DUPD.L Regulatory News (DUPD)

2 June 2014

Dragon-Ukrainian Properties & Development plc

("DUPD" or the "Company" and together with its subsidiaries, the "Group")

Results for the year ended 31 December 2013

Dragon-Ukrainian Properties & Development plc, a leading investor in the real estate sector in Ukraine, is pleased to announce its final results for the year ended 31 December 2013.

Highlights

Operational Highlights

· Fully invested; focused on existing projects rather than new investments

· Invested in 10 projects; 6 of these are cash generating

· Attracted a local partner for Obolon for development financing

· Commenced pre sales campaign at Obolon in October 2013; sales to date met expectations in terms of volume and prices

· Commenced pre-sales at Sadok Vyshnevy project

· Solid progress on sales of residential properties in Green Hills and Riviera Villas, particularly for Green Hills

· Henryland sold all of its property assets to a local private investor in Q3 2013 for USD 23.7 million; divestment came at a 23.3% discount to the Company's 30 June 2013 carrying value for its investment in Henryland

· First tranche of Henryland dividend received (USD 5.3 million); remaining USD 3.7 million is expected in Q4 2014, upon completion of the sale of the Henryland properties

· Arricano completed its IPO on the AIM market in September 2013 raising USD 24 million in cash and acquiring four pipeline projects in an exchange for new shares worth another USD 66 million

· On the Landbank project, conducting basic land development works on a 3 ha land plot in order to prepare such land for sale to private individuals

Financial Highlights

· Total NAV of USD 161.7 million at 31 December 2013 (down 10.3% compared to 30 June 2013 of USD 180.3 million)

· NAV per share of USD 1.48 at 31 December 2013 (down 10.3% compared to 30 June 2013 NAV per share of USD 1.65)

· Cash balance of USD 24.8 million (31.2% up compared to 30 June 2013: USD 18.9 million)

· Net loss before tax USD 38.9 million mostly driven by additional impairment on prepayment for land (USD 13.3 million), fair value loss on investment properties and property under construction (USD 7.0 million) and write-down of inventories (USD 14.0 million) (31 December 2012 loss before tax USD 16.3 million)

Rory Macnamara, non-executive Chairman of the Company commented:

"The principal objective of the Company for the coming years remains the realisation and monetisation of the value of the assets in our portfolio for the benefit of the shareholders. We are confident that strategic and operational realignment of the Company and its Manager, as described above, will contribute positively to achieving our goals. I believe that DUPD is positioned to weather the current political and economic storms and to generate cash flow from its residential portfolio. At the same time, we are encouraged with the political developments in Ukraine over the past few months and await further political stabilisation, which hopefully will be followed by the first signs of economic recovery.

Our projects are setting new standards of quality in the residential market, a fact which is well appreciated by our clients and by industry professionals. On the land bank investment, we will be seeking to sell the first of the re-zoned land plots in Zazymya to individual buyers. We are expecting Arricano Real Estate to open one more shopping mall in Kyiv in 2014 and we will closely follow performance of their stock on the AIM market. With this in mind we will continue to focus on our core strategy of value maximisation and cash generation from all assets in our portfolio."

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About Ukraine

The Ukrainian Economy

Ukraine has entered one of the most turbulent periods in its history with a significant impact on the country's economy. In 2013, GDP growth declined to 0.0% y/y from 0.2% y/y in 2012. Private household consumption was the only component with a positive contribution to GDP; it is, however, losing steam. Exports have declined for two consecutive years as demand for steel, Ukraine's key export commodity, remained depressed. Unfavourable external conditions resulted in the current account shortfall increasing to 8.9% in 2013 from 8.4% of GDP in 2012. Recent political turbulence and unprecedented tensions with Russia, which continue to run high following the annexation of Crimea in March 2014, have resulted in yet larger uncertainty, further curbing both local and foreign investment.

On a positive note, the recently agreed USD 17 billion 2-year stand-by loan programme with the International Monetary Fund ("IMF") provides long-awaited support for government and central bank's financing needs and also paves a way to economic reforms, which should result in an improved investment climate and positive structural changes in the Ukrainian economy in the mid term, although a tighter fiscal policy may squeeze near-term growth. The IMF loan will also unlock aid from other international lenders, with the total Western support package for Ukraine estimated at USD 27 billion, covering a substantial share of government debt service and gas import purchases for the coming two years and stabilising the banking sector.

Despite the prospective support from the IMF and other lenders, numerous challenges remain ahead. The current instability is lowering consumer confidence and spending, while CPI is likely to soar to 14-16% in 2014 from 0.5% in 2013 following a sharp Hryvnya devaluation and surging gas prices for both household and industrial users.

Albeit with weak near-term growth prospects, the country's long-term economic potential is one of the strongest in the region. The consensus forecast sees Ukraine's long-term GDP growth at 4.3%, trailing only Turkey and Kazakhstan. Adequate progress on structural reforms and cessation of conflict with Russia are key prerequisites for the first signs of economic recovery.

The Real Estate Market

The Ukrainian real estate market is seeing low investment activity, flat rents and high yields in all sectors. The market's fundamentals have remained unchanged with Kyiv still lagging behind Central and Eastern European peers in terms of supply and maintaining significant structural growth potential.

Despite the decline in total construction output in 2013, due to the drop in non-residential segments, residential construction continued its steady recovery (+7% y/y). Residential space deliveries increased by 20% in 2013 and were the highest since 2008. Residential stock per capita in Ukraine reached 24 m2, still far below the EU average of 35 m2 per capita, suggesting strong demand potential, although currently demand is still depressed by low household confidence and the subdued mortgage market. In 2013, apartment sales in Kyiv decreased by 8% y/y due to the weak secondary market (-16% y/y), while the primary sales inched 3% up on the back of attractive acquisition structuring offers from developers.

Commercial property sectors remain "tenants' markets" with landlords forced to provide rental discounts in an attempt to retain existing lessees and struggling to attract new ones amidst growing vacancies. Retail property is in better shape compared to the office and industrial sectors, enjoying close to full occupancy levels, due to steady growth of retail trade turnover throughout the past four years. The retail property sector in Kyiv also remains the most lucrative segment of the local market in the longer term, being greatly under-saturated, with per capita shopping centre space at half of that in Warsaw.

Overall, the real estate market in Ukraine is in a state of great uncertainty and is looking forward to macroeconomic stability before seeing new investments and strengthening demand across all property sectors.

About DUPD

DUPD remains the largest AIM-listed real estate investor operating in Ukraine. The Company is present in two top-performing market segments in Ukraine - residential and retail properties - and is well positioned to benefit from further improvement in market sentiment.

2013 was one of the most challenging years for Ukraine, with economic turbulence and political unrest. The annexation of Crimea and the risk of Russian military intervention makes the current situation highly uncertain and the economy extremely fragile. The recently-agreed deal with the IMF brightened the outlook, shored up the country's confidence and may lead to a turnaround in investment, but the conditions of this financial support will take a heavy toll on Ukraine's near-term growth.

Management of DUPD

DUPD utilises the property investment and development expertise of DCM Limited (DCM or "the Manager") and, where a joint venture arrangement is appropriate, other experienced international and local partners. DCM provides advisory, investment management and monitoring services to DUPD in respect of project development and divestment. DCM is the asset management arm of Dragon Capital, Ukraine's leading investment bank, offering a full range of services to institutional, corporate and private clients. Established in 2000, Dragon Capital is an independent partnership controlled by management, with a minority stake held by Goldman Sachs. The company has completed more than 100 deals, including IPOs, private placements, M&A transactions and debt financings, since 2005, raising over USD 3.4 billion.

All investment decisions are considered by the Board of Directors, comprising directors with extensive experience in property investment, development and management as well as general investment, company law and administration. At all times, the majority of the seats on the Board are occupied by independent directors.

Our Investment Strategy

Following a review of the future strategy of the Company by the Board, in conjunction with the Manager, the Board put forward proposals to adopt a new investing policy, which was approved by shareholders on 17 February 2014. Reflecting its fully invested status, the Company plans to make no new property investments, but to monetise its existing property investments as quickly and effectively as the Ukrainian property market will allow and return the proceeds to shareholders in a tax-efficient manner.

In the day-to-day management of the projects, whether maintenance of existing properties, construction supervision or attracting new financing, the Manager is utilising its own proprietary network of local and international contacts.

Chairman's Statement

2013 was a year of challenges and great uncertainty for the Ukrainian economy and for the real estate market in particular. The country's economy had zero growth, while political instability, increasing risk profile and a worsening investment environment have not surprisingly been of concern for local and foreign investors, especially over the second half of the year. At the same time, we are encouraged with the political developments in Ukraine over the past few months and await further political stabilisation, which hopefully will be followed by some first signs of economic recovery - possibly in 2014.

In such an environment we remained focused on thoroughly planning, managing and controlling our real estate investments in order to increase their potential for success and achieve sustainable growth of shareholder value in the short and medium term.

Our clear objective is to provide shareholders of Dragon-Ukrainian Properties and Development plc with an opportunity to benefit from their investment in the Company through efficient distribution of net proceeds of property realisations, having regard to the Company's working capital requirements and existing property project requirements. While the original investing policy in place at the time of our IPO in 2007 assumed development and re-development of new projects, no new investments have been made since 2010. In early 2014, we took an additional step of formally adopting a new investing policy. The new investing policy reflects the Company's fully invested status and provides that the Company make no new property investments and monetise its existing property investments as quickly and effectively as the Ukrainian property market will allow and return the proceeds to shareholders. Following the adoption of the new investing policy, the Board and the Manager have been in discussion with their legal and tax advisers on the most effective structure for returning cash to shareholders, and will provide an update to shareholders on this in due course, including if required any shareholder approvals. The Board is mindful of shareholders desire for distributions and will update shareholders as soon as the Board has approved any decision on distributions.

While realising properties on reasonable terms remains challenging at the present time, we can report the successful divestment of the properties held by Henryland as well as good progress on sales in our residential projects.

The sale of the assets of Henryland, agreed with a strategic buyer in late 2013, remains subject to completion, which is expected by the end of 2014. This is expected to generate a total of USD 9 million of dividends for DUPD before the end of 2014. DUPD's share of the proceeds of disposal effectively reflects a 23.3% discount to the Company's 30 June 2013 carrying value of the investment in Henryland. Out of this amount USD 5.3 million was received in 2013 and contributed positively to our cash balance.

Our residential sales in the high-end cottage community Riviera Villas stood at a moderate level (one sale completed in 2013), while those in Green Hills - our business-class community - increased from 29 to 37 units. We are also happy to report a successful launch of sales in two more projects - Obolon Residences and Sadok Vyshnevy, in September-October 2013. By the end of 2013 we were able to pre-sell 41 apartments and 5 commercial premises in Obolon for USD 8.5 million and sell one apartment for USD 155.9k in Sadok Vyshnevy. Consequently, the cumulative sales and pre-sales in our residential portfolio to date reached USD 21.1 million. The residential part of our portfolio is thus continuing to bolster our cash-generating capacity with a positive outlook going forward.

Another substantial part of our portfolio - Arricano, a retail developer - successfully completed an IPO on the AIM market of the LSE (ticker ARO:LN), raising an additional USD 24 million for development of its portfolio. We have also terminated all legal proceedings with Arricano's principal shareholder, Retail Real Estate S.A., via a comprehensive settlement of claims, after receipt of an amount in settlement of the claims. Certain legal disputes with Stockman Interhold SA (Stockman) a third-party investor in the Sky Mall property of Arricano remain in process, but the company keeps working towards a resolution in the near future.

Results

The Company's Net Asset Value ("NAV") for the year decreased by 18% y/y, or USD 36 million, to USD 161.7 million (31 December 2012: USD 198.04 million) with a net loss of USD 36.3 million (2012: USD 15.3 million). For the second consecutive year, the main contributor to the NAV decline and the net loss was the reduced valuation of our land bank investment (impairment of USD 13.3 million), reflecting a more conservative scenario applied by the Company's independent valuer, altogether with a write-down of inventories at Obolon of USD 10.5 million and at Sadok Vyshnevy of USD 3.5 million, due to more conservative assumptions employed by the new valuer.

Cash balances increased by USD 3 million, from USD 21.7 million to USD 24.7 million, and there continues to be no debt on any of the projects. Principal inflows included USD 6.4 million dividends received from Henryland and advances from pre sales increased by USD 6.5 million to USD 7.5 million. Principal cash outflows included management fees of USD 2.5 million, USD 2.1 million further developments costs on Green Hills and Riviera Villas, and a further USD 1 million for the land bank project. The Company continues to closely monitor its cash balances and monies spent on each of its projects.

The Company appointed DTZ Kiev BV as the independent appraiser for the valuation of the Company property investments, replacing CB Richard Ellis LLC. The Board notes that Mr van der Heijden is chairman of DTZ Kiev BV but the Board does not believe that this has impacted DTZ Kiev BV's independent appraisal of the valuation of the Company's property investments.

Board and Management

I took over the Chairman's role on 1 August 2013. I want to thank Mr van der Heijden, who had been our Non-Executive Chairman since the Company's inception, for his dedication to DUPD and his in-depth involvement in all major projects and decisions. We are extremely pleased that he has agreed to remain a Board member. We also want to thank Nikolay Artemenko, who resigned from the Board as of 1 August 2013, for his valuable contribution during his directorship with the Company.

In February 2014, the Company entered into a new management agreement with DCM Limited (an entity which replaced Dragon Capital Partners Limited following an internal reorganisation in the Dragon Capital Group). This was entered into at the same time as the adoption of a new investing policy to that of an orderly realisation of the Company's properties over the medium term with a view to maximising returns for shareholders and to make no investment in new properties that are not currently part of the Company's existing property portfolio.

The Dragon Capital Group has confirmed that other than the change in the corporate vehicle of the Manager, no other changes have occurred - specifically, no changes in the financial covenant, management and other resources that have been deployed by Dragon Capital Partners Limited. Under the new management agreement, the management fee changed from being based on 1.5 per cent of Gross Asset Value to a sequence of fixed amounts, decreasing on an annual basis going forward. The change was also applied to 2013.

The performance fee under the Third Management Agreement has changed from one which is calculated in two parts, being based on increases in NAV and share price, to a fee entirely based on distributions to shareholders.

The Directors consider that the proposed changes will incentivise the Manager to dispose promptly of the Company's properties and achieve the best possible sales value for each property and therefore maximise the cash returns to shareholders.

Awards and Community

It was pleasing that the hard work of our team was recognised by an independent third party, both in Europe and in Ukraine, as our gated communities Riviera Villas and Green Hills were named best projects in 2013 in their respective categories by European Property Awards and iBuild Ukraine.

Outlook

The principal objective of the Company for the coming years remains the realisation and monetisation of the value of the assets in our portfolio for the benefit of the shareholders. We are confident that strategic and operational realignment of the Company and its Manager, as described above, will contribute positively to achieving our goals. I believe that DUPD is positioned to weather the current political and economic storms and to generate cash flow from its residential portfolio. At the same time, we are encouraged with the political developments in Ukraine over the past few months and await further political stabilisation, which hopefully will be followed by the first signs of economic recovery. Our projects are setting new standards of quality in the residential market, a fact which is well appreciated by our clients and by industry professionals. On the land bank investment, we will be seeking to sell the first of the re-zoned land plots in Zazymya to individual buyers. We are expecting Arricano Real Estate to open one more shopping mall in Kyiv in 2014 and we will closely follow performance of their stock on the AIM market. With this in mind we will continue to focus on our core strategy of value maximisation and cash generation from all assets in our portfolio.

Rory Macnamara

Non-Executive Chairman

Date 2 June 2014

Manager's Report

Operation Overview

In February 2014, DUPD's shareholders approved a new investing policy focused on developing and monetising its existing property investments and returning proceeds to shareholders, as well as not making any new property investments. Given the Company has previously confirmed its fully invested status, in practice the Board and the Manager have not considered any new investments since the Company's investment in Arricano in 2010, and have remained focused on developing its existing property portfolio.

2013 was our best performing year in terms of residential sales, as we opened sales in the Obolon and Sadok projects. Our four residential projects generated USD 11.0 million in contracted sales (52% of the Company's total residential sales) and USD 10.1 million in cash proceeds, which has contributed to DUPD's increased cash balance. The majority of DUPD's residential sales are in the nature of pre sales, with certain cash received upfront and delivery of certain conditions such as completion of an apartment, and/or title transfer, before the sales can be recognised for accounting purposes. Despite the challenging market environment for individual home sales, Green Hills booked USD 1.9 million from nine new sales bringing the total number of sold land plots to 37 out of the initial stock of 178. Riviera Villas sold one house, but had a record year in terms of cash receipts, having collected USD 2.6 million from sales contracts signed in the previous periods. We are focused on advancing the development of these two high-class cottage communities by expanding social and engineering infrastructure and creating new show homes to support future sales.

The bulk of the 2013 residential contracted sales (USD 8.5 million or 78%) were accounted for by apartment pre-sales as DUPD tapped into this much stronger segment of the Ukrainian residential market with Obolon Residences. The first pre-sales became possible due to a successful breakthrough in our prolonged search for development financing, as we managed to attract a local partner who agreed to share some of the development costs in exchange for USD 5 million worth of premises in the building. We started the construction of the first tower in Q2 2013, and in October 2013 we opened the pre-sales campaign. End-of-2013 pre-sales (as well as the Q1 2014 figures) met our expectations in terms of volume and prices, even accounting for the sharp decrease in customers' activity since the start of the Maidan protests at the end of November and the sharp devaluation of the Hryvnya in February of this year. Hence, we are actively proceeding with the construction of Phase 1 and we are also considering the start of Phase 2 in H2 2014 if the situation in Ukraine stabilises.

2013 was also the year of the first sales in our Sadok Vyshnevy project. Out of four pre-sales, only one was closed in 2013, as the other three were suspended due to political events in the country and eventually closed in Q1 2014. The sales prices in this project are in the range of 600-700 USD/m2, slightly exceeding the fair value of the asset.

As competition in the sector of single-family homes weakens, due to the absence of new developments, we are working on Green Hills, Riviera Villas and Sadok Vyshnevy to put them in a good position to benefit from the pent-up demand for individual homes that we believe will occur after the resolution of the economic and political crisis in the country.

We are equally satisfied with the performance of the retail part of our portfolio in 2013, particularly that of our two largest investments, Arricano and Henryland.

Henryland, where DUPD holds 38%, sold all of its property assets (three retail boxes and three properly zoned land plots) to a local private investor in Q3 2013 for USD 23.7 million, entitling DUPD to a dividend of around USD 9 million. The Company received the first tranche of the dividend of USD 5.3 million - bringing its total dividends received from Henryland to USD 7.9 million - and the remaining USD 3.7 million is expected in Q4 2014, upon completion of the sale of the Henryland properties. The divestment came at a 23.3% discount to the Company's 30 June 2013 carrying value for its investment in Henryland and was one of only a few investment sales in the Ukrainian property market in 2013.

Last year, DUPD reached a comprehensive settlement with its majority partner in Arricano, following which the company successfully completed an IPO on AIM in September 2013, raising USD 24 million in cash and acquiring four pipeline projects in an exchange for new shares worth another USD 66 million. Consequently, the total portfolio of Arricano grew to nine shopping centre projects, and the company started to be governed by an enlarged board with DUPD representation and an independent Chairman. In February 2014, the second phase of Yug, the shopping centre in Simferopol, was opened, and in Q3 2014 Arricano is planning to open its third shopping mall in Kyiv, Prospect (one of the newly acquired pipeline projects, with total lettable space of 30,400 m2). On a negative note - the dispute around the ownership of Sky Mall has not been resolved and Arricano still has no control of the asset, while the recent developments in the Crimea have led the company to search for a new safe and tax-efficient ownership structure for Yug.

On the land bank project, we are conducting basic land development works on a 3 ha land plot in order to prepare such land for sale to private individuals by building roads, fencing and providing for electricity, and at the same time we have achieved significant progress in seeking re-zoning of the other location where a new master plan of the neighbouring village, which included DUPD's land within the village's borders, was approved. Large holdings of land, particularly that which requires rezoning, are still the most illiquid type of real estate assets in Ukraine as the market in out-of-town land remains largely dormant. The current intention is to manage the sales and rezoning process in a cost efficient manner, redeploying sales proceeds into other tranches of the land bank project.

We have successfully obtained rezoning to residential usage on 19.9 hectares to date, out of 502 hectares. We continue to work diligently with our partner in the land bank project to seek the necessary rezoning to residential usage of the remaining 482.1 hectares.

Market Overview

Ukraine's commercial and residential property markets continued to show mixed dynamics in 2013. New deliveries on the Kyiv commercial property market (office, retail and industrial) hit 385,000 m2 (+11% y/y) while the number of residential property deals in the Ukrainian capital decreased by 8% y/y.

In 2013, construction in Ukraine dropped by 14% y/y to $7.1bn in value terms amid overall economic weakness. The decline was driven by the segments of non-residential (-16% y/y; 30% of total volume) and infrastructure construction (-19%; 53% share). Residential construction (17% share) was the only segment to report positive growth of 7% y/y.

The Commercial Property Market

The commercial property market was driven by the retail segment in 2013, with Kyiv's total shopping space rising 15% (+125,000 m2 of new premises) to 916,000 m2, according to Colliers International. Despite this sizable growth, the vacancy rate increased only slightly (+0.9pp to 3.9% at the end of 2013) and average rental rates declined only 5% y/y (to $93/m2/month for a mid-size unit). The segment continued to benefit from increasing retail trade turnover (+10% y/y in real terms in 2013 after +16% in 2012 and +14% in 2011). The Kyiv office market saw 130,000 m2 of new supply delivered last year (+8% y/y), bringing its end-2013 stock to 1,540,000 m2. Office rental rates remained largely unchanged while vacancy rates slightly lowered (-1.7pp y/y to 15.1% on average). The industrial property market also demonstrated recovery with some 130,000 m2 of new deliveries (+10% y/y; mainly built-to-suit projects) and end-of-2013 quality stock of an estimated 1,490,000 m2. With low supply last year, vacancy rates decreased from 10% to 5% while rental rates remained little changed. Yet the number of investment deals registered on the commercial property market overall in 2013 was the lowest since 2009.

Residential

In 2013, residential construction in Ukraine increased by 7% y/y while new housing supply (total space commissioned during the year) increased 20% y/y to 8.2 million m2, the highest level since 2008, bringing total residential floor space to an estimated 1,105 million m2 as at the end of 2013, or 24.3 m2 per capita. Despite growth in new supply, activity on the residential market was markedly lower last year, especially in H2 2013, due to increased economic and political risks. In Kyiv, the total number of apartment sales decreased by 8% y/y in 2013, to 30,621, including 16,154 secondary and 14,467 primary deals. The decline was mainly driven by the secondary market (-16% y/y), as primary market deals inched up (+3%). Total sales last year still accounted for only 69% of the 2007 high, reflecting low household income and prohibitively high mortgage rates. Apartment prices on Kyiv's secondary market were unchanged, averaging $1,900/m2 at the end of 2013 (flat in 2013, and 47% below the mid-2008 peak value). Prices on the primary market also remained flat last year, averaging $1,700/m2 at the year-end (-47% and -35% from mid-2008 peaks on the secondary and primary markets, respectively).

Land

In line with our expectations, 2013 saw no turnaround on the domestic land market (particularly the sector of out-of-town land plots for individual construction) due to still limited property market activity, weak mortgage lending and lack of progress towards land market liberalisation. The land market remained mainly stable in 2013, with prices for land plots for individual construction around Kyiv largely unchanged.

Eugene Baranov

Managing Director

DCM Limited

Date 2 June 2014

Volodymyr Tymochko

Managing Director

DCM Limited

Date 2 June 2014

Project Overview

1. Land bank

· Land is registered in legal entities

· First part of land bank (19.9 ha) re-zoned; further re-zoning is in process for remaining landholding

· The Company is focused on gradually selling the land as it is re-zoned, as suitable for construction of residential and commercial facilities, when the land market recovers

2. Obolon Residences

· Landmark residential complex with office and retail premises 

· Central location in a prestigious Kyiv district

· Local equity co-investor attracted in Q2 2013

· Construction of Phase 1 under way

· Official sales campaign started in October 2013; 41 apartments sold in 2013

3. Arricano Real Estate plc

The Arricano portfolio of nine international quality shopping malls, of which five are fully operational, is the largest in the emerging Ukrainian market of professional retail space.

· In September 2013, the Company floated on AIM (ARO LN)

· DUPD's shareholding was diluted to 12.51%

· Portfolio of nine shopping centres of which five are fully operational

· Second phase of South Gallery (Simferopol) opened in February 2014, hosting the first Auchan store in Crimea

· Prospect (Kyiv) is planned to open in September 2014

4. Riviera Villas

Riviera Villas is differentiated from other up-market residential communities around Kyiv by its unique architectural style and its extensive and luxurious social infrastructure.

· Elite cottage community near Kyiv

· Unique luxurious social and leisureinfrastructure

· Won a prestigious award from European Property Awards 2013 in London, in the category of Development Multiple Units for Ukraine

· Utilities are on the site and waterfront infrastructure is completed

· 18 land plots sold; first street out of four completed; stock of seven homes available for sale

5. Green Hills

Located on a picturesque hill bordering a forest area with a river and lakes nearby, making it ideal for a gated community.

· Close proximity to Kyiv (10 km) and convenient transport access

· The first North-American-style cottage community developed in Ukraine

· All key infrastructure is in place

· 41 land plots sold, 23 families living in

6. Henryland

· In 2013, Henryland sold all its assets for c. USD 23.7 million and received an initial instalment of c. USD 14.1 million

· In December 2013, Henryland paid USD 13.8 million in dividends, USD 5.3 million (38%) of which were received by DUPD

· The remaining part of DUPD's dividends (USD 3.7 million) is expected to be received in Q4 2014 upon completion of the sale of the assets.

7. Sadok Vyshnevy

· 38 apartments in a constructed town-house community in a Kyiv suburb

· Individual property acts received for each of the properties

· All homes commissioned

· One apartment pre-sold in 2013

8. Avenue Shopping Centre

· Shopping centre development project

· Design documentation developed

· Land lease extended to December 2018

· Construction permit pending

9. Glangate

· Two land plots for shopping centre development in Kremenchuk and Rivne

· Kremenchuk - construction permit received

· Rivne - land plot ready for design development

Investing Policy

Dragon - Ukrainian Properties & Development plc ("DUPD" or "the Company") is an "investing company" for the purposes of the AIM Rules for Companies. The AIM Rules for Companies require an investing company to have in place an investing policy which is "sufficiently precise and detailed so that it is clear, specific and definitive". The AIM Rules for Companies provide guidance in relation to what this investing policy is expected to include as a minimum.

On 17 February 2014, the Company's shareholders approved a new investing policy, which is set out below.

Investing strategy - asset allocation - geographic focus and sector focus

The Board will seek to realise the Company's properties in an orderly manner, such realisations to be effected at such times, on such terms and in such manner as the Board (in its absolute discretion) may determine.

Assets or companies in which the Company can invest

The Company will not make any investments in new properties.

However, this will not preclude the Board (in its absolute discretion) from making any investment in existing properties in the following circumstances:

· where the Board, as advised by the Manager, believes such investment is to protect or enhance the value and saleability of such property;

· where the Company is contractually committed to make such investment;

· in respect of properties currently under construction, where the Company continues to pursue, where necessary, any licences and/or approvals which are required for a particular property to continue its development;

· undertaking investment in additional phases of such properties (other than the existing phase currently being developed in respect of such property) where the Board, as advised by the Manager, believes such investment in additional phases is to protect or enhance the value and saleability of such property;

· authorising the expenditure of such capital as is necessary to: (i) acquire any joint venture party's interests in any of the Company's existing investments; or (ii) carry out any construction necessary to maximise value and saleability of any existing property; and

· entering into any contract or other arrangement with any third party to realise all or any part of its existing properties.

In addition, the Company will only commence construction on any of its existing properties that have yet to commence construction to protect or enhance the value and saleability of such property. In respect of such properties, the Company will also continue to pursue, where necessary, any licences and/or approvals which are required for a particular property.

These above restrictions will not preclude the Company making investments in short-dated cash or near cash equivalent securities, which form part of its cash management practices.

Strategy by which the investing policy will be achieved

The Board and the Manager will investigate a number of approaches to realisation of its properties, which will include, but not be limited to, sales of individual assets or groups of assets or a sale of the entire portfolio (or a combination of such methodologies), or an in-specie distribution of such property. The Board will only consider in-specie distributions to shareholders when other realisation alternatives have been fully explored and the relevant property investment is quoted on a stock exchange.

The Board and the Manager may decide to appoint independent advisers to assist in the execution of the New Investing Policy, including, but not limited to, property valuers and property agents.

Whether investments will be active or passive investments

The Manager assumes a proactive approach to every property project in the Company's property portfolio.

Holding period for investments

The New Investing Policy includes an orderly realisation of the Company's properties over the medium term with a view to maximising returns for shareholders. Accordingly, the Board will seek to realise the Company's properties and exercise all legal rights of the Company in such manner and on such timescale as the Directors see fit, with a view to ensuring that returns to shareholders are maximised.

Spread of investments and maximum exposure limits

The Company does not have a prescribed policy in relation to the spread of investments or maximum exposure limits.

The realisation of the Company's properties may, over time, result in the Company having a reduction in the diversification of investments. However, the realisation of the Company's properties over time will also result in the reduction of the Company's overall investment in real estate assets.

Policy in relation to gearing and cross holdings 

The Board (in its absolute discretion) may make prudent use of leverage to make investments or expenditure consistent with its investing policy and to satisfy working capital requirements. Borrowings may be undertaken by the Company itself or by any of its subsidiaries or project companies.

Given that the New Investing Policy is an orderly realisation of the Company's properties over the medium term, it is not expected that the Company will secure additional debt financing other than where the Company believes it is required to protect or enhance the value and saleability of such property.

Investing restrictions

Other than the requirement for the Manager to manage any potential conflicts of interest, and the requirement to invest in accordance with its New Investing Policy, there are no other investing restrictions.

Nature of returns that the Company will seek to deliver to shareholders

Under the New Investing Policy, the Board will seek to return any surplus funds to shareholders when appropriate. The net proceeds of all property realisations will be returned to shareholders, at the Board's discretion, having regard to:

· the requirement to invest further funds in the Company's existing property projects only to protect or enhance the value and saleability of such property, and/or where the Company is contractually committed to make such investment;

· the Company's working capital requirements and running costs (including the fees payable under the Third Management Agreement);

· the cost and tax-efficiency of individual transactions and/or distributions; and

· the 2006 Act.

It is expected that surplus capital will be returned to shareholders over time in a manner which may involve dividends, share buy-backs, voluntary tender offers, dividends and/or capital reductions. The decision to make any such returns, the method through which such returns are effected, and the quantum and timing of any such returns will be at the sole discretion of the Board. The Board will only consider in-specie distributions to shareholders when other realisation alternatives have been fully explored and the relevant property investment is quoted on a stock exchange.

Other matters

Cash management

Pending future returns of value to shareholders, all of the Company's funds (whether in the form of cash or otherwise) will be kept under the control of the Board or as it may direct.

Currency hedging

The Company will hedge currency and interest rate risk as and to the extent that the Board (in its absolute discretion) considers appropriate.

Management of liabilities

The Company will endeavour, at the direction of the Board (in its absolute discretion), to manage all actual or potential material liabilities, risks or exposures of the Company (including, without limitation, any existing contractual commitments, disputes (potential or actual) and litigation (threatened or actual)) in a manner consistent with the orderly realisation of the Company's properties.

Conflict policy

The Dragon Capital Group pursues a number of real estate development projects in Ukraine. Under the terms of the Third Management Agreement the Manager has no ability to commit the Company or any of its subsidiaries to make any acquisition or disposal. In the event that any Relevant Party has the opportunity to acquire Conflict Property then the Manager shall cause the Relevant Party to provide, inter alia, all material details of the Conflict Property to the Company, in order for the Company to decide whether or not to notify the Manager that it should pursue the opportunity to acquire the Conflict Property (within the scope of the New Investing Policy). If the Company so notifies the Manager of its intention to pursue the opportunity to acquire a Conflict Property, the Manager shall procure that no affiliate of the Manager shall acquire any interest in the Conflict Property in question without the prior consent of the Company.

The consolidated and Parent Company statements of financial position are to be read in conjunction with the notes to, and forming part of, the financial statement set out below.

These consolidated and Parent Company financial statements were approved by the Board of Directors on 16 May 2014 and were signed on its behalf by:

Chairman of the board Rory Macnamara

Non-executive director Fredrik Svinhufvud

The consolidated and Parent Company statements of financial position are to be read in conjunction with the notes to, and forming part of, the financial statement set out below.

The directors believe that all results are derived from continuing activities.

The consolidated and Parent Company statements of financial position are to be read in conjunction with the notes to, and forming part of, the financial statement set out below.

The consolidated and Parent Company statements of cash flows are to be read in conjunction with the notes to, and forming part of, the financial statements set out below.

The consolidated and Parent Company statements of cash flows are to be read in conjunction with the notes to, and forming part of, the financial statements set out below.

Consolidated

The consolidated and Parent Company statements of cash flows are to be read in conjunction with the notes to, and forming part of, the financial statements set out below.

Parent Company

The consolidated and Parent Company statements of cash flows are to be read in conjunction with the notes to, and forming part of, the financial statements set out below.

1. Background

(a) Organisation and operations

Dragon - Ukrainian Properties & Development plc (the Parent Company) was incorporated in the Isle of Man on 23 February 2007. The Parent Company's registered office at the date when these financial statements were approved was 2nd Floor, Belgravia House, 34-44 Circular Road, Douglas, Isle of Man IM1 1AE and its principal place of business is Ukraine.

On 1 June 2007 the Parent Company raised USD 208 million through an initial public offering on the Alternative Investment Market (AIM) of the London Stock Exchange. On 29 November 2007, the Parent Company completed a secondary placing on AIM and raised USD 100 million.

The consolidated financial statements as at 31 December 2013 comprise the Parent Company and its subsidiaries and the Group's interest in associates (together referred to as the Group).

The main activities of the Group are investing in the development of properties in Ukraine.

(b) Business environment

Ukraine's political and economic situation has deteriorated significantly since the Government's decision not to sign the Association Agreement and the Deep and Comprehensive Free Trade Agreement with the European Union in late November 2013. Political and social unrest combined with rising regional tensions has deepened the ongoing economic crisis and has resulted in a widening of the state budget deficit and a depletion of the National Bank of Ukraine's foreign currency reserves and, as a result, a further downgrading of the Ukrainian sovereign debt credit ratings. In February 2014, following the devaluation of the national currency, the National Bank of Ukraine introduced certain administrative restrictions on currency conversion transactions and also announced a transition to a floating foreign exchange rate regime. The final resolution and the effects of the political and economic crisis are difficult to predict but may have further severe effects on the Ukrainian economy.

Whilst management believes it is taking appropriate measures to support the sustainability of the Group's business in the current circumstances, a continuation of the current unstable business environment could negatively affect the Group's results and financial position in a manner not currently determinable. These consolidated financial statements reflect management's current assessment of the impact of the Ukrainian business environment on the operations and the financial position of the Group. The future business environment may differ from management's assessment. These consolidated financial statements do not include any adjustments for the impact of events in Ukraine that have occurred after the reporting date.

The Directors believe that they are taking all the necessary measures to maintain the viability of the Group and the development of its business in the current business and economic environment.

2. Basis of preparation

(a) Statement of compliance

These consolidated and Parent Company financial statements are prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU.

(b) Basis of measurement

The consolidated and Parent Company financial statements are prepared on the historical cost basis except for investment properties and financial assets at fair value through profit or loss, which are carried at fair value.

(c) Functional and presentation currency

These consolidated and Parent Company financial statements are presented in thousands of US dollars (USD).

The Group consists of entities that are domiciled in Ukraine, Cyprus, British Virgin Islands and Isle of Man, and as a result there are a number of currencies in use by group entities.

However, the Directors believe that the most appropriate functional and presentation currency for all consolidated entities and these consolidated financial statements is US dollars. All funds raised by the Parent Company are in US dollars, and all project developments are based on US dollars. Deposits and prepayments are also in US dollars. All financial information presented in US dollars is rounded to the nearest thousand.

For Ukrainian entities there are certain transactions in Ukrainian Hryvnia, which is not a convertible currency.

(d) Use of judgments, estimates and assumptions

The preparation of financial statements in conformity with IFRS as adopted by the EU requires the Directors to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses and the disclosure of contingent assets and liabilities. Actual results may differ from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected.

In particular, information about significant areas of estimation uncertainty and critical judgments in applying accounting policies that have the most significant effect on the amounts recognised in the consolidated financial statements and could lead to significant adjustment in the next financial year are included in the following notes:

• Note 5 - Valuation of investment properties

• Note 6 - Valuation of prepayments for land

• Note 7 - Impairment of investments in associates

• Note 9 - Net realisable value of trading property.

(e) Going concern

These consolidated financial statements are prepared on a going concern basis. In the year ended 31 December 2013 the Group incurred a net loss of USD 36,298 thousand and had negative cash flows from operating activities of USD 432 thousand. As at that date the Group's current assets exceeded its current liabilities by USD 53,376 thousand and its Net Asset Value amounted to USD 161,742 thousand.

The Directors believe that the Group's existing cash resources are sufficient to meet the Group's liabilities for the foreseeable future and therefore that the going concern basis for preparing these consolidated financial statements is appropriate.

3. Significant accounting policies

The accounting policies set out below are applied consistently to all periods presented in these consolidated financial statements, and are applied consistently by Group entities, except as explained in note 3(s), which addresses change in accounting policies.

(a) Basis of consolidation

(i) Subsidiaries

Subsidiaries are entities controlled by the Group. The Group controls an entity when it is exposed to, or has right to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity.

The financial results of subsidiaries are included in the Consolidated financial statements from the date that control commences until the date that control ceases. Where necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies in line with those used by the Group.

The results of subsidiaries acquired during the year are included in profit or loss from the effective date of acquisition. Losses applicable to the non-controlling interest in a subsidiary are allocated to the non-controlling interest even if doing so causes the non-controlling interest to have a deficit balance.

Any premium and discount arising on the acquisition of a non-controlling interest in a subsidiary represents the excess/deficiency of the cost of the additional investment over/under the carrying amount of the net assets acquired at the date of exchange. The effect of these transactions is recognised directly in equity.

On the loss of control, the Group derecognises the assets and liabilities of the subsidiary, any non-controlling interests and other components of equity related to the subsidiary. Any surplus or deficit arising on the loss of control is recognised in profit or loss. If the Group retains any interest in the previous subsidiary, then such interest is measured at fair value at the date that control is lost. Subsequently, that retained interest is accounted for as an equity-accounted investee or as an available-for-sale financial asset depending on the level of influence retained.

In the financial statements of the Parent Company, subsidiaries are accounted for at cost, less impairment.

Consolidated subsidiaries include the following:

On 3 March 2012 Startide LTD acquired 100% in the closed non-diversified venture investment fund "Development" (Fund "Development") through the purchase of 14,300 investment certificates for a total consideration of USD 178 thousand. The Group intends to use Fund "Development" as a financial vehicle for the Obolon project.

During 2013 the Group increased its investment in Fund "Development" by acquiring an additional 201,220 investment certificates for a total consideration USD 2,597 thousand.

Based on a written resolution of the sole shareholder of Landzone LTD on 14 February 2013 the share premium of USD 5,000 thousand was returned to the Parent company as this amount exceeds the needs of Landzone LTD.

(ii) Associates

Associates are those entities in which the Group has significant influence, but not control, over the financial and operating policies. Significant influence is presumed to exist when the Group holds between 20% and 50% of the voting power of another entity. In certain cases when the Group has less than 20% of the voting power of another entity, this entity is still accounted for as an associate on the basis of significant influence (see note 7).

Investments in associates are accounted for using the equity method and are recognised initially at cost. The cost of the investment includes transaction costs.

The consolidated financial statements include the Group's share of the income and expenses and equity movements of associates, after adjustments to align the accounting policies with those of the Group, from the date that significant influence commences until the date that significant influence ceases.

When the Group's share of losses exceeds its interest in an associate, the carrying amount of that interest including any long-term investments, is reduced to zero, and the recognition of further losses is discontinued, except to the extent that the Group has an obligation to or has made payments on behalf of the investee.

In the financial statements of the Parent Company, investments in associates are accounted for at cost less impairment.

(iii) Joint operations

A joint operation is a joint arrangement carried on by each joint operator using its own assets in pursuit of the joint operations. The consolidated financial statements include the assets that the Group controls and the liabilities that it incurs in the course of pursuing the joint operation, and the expenses that the Group incurs and its share of the income that it earns from the joint operation.

(iv) Transactions eliminated on consolidation

Intra-group balances and any unrealised income and expenses arising from intra-group transactions, are eliminated in preparing these consolidated financial statements. Unrealised gains arising from transactions with equity accounted investees are eliminated against the investment to the extent of the Group's interest in the investee. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment.

(b) Foreign currency and operations

(i) Foreign currency transactions

Transactions in foreign currencies are translated to the respective functional currencies of Group entities at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between amortised cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortised cost in foreign currency translated at the exchange rate at the end of the reporting period.

Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value was determined. Non-monetary items in a foreign currency that are measured in terms of historical cost are translated using the exchange rate at the date of the transaction. Foreign currency differences arising in retranslation are recognised in profit or loss, except for differences arising on the retranslation of available-for-sale equity instruments which are recognised in other comprehensive income.

(ii) Foreign operations

The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated to USD at exchange rates at the reporting date. The income and expenses of foreign operations are translated to USD at exchange rates at the dates of the transactions.

(c) Financial instruments

(iii) Non-derivative financial assets

The Group initially recognises loans and receivables and deposits on the date that they are originated. All other financial assets (including assets designated at fair value through profit or loss) are recognised initially on the trade date at which the Group becomes a party to the contractual provisions of the instrument.

The Group derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the Group is recognised as a separate asset or liability.

Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Group has a legal right to offset the amounts and intends either to settle on a net basis or to realise the asset and settle the liability simultaneously.

The Group classifies non-derivative financial assets into the following categories: financial assets at fair value through profit or loss, held-to-maturity financial assets, loans and receivables and available-for-sale financial assets.

A financial asset is classified at fair value through profit or loss if it is classified as held for trading or is designated as such upon initial recognition. Financial assets are designated at fair value through profit or loss if the Group manages such investments and makes purchase and sale decisions based on their fair value in accordance with the Group's documented risk management or investment strategy. Upon initial recognition attributable transaction costs are recognised in profit or loss as incurred. Financial assets at fair value through profit or loss are measured at fair value, and changes therein are recognised in profit or loss.

If the Group has the positive intent and ability to hold debt securities to maturity, then such financial assets are classified to held-to-maturity. Held-to-maturity financial assets are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition held-to-maturity financial assets are measured at amortised cost using the effective interest method, less any impairment losses. Any sale or reclassification of a more than insignificant amount of held-to-maturity investments not close to their maturity would result in the reclassification of all held-to-maturity investments as available-for-sale, and prevent the Group from classifying investment securities as held-to-maturity for the current and the following two financial years.

Loans and receivables are a category of financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition loans and receivables are measured at amortised cost using the effective interest method, less any impairment losses.

Loans and receivables comprise the following classes of assets: trade and other receivables as presented in note 10, loans receivable, loans to Group companies as presented in note 11 and cash and cash equivalents as presented in note 12.

Available-for-sale financial assets are non-derivative financial assets that are designated as available-for-sale or are not classified in any of the above categories of financial assets. Such assets are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, they are measured at fair value and changes therein, other than impairment losses, and foreign currency differences on available-for-sale debt instruments, are recognised in other comprehensive income and presented within equity in the fair value reserve. When an investment is derecognised or impaired, the cumulative gain or loss in equity is reclassified to profit or loss. Unquoted equity instruments whose fair value cannot reliably be measured are carried at cost.

Cash and cash equivalents comprise cash balances, call deposits and liquid investments with maturities at initial recognition of three months or less.

(iv) Non-derivative financial liabilities

The Group initially recognises debt securities issued and subordinated liabilities on the date that they are originated. All other financial liabilities (including liabilities designated at fair value through profit or loss) are recognised initially on the trade date at which the Group becomes a party to the contractual provisions of the instrument.

The Group derecognises a financial liability when its contractual obligations are discharged or cancelled or expire.

The Group classifies non-derivative financial liabilities in the other financial liabilities category. Such financial liabilities are recognised initially at fair value less any directly attributable transaction costs. Subsequent to initial recognition, these financial liabilities are measured at amortised cost using the effective interest method.

Other financial liabilities comprise trade and other payables as presented in note 16 and finance lease liabilities as presented in note 14.

Bank overdrafts that are repayable on demand and form an integral part of the Group's cash management are included as a component of cash and cash equivalents for the purpose of the statement of cash flows.

(v) Share capital

Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares and share options are recognised as a deduction from equity, net of any tax effects.

When share capital recognised as equity is repurchased, the amount of the consideration paid, which includes directly attributable costs, net of any tax effects, is recognised as a deduction from equity. Repurchased shares are immediately cancelled and the total number of issued shares reduced by the purchase.

(vi) Derivative financial instruments

Embedded derivatives are separated from the host contract and accounted for separately if the economic characteristics and risks of the host contract and the embedded derivative are not closely related, a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative, and the combined instrument is not measured at fair value through profit or loss.

Derivatives are recognised initially at fair value; attributable transaction costs are recognised in profit or loss when incurred. Subsequent to initial recognition, derivatives are measured at fair value, and changes therein are recognised immediately in profit or loss.

(d) Investment properties

Investment properties are those that are held either to earn rental income or for capital appreciation or for both, but not for sale in the ordinary course of business, use in production or supply of goods or services or for administrative purposes. Investment properties are carried at fair value.

Investment properties principally comprise freehold land, leasehold land and investment properties held for future redevelopment. Leasehold of land held under operating lease is classified and accounted for as investment property when it meets the definition of investment property.

(i) Initial measurement and recognition

Investment properties are measured initially at cost, including related acquisition costs. Cost includes expenditure that is directly attributable to the acquisition of the investment property. The cost of self-constructed investment property includes the cost of materials and direct labour, any other costs directly attributable to bringing the investment property to a working condition for its intended use and capitalised borrowing costs.

If the Group uses part of the property for its own use, and part to earn rentals or for capital appreciation, and the portions can be sold or leased out separately, they are accounted for separately. Therefore the part that is rented out is investment property. If the portions cannot be sold or leased out separately, the property is investment property only if the company-occupied portion is insignificant.

(ii) Subsequent measurement

Subsequent to initial recognition investment properties are stated at fair value. Any gain or loss arising from a change in fair value is included in profit or loss in the period in which it arises.

When the Group begins to redevelop an existing investment property for continued future use as investment property, the property remains an investment property, which is measured at fair value, and is not reclassified to property and equipment during the redevelopment.

Investment properties are derecognised on disposal or when they are permanently withdrawn from use and no future economic benefits are expected from its disposal. The gain or loss on disposal is calculated as the difference between the net disposal proceeds and the carrying amount of the asset and is recognised as gain or loss in profit or loss.

It is the Group's policy that an external, independent valuation company, having an appropriate recognised professional qualification and recent experience in the location and category of property being appraised, values the portfolio every six months. The fair value is the amount for which a property could be exchanged on the date of valuation between a willing buyer and a willing seller in an arm's length transaction. The valuation is prepared in accordance with the practice standards contained in the Appraisal and Valuations Standards published by the Royal Institution of Chartered Surveyors (RICS) or in accordance with International Valuation Standards published by the International Valuations Standards Council.

(iii) Reclassification to owner-occupied property or inventory

When the use of a property changes from investment property carried at fair value to owner-occupied property or inventory, the property's deemed cost for subsequent accounting in accordance with IAS 16 Property, Plant and Equipment or IAS 2 Inventories is its fair value at the date of change in use. Any gain or loss arising on revaluation as at the date of transfer is recognised in profit or loss.

(e) Prepayments for land

Prepayments for land are measured at cost less any accumulated impairment losses. The carrying amounts of prepayments for land are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset's recoverable amount is estimated. For details of the impairment assessment refer to note 3(j)(ii).

(f) Property and equipment

(i) Recognition and measurement

Items of property and equipment are measured at cost less accumulated depreciation and accumulated impairment losses.

Cost includes expenditures that are directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the asset to a working condition for its intended use, and the costs of dismantling and removing the items and restoring the site on which they are located. Purchased software that is integral to the functionality of the related equipment is capitalised as part of that equipment.

When parts of an item of property and equipment have different useful lives and are considered major components, they are accounted for as separate items of property and equipment.

The gain or loss on disposal of an item of property and equipment is determined by comparing the proceeds from disposal with the carrying amount of property and equipment, and is recognised net within other income/other expenses in profit or loss.

(ii) Reclassification to investment property

When the use of a property changes from owner-occupied to investment property, the property is remeasured to fair value and reclassified as investment property. Any gain arising on remeasurement is recognised in profit or loss to the extent that it reverses a previous impairment loss on the specific property, with any remaining gain recognised in other comprehensive income and presented in the revaluation reserve in equity. Any loss is recognised immediately in profit or loss.

(iii) Subsequent costs

The cost of replacing a component of an item of property and equipment is recognised in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Group, and its cost can be measured reliably. The carrying amount of the replaced component is derecognised. The costs of the day-to-day servicing of property and equipment are recognised in profit or loss as incurred.

(iv) Depreciation

Depreciation is recognised in profit or loss on a straight-line basis over the estimated useful lives of each component of an item of property and equipment. Leased assets are depreciated over the shorter of the lease term and their useful lives unless it is reasonably certain that the Group will obtain ownership by the end of the lease term. Land is not depreciated.

The estimated useful lives for the current and comparative periods are as follows:

• Vehicles and equipment 5-7 years

• Fixture and fittings 3 years

(g) Intangible assets

(i) Goodwill

Goodwill that arises on the acquisition of subsidiaries is included in intangible assets.

The Group measures goodwill at the acquisition date as:

· The fair value of the consideration transferred, plus

· The recognised amount of any non-controlling interests in the acquiree, plus, if the business combination is achieved in stages, the fair value of the existing equity interest in the acquiree, less

· The net recognised amount (generally fair value) of the identifiable assets acquired and liabilities assumed.

When the excess is negative, a bargain purchase gain is recognised immediately in profit or loss.

The consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts are generally recognised in profit or loss.

Transaction costs, other than those associated with the issue of debt or equity securities, that the Group incurs in connection with a business combination are expensed as incurred.

Goodwill is measured at cost less accumulated impairment losses. In respect of equity accounted investees, the carrying amount of goodwill is included in the carrying amount of the investment, and an impairment loss on such an investment is not allocated to any asset, including goodwill, that forms part of the carrying amount of the equity accounted investee.

(ii) Other intangible assets

Other intangible assets that are acquired by the Group, which have finite useful lives, are measured at cost less accumulated amortisation and accumulated impairment losses.

(iii) Subsequent expenditure

Subsequent expenditure is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates and its cost can be measured reliably. All other expenditure, including expenditure on internally generated goodwill and brands, is recognised in profit or loss as incurred.

(h) Leased assets

Leases in terms of which the Group assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset.

Other leases are operating leases and the leased assets are not recognised in the statement of financial position.

(i) Inventories

Inventories are measured at the lower of cost and net realisable value. The cost of inventories is based on the first-in first-out principle, and includes expenditure incurred in acquiring the inventories and bringing them to their existing location and condition.

Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses.

(j) Impairment 

(i) Non-derivative financial assets

A financial asset not carried at fair value through profit or loss is assessed at each reporting date to determine whether there is any objective evidence that it is impaired. A financial asset is impaired if objective evidence indicates that a loss event has occurred after the initial recognition of the asset, and that the loss event had a negative effect on the estimated future cash flows of that asset that can be estimated reliably.

Objective evidence that financial assets (including equity securities) are impaired can include default or delinquency by a debtor, restructuring of an amount due to the Group on terms that the Group would not consider otherwise, indications that a debtor or issuer will enter bankruptcy, adverse changes in the payment status of borrowers or issuers in the Group, economic conditions that correlate with defaults or the disappearance of an active market for a security. In addition, for an investment in an equity security, a significant or prolonged decline in its fair value below its cost is objective evidence of impairment.

The Group considers evidence of impairment for loans and receivables and held-to-maturity investment securities at both a specific asset and collective level. All individually significant loans and receivables and held-to-maturity investment securities are assessed for specific impairment. All individually significant loans and receivables and held-to-maturity investment securities found not to be specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified. Loans and receivables and held-to-maturity investment securities that are not individually significant are collectively assessed for impairment by grouping together loans and receivables and held-to-maturity investment securities with similar risk characteristics.

In assessing collective impairment the Group uses historical trends of the probability of default, timing of recoveries and the amount of loss incurred, adjusted for the Directors' judgment as to whether current economic and credit conditions are such that the actual losses are likely to be greater or less than suggested by historical trends.

An impairment loss in respect of a financial asset measured at amortised cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the asset's original effective interest rate. Losses are recognised in profit or loss and reflected in an allowance account against loans and receivables or held-to-maturity investment securities. Interest on the impaired asset continues to be recognised. When a subsequent event causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed through profit or loss.

Impairment losses on available-for-sale financial assets are recognised by reclassifying the losses accumulated in the fair value reserve in equity, to profit or loss. The cumulative loss that is reclassified from equity to profit or loss is the difference between the acquisition cost, net of any principal repayment and amortisation, and the current fair value, less any impairment loss previously recognised in profit or loss. Changes in impairment provisions attributable to application of the effective interest method are reflected as a component of interest income. If, in a subsequent period, the fair value of an impaired available-for-sale debt security increases and the increase can be related objectively to an event occurring after the impairment loss was recognised in profit or loss, then the impairment loss is reversed, with the amount of the reversal recognised in profit or loss. However, any subsequent recovery in the fair value of an impaired available-for-sale equity security is recognised in other comprehensive income.

(ii) Non-financial assets

The carrying amounts of non-financial assets, other than inventories and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset's recoverable amount is estimated. For goodwill and intangible assets that have indefinite lives or that are not yet available for use, the recoverable amount is estimated each year on the reporting date.

An impairment loss is recognised if the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. A cash-generating unit is the smallest identifiable asset group that generates cash flows that largely are independent from other assets and groups. Impairment losses are recognised in profit or loss. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the units and then to reduce the carrying amount of the other assets in the unit (group of units) on a pro rata basis.

The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted 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.

An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset's carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.

(k) Share-based payments

The fair value at the date of grant of options granted to directors and employees is recognised as an employee expense, with a corresponding increase in equity, over the period that the directors and employees become unconditionally entitled to the options. The amount recognised as an expense is adjusted to reflect the actual number of share options that vest.

For equity settled share-based payment transactions other than transactions with directors and employees the Group measures the goods or services received at their fair value, unless that fair value cannot be estimated reliably. If this is the case the Group measures their fair values and the corresponding increase in equity, indirectly, by reference to the fair value of equity instruments granted.

(l) Provisions

A provision is recognised if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The unwinding of the discount is recognised as finance cost.

(m) Rental income from investment properties

Rental income from investment properties is recognised in profit or loss on a straight-line basis over the term of the lease.

(n) Lease payments

Payments made under operating leases are recognised in profit or loss on a straight-line basis over the term of the lease. Lease incentives received are recognised as an integral part of the total lease expense over the term of the lease.

Minimum lease payments made under finance leases are apportioned between the finance cost and the reduction of the outstanding liability. The finance cost is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability.

Contingent lease payments are accounted for by revising the minimum lease payments over the remaining term of the lease when the contingency no longer exists and the lease adjustment is known.

At inception of an arrangement, the Group determines whether such an arrangement is or contains a lease. This will be the case if the fulfilment of the arrangement is dependent on the use of a specific asset and the arrangement contains a right to use the asset.

At inception or upon reassessment of the arrangement, the Group separates payments and other consideration required by such an arrangement into those for the lease and those for other elements on the basis of their relative fair values. If the Group concludes for a finance lease that it is impracticable to separate the payments reliably, then an asset and a liability are recognised at an amount equal to the fair value of the underlying asset. Subsequently the liability is reduced as payments are made and an imputed finance charge on the liability is recognised using the Group's incremental borrowing rate.

(o) Finance income and costs

Finance income comprises interest income on funds invested, dividend income and currency exchange gains. Interest income is recognised as it accrues in profit or loss, using the effective interest method. Dividend income is recognised on the date that the Group's right to receive payment is established.

Finance costs comprise interest expense, fair value losses on financial assets at fair value through profit or loss, impairment loss on financial assets and currency exchange losses.

Foreign currency gains and losses are reported on a net basis as either finance income or finance cost depending on whether foreign currency movements are in a net gain or net loss position.

(p) Income tax expense

Income tax expense comprises current and deferred tax. Current tax and deferred tax are recognised in profit or loss except to the extent that it relates to a business combination, or items recognised directly in equity or in other comprehensive income.

Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years.

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. Deferred tax is not recognised for:

· temporary differences on the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss,

· temporary differences related to investments in subsidiaries and jointly controlled entities to the extent that it is probable that they will not reverse in the foreseeable future, and

· taxable temporary differences arising on the initial recognition of goodwill.

Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date.

Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax assets and liabilities, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realised simultaneously.

In accordance with the tax legislation of Ukraine, tax losses and current tax assets of a company in the Group may not be set off against taxable profits and current tax liabilities of other Group companies. In addition, the tax base is determined separately for each of the Group's main activities and, therefore, tax losses and taxable profits related to different activities cannot be offset.

A deferred tax asset is recognised for unused tax losses, 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 utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised.

(q) Earnings per share

The Group presents basic and diluted earnings per share (EPS) data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the Parent Company by the weighted average number of ordinary shares outstanding during the year, adjusted for own shares held. Diluted EPS is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding, adjusted for own shares held, for the effects of all dilutive potential ordinary shares, which comprise warrants and share options.

(r) Segment reporting

An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Group's other components.

The Directors determined that the sole segment in which the Group operates is property development. For operational purposes the Board analyses the Group's activity on the basis of individual projects and they are described in detail in the Annual Report. Budgeting and comparison of actual versus budgeted results is also done on the basis of individual projects.

(s) Changes in accounting policy

From 1 January 2013, the Group adopted Amendments to IAS 1 Presentation of Items of Other Comprehensive Income, IFRS 7 Financial Instruments: Disclosures - Offsetting Financial Assets and Financial Liabilities, IFRS 13 Fair Value Measurement, IFRS 11 Joint Arrangements, IFRS 12 Disclosure of Interests in Other Entities and IFRS 10 Consolidated Financial Statements.

· Amendments to IAS 1 Presentation of Items of Other Comprehensive Income requires that an entity present separately items of other comprehensive income that may be reclassified to profit or loss in the future from those that will never be reclassified to profit or loss. Additionally, the amendment changes the title of the statement of comprehensive income to statement of profit or loss and other comprehensive income. Application of amendments to IAS 1 did not have significant impact on these consolidated and Parent Company financial statements.

· Amendments to IFRS 7 Financial instruments: Disclosures - Offsetting Financial Assets and Financial Liabilities contain new disclosure requirements for financial assets and liabilities that are offset in the statement of financial position or subject to master netting arrangements or similar agreements. Application of amendments to IFRS 7 did not have significant impact on these consolidated and Parent Company financial statements.

· IFRS 13 Fair Value Measurement replaces the fair value measurement guidance contained in individual IFRSs with a single source of fair value measurement guidance. It provides a revised definition of fair value, establishes a framework for measuring fair value and sets out disclosure requirements for fair value measurements. IFRS 13 does not introduce new requirements to measure assets or liabilities at fair value, nor does it eliminate the practicability exceptions to fair value measurement that currently exist in certain standards. Application of IFRS 13 resulted in extended disclosures in respect of fair value of investment properties made in these consolidated and Parent Company financial statements.

· IFRS 10 Consolidated Financial Statements introduces a single control model which includes entities that are currently within the scope of SIC-12 Consolidation - Special Purpose Entities. Under the new three-step control model, an investor controls an investee when it is exposed, or has rights, to variable returns from its involvement with that investee, has the ability to affect those returns through its power over that investee and there is a link between power and returns. Application of this standard had no impact on the recognised assets, liabilities and comprehensive income of the Group.

· As a result of IFRS 11 Joint Arrangements, the Group has changed its accounting policy for its interests in joint arrangements. Under IFRS 11, the Group has classified its interests in joint arrangements as either joint operations (if the Group has rights to the assets, and obligations for the liabilities, relating to an arrangement) or joint ventures (if the Group has rights only to the net assets of an arrangement). When making this assessment, the Group considered the structure of the arrangements, the legal form of any separate vehicles, the contractual terms of the arrangements and other facts and circumstances. Previously, the structure of the arrangement was the sole focus of classification. Application of this standard had no impact on consolidation of the Group's investees.

· IFRS 12 Disclosure of Interests in Other Entities contains requirements on additional disclosures about the Group's interests in subsidiaries and equity-accounted investees. Application of this standard had no impact on the consolidated and Parent Company financial statements.

(t) 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.

When measuring the fair value of an asset or a liability, the Group uses market observable 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.

· Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities.

· Level 2: inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).

· Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).

If the inputs used to measure the fair value of an asset or a liability might be categorised in different levels of the fair value hierarchy, then the fair value measurement is categorised in its entirety 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.

When applicable, further information about the assumptions made in measuring fair values is disclosed in the notes specific to that asset or liability.

(u) New standards and interpretations not yet adopted

A number of new standards, amendments to standards and interpretations are not yet effective for the year ended 31 December 2013, and have not been applied in preparing these consolidated and Parent Company financial statements. Of these pronouncements, potentially the following will have an impact on these consolidated and Parent Company financial statements. Management plans to adopt these pronouncements when they become effective.

IFRS 9 Financial Instruments will be effective for annual periods beginning on or after 1 January 2018 and is intended ultimately to replace International Financial Reporting Standard IAS 39 Financial Instruments: Recognition and Measurement. The first phase of IFRS 9 was issued in November 2009 and relates to the classification and measurement of financial assets. The second phase regarding classification and measurement of financial liabilities was published in October 2010. The third phase was issued in November 2013 and relates to general hedge accounting. The final standard is expected to be issued in 2014. The Group recognises that the new standard introduces many changes to the accounting for financial instruments and is likely to have a significant impact on Group's consolidated financial statements. The impact of these changes will be analysed during the course of the project as further phases of the standard are issued. The Group does not intend to adopt this standard early.

Amendments to IAS 32 Financial Instruments: Presentation - Offsetting Financial Assets and Financial Liabilities specify that an entity currently has a legally enforceable right to set-off if that right is not contingent on a future event; and enforceable both in the normal course of business and in the event of default, insolvency or bankruptcy of the entity and all counterparties. The amendments are effective for annual periods beginning on or after 1 January 2014, and are to be applied retrospectively. The amendment is not expected to have significant impact on the consolidated and Parent Company financial statements.

Various Improvements to IFRSs have been dealt with on a standard-by-standard basis. All amendments, which result in accounting changes for presentation, recognition or measurement purposes, will come into effect for annual periods beginning after 1 January 2014. The Group has not yet analysed the likely impact of the improvements on its financial position or performance.

4. Disposal of subsidiaries and non-controlling interests

(a) Disposal of non-controlling interests

In January 2013 the Group disposed of a 5 per cent interest in Riverscope Ltd (Land bank project) for USD 133 in cash (equivalent of EUR 100), decreasing its ownership from 95 to 90 per cent. The carrying amount of Riverscope Ltd negative net assets in the Group's financial statements on the date of disposal was USD 62,828 thousand. The Group recognised an increase in non-controlling interests of USD 3,141 thousand and decrease in accumulated losses of USD 3,141 thousand.

In January 2013 the Group disposed of a 5 per cent interest in Landshere Ltd (project Land bank) for USD 133 in cash (equivalent of EUR 100), decreasing its ownership from 95 per cent to 90 per cent. The carrying amount of Landshere Ltd negative net assets in the Group's financial statements on the date of disposal was USD 62,736 thousand. The Group recognised a decrease in non-controlling interests of USD 3,137 thousand and decrease in accumulated losses of USD 3,137 thousand.

(b) Disposal of subsidiaries

In April 2012 the Group sold Ukrainian Development Holding LTD for USD 3 thousand to Mr. Georgios Chr. Kyrou. The gain of USD 4 thousand as a result of this transaction was recognised in profit or loss.

The disposal of the subsidiary had the following effect on assets and liabilities on the date of disposal:

In April 2012 the Group sold Ukrainian Properties LTD for USD 2 thousand to Mittelmeer Nominees Limited. The gain of USD 4 thousand as a result of this transaction was recognised in profit or loss.

The disposal of the subsidiary had the following effect on assets and liabilities on the date of disposal:

5. Investment properties and property under construction

Movements in investment properties and property under construction for the years ended 31 December are as follows: