amounted to US$75.6 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, and within walking distance of Botanicheskuiy Sad and Sviblovo metro stations. The future residential complex has a land plot of 3.2 Ha and a GBA of 206,790 sq.m: 111,191 sq.m of residential area, 6,909 sq.m of commercial premises and 678 underground and above ground parking lots.

The project is being constructed in two phases:

The main construction phase and pre-sale of apartments at Botanic Garden began in Q1 2017 with the development and marketing of the project progressing as expected.

The balance sheet value of the project as of 31 December 2018 was US$ 77.8 million.

TVERSKAYA PLAZA IC

Tverskaya Plaza Ic is a Class A office development 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 50,200 sq.m, including underground parking of approximately 238 parking spaces, and an estimated GLA of 40,000 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.

Following some improvement in the Moscow office market, and given the excellent location of the project, AFI Development has launched construction of the project in Q1 2019.

Based on an independent valuation of the Company's portfolio by JLL as of 31 December 2018, the fair value of Tverskaya Plaza Ic is US$61.1 million.

TVERSKAYA PLAZA II

In Q2 2017, the Company obtained development rights for the project, which has been approved for development by the Moscow construction authorities as a "recreational centre" with a GBA of 22,000 sq.m.

Plaza II is a retail-entertainment project envisaging construction of a 7-storey building with one underground level, with a total GBA of 22,000 sq.m, and providing a GLA of 14,000 sq.m.

Based on an independent valuation of the Company portfolio by JLL, as of 31 December 2018, the fair value of the Company share in Plaza II was US$18.0 million.

TVERSKAYA PLAZA IV

Plaza IV is a Class A office development with supporting ground level retail zones, located at 11, Gruzinsky Val. The project has a GBA of 92,285 sq.m (including underground parking) and an estimated GLA of 75,292 sq.m

Based on an independent valuation of the Company portfolio by JLL, as of 31 December 2018, the fair value of the Company share in Plaza IV was US$54.0 million.

KOSSINSKAYA

Kossinskaya is mixed-use building spanning 108,528 sq.m with nine aboveground floors and a single underground level. The property was constructed in 2005.

Based on an independent valuation of the Company portfolio by JLL as of 31 December 2018, the fair value of Kossinskaya is US$25.7 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 the 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 2018

The Company did not have any significant events subsequent to 31 December 2018.

Disposals and Acquisitions

The Company did not have any disposals or acquisitions in 2018.

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"), 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:

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 employees who have provided construction consulting and construction management services with respect to our investment and trading properties. 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.

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 (with 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 from interest on our bank deposits and gains from other investments.

Finance expenses

Our finance expense comprises loss on other investments, if any, 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 and EURO 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 incurred. Capitalisation of borrowing costs may continue until the assets are 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 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 employee costs related to such projects.

In addition, we capitalise financing costs related to development projects only during the period of construction. We do not, however, commence the capitalising of financing costs related to expenditures on a project until construction has begun. 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 eight Cyprus companies 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 and EURO denominated payables and receivables of our Russian and foreign 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 Russian VAT legislation, VAT can also be claimed during the period of construction provided that all required documentation is presented to the VAT authorities.

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, capitalisation of certain costs in relation to the design, construction and financing of projects that are capitalised for the purposes of consolidated financial statements under IFRS is not allowed. 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. Deferred tax assets are recognised for unused tax losses, unused tax credits and deductible temporary differences to the extent that it is probable that future taxable profits will be available against which they can be used.

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 2018 and 2017

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

Sale of residential - transferred over time

Sale of residential. Our income from sale of residential increased by US$107.7 million in total, from US$61.8 million in 2017 to US$169.6 million in 2018, due to the IFRS 15 adoption. For more details see Note 5 to the consolidated financial statements.

Operating expenses. Our operating expenses increased by 11.1% year-on-year to US$63.4 million in 2018 (2017: US$57.1 million). More than half of operating expenses' rise is explained by amended property tax calculation methodology. Other factor causing increase in operating costs relates to our marketing efforts as for the projects AFI Residence Paveletskaya, Bolshaya Pochtovaya and Botanic Garden.

Administrative expenses. Our administrative expenses decreased by 8.0% year-on-year to US$5.5 million in 2018 (2017: US$6.0 million). The decrease is attributable to the cost saving initiatives across the Company.

Net valuation gain/ (losses) on properties. Net result of investment property valuation changed from a gain of US$2.0 million in 2017 to a loss of US$11.5 million in 2018. For additional information, please refer to "Portfolio Valuation" section below.

Finance income. Our finance income increased by 118.6% year-on-year to US$1.6 million in 2018 (2017: US$0.8 million). The increase was a result of more efficient cash management.

Finance expense. Our finance expense decreased by 30.2% year-on-year to US$35.2 million in 2018 (2017: US$50.4 million), as a result of repayment of Ozerkovskaya (Aquamarine) III loan and decrease of interest rate due to the conversion of US$ denominated loans into EUR.

FX Gain/ (Loss). We recorded a foreign exchange loss of US$2.3 million in 2018, against a gain of US$12.4 million in 2017. This was a result of Russian Rouble depreciation versus the US Dollar during 2018.

Income tax expense. Our current tax expense decreased by US$ 8.5 million to US$ 4.3 million due to the additional Russian capital gain tax from sale of non-residential premises to an end-user at Ozerkovskaya III Business Centre incurred in Q4 2017. Deferred tax expense decreased by US$ 14.9 million to US$ 6.2 million.

Profit/Loss for the year. Due to the factors described above, we recorded a US$ 31.5 million net gain for 2018 compared to net loss of US$4.7 million for 2017.

Liquidity and Capital Resources

Cash flows

Summary of cash flows for 2018 and 2017

* Note: the cash and cash equivalents do not include US$11.2 million (2017: US$10.5 million) fair value of marketable securities.

Net cash from operating activities

Net cash from operating activities decreased to US$64.4million in 2018, from US$104.7 million in 2017. The decrease is attributable to the adoption and application of IFRS 15 Revenue from Contracts with Customers from 1 January 2018.

Net cash from investing activities

Net cash outflow used in investing activities amounted to US$ 17.8 million in 2018 against cash from investing activity amounted to US$ 105.9 in 2017 attributable to cash inflow from sale of two buildings at Aquamarine III Business Centre in 2017.

Net cash used in financing activities

Net cash used in financing activities increased to a negative US$50.8 million in 2018 from a negative US$125.3 million in 2017 due to refinancing of Bellgate loan and repayment of Ozerkovskaya III loan in January 2018. For further details please see Note 27 to the consolidated financial statements.

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.

AFI Development ended 2018 with of approximately US$100.2 million in cash, cash equivalents and marketable securities on our balance sheet and a debt[7] to equity level of 68%.

The Company's 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, the aim is to refinance 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, 2018 our debt portfolio was as follows:

The total balance of secured debt financing reached US$503.52 million as at 31 of December 2018, including US$503.4 million of Principal Debt and US$0.17 million of accrued interest with average interest rate 5.4% per annum as at 31.12.2018 (6.9% per annum as at 31.12.2017) (for more details see note 27 to our consolidated financial statements).

As at 31 December 2018, our loans and borrowings were payable as follows:

Portfolio Valuation

In 2018 Jones Lang LaSalle LLC ("JLL") continued to serve as the Company independent appraisers. As at 31 December 2018, based on the JLL independent appraisers' report, the value of AFI Development's portfolio of investment properties stood at US$742.6 million, while the value of the portfolio of investment property under development stood at US$141.9 million.

Consequently, the total value of the Company's assets, based predominantly on independent valuation as of 31 December 2018, decreased 12% year-on-year to US$1.25 billion, compared to US$1.42 billion as at 31 December 2017. The drop in values was mostly technical, triggered by the exchange rate fluctuation effect (the rouble depreciated by 20.61% YoY) and reduction in the book values of residential projects due to delivery of apartments in AFI Residence Paveletskaya in Q2 2018 and the implementation of IFRS 15.

Principal Business Risks and Uncertainties Affecting the Company

Risk management framework

The Board of Directors is ultimately responsible for the establishment and oversight of the Company's risk management framework as well as 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 management monitoring of 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 Board of Directors requests management to take corrective actions as necessary and submit follow up reports to the Audit Committee and the Board, 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

In February 2018 the Board of Directors approved a new cash management and investment policy allowing the Company to invest 20% of its available cash into medium and high risk instruments, including externally managed investment products. 80% of available cash is invested into bank deposits and money market to guarantee liquidity.

The management monitors liquidity of the Company daily. The Board reviews and discusses the investment portfolio on quarterly basis.

Guarantees

The Company's policy is to provide financial guarantees to wholly-owned subsidiaries in exceptional cases. In negotiations with lending banks, the Company aims to avoid recourse to AFI Development on loans taken by subsidiaries.

All of AFI Development guarantees under a loan facility agreement of Bellgate Constructions Limited (AFIMALL City), Krown Investments LLC (Ozerkovskaya III) and OJSC MKPK (AFI Residence Paveletskaya) were terminated in 2018 due to repayment of debt. As at 31 December 2018, there were no outstanding guarantees.

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.

Management monitors AFI Development's liquidity position on a daily basis and 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 foreign currency exchange rates, interest rates and equity prices. We do not use financial instruments, such as foreign exchange forward contracts, foreign currency options and forward rate agreements, to manage these market risks.

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 2018, 73 % of our financial liabilities were fixed rate. For more detail see note 32 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, Russian Rouble and the Euro.

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 priority is to meet construction and delivery schedule of residential premises to customers. [To preserve once received construction rights the Company is obliged to accomplish construction within a pre-set time schedule.] The Company owns a number of valid building permits and is exposed to the risk of construction rights loss in case of breach of construction time schedule.

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.

Renovation Programme

The launch of the municipal "Renovation Programme" in Moscow will create a large new state-owned player mainly in the economy and comfort-class segments. Due to significant uncertainty, currently existing on the market, as for further evolvement of this programme, the Company's management along with other market players believe that the programme can have a significant influence on the Moscow housing market. For details on the "Renovation Programme" please refer to the Market Update section above.

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 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, 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 recognising 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

During 2018, the Company had one related party transaction, as defined in the UK Listing Rules:

On 29th August 2018 the Board of Directors of the Company approved granting of a loan in the maximum amount of EUR 5 million to Grosolim Ltd, a company controlled by Mr Leviev. The loan is to be provided at Euribor + 5.2% annual interest rate, the interest will be paid quarterly while the principal amount will be paid at 5-year maturity. The loan is secured by a personal guarantee of Mr Lev Leviev. In September 2018 one drawdown of this loan in the amount of EUR1 million was made on 12 April 2019 the Company received the repayment of total outstanding amount of the loan including accrued interest.

AFI DEVELOPMENT PLC

FINANCIAL STATEMENTS

For the year ended 31 December 2018

C O N T E N T S

Board of Directors and Professional Advisers

Management's Report

Directors' Responsibility Statement

Independent Auditors' Report

Consolidated Financial Statements

Separate Financial Statements of the Parent Company

BOARD OF DIRECTORS AND PROFESSIONAL ADVISERS

Board of Directors Elias Ebrahimpour - Chairman (appointed on 1 January 2019)

Lev Leviev - Chairman (resigned on 31th August 2018)

Mark Groysman (appointed on 1st September 2018 and resigned on 1 December 2018)

Avraham Noach Novogrocki (appointed on 1 December 2018)

Panayiotis Demetriou

David Tahan (resigned on 1 January 2019)

Secretary Fuamari Secretarial Limited

Independent Auditors KPMG Limited

Bankers Joint Stock Company VTB Bank

Joint Stock Commercial Savings Bank of the Russian Federation (Sberbank)

Otkritie FC Bank

VP Bank (Switzerland) Ltd

Registered Office Spyrou Araouzou 165,

Lordos Waterfront Building,

3035 Limassol,

Cyprus

MANAGEMENT REPORT

The Board of Directors of AFI Development Plc (the "Company") presents to the members its management report together with the audited consolidated financial statements of the Company for the year ended 31 December 2018.

PRINCIPAL ACTIVITY AND NATURE OF OPERATIONS OF THE COMPANY

The principal activities of the Group, which remained unchanged from last year, are real estate investment and development. The principal activity of the Company is the holding of investments in subsidiaries.

EXAMINATION OF THE DEVELOPMENT, POSITION AND PERFORMANCE OF THE ACTIVITIES OF THE GROUP

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 Flotonic Limited.

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, quality and customer service.

AFI Development focuses on developing and redeveloping high quality commercial and residential real estate assets across Russia, with Moscow being its main market. The Company's existing portfolio comprises commercial projects focused on offices, shopping centres, hotels and mixed-use properties, and residential projects in prime locations in Moscow. 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.

As at 31 December 2018, the Company's portfolio consisted of 7 investment properties, 4 investment properties under development, 4 trading properties under construction, 2 trading properties and 4 hotel projects.

FINANCIAL RESULTS

The Group's results are set out in the consolidated income statement on page 13. The profit of the Group for the year before taxation amounted to US$42,084 thousand (2017: US$29,327 thousand). The profit after taxation attributable to the Group's owners amounted to US$31,510 thousand (2017: loss US$4,918 thousand).

DIVIDENDS

The Board of Directors does not recommend the payment of a dividend and the profit for the year is transferred to retained earnings or accumulated losses.

MAIN RISKS, UNCERTAINTIES AND USE OF FINANCIAL INSTRUMENTS

The Group is exposed to market price risk, interest rate risk, credit risk, liquidity risk. The most significant risks faced by the Group and the steps taken to manage these risks and the Group's financial risk management objectives and policies are described in note 32 of the consolidated financial statements.

FUTURE DEVELOPMENTS

The Group is one of the leading real estate development companies operating in Russia. It focuses on developing and redeveloping high quality commercial and residential real estate assets in Moscow and the Moscow Region. The strategy during the reporting period and for the future periods is to sell the residential properties that the Group develops and to either lease the commercial properties that the Group develops or sell them if the Group is able to achieve a favourable return.

GOING CONCERN

As described in note 2i the consolidated financial statements have been prepared on a going concern basis, which assumes that the Group is in a position to generate enough cash to cover its working capital requirements and debt service obligations in order to continue its operations in the foreseeable future.

SHARE CAPITAL

There were no changes to the share capital of the Company during the current year. As at the year end the share capital of the Company comprised of:

All "A" shares are on deposit with BNY (Nominees) Limited and each "A" share is represented by one GDR listed on the London Stock Exchange ("LSE"). All "B" shares were admitted to a premium listing of the Official list of the UK Listing Authority and to trading on the main market of LSE.

IMPLEMENTATION AND COMPLIANCE TO THE CODE OF CORPORATE GOVERNANCE

Although the Company is incorporated in Cyprus, its shares are not listed on the Cyprus Stock Exchange, and therefore it is not required to comply with the corporate governance regime of Cyprus. Pursuant to the UK Listing Rules however, the Company is required to comply with the UK Corporate Governance Code or to explain its reasons for non-compliance. The Company's policy is to achieve best practice in its standards of business integrity in relation to all activities. This includes a commitment to follow the highest standards of corporate governance throughout the AFI Development group. For the financial year 2018, the Company applied the UK Corporate Governance Code published in April 2016 (the "Code"), on which the Company reported in its 2018 Annual report. The Company is applying the UK Corporate Governance Code published in July 2018 to the financial year 2019 and will report on this in next year's Annual Report.

The directors are pleased to confirm that the Company has complied with the provisions of the Code for the period under review, with the exception that the Executive Chairman of the Board, Mr Leviev, was not independent on appointment (as recommended by section A.3.1 of the Code) by virtue of the fact that he was, until 31st August 2018, an Executive Chairman while being, indirectly, a major shareholder of the Company. Mr Leviev holds a controlling stake in Flotonic Limited, the major shareholder of the Company. The directors had considered Mr Leviev to be a key member of the Company's leadership during his period in office and greatly valued his oversight and management role. It should be noted that Mr Leviev resigned from his position on the Board on 31 August 2018.

PARTICIPATION OF DIRECTORS IN THE COMPANY'S SHARE CAPITAL

None of the Directors holds shares of the Company directly. Mr Lev Leviev, a former Executive Chairman of the Board, holds 64.88% indirectly through Flotonic Limited as described in detail in note 33 "Group Composition".

BRANCHES

The Group operates six branches and/or representative offices of Cypriot, BVI and Luxembourg entities in the Russian Federation. These are Bellgate Construction Ltd branch, which operates AFIMALL City project, Amerone Ltd branch, Bugis Finance branch, Aquamare Uno Ltd branch and Triumvirate I S.a r.I branch hold investment properties under development projects and Bastet Estates Ltd branch acting as sale agents for residential properties.

BOARD OF DIRECTORS

The members of the Board of Directors as at 31 December 2018 and at the date of this report are shown on page 1. The Directors' date of appointment or resignation, if applicable, is indicated on page 1. The term of those that have not resigned will expire on the date of the next annual general meeting of the shareholders but all of them are eligible for re-election. There were no significant changes in the assignment of responsibilities of the Board of Directors during the current year. Remuneration of Board of Directors is disclosed in note 38.

OPERATING ENVIRONMENT OF THE COMPANY

Any significant events that relate to the operating environment of the Company are described in note 32 to the consolidated financial statements.

EVENTS AFTER THE REPORTING PERIOD

Events which took place after the reporting date and which have a bearing on the understanding of the financial statements are described in note 39 of the consolidated financial statements.

RELATED PARTY TRANSACTIONS

Disclosed in note 38 of the consolidated financial statements.

INDEPENDENT AUDITORS

The independent auditors, KPMG Limited, have expressed their willingness to continue offering their services. A resolution reappointing the auditors and giving authority to the Board of Directors to fix their remuneration will be proposed at the Annual General Meeting.

By order of the Board

Fuamari Secretarial Limited

Secretary

Nicosia, 15 April 2019

STATEMENT BY THE MEMBERS OF THE BOARD OF DIRECTORS AND THE COMPANY OFFICIALS RESPONSIBLE FOR THE DRAFTING OF THE CONSOLIDATED FINANCIAL STATEMENTS IN ACCORDANCE WITH THE PROVISIONS OF CYPRUS LAW 190(I)/2007 ON TRANSPARENCY REQUIREMENTS

We, the members of the Board of Directors and the Company officials responsible for the drafting of the consolidated financial statements of AFI Development Plc (the 'Company') for the year ended 31 December 2018, the names of which are listed below, confirm that, to the best of our knowledge:

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

The Board of Directors:

Non-executive independent directors

Elias Ebrahimpour - Chairman …........................................................

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

Avraham Noach Novogrocki .............................................................

Company officers:

Chief executive officer

Mark Groysman .............................................................

Chief financial officer

Alexey Miroshnikov .............................................................

15 April 2019

INDEPENDENT AUDITORS' REPORT

TO THE MEMBERS OF

AFI DEVELOPMENT PLC

Report on the audit of the consolidated financial statements and the separate financial statements

Opinion

We have audited the accompanying financial statements of AFI Development Plc ("the Company") and its subsidiaries (the "Group"), and the separate financial statements of AFI Development Plc (the "Company"), which are presented on pages 12 to 113 and comprise the consolidated statement of financial position and the statement of financial position of the Company as at 31 December 2018, and the consolidated statements of income statement, comprehensive income, changes in equity and cash flows and the statements of income statement, comprehensive income, changes in equity and cash flows of the Company for the year then ended, and notes to the financial statements, including a summary of significant accounting policies.

In our opinion, the accompanying consolidated financial statements and the separate financial statements give a true and fair view of the financial position of the Group and the Company as at 31 December 2018, and of their financial performance and their cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the European Union ("IFRS-EU") and the requirements of the Cyprus Companies Law, Cap. 113, as amended from time to time (the "Companies Law, Cap. 113").

Basis for Opinion

We conducted our audit in accordance with International Standards on Auditing ("ISAs"). Our responsibilities under those standards are further described in the "Auditors' Responsibilities for the audit of the consolidated financial statements and separate financial statements" section of our report. We remained independent of the Group and Company throughout the period of our appointment in accordance with the Code of Ethics for Professional Accountants of the International Ethics Standards Board for Accountants ("IESBA Code"), and the ethical requirements in Cyprus that are relevant to our audit of the consolidated financial statements and the separate financial statements, and we have fulfilled our other ethical responsibilities in accordance with these requirements and the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Key Audit Matters

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements and the separate financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements and the separate financial statements, as a whole, and in forming our opinion thereon and we do not provide a separate opinion on these matters.

Other Information

The Board of Directors is responsible for the other information. The other information comprises the management report, the preliminary statement of results, the chairman's statement, the management discussion and analysis of financial condition and results of operations and the annual report which includes the corporate governance statement and the corporate social responsibility statement but does not include the consolidated and separate financial statements and our auditor's report thereon.

Our opinion on the consolidated and separate financial statements does not cover the other information and we do not express any form of assurance conclusion thereon, except as required by the Companies Law, Cap.113.

In connection with our audit of the consolidated and separate financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the consolidated and separate financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed on other information that we obtained prior to the date of this auditor's report, we conclude that there is a material misstatement of this other information, we are required to report that fact.

With regards to preliminary statement of results, the chairman's statement, the management discussion and analysis of financial condition and results of operations, the annual report and the corporate social responsibility statement we have nothing to report.

With regards to the management report and the corporate governance statement, our report is presented in the "Report on other legal and regulatory requirements" section.

Responsibilities of the Board of Directors and those charged with governance for the consolidated financial statements and the separate financial statements

The Board of Directors is responsible for the preparation of consolidated financial statements and separate financial statements that give a true and fair view in accordance with IFRS-EU and the requirements of the Cyprus Companies Law, Cap. 113, and for such internal control as the Board of Directors determines is necessary to enable the preparation of consolidated financial statements and separate financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated financial statements and the separate financial statements, the Board of Directors is responsible for assessing the Group's and Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless there is intention to either liquidate the Company and/ or the Group or to cease operations, or there is no realistic alternative but to do so.

The Board of Directors and those charged with governance are is responsible for overseeing the Group's financial reporting process.

Auditors' responsibilities for the audit of the consolidated financial statements and the separate financial statements

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements and the separate financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors' report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements and separate financial statements.

As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional scepticism throughout the audit. We also:

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements and the separate financial statements of the current period and are therefore the key audit matters.

Report on other legal and regulatory requirements

Other regulatory requirements

Pursuant to the requirements of Article 10(2) of European Union (EU) Regulation 537/2014 we provide the following information in our Independent Auditors' Report, which is required in addition to the requirements of ISAs.

Date of our appointment and period of engagement

We were reappointed as auditors on 20 December 2018 by the General Meeting of the Company's members to audit the consolidated and separate financial statements of the Group and the Company for the year ended 31 December 2018. Our total uninterrupted period of engagement is 18 years, covering the periods ending 31 December 2001 to 31 December 2018.

Consistency of auditor's report to the additional report to the Audit Committee

We confirm that our audit opinion is consistent with the additional report presented to the Audit Committee dated 10 April 2019.

Provision of Non-audit Services ("NAS")

We have not provided any prohibited NAS referred to in Article 5 of EU Regulation 537/2014 as applied by Section 72 of the Auditors Law of 2017, L.53(I)2017, as amended from time to time ("Law L.53(I)/2017").

Pursuant to the London Stock Exchange Listing Rules we are required to review:

We have nothing to report in respect of the above.

Other legal requirements

Pursuant to the additional requirements of law L.53(I)2017, and based on the work undertaken in the course of our audit, we report the following:

Other Matter

This report, including the opinion, has been prepared for and only for the Company's members as a body in accordance with Article 10(1) of the EU Regulation 537/2014 and Section 69 of Law L.53(I)/2017 and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whose knowledge this report may come to.

The engagement partner on the audit resulting in this independent auditors' report is Marios G. Gregoriades.

Marios G. Gregoriades, CPA

Certified Public Accountant and Registered Auditor

For and on behalf of

KPMG Limited

Certified Public Accountants and Registered Auditors

14 Esperidon Street

1087 Nicosia, Cyprus

15 April 2019

CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31 December 2018

C O N T E N T S

Consolidated Income Statement

Consolidated Statement of Comprehensive Income

Consolidated Statement of Changes in Equity

Consolidated Statement of Financial Position

Consolidated Statement of Cash Flows

Notes to the Consolidated Financial Statements

CONSOLIDATED INCOME STATEMENT

For the year ended 31 December 2018

The notes are an integral part of these consolidated financial statements.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the year ended 31 December 2018

The notes are an integral part of these consolidated financial statements.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the year ended 31 December 2018

The notes are an integral part of these consolidated financial statements.

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2018

The consolidated financial statements were approved by the Board of Directors on 15 April 2019.

........................ ...............................

Elias Ebrahimpour Avraham Noach Novogrocki

Chairman Director

The notes are an integral part of these consolidated financial statements.

CONSOLIDATED STATEMENT OF CASH FLOWS

For the year ended 31 December 2018

The notes are an integral part of these consolidated financial statements.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 31 December 2018

1. INCORPORATION AND PRINCIPAL ACTIVITY

AFI Development PLC (the "Company") was incorporated in Cyprus on 13 February 2001 as a limited liability company under the name Donkamill Holdings Limited. In April 2007 the Company was transformed into public company and changed its name to AFI Development PLC. The address of the Company's registered office is 165 Spyrou Araouzou Street, Lordos Waterfront Building, 5th floor, Flat/office 505, 3035 Limassol, Cyprus. As of 7 September 2016 the Company is a 64.88% subsidiary of Flotonic Limited, a private holding company registered in Cyprus, 100% owned by Mr Lev Leviev. The remaining shareholding of "A" shares is held by a custodian bank in exchange for the GDRs issued and listed in the London Stock Exchange ("LSE"). On 5 July 2010 the Company issued by way of a bonus issue 523,847,027 "B" shares, which were admitted to a premium listing on the Official List of the UK Listing Authority and to trading on the main market of LSE. On the same date, the ordinary shares of the Company were designated as "A" shares.

These consolidated financial statements comprise the Company and its subsidiaries (together referred to as the "Group") and the Group's interest in jointly controlled entities. The principal activity of the Group is real estate investment and development.

The principal activity of the Company is the holding of investments in subsidiaries as presented in note 33 "Group Composition".

2. BASIS OF ACCOUNTING

i. Going concern basis of accounting

Macroeconomic environment was challenging in 2018. The Rouble weakened significantly versus the dollar towards the end of 2018, the Central Bank of Russia has increased its key lending rate in December 2018 and the United States' Office of Foreign Assets Control imposed strict blocking sanctions on April 6, 2018. In addition to that, legislation and tax changes affecting real estate sector will be effective in 2019. At the same time the Russian economy is expected to grow at moderate rates.

Despite the challenging operating environment, the Group has recognised a profit after tax of US$31.5 million for the twelve month period ended 31 December 2018. Its cash and cash equivalents and marketable securities remained stable at circa US$100.2 million. Its current liabilities decreased to US$16.4 million due to the repayment of Ozerkovskaya III loan in January 2018.

Management estimates that the Group will continue to generate sufficient operating cash flows from yielding properties such as AFIMall, the hotels and BC Ozerkovskaya III so as to meet loan interest and principal payments of the refinanced loan and new loans. The management succeeded in reducing debt and refinancing loans in Euro, decreasing the interest rates by 2%, which in turn resulted in a total decrease of finance cost by 13 bps. This will enable the Company to repay the principal when it falls due and to secure stable operational existence for the foreseeable future.

Based on cash flow projection for following 12 month period, the management reached a reasonable conclusion that the Group is in a position to secure further financing for its projects under construction by sales proceeds and to generate enough cash to cover its working capital requirements in order to continue its operations in the foreseeable future.

Considering all the above conditions and assumptions, the management concluded that the Group had adequate resources to continue in operational existence for the foreseeable future and adopted the going concern basis in preparing the consolidated financial statements.

ii. Statement of compliance

These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU) and the requirements of the Companies Law of Cyprus, Cap. 113.

The consolidated financial statements were authorised for issue by the Board of Directors on 15 April 2019.

iii. Functional and presentation currency

These consolidated financial statements are presented in United States Dollars which is the Company's functional currency. All amounts have been rounded to the nearest thousand, unless otherwise indicated.

3. Use of judgements and estimates

In preparing these consolidated financial statements, management has made judgements, estimates and assumptions that affect the application of the Group's accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to estimates are recognised prospectively.

Judgements

Information about judgements made in applying accounting policies that have the most significant effect on the amounts recognised in the consolidated financial statements is included in the following notes:

Assumptions and estimation uncertainties

Information about assumptions and estimation uncertainties at 31 December 2018 that have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities in the next financial year is included in the following notes:

Measurement of fair values

A number of the Group's accounting policies and disclosures require the measurement of fair values, for both financial and non-financial assets and liabilities.

The Group has 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 chief financial officer.

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.

Significant valuation issues are reported to the Group's audit committee.

When measuring the fair value of an asset or a liability, the Group uses observable market data as far as possible. Fair values are categorised into different levels in a fair value hierarchy based on the inputs used in the valuation techniques as follows:

If the inputs used to measure the fair value of an asset or a liability fall into different levels of the fair value hierarchy, then the fair value measurement is categorised in its entirely in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement.

The Group recognises transfers between levels of the fair value hierarchy at the end of the reporting period during which the change has occurred.

Further information about the assumptions made in measuring fair values is included in the following notes:

4. STANDARDS ISSUED BUT NOT YET EFFECTIVE

Adoption of new and revised International Financial Reporting Standards and Interpretations as adopted by the European Union (EU)

As from 1 January 2018, the Group adopted all changes to International Financial Reporting Standards (IFRSs) as adopted by the EU which are relevant to its operations. This adoption did not have a material effect on the consolidated financial statements except for the adoption of IFRS 15 "Revenue from contracts with customers" (see note 5).

The following Standards, Amendments to Standards and Interpretations have been issued by International Accounting Standards Board ("IASB") but are not yet effective for annual periods beginning on 1 January 2018. Those which may be relevant to the Group are set out below. The Group does not plan to adopt these Standards early.

Standards and Interpretations adopted by the EU

Standards and Interpretations not adopted by the EU

The Group is currently evaluating the expected impact of adopting the amendments on its financial statements. As such, the expected impact of the improvements is not yet known or reasonably estimable.

Of those standards that are not yet effective, IFRS 16 is expected to have a material impact on the Company's financial statements in the period of initial application.

Estimated impact of the adoption of IFRS 16 "Leases"

The Group is required to adopt IFRS 16 "Leases" from 1 January 2019. The Group has assessed the estimated impact that the initial application of IFRS 16 will have on its consolidated financial statements, as described below. The estimated impact of the adoption of this standard on the Group's equity as at 1 January 2019 is based on assessment undertaken to date and is summarised below. The actual impact of adopting the standard at 1 January 2019 may change because the new accounting policy is subject to change until the Group presents its first financial statements that include the date of initial application.

The standard introduces a single, on-balance sheet lease accounting model for lessees. A lessee recognises a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. There are recognition exemptions for short-term leases and leases of low value items. Lessor accounting remains similar to the current standard - i.e. lessors continue to classify leases as finance or operating leases.

IFRS 16 replaces existing leases guidance including IAS 17 Leases, IFRIC 4 Determining whether an Arrangement contains a Lease, SIC-15 Operating Leases-Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease.

A. Leases in which the Group is a lessee

The Group will recognise new assets and liabilities for its leases of land. The nature of expenses related to those leases will now change because the Group will recognise a depreciation charge for right-of-use assets, other than those classified as investment property and investment property under development under fair value model, and interest expense on lease liabilities. The depreciation charge related to right-of-use assets arising from land lease under trading properties under development will be capitalised as an addition to its cost.

Currently, the Group recognises operating lease expense on a straight-line basis over the term of the lease, and recognises assets or liabilities only to the extent that there is a timing difference between actual lease payments and the expense recognised.

Based on the information currently available, the Group estimates that it will recognise lease liabilities of US$ 20,667 thousand, increase in investment property and investment property under development carrying amounts of US$ 9,084 thousand and right-of-use assets of US$ 7,804 thousand as at 1 January 2019, with overall effect on retained earnings/accumulated losses of US$ 3,780 thousand at the same date.

B. Leases in which the Group is a lessor

No impact is expected for leases in which the Group is a lessor.

C. Transition

The Group plans to apply IFRS 16 initially on 1 January 2019, using modified retrospective approach. Therefore, the cumulative effect of adopting IFRS 16 will be recognised as an adjustment to the opening balance of retained earnings at 1 January 2019, with no restatement of comparative information.

5. CHANGES IN SIGNIFICANT ACCOUNTING POLICIES

The Group has initially applied IFRS 15 Revenue from Contracts with Customers from 1 January 2018 (see A). A number of other new standards, including IFRS 9 Financial Instruments (see B), are also effective from 1 January 2018 but they do not have a material effect on the Group's financial statements.

A. IFRS 15 Revenue from Contracts with Customers

Due to the transition method chosen by the Group in applying this standard, comparative information throughout these financial statements has not been restated to reflect the requirements of this standard.

The effect of initially applying this standard, IFRS 15, is mainly attributed to the following:

- Earlier recognition of revenue from sales of residential properties under DDU contracts (see below)

- Recognition of significant financial component on payments received in advance from customers for residential properties under DDU contracts (see below)

IFRS 15 establishes a comprehensive framework for determining whether, how much and when revenue is recognised. It replaces existing revenue recognition guidance, including IAS 18 Revenue, IAS 11 Construction Contracts and related interpretations. Under IFRS 15, revenue is recognised when a customer obtains control of the goods or services. Determining the timing of the transfer of control - at a point in time or over time - requires judgement.

The Group has adopted IFRS 15 using the cumulative effect method (without practical expedients), with the effect of initially applying this standards recognised at the date of initial application (i.e. 1 January 2018). Accordingly, the information presented for 2017, has not been restated, i.e. it is presented, as previously reported, under IAS 18 and related interpretations. Additionally, the disclosure requirements in IFRS 15 have not generally been applied to comparative information.

The following table summarises the impact, net of tax, of transition to IFRS 15 on retained earnings and Non-controlling interests at 1 January 2018.

The following tables summarise the impacts of adopting IFRS 15 on the Group's statement of financial position as at 31 December 2018 and its statement of profit or loss and other comprehensive income for the year then ended for each of the line items affected. There was no material impact on the Group's statement of cash flows for the year ended 31 December 2018.

Impact on the consolidated statement of profit or loss and other comprehensive income