AFRB.L Regulatory News (AFRB)

(Includes corrections to the format of tables within Annex A)

THIS ANNOUNCEMENT IS NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION

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

17 March 2015

AFI DEVELOPMENT PLC

("AFI DEVELOPMENT" OR "THE COMPANY")PRELIMINARY STATEMENT OF RESULTS FOR THE YEAR ENDED 31 DECEMBER 2014SOLID OPERATIONAL RESULTS OFFSET BY VALUATION LOSSES

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 2014.

Financial highlights:

· Despite a severe rouble depreciation against the dollar, rental income and income from hotel operations decreased marginally by 2% year-on-year to US$141.4 million (compared to US$144.5 million for 2013)

- AFIMALL City contribution amounted to US$107.0 million (compared to US$103.9 million for 2013), a 3% increase year-on-year despite a difficult macroeconomic environment

· In 2014 AFI Development incurred a net loss of US$287.3 million, compared to a net profit of US$103.9 in 2013, mainly due to valuation losses of US$220.7 million in Q4 2014;

· Gross profit for 2014 was US$49.9 million, compared to US$76.3 million in 2013 (the 2013 results were largely affected by the completion of a disposal transaction of parking spaces at AFIMALL City to VTB Bank JSC)

· Cash position remains strong at US$93.3 million in cash, cash equivalents and marketable securities as at 31 December 2014, compared to US$203.3 million as at 31 December 2013

· Gross Asset Value reduced to US$2.0 billion as at 31 December 2014 (compared to US$2.4 billion as at 31 December 2013), due to sharp valuation decreases across the portfolio owing to deteriorating macroeconomic conditions

Operational highlights:

· AFIMALL City operations continued to demonstrate positive dynamics with revenues rising 3% year-on-year to US$107.0 million

- NOI was US$83.0 million for the year, representing growth of 20% year-on-year

- Occupancy levels at 85% of total leasable area

· Sales of apartments continue at Odinburg with 594 sale contracts signed (as of 16 March 2015)

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

"There is no doubt that 2014 has been a challenging year for AFI Development and the Russian market as a whole. Macroeconomic headwinds and difficult geopolitical situation have inevitably affected demand for real estate assets across the country, including our core market of Moscow. Our results reflect the negative adjustments to the valuation of our portfolio caused by macroeconomic trends and the deteriorating risk profile of the country as a whole. Operationally, however, our results remain solid driven by our unwavering commitment to the highest standards of design, construction and quality of customer service. Although we remain confident in the long-term opportunities in our market, we expect operating conditions to remain challenging throughout 2015."

FY 2014 Results Conference Call

AFI Development will hold a conference call for analysts and investors to discuss its full year 2014 results, following their publication.

The details for the conference call are as follows:

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

For further information, please contact:

AFI Development +7 495 796 9988

Ilya KutnovEkaterina Shubina

Citigate Dewe Rogerson, London +44 20 7638 9571

David Westover

Sandra NovakovShelly Chadda

About AFI Development

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

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

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

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

Forward-looking Statements

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

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

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

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

Chairman and Executive Director's Joint Statement

The year 2014 was marked by a serious deterioration of macroeconomic conditions in Russia. There were international sanctions against Russian state-controlled and private companies, including major banks. At the same time, the price of Urals crude oil, the main Russian export commodity, has declined more than twofold over the year. The combination of these factors caused significant depreciation of the Russian rouble versus the US dollar, an increase in inflation and a negative GDP growth rate forecast for 2015[1]. Additionally, the Russian Central Bank decided in December 2014 to increase its key lending rate from 10.5% to 17% (reduced to 15% in January 2015 and to 14% in March 2015), causing a sharp rise in rouble borrowing costs to levels unviable for most corporate and private borrowers.

These developments have started to affect the real estate market in Russia and its capital Moscow, which is the key market for AFI Development. Towards the end of 2014, the vacancy rate in class A office buildings increased to 28.4%, while across A and B class office space it reached 16.7%[2]. Whilst growth in vacancy rates in the retail segment was less pronounced (6% by the end of 2014), analysts note a 20% decrease in average shopping centre rents in dollar terms[3]. Following severe rouble depreciation, office and retail tenants started to experience difficulties in paying dollar-denominated rents, causing many market analysts to forecast a "de-dollarisation" trend across the Moscow commercial real estate market.

The main effect of the difficult market environment on our financial results was significant downward revision of portfolio values in the fourth quarter of 2014. The value of our portfolio of properties was reduced from US$2.4 billion at the end of 2013 to US$2.0 billion at the end of 2014. The significant devaluation of the rouble in relation to the dollar during the fourth quarter caused a decrease in net operating income projections. At the same time, the recent downgrades of the Russian Federation sovereign credit rating by Standard & Poor's and Moody's triggered an increase in the risk-free rate and a corresponding increase in the discount rate employed in DCF valuation models.

The difficult current macroeconomic environment has also caused AFI Development to change some of its development plans. For example, we have decided to postpone the development of Kossinskaya as an apparel and fashion wholesale trade centre due to uncertain levels of potential demand. For other projects currently in the active development stage, such as Tverskaya Plaza Ic, we are looking to obtain debt financing at favourable terms and for the market environment to improve before moving forward. At the same time, development continues to plan at our residential project Odinburg, where we are close to completing our first building, whith apartment pre-sales ongoing.

Our key yielding project, AFIMALL City, currently valued at US$1 billion, continued to improve its operational performance during the year. Sustained strong growth in occupancy levels and the ability to attract new, high quality tenants reflect the high popularity achieved by the Mall. With increasing ease of access due to continued improvements in transport links and the overall development of the "Moscow City" district, AFIMALL City's attractiveness is expected to show further growth in the years to come.

We are pleased to report that, despite difficult market conditions, our rental income for 2014 is down by only 2%. This is driven by the strong performance of AFIMALL City. However, mainly as a result of a valuation loss of US$220.7 million in Q4 2014, we incurred a net loss of US$286.4 million for the year.

Looking to 2015, we remain cautious regarding the outlook for our key market segments. Based on negative expectations with respect to economic growth in Russia and continued lack of geopolitical stability, we expect demand for real estate assets across the capital to decline throughout the year. We continue to monitor market trends and to adapt our strategy to ensure our efforts are focused on the most attractive developments, whilst ensuring our yielding assets maintain their solid operational performance.

Valuation

As at 31 December 2014, based on the Cushman & Wakefield LLC ("C&W") independent appraisers'report, the value of AFI Development's portfolio of investment properties stood at US$1.37 billion, while the value of the portfolio of investment property under development stood at US$0.4 billion.

Consequently, the total value of the Company's assets, mainly based on independent valuation as of 31 December 2014, was US$2.0 billion, compared to US$2.4 million as at 31 December 2013.

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

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

2. As a result of the slowdown in the national economy and increase in country risks, capitalisation and discount rates and projection of future cash flows within the portfolio valuation were revised by C&W individually for each project

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

Liquidity

We completed 2014 with a strong liquidity position of approximately US$93.3 million of cash, cash equivalents and marketable securities on our balance sheet and a debt[4] to equity level of 53%. This strong position reflects the Company's ability to successfully balance liquidity requirements from a number of sources.

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

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

Key developments since financial year end

In January 2015, the Company subsidiary, Krown Investments LLC ("Krown") signed an addendum to the loan facility agreement with VTB Bank OJSC ("the Bank), extending the term of the loan to 26 January 2018. Krown, which owns the Aquamarine III (Ozerkovskaya III) office complex, had an existing loan from the Bank maturing on 26 January 2015, of which US$ 205 million was outstanding. In addition to extending the term of the loan, the new addendum amended the payment schedule and interest rate conditions of the loan agreement and introduced new covenants. The payment schedule anticipates repayments of the principal starting from Q4 2015, while the new covenants include a Debt Service Coverage Ratio of 1.2 applicable from Q4 2015 and a Loan to Value ratio of 65%. In line with the addendum, on 26th January 2015 Krown paid US$10 million to the Bank as partial repayment of the outstanding loan amount, thus reducing the total to US$195 million. About 90% of the principal is to be paid at maturity.

Portfolio Update

AFIMALL City

During 2014, AFIMALL City reported a strong increase in occupancy levels, reaching 85% vs 76% in December 2013. During its three years of full operation AFIMALL has become one of the most popular shopping centres located in central Moscow, with a quality tenant mix and comfortable leisure, dining and entertainment zones.

Many international retailers chose AFIMALL for their first Russian shops. Forever 21, H&M Home, Crate&Barrel Laura Ashley, and Mirko Botticelli all opened their AFIMALL outlets during 2014. Additionally, the "Fizika" fitness chain opened its two-level club at AFIMALL in 2014, attracting additional visitors to the Mall.

Regarding the claim, filed in August 2014 by the Prosecution Office of the Moscow Central District on fire safety issues, AFI Development confirms that the works requested by the State Fire Safety Control Authorities have been completed by the specified deadlines, following which the Prosecution Office withdrew its claim in February 2015.

AQUAMARINE III (OZERKOVSKAYA III)

Following the disposal of Building 1 to diamond miner Alrosa, AFI Development retains title to the remaining three buildings of the complex, which have a combined GBA of 61,772 sq.m. and GLA of 46,247 sq.m. The Company is currently in negotiations with potential buyers and 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), has produced solid results in 2014, taking into account the difficult macroeconomic environment.

TVERSKAYA PLAZA Ic

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

KOSSINSKAYA - EXPOLON

In November 2014, AFI Development's Board of Directors decided to place on hold and reconsider further implementation of the development concept of Kossinskaya as an apparel and fashion wholesale trade centre named "Expolon", in light of the current economic situation in Russia.

ODINBURG

Construction works of Phase 1 ("Korona") of this development are currently underway. The first building within this phase is close to completion, with final facade works taking place. Construction of the second building began in December 2014. Sales of apartments are progressing in line with the market situation. As of the date of publication of this report, 594 contracts for sales of apartments have been signed.

PAVELETSKAYA PHASE II

During 2014, AFI Development finalised the planning stage of the project. The Company intends to start pre-construction works during H2 2015, subject to improvement in the market situation.

BOLSHAYA POCHTOVAYA

AFI Development is currently developing the design of the project and aims to obtain a construction permit during 2015.

BOTANIC GARDEN

In December 2014, AFI Development restored the Botanic Garden project on its balance sheet, following liquidation of former primary investor, Novoe Koltso Moskvy OJSC ("NKM"), as risks related to the bankruptcy of NKM were removed. The Company has completed the planning of the residential complex and received the Moscow construction authorities' approval for the project. In addition, the necessary construction permit was obtained in December 2014.

Market Overview - General Moscow Real Estate

Macroeconomic environment

During the second half of 2014, Russia was faced with difficult market conditions including decreasing oil prices and growing risk perceptions of the country, leading to a 43% depreciation of the rouble against the US dollar during Q4 alone. Economic growth is widely expected to suffer further during 2015.

Towards the end of 2014, a weak rouble put pressure on inflation, which reached 11.4% year-on-year in December 2014. As a result of this anticipated increase in inflation, consumers aggressively purchased goods which allowed retail sales to remain firm in Q4 2014 at 5.3%. However, looking ahead to 2015, this trend is not anticipated to continue and a 4% contraction in retail sales over 2014 levels is expected.

During 2014, the share of foreign investors in Russian real estate decreased to 24%, compared to 45% in 2013, with local investors largely dominating the market. This trend is expected to continue during 2015 with local players having more comfort in the market than others; however, foreign investors could be attracted back to the market given the lower cost of debt financing if risk appetites allow.

[Source: Russian Investment Market, Q4 2014, JLL; Cushman & Wakefield Report, Marketbeat: Russia; Economist Intelligence Unit Report]

Moscow office market

The overall volume of project completions in 2014 increased by 58% to 1.4m sq.m., representing the highest levels in five years, with over 50% meeting Class A requirements, amounting to the highest ever volume on record.

Driven by the considerable volume of new supply as well a decreasing demand, the average vacancy rate for class A and B combined further increased to 16.7% from 13.7% a year earlier, with vacancy rates in Class A buildings growing at a particularly fast rate to 28.4%, from 18.2% in 2013.

Prime rents ranged from USD750-900 per sq.m. per annum, while Class A rents ranged between US$450 and US$650 and Class B+ rents ranged between US$275-450 per sq. m. per annum. The rouble devaluation during Q4 2014 made companies look for alternatives to US dollar denominated rental rates and de-dollarisation of the Moscow office market is expected to be the main trend in 2015 as rents remain under pressure and are expected to be 10-15% lower.

Looking to 2015, it is expected that about 1 million sq.m. of new office space will be supplied, with the Moscow City area accounting for approximately 25% of that figure. That said, many developers have not yet revised construction plans based on current challenges within the market and it is expected that the pipeline could be reduced further.

[Source: Moscow Office Market View Q4 2014, JLL; Marketbeat Russia, Office Snapshot Q4 2014, Cushman & Wakefield]

Moscow Retail Market

14 shopping centres, including Europe's biggest mall, AviaPark, opened in Moscow during the year. It is expected that during 2015, completions will reach 1.9 million sq.m. as shopping centre supply in Moscow increases by 500,000 sq.m., largely due to a significant number of completions that were expected in 2014 being pushed to 2015.

By the end of 2014, average vacancy rates in Moscow's shopping centres had risen to highs of 6% due to the current economic climate. It is expected that rates will continue to rise to approximately 8% during 2015 as a result of lower retailer demand stemming from the weakening purchasing power of consumers.

Shopping centre rents in Moscow decreased by 20% during 2014 with average rents in the range of USD400-1,450 (per sq.m. per annum) and prime rates ranging between USD2,400 and USD4,500 (per sq.m. per annum). Rental rates are expected to continue to face pressure in 2015 as a result of increasing competition between shopping centres and demands for discounts from retailers. That said, desirable shopping centres will remain in demand with rents not anticipated to shrink significantly.

Looking ahead to 2015, retail sales in Russia are expected to contract by 4% as a result of increased cost of imported goods due to self-imposed sanctions and a devalued rouble negatively affecting consumer purchasing power.

[Source: Marketbeat Russia, Retail Snapshot Q4 2014, Cushman & Wakefield; Retail Market Overview Q4-2014- Shopping Centres, JLL]

Moscow and Moscow Region Residential Market

Moscow - During 2014, approximately 3.3 million sq.m. of residential space was delivered in Moscow, including circa 1.6 million sq.m commissioned in "new Moscow" and about the same area commissioned in "old Moscow". The focus of development activity is gradually shifting to "new Moscow" territories.

The analysis of the structure of the multi-storey residential market reveals business class as the most popular segment among developers, accounting for 49.9% of the supply volume during 2014. Comfort class comes second with 33.3% in the total volume. Premium class occupies 14.3% coming third. Economy class proved to be the least popular with only 3.3% of the whole volume of construction.

In 2014 the average weighted price on the primary residential market of "old" Moscow grew by 13.4% in Russian rouble terms as compared to 2013, to 217,910 RUR per sq m (excluding premium class and apartments). Prices in US dollar terms, however, dropped by 34% to 3,870 USD per sq.m. This is explained by the significant Russian rouble depreciation versus the US dollar during the year, which could not be counterbalanced by growth in the price of housing..

Moscow region - During 2014, there were 982 new buildings commissioned in the Moscow region (representing circa 8.255 million sq.m., an increase of 11.5% over 2013)

The average price per sq.m. in the Moscow region amounted to RUR 81 550 (circa US$1,462). By the year end, comfort class apartments reached RUR83 750 per sq.m. (circa US$ 1,475), whilst business class apartments were priced at RUR189 450 per sq.m. (circa US$3,337).The average price per sq.m. in the Odintsovo region was RUR 96,800 (circa US$1,705).

[Source: Report by Blackwood End of 2014, IntermarkSavills, Rosstat]

Board of Directors

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

Mr. Lev Leviev, Executive Chairman of the Board

Mr. Mark Groysman, Executive Director

Mr. Avraham Novogrocki, Non-Executive Director

Mr. Christakis Klerides, Senior Non-Executive Independent Director

Mr. Moshe Amit, Non-Executive Independent Director;

Mr. John Robert Camber Porter, Non-Executive Independent Director

Mr. Panayiotis Demetriou, Non-Executive Independent Director

17 March 2015

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Overview

As at 31 December 2014, the Company's portfolio consisted of 8 investment properties, 7 investment properties under development, 1 trading property under development, 1 inventory of real estate and 4 hotel projects. The portfolio comprises commercial projects focused on offices, shopping centres, hotels, mixed-use properties and residential projects in prime locations in Moscow. The total value of the Company's assets, based predominantly on independent valuation as of 31 December 2014, was US$2.0 billion[5]. About 68% of the assets book value is attributed to yielding properties.

Revenues for 2014 decreased by 29% year-on-year to US$144.1 million mainly due to the fact that the 2013 revenue was largely influenced by completion of the disposal transaction of 643 parking places to VTB Bank JSC in Q1 2013. AFI Development recorded a 35% year-on-year decrease in gross profit to US$49.9 million due to the same reason. Cash, cash equivalents and marketable securities decreased by 54% to US$93.3 million as at 31 December 2014 due to financing of construction works, performed in 2014, by own capital.

In 2014 AFI Development incurred net loss of US$287.3 million, compared to net profit of US$103.9 in 2013, mainly due to valuation loss of US$220.7 million in Q4 2014

Key Factors Affecting our Financial Results

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

Macroeconomic Factors

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

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

Source: The Economist Intelligence Unit. Rosstat

Company Specific Factors 

The following factors affected our performance in 2014:

· In the beginning of 2014 the Company started active sales of apartments at Odinburg, which had a positive impact on the cash flows.

· In Q4 2014 the gross value of the Company portfolio of properties decreased from circa US$2.5 billion recorded at end-September 2014 to circa US$2.0 billion at year-end. The Company recorded a net valuation loss on investment properties, investment properties under development and inventory of real estate during Q4 2014 of circa US$210 million before taxes. The equity decreased in Q4 2014 in the amount of circa US$390 million. The decrease in portfolio value and the valuation loss and impairment were caused by negative developments in the macroeconomic environment in Russia, which resulted in several negative factors influencing valuation models across the portfolio of properties.

Key Portfolio Updates

YIELDING ASSETS

AFIMALL City

AFIMALL City is a major retail scheme located in the high-rise business district of Moscow, "Moscow-City". With a total GBA of nearly 283,182[6] sq.m. (including parking), and GLA of nearly 107,000 sq.m., the project has a shopping gallery of nearly 400 shops and an 11-screen movie theatre with a number of additional outstanding leisure facilities. AFIMALL City is one of Europe's largest and most ambitious retail developments in recent years. The Mall introduces a new standard of quality to the Russian retail sector and offers visitors a combined shopping, dining and entertainment experience unmatched in any other retail development in Moscow.

During 2014, AFIMALL City reported a strong increase in occupancy level, reaching 85% in December 2014 vs 76% in December 2013. During its three years of full operation AFIMALL has become one of the most popular shopping centres located in central Moscow with a quality tenant mix and comfortable leisure, dining and entertainment zones.

In the course of the year, AFIMALL became the leading Moscow shopping centre, selected by new-to-Russia brands for their first Russian shops. Forever 21, H&M Home, Crate&Barrel Laura Ashley, Mirko Botticelli all opened their AFIMALL outlets during 2014. Additionally, the "Fizika" fitness chain opened its two-level club at AFIMALL in 2014, attracting additional visitors to the Mall.

The new metro station "Delovoy Tsentr" was opened in January 2014, which, similar to "Vistavochnaya" station, provides direct access to AFIMALL. Over the next year, this station is planned to become the main connecting point for a new line which will link the densely populated residential districts Ramenky, Horoshevskiy, Savyolovsky and Maryina Roscha.

By 2017, transport infrastructure in the business district is expected to significantly improve, which will result in better accessibility and higher attractiveness of "Moscow City" amongst corporate tenants and office employees. The development environment of "Moscow City" continues to be a strong driver for the future traffic growth of AFIMALL City. AFIMALL is surrounded by completed office towers and projects under construction. According to CBRE, during 2013-2014 three new building have been completed, including Mercury City, Stalnaya Vershina (ex-Eurasia Tower) and OKO, adding almost 200, 000 sq.m. of space.

Notwithstanding that construction of surrounding buildings is still ongoing, AFIMALL is easy to reach from different directions: from office towers "Federation", "Naberezhnaya Tower" and "Capital City", as well as from Novotel, "Evolution" tower and the neighbouring ExpoCentre. In 2014, the management of AFIMALL launched a new navigation system, which helps visitors quickly and simply find their way to nearby parking or shops.

According to independent appraisers Cushman & Wakefield, the market value of AFIMALL City as of 31 December 2014 was US$1,000 million.

OZERKOVSKAYA III

Ozerkovskaya (Aquamarine) III is an office complex forming part of the "Aquamarine" mixed-use development, located on the Ozerkovskaya embankment in the very heart of the historical Zamoskvorechie district of Moscow. The project consists of three Class A buildings of 46,247 sq.m. of combined lettable space[7] and common underground parking for 446 cars . The project creates very attractive working conditions through state-of-the-art architecture, innovative design and efficient use of space. Due to these characteristics, "Aquamarine III" sets new standards for quality and an aspirational environment among Moscow's commercial developments.

AFI Development is in negotiations with potential buyers and tenants regarding selling or leasing the project either in full or in parts.

According to independent appraisers Cushman & Wakefield, the market value of the remaining buildings of the Complex as of 31 December 2014 was US$300 million.

HOTELS

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

AQUAMARINE HOTEL

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

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

The hotel's performance in 2014 was negatively affected by the slowdown in international business activity in Moscow, more intense competition and rouble depreciation versus the dollar.

The balance sheet value of the project as of 31 December 2014 was US$17.3 million.

PLAZA SPA HOTEL ZHELEZNOVODSK

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

During 2014 the hotel demonstrated growing occupancy, which reached an average of 69% for the year. The hotel benefited from the current trend of growing domestic tourism in Russia.

The balance sheet value of the project as of 31 December 2014 was US$12.2 million.

PLAZA SPA KISLOVODSK

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

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

The balance sheet value of the Company share in the project (50%) as of 31 December 2014 was US$14.4 million.

DEVELOPMENT PROJECTS

Tverskaya Plaza Ic

Tverskaya Plaza Ic is a Class A office complex located in the cultural and business quarter of the Tverskoy sub-district. The complex is located within a 4-minute walk of Belorusskaya metro station, which serves as the main transport hub linking the city centre with one of Moscow's main airports - Sheremetievo International Airport. The project has a GBA of 61,810 sq.m. (including underground parking of approximately 467 parking spaces) and an estimated GLA of 37,035 sq.m.

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

Based on an independent valuation of the Company's portfolio by Cushman & Wakefield as of 31 December 2014, the fair value of Tverskaya Plaza Ic is US$87.7 million.

Tverskaya Plaza IV

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

During 2014, the Company progressed with securing the land lease agreement with Moscow authorities.

Based on an independent valuation of the Company portfolio by Cushman & Wakefield as of 31 December 2014, the fair value of Plaza IV was US$107.1 million.

KOSSINSKAYA

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

Based on an independent valuation of the Company portfolio by Cushman & Wakefield as of 31 December 2014, the fair value of Kossinskaya is US$ 53.7 million.

ODINBURG

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

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

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

• Phase I - Construction of a 22-section residential building named Korona (Crown) and of the infrastructure for the kindergartens and schools. This will have a total sellable area of 145,059 sq.m. (2,652 apartments);

• Phase II - Construction of 8 residential buildings and of infrastructure for the kindergartens, schools and outdoor multi-level parking. This will have a total sellable area of of 307,931sq.m of 319,775 sq.m. (6,487 apartments). Each phase includes commercial premises on the ground floor that are planned to be sold to end users.

The construction works of Phase 1 ("Korona") are underway. Construction of the first building within this development is near completion, with final facade works taking place. The construction of the second building began in December 2014. Initial sales of apartments are progressing in line with the market situation. As of the date of publication of this report, 594 contracts for sales of apartments have been signed.

The balance sheet value of the project as of 31 December 2014 was US$133.0 million.

PAVELETSKAYA II

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

Following the decision of the town-planning land committee ("GZK") and the land plot master-plan ("GPZU") GBA of the project is to comprise 151,373 sq.m., which includes 48,180 sq.m of residential area, circa 26,115 sq.m. of commercial area and 1760 units of underground parking.

During the 2014, AFI Development finalised the planning stage of the project. The Company intends to start pre-construction works during H2 2015.

Based on an independent valuation of the Company portfolio by Cushman & Wakefield as of 31 December 2014, the fair value of Paveletskaya Phase II is US$67.4 million.

BOLSHAYA POCHTOVAYA

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

The development plan for the property anticipates construction of 170,350 sq.m. GBA, which includes 56,952 sq.m. of residential area, 34,208 sq.m. of commercial area and 1,771 underground spaces. Currently, the Company is developing the design of the project and plans to receive the construction permit in 2015.

Based on an independent valuation of the Company portfolio by Cushman & Wakefield as of 31 December 2014, the fair value of Bolshaya Pochtovaya is US$108.3 million.

BOTANIC GARDEN

Botanic Garden is a residential project, located in the North-Eastern Administrative District of Moscow, approximately 8 km from the Third Transportation Ring, near the major transportation route of the district Prospect Mira, within walking distance from Botanicheskuiy Sad and Sviblovo metro stations. The future residential complex has a land plot of 3.2 Ha and a gross building (GBA) of 255,025 sq.m. (including "city share"): 107,501 sqm of residential area, 5,149 sqm of commercial premises and 1,334 underground and above ground parking lots.

In December 2014 AFI Development restored the Botanic Garden project on its books, following liquidation of former primary investor, Novoe Koltso Moskvy OJSC ("NKM"), as risks related to the bankruptcy of NKM were removed. The Company has completed the planning of the residential complex, while the project received the approval of the Moscow construction authorities. A construction permit was received in December 2014.

Based on an independent valuation of the Company portfolio by Cushman & Wakefield as of 31 December 2014, the fair value of Botanic Garden is US$20.1 million.

LAND BANK

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

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

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

Key Events Subsequent to 31 December 2014

Following the year-end the following key events occurred:

In January 2015, the Company subsidiary, Krown Investments LLC ("Krown") signed an addendum to the loan facility agreement with VTB Bank OJSC ("the Bank), extending the term of the loan to 26 January 2018. Krown, which owns the Aquamarine III (Ozerkovskaya III) office complex, had an existing loan from the Bank maturing on 26 January 2015, of which US$ 205 million was outstanding. In addition to extending the term of the loan, the new addendum amended the payment schedule and interest rate conditions of the loan agreement and introduced new covenants. The payment schedule anticipates repayments of the principal starting from Q4 2015, while the new covenants include a Debt Service Coverage Ratio of 1.2 applicable from Q4 2015 and a Loan to Value ratio of 65%. In line with the addendum, on 26th January 2015 Krown paid US$10 million to the Bank as partial repayment of the outstanding loan amount, thus reducing the total to US$195 million. About 90% of the principal is to be paid at maturity.

Disposals and Acquisitions

During 2014, the Company made the following disposal:

In March 2014 AFI Development disposed of its 100% share in Keyiri Trade & Invest Limited with its Russian subsidiary Favorit LLC, holding rights to the St Petersburg project for US$1,400 thousand. The disposal followed the decision not to develop the project. The resulting profit on sale amounting to US$61 thousand was recognised in the income statement of Q1 2014.

During 2014, the Company made the following acquisition:

In July 2014 our subsidiary, MTOK JSC, acquired an office building with total area of 720 sq.m. on Sadovaya Samotechnaya street in central Moscow, for a total consideration of RUR 86.75 million (circa US$1.9 million). The building was acquired from Novoe Koltso Moskvy JSC (former "primary investor" in the Botanic Garden Project, "NKM") as part of its bankruptcy proceedings. The purpose of the acquisition was to accelerate the liquidation of NKM.

Presentation of Financial Information

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

Financial policies and practices

Revenue Recognition

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

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

Hotel operation income

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

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

Operating expenses

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

Administrative expenses

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

Profit on disposal of investment in subsidiaries

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

Revaluation of investment property

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

Operating profit before net finance costs

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

Finance income

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

Finance expenses

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

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

Income tax expense

Income taxes are calculated based on tax legislation applicable to the country of residence of each of our subsidiaries and, as a company based and organised in Cyprus, we are subject to income tax in Cyprus. We and our Cypriot subsidiaries are currently subject to a statutory corporate income tax rate of 12.5% in Cyprus. Our Russian subsidiaries were subject to corporate income tax at a rate of 20%.

Capitalisation of Costs for Properties under Development 

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

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

Exchange Rates

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

Recovery of VAT

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

Deferred Taxation

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

Fair Value Calculation

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

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

Results of Operations

Description of Statement of comprehensive income Line Items

Summary of statement of comprehensive income for 2014 and 2013

Revenue - General Overview

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

Rental income

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

Sale of residential

On 3 June 2013 the Company completed the first stage of the sale of 643 parking spaces of AFIMALL City to VTB Bank and therefore recognised revenue of US$54.5 million in the income statement. During 2014 the Company sold 2 residential apartments and 14 parking lots in the Ozerkovskaya II project.

Operating expenses. Our operating expenses decreased by US$14.0 million, from US$76.5 million in 2013 to US$62.5 million in 2014. The year-on-year decrease of 18.3% is attributable to decreased property tax charge, decrease in brokerage expense and rouble devaluation versus the dollar.

Administrative expenses. Our administrative expenses increased by US$5.4 million or 31.9% year-on-year, from US$16.9 million in 2013 to US$22.3 million in 2014. The increase is attributable to increase in bad debt provision from US$0.9 of reverse in 2013 to US$4.6 of additional charge in 2014.

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

Profit on sale/disposal of properties/investment. In March 2014 AFI Development disposed of its 100% share in Keyiri Trade & Invest Limited with its Russian subsidiary Favorit LLC, holding rights to the St Petersburg project for US$1,400 thousand. The disposal followed the decision not to develop the project. The resulting profit on sale amounting to US$61 thousand was recognised in the income statement of Q1 2014. For additional information, please refer to "Disposals and acquisitions" section above.

Net valuation gain/(losses) on properties. Net result of investment property valuation decreased from a gain of US$106.2 million in 2013 to a loss of US$85.9 million in 2014. For additional information, please refer to "Portfolio Valuation" section below.

Finance income. Our finance income decreased by US$13.9 million or 66.5% year-on-year, from US$21.0 million in 2013 to US$7.0 million in 2014. The decrease was a result of loans write-off in 2013.

Finance expense. Our finance expense decreased by US$6.1 million or 9.1% year-on-year, from US$66.9 million in 2013 to US$60.8 million in 2014. The decrease followed full repayment of the Sberbank loan at our Plaza Spa Zheleznovodsk project in 2013 and partial repayment of the principal of the VTB bank loan as per the agreed loan facility at AFIMALL City project. In addition in Q1 2014 the Company fully repaid the fourth instalment (RUR 1,333 million) to the City of Moscow for the acquisition of the parking area under the AFIMALL City which cancelled discounting charges on long-term portion of the liability.

FX Gain/(Loss). We recorded a foreign exchange loss of US$224.8 million in 2014, against a loss of US$28.9 million in 2013. This was a result of Russian Rouble depreciation versus the US Dollar during 2014.

Income tax expense. Our current tax expense decreased to US$0.6 million compared to US$8.9 million in 2013 mainly due to tax obligations incurred as a result of sale of the office building in Ozerkovskaya III in 2013.

Profit/Loss for the year. Due to the factors described above, we recorded a US$287.3 million net loss for 2014 compared to net gain of US$103.9 million for 2013.

Liquidity and Capital Resources

Cash flows

Summary of cash flows for 2014 and 2013

* Note: the cash and cash equivalents do not include US$6.5 million (2013: US$10.0 million) fair value of marketable securities.

Net cash from operating activities

Net cash from operating activities increased to US$64.5 million in 2014, from US$19.1 million in 2013. The increase is attributable to advances received from customers for the sale of residential properties at the Odinburg project.

Net cash from investing activities

Net cash outflow from investing activities amounted to US$116.5 million is attributable to payments for construction and acquisition of investment property and investment property under development mainly.

Net cash used in financing activities

Net cash from financing activities decreased to a negative US$42.2 million in 2014 from a positive US$199.0 million in 2013 due to the fact that in 2013 there was increased debt financing and the new loan facility of US$220 million obtained by Krown Investments LLC.

Capital Resources

Capital Requirements 

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

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

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

We completed 2014 with a strong liquidity position of approximately US$93.3 million cash, cash equivalents and marketable securities on our balance sheet and a debt[8] to equity level of 53%. This strong position reflects the Company's ability to successfully balance liquidity requirements from a number of sources.

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

As of December 31, 2014 our debt portfolio was as follows:

* In January 2015 the loan was refinanced by VTB Bank JSC, please refer to Note 41 to the Consolidated Financial Statement

The total balance of Debt financing reached US$686.4 million as at 31 of December 2014, including US$686.1 million of Principal Debt and US$0.3 million of Accrued Interest with Average Interest Rate 6.88% per annum as at 31.12.2014 (6.97% respectively as at 31.12.2013) (for more details see note 28 to our consolidated financial statements).

As at 31 December 2014, our loans and borrowings were payable as follows:

Portfolio Valuation

As at 31 December 2014, based on the Cushman & Wakefield LLC ("C&W") independent appraisers' report, the value of AFI Development's portfolio of investment properties stood at US$1.38 billion, while the value of the portfolio of investment property under development stood at US$0.4 billion.

Consequently, the total value of the Company's assets, based predominantly on independent valuation as of 31 December 2014, was US$2.0 billion, compared to US$2.4 million as at 31 December 2013.

Principal Risks and Uncertainties Affecting the Company

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

Risk management framework

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

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

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

Credit risk

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

Trade and other receivables

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

AFI Development has no other significant concentrations of credit risk, although collection of receivables could be influenced by economic factors.

Investments

The Company limits its exposure to credit risk by investing only in liquid securities and only with counterparties that have a high credit rating. Management actively monitors credit ratings and given that the Group only has invested in securities with high credit ratings, management does not expect any existing counterparty to fail to meet its obligations, except as disclosed in note 33 to the Company's Audited Financial Statements for year 2014.

Guarantees

The Company's policy is to provide financial guarantees only to wholly-owned subsidiaries in exceptional cases. In negotiations with lending banks the Company is aiming to avoid recourse to AFI Development on loans taken by subsidiaries. As at 31 December 2014, there were two outstanding guarantees: one for the amount of US$1 million in favour of VTB Bank JSC under a loan facility agreement of Bellgate Construction Limited (AFIMALL City) and the second one for the amount of US$205 million in favour of VTB Bank JSC under a loan facility agreement of Krown Investments LLC (Ozerkovskaya III).

Liquidity risk

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

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

Market risk

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

Interest rate risk

We are subject to market risk deriving from changes in interest rates, which may affect the cost of our current floating rate indebtedness and future financing. As of 31 December 2014, 27% of our financial liabilities were fixed rate. For more detail see note 33 to our consolidated financial statements.

Currency risk

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

Operational risk

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

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

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

Critical Accounting Policies

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

A detailed description of certain of the main accounting policies we use in preparing our consolidated financial statements is set forth in notes 3 and 5 to our consolidated financial statements.

Estimates regarding fair value

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

The principal assumptions underlying our estimates of fair value are those related to the receipt of contractual rentals, expected future market rentals, void/vacancy periods, maintenance requirements and discount rates that we deem appropriate. We regularly compare these valuations to our actual market yield data and actual transactions and those reported by the market. We determine expected future market rents on the basis of current market rents for similar properties in the same location and condition. For further details, please refer to Note 3 to our consolidated financial statements.

Impairment of financial assets

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

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

Impairment of non-financial assets

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

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

Deferred income taxes

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

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

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

Share-based payment transactions

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

Related Party transactions

There were no related party transactions (as defined in UK Listing Rules) in the financial year ended 31 December 2014 or in the period since 31 December 2014.

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

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

B. Set forth below information on residential projects under development as December 31, 2014:

(1) "Number of residential units sold" - based on signed contracts only[9]

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

According to the investment agreement, the project should contain 453,000 sq.m. of residential areas after completion and social amenities (such as a school, and a kindergarten, both of which will be constructed in two stages, a healthcare center, etc.). As at the date of this Periodic Report, the property company has received approval for the planning and design documents and a building permit in effect until May 30, 2017, regarding the first two stages of the first phase of the construction of one residential building in the project containing 2,652 housing units, pursuant to the revised project documents.

It should be noted that in the investment agreement in respect of Odinburg, the Property Company is required to build a school and a kindergarten by the middle of 2010. Since the projects were frozen before that date due to the financial crisis, the Property Company did not keep to said original scheduled timetable in connection with the construction of said facilities, so that it has been in breach of the agreement since the middle of 2010. In July 2011, the municipal authority of the Odintsovo region sent a letter to the Property Company concerning the Property Company's failure to abide by the timetable determined in the investment agreement and notified the Property Company that it was considering terminating the investment agreement. The Property Company replied to the letter and thus negotiations began with the municipal authority of the Odintsovo region. As a result of said negotiations, additional developments began in the project, specifically the grant of a building permit to the Property Company. It should also be noted that the Property Company is engaged in negotiations to extend the investment agreement and the lease agreements in connection with the 38 plots of the project, to make the period of their validity consistent with that of the building permit.

Under the investment agreement (from 2004) between the building department of Moscow region, the Odintsovo municipal authority and the Property Company holding the project as previously stated, Property Company will be entitled to receive 94% of the residential areas in the project with the addition of an area of 13,400 sqm of apartments, while the Odintsovo municipal authority will be entitled to receive the remaining area (including the facilities for public use). Property Company will be entitled to 90% of the total non-residential areas. Moreover, the holding company has an option (the period of which is not defined in said investment agreement) to purchase the municipal authority's share in the areas allocated for residences as previously stated (in whole or in part) at a price to be agreed between the parties. Under the investment agreement, the project company is not entitled to sell apartments in the project until the municipal authority has taken delivery of the part of the residential area allocated to it under the agreement. The Company and the municipal authorities are currently negotiating amendments to a number of provisions in the Investment Agreement with the aim of allowing said sales to be made at an earlier date.

Notably, there are 38 lease agreements with said holding company in respect of an area of 317,000 sqm required for the construction of the project. These agreements were signed in 2009 for the period until May 25, 2014 after the legal proceedings were completed (mainly technical) that the Property Company initiated against the Odintsovo municipal authority to enforce its rights to enter into these agreements. As for the ownership of the land, it should be noted that the ownership is only of a reduced area (8,400 sqm) required for the construction of the project.

Average price RUR per square meter on company projects as December 31, 2014:

Expected information (000'$)[13]:

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

Sensitivity Analysis

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

Following are the details of projects not yet started (excluding contingent projects and excluding land reserves as detail below) as at December 31, 2014:

Including City Share of circa 6% of Residential area*

Land bank designated for Residence as at December 31, 2014:

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

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

(2) As at December 31, 2013, the Company's group held (indirectly) property rights in 1 residential unit in the Four Winds Residential project and in 3 residential units in the Ozerkovskaya Phase II project.

In its residential real estate development activities in Russia, the Group targets mainly private customers with a high socio‑economic background. For the Odinburg project the target customers are of medium to low socio-economic background.

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

General Information regarding the Activity Segment

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

General Economic Parameters Regarding the Russian Market:

Products and Services

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

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

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

(b) Breakdown of the lettable property areas based on regions and uses as at 31.12.13 (sq.m.)

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

* Includes Sadovaya-Samotechnaya

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

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

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

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

* Includes Sadovaya-Samotechnaya

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

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

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

(m) Breakdown of the average occupancy rates

* Presented in relation to total lettable areas

** Not Including Ozerkovskaya III project and Sadovaya-Samotechnaya

(n) Number of properties based on regions and uses

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

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

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

(p) Expected revenues in respect of signed lease agreements

* Does not include revenue from parking  

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

(a) Investment projects under development

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

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

3. Significant Investment Properties - Tverskaya Plaza II

4. Significant Investment Properties - Ozerkovskaya III

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

(a) Presentation of property:

(b) Significant Data:

 (c) Breakdown of Structure of Revenues and Expenses:

(d) Major Tenants in the Property: