6th Aug 2007 16:02
Eastern European Property Fund Ltd06 August 2007 EASTERN EUROPEAN PROPERTY FUND LIMITED PRELIMINARY RESULTS FOR THE PERIOD ENDED 31 MARCH 2007 Eastern European Property Fund Limited (the "Company") today announces its preliminary results for the period ended 31March 2007. 2007 Highlights: • Gross proceeds of £20 million raised through placing and admission to AIM in March 2006• Eight properties acquired for a total cost of £17.0 million• Property valued by DTZ Debenham Tie Lung at £21.5 million, an increase of 27% as at 31 March• Net asset value at 31 March of £22.4 million, 112.01p per share CHAIRMAN'S STATEMENT I am pleased to present the Results of the Group for the period ended 31 March 2007. The Company was incorporated on 27 February 2006 and on 23 March 2006 the Company raised gross proceeds of £20 million(net proceeds of £19.1 million) through the issue of 20,000,000 Ordinary Shares at 100.00 pence each, with the OrdinaryShares being admitted to trading on AIM, a market operated by the London Stock Exchange. The Group's investment objective is to provide Shareholders with a high level of income and the potential forsignificant capital growth by investing in a range of office, retail, industrial and residential properties in Turkey,Bulgaria, Romania and Ukraine (the "Target Countries"). Since it began trading, the Group has successfully madeacquisitions in Turkey, Romania and Bulgaria. Investment in the Ukraine, which we previously thought to be an areawhere significant opportunities existed, has not taken place to date due to a lack of perceived return and additionalrisk relative to the other Target Countries. Your Board will continue to review the suitability of the Ukraine as aTarget Country and may still invest in the Ukraine if considered appropriate. Results At 30 September 2006 I reported to you that to generate the desired level of return, the Group would have to be fullyinvested. Six months on, I am happy to report that through the purchase of carefully selected properties we have fullycommitted our net proceeds of the Placing and are in negotiations to secure bank debt to expand our portfolio further. During the period the Group built an investment property portfolio, which has been valued by DTZ Debenham Tie Leung at£21.5 million, as at 31 March 2007. Details of these properties are set out in the Property Manager and Adviser'sReport. I am pleased to report that the valuation of our recently acquired portfolio resulted in a gain of £4.6million (an increase of 27%) on the cost (including acquisition expenses) of £17.0 million. The Group made a net profit for the period to 31 March 2007 of £3.3 million, representing earnings per Ordinary Shareof 16.55 pence. The consolidated net asset value as at 31 March 2007 was £22.4 million (112.01 pence per OrdinaryShare). During the period, the price of the Ordinary Shares ranged from 97.00 pence to 105.50 pence each. At the period end,the mid price of the Ordinary Shares was 97.75 pence, representing a discount to net asset value of 12.33%. Dividend The Group's income in its first accounting period has been absorbed by its operating costs. The income in this periodconsisted largely of bank interest, with a minimal amount of rental income derived from the property portfolio. Sincethe year end however, I am pleased to report that, through the letting of some of the properties where refurbishmenthas been completed, solid income streams are now being produced. Although the Group suffered a distributable loss for the period of £0.7 million, due to the unrealised gain onrevaluation of investment properties, it achieved an overall profit for the period of £3.3 million and at the periodend, after £18,891,000 was transferred to distributable reserves from the share premium account, distributable reservesstood at £18.2 million. Therefore, on 6 August 2007, the Board declared an interim dividend for the period ended 31March 2007 of 3.20 pence per Ordinary Share. The Directors do not propose a final dividend for the period. The Board and its advisers hope that, as the Group's properties are refurbished and let, the enhanced rental incomewill enable the Company to increase dividends in future periods. Outlook Finding properties of appropriate quality during the period has proved to be challenging in under developed commerciallending markets of the Target Countries. Existing owners are expecting unrealistically high prices for buildings thatare let, despite, in some cases, the leases being quite short. Fortunately investors continue to focus on fully-letproperties, opening up opportunities to purchase property, which is only part-let or un-let on an attractive valuation.Part-let or un-let properties generally represent much better value than fully-let equivalents, despite theadditional letting risk that this approach entails. During the period, investment was initially slow but, during the last six months, a number of suitable properties havebeen acquired. The Group now owns six properties in Turkey, one in Bulgaria and one in Romania, details of which areset out in the Property Manager and Adviser's Report. The Group intends to take advantage of the opportunities that still exist to acquire further properties in excellentlocations. The Directors have inspected the properties in Istanbul and believe that the best overall return in thecurrent market is to be found where value can be added through refurbishment prior to letting. Charles ParkinsonChairman6 August 2007 PROPERTY MANAGER AND ADVISER'S REPORT StrategyWe have pursued a strategy of purchasing property in strategic locations in or around the major urban centres inthe Target Countries, which, have the potential to realise gain though active management. We are pleased toreport that all available equity, which the Company raised on its placing and admission to AIM in March 2006,has now been invested across Istanbul (Turkey) - 69%; Bucharest (Romania) - 17% and Sofia (Bulgaria) - 14%. Despite reviewing a large number of potential purchases in Kiev (Ukraine), none were concluded as we judged thatthe overall level of return achievable was insufficient, after allowing for the additional risk of investingthere, relative to the risk adjusted returns available in the other major cities of our Target Countries.Whilst no acquisitions have been made in the Ukraine to date, these factors are continually reviewed andre-evaluated and, should the situation improve, then the Group may commence investment in this country. Property Portfolio Tenant demand for available space has been above expectations and substantial lettings have been concluded inIstanbul to Roberts (a Scandinavian Coffee Shop operator) and Darty (part of the Kesa Group plc) with incomeyields on costs for all properties on target at more than 9%. Yield compression has occurred on fully-letinvestments in all Target Countries. A combination of astute buying and letting has resulted in a valuationsurplus on the invested property compared to the purchase cost (including acquisition expenses) of approximately27% overall, as valued locally by DTZ Debenham Tie Leung in either US Dollars or Euros as appropriate. Current Holdings Cost Market Value £'000 £'000Bulgaria24 George Washington Street, Sofia Office 2,429 3,421 RomaniaTransalkim Warehouse, S Bucharest Industrial 2,902 3,285 Turkey134.39 Susam Street, Cihangir, Istanbul Office 806 1,4816th Floor, The Misir Building, Istiklal Street, Istanbul Office 996 1,192Ravouna Apartments, 401 Istiklal Street, Beyoglu, Istanbul Office / retail 1,763 2,226Oriental Passage, Istiklal Street, Beyoglu, Istanbul Leisure / office / 6,417 8,222 retailNil Passage, Istiklal Street, Beyoglu, Istanbul Leisure / office / 1,099 1,016 retailPera Residence, Asmalimescrit Street, Beyoglu, Istanbul Retail 562 661 ---------- ---------- 11,643 14,798 ---------- ----------Total investment properties 16,974 21,504 ---------- ---------- The investments at the period end were as follows:- 24 George Washington Street, Sofia, Bulgaria (office) These premises were bought at the end of 2006. €1.4million was paid on purchase and the balance of €3.4million ispayable on completion of the building contract. A pre-let is in place for part of the space at €180,000 p.a. Oncefully let, the yield on cost is expected to be over 10% p.a. Transalkim Warehouse, S. Bucharest, Romania (industrial) This industrial complex was bought fully-let in February 2007 for €3.95 million at an initial yield of approximately10%. The tenant, Transalkim, is a leading European logistics operator. 134.39 Susam Street, Cihangir, Istanbul, Turkey (office) The property has been completely renovated at a total cost of approximately US$2.0 million. Interested buyers continueto come forward at levels substantially above the total cost, and the Group is reviewing a potential sale as well asrental options. 6th Floor, The Misir Building, Istiklal Street, Beyoglu, Istanbul, Turkey (office) A total of circa US$1.9 million was allocated to this purchase, including refurbishment costs of US$0.3 million. Thetwo tenants, Elektronick and Propaganda (both media companies) now occupy the 6th Floor on leases to March 2012 at aninitial yield of 9% per annum. Each tenancy has built-in rental growth mechanisms on an annual basis at 5% on leasesdenominated in US Dollars. Ravouna Apartments, 401 Istiklal Street, Beyoglu, Istanbul, Turkey (office / retail) This property, which fronts Istiklal Street, was purchased in 2006 for US$3.3 million and provides an opportunity tocreate new retail space with enhanced rental value once renovation works are carried out. We have submitted renovationproposals to the Local Authority and are in negotiation with the existing tenant as well as seeking offers fromalternative operators who are looking to secure a presence on Istiklal Street. Oriental Passage, Istiklal Street, Beyoglu, Istanbul, Turkey (leisure / office / retail) This mixed use property was purchased for US$11.6 million at the end of 2006. A Scandinavian coffee operator "Roberts"which has 180 outlets in Northern Europe has taken a five-year lease. Darty Electrical, part of the Kesa Group plc, awell-established network of electrical retail outlets throughout the UK and France, has agreed to rent the remainingground and first floors and part of the basement. This is the second store taken by Darty in Turkey. Further lettingshave also been completed to other occupiers. When fully let, the yield on acquisition cost should be approximately 10%. Nil Passage, Istiklal Street, Beyoglu, Istanbul, Turkey (leisure / office / retail) This recent purchase is adjacent to the Oriental Passage and cost US$2.5million. Through this strategic purchase wehope to exploit the potential of the Oriental Passage by combining it in time with Nil Passage to create a larger retailmall. Pera Residence, Asmalimescrit Street, Beyoglu, Istanbul, Turkey (retail) This property cost in the region of US$1.1 million. Refurbishment of the three ground floor shops and basement iscomplete and the Group is in discussions with potential tenants. The rental return should comfortably exceed 10% oncost. Regional Economic Overview On 1 January 2007, Romania and Bulgaria joined the EU. Accordingly, the European Commission now receive regular reportson progress and reform, which were a condition of accession and which are linked to the granting of agricultural anddevelopment aid. Infrastructure and rural development funds have now been allocated. Bulgaria and Romania are expectedto receive €12 billion and €20 billion respectively. Despite some political turmoil, which might delay the disbursementof structural funds, we do not believe that this will have an adverse affect on the economy as growth in both propertyprices and overall prosperity seems strong. The election of a new Turkish president in April led to some political instability, with general elections being calledforward from November to July 2007. Following the return of the existing government, Turkish financial markets havereacted favourably to the prospect of a continuation of its pro-business policies. The Ukraine also has a political crisis as President Viktor Yushchenko continues to feud with the Prime Minister ViktorYanukovich resulting in early elections called for 30 September 2007. However, the underlying economy remains strongdespite political uncertainties. Property Markets Overview Romania - From early this year, there is evidence of an increasing supply in the office market but despite this thegrowth in demand continues to outstrip supply causing rental values to continue to rise. Bulgaria - Central Sofia office rents have increased significantly in the last quarter due to the very limited supply ofquality properties. EU accession appears to have reduced perceived risks and resulted in further external interest inproperty investments. Turkey -The country continues to benefit from strong foreign investment. Residential mortgages have been introducedalthough restricted to 75% loan to value and banks are developing commercial mortgage products. There are noindications of any slowing in the markets within the Beyoglu district in Istanbul where the Group is investing. Indeed,many more projects seem to be emerging with the refurbishment of offices, residential and retail units in much ofIstiklal Street, the main street in the area. Ukraine - the property market in Kiev continues to be strong in all areas with a significant shortage of westernstandard space in both the commercial and residential property sectors. Bureaucratic planning processes however limitthe opportunities to capitalise on this shortage of quality space and the costs of local financing for projects remainsvery high. Financing With the Group now having fully invested the initial equity raised, further investment will be funded by a combinationof gearing against the existing portfolio and further issues of Ordinary Shares. Negotiations to secure bank fundingare currently taking place with several banks in order to secure appropriate borrowing terms. Hedging As stated in the Admission Document, the Company does not intend to hedge the exchange rate risk on the propertyportfolio. The Company has raised equity by way of a Sterling share issue and has purchased property in a combinationof US Dollars and Euros with rental flows also being received in US Dollars and Euros. It is likely that bank funding,should it be secured, will be denominated in US Dollars and/or Euros and that this will, to an extent, provide a naturalhedge to the activities of the Group. General Tenant demand and scarcity of certain types of property has caused, and continues to maintain, pressure on rent levels,throughout the Target Countries. As the Group is focused on property within the existing urban fabric, where planningconstraints restrict the release of modern premises, the Property Manager and Adviser remain confident thatopportunities to expand the Group will exist for some time into the future. The Group will continue to focus on property in the major cities and try to exploit opportunities with limited risk interms of planning and construction cost exposure. This will not preclude buying existing buildings and refurbishingthem, or new property, which may be close to completion. It is likely that the Group will continue to take risks inrespect of letting vacant space, but will always balance this risk by focusing on location and quality of premises thatare considered scarce for the potential occupier for that space. However, the Group will continue to seek outinvestment opportunities that are likely to be vacant space. In terms of geographical exposure it is likely that the Group will continue to have the largest portion of its portfolio(by value) in Istanbul, with Bucharest second and Sofia with the least exposure, due to the size of the population. Asindicated above we will be monitoring Kiev (Ukraine) but it seems unlikely that the Group will be investing in thislocation in the near future. Prospects At the present time we are exploring potential acquisitions in Beyoglu, Turkey and Central Bucharest, Romania.Generally, we remain committed to seeking property in central city locations (for offices and retail) and close toprincipal transport routes (for industrial/warehouse). We remain convinced that further significant opportunities existwhich would enhance and grow the existing portfolio further. Bob LockerCollins Stewart Property Fund Management Limited Keiran GallagherOliver CadoganActive Property Investments Limited 6 August 2007 The financial information set out in this announcement does not constitute the Group's statutory financial statementsfor the period ended 31 March 2007. The results for the period ended 31 March 2007 are audited. CONSOLIDATED INCOME STATEMENTfor the period from 27 February 2006 to 31 March 2007 27 February 2006 to 31March 2007 Note £'000IncomeRent receivable 69Bank interest receivable 614Unrealised gain on revaluation of investment properties 10 4,559 ------------Total income 5,242 ------------ExpensesAdministrator's fees 2 (131)Management fees 2 (340)Performance fee 2 (241)Other operating expenses 5 (391) ------------Total expenses (1,103) ------------Net profit from operating activities 4,139 Taxation 16 (829) ------------Profit for the period 3,310 ------------ Earnings per share - basic and fully diluted 6 16.55p ------------ All the items in the above statement are derived from continuing operations. CONSOLIDATED STATEMENT OF CHANGES IN EQUITYfor the period from 27 February 2006 to 31 March 2007 Share Share Distributable Non-distributable Note capital premium reserves r eserves Total £'000 £'000 £'000 £'000 £'000Gross proceeds of placing 18 200 19,800 - - 20,000Issue costs 18 - (909) - - (909)Cancellation of share premium account 18 - (18,891) 18,891 - -Profit/(loss) for the period - - (668) 3,978 3,310 ---------- ---------- ---------- ---------- ----------Net assets at 31 March 2007 200 - 18,223 3,978 22,401 ---------- ---------- ---------- ---------- ---------- CONSOLIDATED BALANCE SHEETas at 31 March 2007 Note 31 March 2007 £'000Non-current assetsFreehold investment property 10 21,504Property, plant and equipment 9 73Intangible assets 8 15Deferred tax assets 17 161 ---------- 21,753Current assetsTrade and other receivables 13 759Cash and cash equivalents 1,364 ---------- 2,123 ----------Total assets 23,876 Current liabilitiesTrade and other payables 14 (446)Overseas corporate tax (89) ---------- (535)Non-current liabilitiesRents received in advance 15 (72)Deferred tax liabilities 17 (868) ---------- (940) ----------Total liabilities (1,475) ----------Net assets 22,401 ---------- Capital and reservesCalled-up share capital 18 200Share premium 18 -Distributable reserves 18,223Non-distributable reserves 3,978 ----------Total equity Shareholders' funds 22,401 ---------- Net Asset Value per Ordinary Share - basic and fully diluted 20 112.01p ---------- CONSOLIDATED CASH FLOW STATEMENTfor the period from 27 February 2006 to 31 March 2007 27 February 2006 to 31 March 2007 Note £'000Net profit from operating activities 4,139Adjustments for:Interest receivable (614)Gain on revaluation of investment properties (4,559)Depreciation 5 ----------Net cash outflow from operating activities before working capital changes (1,029)Increase in trade and other receivables (755)Increase in trade and other payables 446Increase in other non-current liabilities 72Interest received in the period 610Tax paid in the period (33) ----------Net cash outflow from operating activities (689) Investing activitiesPurchase of investment property (16,974)Purchase of intangible assets 8 (15)Purchase of property, plant and equipment (78) ----------Net cash outflow from investing activities (17,067) Financing activitiesIssue of shares 20,000Share issue costs (909) ----------Net cash inflow from financing activities 19,091 ----------Increase in cash and cash equivalents 1,335 ---------- Cash and cash equivalents at beginning of period -Increase in cash and cash equivalents 1,335Foreign exchange movement 29 ----------Cash and cash equivalents at end of period 1,364 ---------- NOTES TO THE RESULTSfor the period from 27 February 2006 to 31 March 2007 1. Significant accounting policies a) Statement of compliance These results have been prepared in accordance with International Financial Reporting Standards ("IFRSs"), issued by the International Accounting Standards Board ("IASB"), interpretations issued by the International Financial Reporting Interpretations Committee and applicable legal and regulatory requirements of Guernsey Law and reflect the following policies, which have been adopted and applied consistently. b) Basis of preparation The results have been prepared on a fair value basis for investment property and financial assets and financial liabilities at fair value through profit or loss. Other financial assets and financial liabilities are stated at amortised cost. The results are presented in Sterling, rounded to the nearest thousand. The preparation of results in conformity with IFRSs requires management to make judgements, estimates and assumptions that affect the application of policies and the reported amounts of assets and liabilities, income and expense. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. Judgements made by management in the application of IFRSs that have a significant effect on the results and estimates with a significant risk of material adjustment in the next year are discussed in notes 10 and 23. The accounting policies have been consistently applied by the Group. c) Basis of consolidation The results consolidate the results of the Company and its subsidiary undertakings drawn up to 31 March 2007. The results of the subsidiary undertakings are accounted for in the Consolidated Income Statement from the date the subsidiaries were formed (the subsidiaries have only been owned by the Company). Subsidiaries are those entities, including special purpose entities, controlled by the Company. Control exists when the Company has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that presently are exercisable are taken into account. The cost of investment in a subsidiary is eliminated against the Company's share in net assets at the date of acquisition. All intercompany receivables, payables, income and expenses are eliminated. Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Company obtains control, and continue to be consolidated until the date that such control ceases. The results of subsidiaries are included in the consolidated results from the date that control commences. Where properties are acquired by the Group through corporate acquisitions and there are no significant assets or liabilities acquired other than the property, the acquisition has been treated as an asset acquisition. The consolidated results incorporate the net assets and liabilities of the Company and its subsidiaries at the balance sheet date and their results for the period then ended. All intercompany balances and transactions are eliminated. d) Income recognition Bank interest Short-term deposit interest is accounted for on an accruals basis. Rental income Rental income from investment property rented under operating lease is recognised through the Consolidated Income Statement on a straight-line basis over the period commencing on the later of the start of the lease or acquisition of the property by the Group, and ending on the earlier of the end of the lease and the next break point, unless it is reasonably certain that the break option will not be exercised. Rental income revenue excludes service charges and other costs directly recoverable from tenants. Direct costs of rental income comprise head rents payable, irrecoverable service charge costs and other property outgoings. Rental income is included gross of any foreign income tax charged. e) Expenses All expenses are accounted for on an accruals basis. The management, performance and administration fees, finance costs and all other expenses (with the exception of share issue costs, which are charged directly to the share premium account) are charged through the Consolidated Income Statement in the period in which they are incurred. f) Intangible assets Intangible assets are measured at cost less accumulated amortisation and impairment losses. Amortisation is recognised in the Consolidated Income Statement on a straight-line basis over the estimated useful lives of the intangible assets. The estimated useful lives of the current period are as follows: Trade mark 15 years g) Property, plant and equipment Items of property, plant and equipment are measured at cost less accumulated depreciation and impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the asset. Depreciation is recognised in the Consolidated Income Statement on a straight-line basis over the estimated useful lives of each part of an item of property, plant and equipment. When parts of an item of property, plant and equipment have different useful lives, those components are accounted for as separate items of property, plant and equipment. The estimated useful lives of the current period are as follows: Furniture and fixtures 5-10 years h) Freehold investment property Investment property is initially measured at cost, being the fair value of consideration given including related transaction costs. Additions to investment property consist of costs of a capital nature and, in the case of investment property under development, capitalised interest. After initial recognition, investment property is carried at its fair value. The fair value of the investment property is largely based on estimates using property appraisal techniques and other valuation methods as outlined below. Such estimates are inherently subjective and actual values can only be determined in a sales transaction. The appraisers determine the fair value by applying the methodology and guidelines as set out in the appropriate sections of both the current Practice Statements and United Kingdom Practice Statements contained within the RICS Appraisal and Valuation Standards, 5th Edition (the "Red Book") and in accordance with IAS 40. This approach is based on discounting the future net income receivable from properties to arrive at the net present value of the future income stream. Future net income comprises the rent secured under existing leases, less any known or expected non-recoverable costs and the current market rent attributable to future vacancy years. The consideration basis for this calculation excludes the effects of any taxes. The discount factors used to fair value are consistent with those used to value similar properties, with comparable leases in each of the respective markets. All investment properties are valued twice per year by independent appraisers. The last valuation for investment properties carried out by DTZ Debenham Tie Leung was at 31 March 2007. The difference between the fair value of an investment property at the reporting date and its carrying amount prior to re-measurement is included in the Consolidated Income Statement as a valuation gain or loss. When the Group begins to redevelop an existing investment property for continued future use as an investment property, the property remains an investment property and is accounted for as such. When the Group begins to redevelop an existing investment property with a view to sale, the property is transferred to trading properties and held as a current asset. The property is re-measured to fair value as at the date of the transfer with any gain or loss being taken to the Consolidated Income Statement. The re-measured amount becomes the deemed cost at which the property is then carried in trading properties. i) Trade and other receivables Trade and other receivables are carried at the original invoice amount, less allowances made for doubtful receivables. Provision is made when there is objective evidence that the Group will be unable to recover balances in full. Balances are written off when the probability of recovery is assessed as being remote. j) Trade and other payables Trade and other payables are carried at payment or settlement amounts. Where the time value of money is material, payables are carried at amortised cost. k) Taxation The Company has been granted exemption from Guernsey taxation under The Income Tax (Exempt Bodies) (Guernsey) Ordinance 1989 and is charged an annual exemption fee which is currently £600. The Directors intend to conduct the Company's affairs such that it continues to remain eligible for exemption from Guernsey tax. Investment income is recorded gross of applicable taxes and tax expense is recognised in the Consolidated Income Statement as incurred. The property subsidiaries are subject to tax on income arising on the property portfolio, after deduction of allowable expenses. Withholding tax and irrecoverable VAT may also arise on distributions and interest from the subsidiaries. l) Deferred taxation Deferred income tax is provided, using the liability method, on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred income tax liabilities are recognised for all taxable temporary differences. Deferred income tax assets are recognised for all deductible temporary differences and unused tax losses, to the extent that it is probable that taxable profit will be available in the foreseeable future against which the deductible temporary differences and unused tax losses can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the relevant tax benefit will be realised. Deferred tax is measured at the tax rates that are expected to apply when the liability is settled, based on tax rates (and tax laws) that have been enacted or substantially enacted at the balance sheet date. m) Distributable and non-distributable reserve Management charges, performance fees, interest charged and unrealised investment gains and losses are allocated to the non-distributable reserve. All other income and expenses, foreign exchange gains and losses and realised investment gains and losses of the Group are allocated to the distributable reserve. Dividends are accounted for when paid and are reflected in the Consolidated Statement of Changes in Equity. n) Cash and cash equivalents Cash in hand and in banks and short-term deposits, which are held to maturity, are carried at fair value. Cash and cash equivalents are defined as cash in hand, demand deposits and short-term, highly liquid investments readily convertible to known amounts of cash and subject to insignificant risk of changes in value. For the purpose of the Consolidated Cash Flow Statement, cash and cash equivalents consist of cash in hand and deposits at banks but does not include deposits with solicitors. o) Net asset value per share and earnings per share The net asset value per share disclosed on the face of the Consolidated Balance Sheet is calculated by dividing the net assets by the number of Ordinary Shares in issue at the period end. Earnings per share is calculated by dividing the profit for the period by the weighted average number of Ordinary Shares in issue during the period. p) Issue costs The placing expenses incurred have been written off in full against the share premium account. q) Foreign exchange translations The currency of the primary economic environment in which the Group operates (the functional currency) is deemed to be Sterling as there is no one dominant currency. Sterling is also its presentational currency. Transactions involving currencies other than Sterling are recorded at the exchange rate ruling on the transaction date. At each balance sheet date, monetary items and non-monetary assets and liabilities that are fair valued, which are denominated in foreign currencies are retranslated at the closing rates of exchange. Exchange differences arising on settlement of monetary and non-monetary items, and from retranslating investments and other financial instruments measured at fair value through profit or loss at the balance sheet date, and other monetary items are charged through the Consolidated Income Statement to the distributable reserve. r) Financial statements of foreign operations The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on consolidation, are translated to Sterling at the foreign exchange rates ruling at the balance sheet date. The income and expenses of foreign operations, excluding foreign operations in hyperinflationary economies, are translated into Sterling at rates approximating to the foreign exchange rates ruling at the dates of the transactions. The revenues and expenses of foreign operations in hyperinflationary economies are translated into Sterling at the foreign exchange rates ruling at the balance sheet date. Foreign exchange differences arising on retranslation are recognised as a separate component of equity. Prior to translating the results of foreign operations in hyperinflationary economies, the results, including comparatives, are restated to account for changes in the general purchasing power of the local currency. The restatement is based on relevant price indices at the balance sheet date. s) Segmental reporting The Directors are of the opinion that the Group is engaged in a single segment of business, being investment in property, and operates in five geographical areas; Guernsey, Bulgaria, Cyprus and Malta, Romania and Turkey. t) Impairment of intangible assets and property, plant and equipment The assets or groups of assets are assessed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Individual assets are grouped for impairment assessment purposes at the lowest level at which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets. If any such indication of impairment exists, the Group makes an estimate of its recoverable amount. An asset group's recoverable amount is the higher of its fair value less costs to sell and its value in use. Where the carrying amount of an asset group exceeds its recoverable amount, the asset group is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are adjusted for the risks specific to the asset group and are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money. u) Share capital Funds received from the issue of Ordinary Shares is allocated to share capital, to the extent that it relates to the nominal value of the Ordinary Shares, with any excess being allocated to the share premium account. Ordinary Shares are classified as equity. v) Loans to subsidiary undertakings Loans to subsidiary undertakings are valued at cost, less allowances made for doubtful receivables. Where the time value of money is material, receivables are carried at amortised cost. Provision is made when there is objective evidence that the Company will be unable to recover balances in full. Balances are written off when the probability of recovery is assessed as being remote. The loans to subsidiary undertakings are translated at the relevant foreign exchange rate at the balance sheet date. Exchange differences arising on the settlement or retranslation of the loans to subsidiary undertakings are charged through the Company Income Statement to the distributable reserve. w) Investment in subsidiary undertakings The Company's investments in subsidiary undertakings are carried in the Company Balance Sheet at cost subject to the need for provision for impairment. Recognition The Company recognises investments in subsidiary undertakings on the date it commits to purchase the instruments. From this date, any gains and losses arising from the changes in fair value of the assets are recognised. Derecognition An investment in a subsidiary undertaking is derecognised when the Company loses control over the contractual rights that comprise that asset. This occurs when rights are realised, expire or are surrendered. Realised gains and losses on the investments in subsidiary undertakings sold are calculated as the difference between the sales proceeds and cost. Investments in subsidiary undertakings that are sold are derecognised and corresponding receivables from the buyer for the payment are recognised as of the date the Company commits to sell the assets. The Company uses the weighted average method to determine realised gains and losses on derecognition. x) New standards and interpretations not applied IASB and IFRIC have issued the following standards and interpretations with an effective date after the date of these results: International Accounting Standards (IAS/IFRS) Effective date IAS 1 Presentation of Financial Statements (revised) 1 January 2007 (revised) IFRS 7 Financial Instruments: Disclosure 1 January 2007 IFRS 8 Operating Segments 1 January 2008 International Financial Reporting Interpretations Committee (IFRIC) IFRIC 7 Applying the Restatement Approach Under IAS 29 Financial Reporting 1 March 2006 in Hyperinflationary Economies IFRIC 8 Scope of IFRS 2 1 May 2006 IFRIC 9 Reassessment of Embedded Derivatives 1 June 2006 IFRIC 10 Interim Financial Reporting and Impairment 1 November 2006 IFRIC 11 IFRS 2 - Group and Treasury Share Transactions 1 March 2007 IFRIC 12 Service Concession Arrangements 1 January 2008 The Directors have chosen not to early adopt the above standards and interpretations but they do not anticipate that they would have a material impact on the Group's results in the period of initial application. Upon adoption of IFRS 7, the Group will have to disclose additional information about its financial instruments, their significance and the nature and extent of risks that they give rise to. More specifically the Group will need to disclose the fair value of its financial instruments and its risk exposure in greater detail. There will be no effect on reported income or net assets. 2. Management and administration fees At launch, Collins Stewart Fund Management Limited ("CSFM") was Manager, Administrator and Secretary to the Company, Collins Stewart Property Fund Management Limited ("CSPFM") acted as Property Manager and Active Property Investments Limited acted as the Investment Adviser. On 20 October 2006 Collins Stewart Tullett plc ("Collins Stewart") sold substantially all of the business of CSFM to Elysium Fund Management Limited ("Elysium") a new fund management/administration business set up by the former management team of CSFM. On 27 October 2006 the Board agreed, in the interests of continuity and to minimise any disruption to the Group's activities, to novate to Elysium the Management Agreement, Administration Agreement and Investment Advisory Agreement previously held with CSFM. The terms of the new Management Agreement, Administration Agreement and Investment Advisory Agreement remain unchanged from those with CSFM. All of the previous fee arrangements for these services and the roles of CSPFM as Property Manager and Active Property Investments Limited as Investment Adviser remain unaffected by these changes. Administration fee The Group shall pay the Administrator by way of remuneration for its administration and secretarial services hereunder an administration fee of 0.1% of the Gross Asset Value per annum calculated at the close of business at each quarter end, subject to a minimum of £125,000 per annum. Management fee Elysium is entitled to receive an annual fee of 1.75% of the Gross Asset Value of the Group. The management fee is payable quarterly in advance. Performance fee In addition, Elysium is entitled to a performance fee in certain circumstances. This fee is payable by reference to the increase in Adjusted NAV per Ordinary Share over the course of a 'performance period'. The first performance period began on Admission and ended on 31 March 2007; each subsequent performance period is a period of one financial year. Elysium is entitled to a performance fee in respect of a performance period only if two conditions are met. First, a performance hurdle condition must be met. The performance hurdle is that the Adjusted NAV per Ordinary Share at the end of the relevant performance period exceeds an amount equal to the Placing Price increased at a rate of 7% per annum on a compounding basis up to the end of the relevant performance period. The second condition to be met (a 'high watermark' test) is that the Adjusted NAV per Ordinary Share at the end of the relevant performance period is higher than the highest previously recorded Adjusted NAV per Ordinary Share at the end of a performance period, in relation to which a performance fee was last earned (or if no performance fee had been earned since Admission, is higher than the Placing Price). If the performance hurdle is met, and the high watermark exceeded, the performance fee will be an amount equal to 20% of the excess of the Adjusted NAV per Ordinary Share at the end of the relevant performance period over the higher of (i) the performance hurdle; (ii) the Adjusted NAV per Ordinary Share at the start of the relevant performance period; and (iii) the high watermark (in both cases on a per Ordinary Share basis), multiplied by the time weighted average of the number of Ordinary Shares in issue in the performance period (or since Admission in the first performance period). The Manager has the benefit of an indemnity from the Group in relation to liabilities incurred by the Manager in the discharge of its duties other than those arising by reason of any fraud, willful default, negligence or bad faith on the part of the Manager or its delegates. The Manager's appointment as investment manager is terminable by either party on not less than twelve months' notice, such notice to expire at any time on or after the third anniversary of Admission. The Management Agreement may also be terminated by either the Manager or the Group if the other party, or CSPFM, has gone into liquidation, administration or receivership or has committed a substantial or continuing breach of the Management Agreement. The Manager is responsible for the payment of the fees of the Investment Adviser and Property Manager. 3. Segmental analysis Segment information is presented in respect of the Group's geographical segments. The Group operates in five principal geographic segments, being Guernsey, Bulgaria, Cyprus and Malta, Romania, and Turkey. Guernsey is where the primary holding company is registered; it provides loans to the other subsidiaries and receives bank and loan interest and dividend income. The Maltese and Cypriot subsidiaries are investment holding companies and Bulgaria, Romania and Turkey hold investment property. Income Statement Guernsey Bulgaria Cyprus & Malta Romania Turkey Total £'000 £'000 £'000 £'000 £'000 £'000Rent income receivable - - - 49 20 69Bank interest receivable 579 6 - 25 4 614 ---------- ---------- ---------- ---------- ---------- ----------Income 579 6 - 74 24 683 Administrative, other (914) (5) (32) 9 (161) (1,103)expenses and foreignexchange movements ---------- ---------- ---------- ---------- ---------- ----------Net (loss)/profit from (335) 1 (32) 83 (137) (420)operating activitiesUnrealised gain on - 981 - 378 3,200 4,559revaluation of investmentproperties ---------- ---------- ---------- ---------- ---------- ----------(Loss)/profit before tax (335) 982 (32) 461 3,063 4,139Taxation (20) (93) - (82) (634) (829) ---------- ---------- ---------- ---------- ---------- ----------(Loss)/profit for the period (355) 889 (32) 379 2,429 3,310 ---------- ---------- ---------- ---------- ---------- ---------- Balance Sheet Guernsey Bulgaria Cyprus & Malta Romania Turkey Total £'000 £'000 £'000 £'000 £'000 £'000Investment property - 3,421 - 3,285 14,798 21,504Property, Plant & Equipment - - - 36 37 73Intangible assets - - - - 15 15Deferred tax assets - 5 - 4 152 161Trade and other receivables 67 485 2 26 179 759Cash and cash equivalents 960 129 5 133 137 1,364 ---------- ---------- ---------- ---------- ---------- ----------Total assets 1,027 4,040 7 3,484 15,318 23,876 ---------- ---------- ---------- ---------- ---------- ---------- Current liabilities (390) (7) (10) (48) (80) (535)Non-current liabilities - (99) - (61) (780) (940) ---------- ---------- ---------- ---------- ---------- ----------Total liabilities (390) (106) (10) (109) (860) (1,475) ---------- ---------- ---------- ---------- ---------- ----------Net assets/(liabilities) 637 3,934 (3) 3,375 14,458 22,401 ---------- ---------- ---------- ---------- ---------- ---------- 4. Directors' fees 27 February 2006 to 31 March 2007 £'000 Charles Parkinson 27 Carol Goodwin 22 Hugh Ward 22 Richard Barnes 22 ---------- 93 ---------- No bonuses or pension contributions were paid or were payable on behalf of the Directors. 5. Other operating expenses 27 February 2006 to 31 March 2007 £'000 Custodian and settlement fees 5 Depreciation (note 9) 2 Directors' fees 93 Auditors' remuneration 47 Nominated Adviser fees 15 Nominated broker fees 15 Registrar fees 10 Legal and professional fees 95 Loss on foreign currency exchange (1) 2 Other expenses 107 ---------- 391 ---------- (1) The loss on foreign exchange relates to exchange differences arising on settlement of monetary and non-monetary items, and from retranslating investments and other financial instruments measured at fair value through profit or loss at the balance sheet date, and other monetary items. 6. Earnings per share - basic and fully diluted The gain, in pence per Ordinary Share, is based on a profit of £3,310,000 and on a weighted average number of 20,000,000 Ordinary Shares in issue. There is no difference between the basic and fully diluted gain per share. 7. Dividends No dividends were paid in the period ended 31 March 2007. However, on 6 August 2007 the Board declared an interim dividend of 3.20 pence per Ordinary Share for the period ended 31 March 2007. The Directors do not propose a final dividend for the period to 31 March 2007. 8. Intangible assets During the period the Company purchased a trademark for Markiz Patisserie. The estimated useful economic life of the trade mark is fifteen years. 31 March 2007 £'000 Cost Addition 15 ---------- Accumulated Amortisation Provided during the period - ---------- Balance carried forward 31 March 2007 15 ---------- 9. Property, plant and equipment 31 March 2007 £'000 Cost Addition 75 ---------- Accumulated Depreciation Provided during the period (2) ---------- 73 Balance carried forward 31 March 2007 ---------- 10. Freehold investment property 27 February 2006 to 31 March 2007 £'000 Purchases at cost 16,974 ---------- Movement in unrealised appreciation 4,559 Foreign exchange loss - adjustment between using average and balance sheet rates (29) ---------- 4,530 ---------- At 31 March 2007 21,504 ---------- In the opinion of the Directors and the Property Manager the fair value of the properties held at the period end is as detailed in the valuation report provided to the Directors. Property assets are inherently difficult to value as there is no liquid market or pricing mechanism. As a result, valuations are subject to substantial uncertainty. This uncertainty may be accentuated in the Target Countries as there are fewer benchmarks available for valuation purposes than in, for example, Continental Europe. There is no assurance that the estimates resulting from the valuation process will reflect the actual sales price even where such sales occur shortly after the date of the valuation. The Group invests primarily in US Dollars, Euros or local currency in the Target Countries. Although US Dollars, Euros and local currencies of the Target Countries are freely convertible into other currencies, exchange rate fluctuations and currency devaluation could have a material effect on the market value of the Group's property investments, which although expressed in Sterling above, are valued by DTZ Debenham Tie Leung in either US Dollars or Euros. As stated in the Admission Document, on an on-going basis, the Group does not intend to hedge the exchange rate risk between Sterling, and US Dollars, Euros and local currencies in the Target Countries. In order to manage the Group's exposure to foreign exchange risk, rather than purchase properties in local currency; the Group has purchased the properties and subsequently values the properties in either US dollars or Euros. This removes the volatility of and reduces the foreign exchange exposure that may be experienced with the less stable local currencies, namely the Bulgarian Lev, Romanian RON, and Turkish Lira. All investment properties were valued by qualified professional valuers working for DTZ Debenham Tie Leung, international property advisers, at fair value (see note 1h) as at 31 March 2007 in accordance with the latest edition of the Royal Institution of Chartered Surveyors ("RICS") Appraisal and Valuation Manual. All such valuers are Chartered Surveyors, being members of RICS. 11. Investments in subsidiary undertakings Details of the subsidiary undertakings held by the Company at 31 March 2007 were as follows: Registered % of Principal Activity Cost ordinary shares held £'000 Dogu Avrupa Gayrimenkul Yatirim ve Ticaret Turkey 100% Property Investment 3,806 Limited Sirketi ("Dogu Avrupa") EEPF Susam Sokak Gayrimenkul ve Turiszm Turkey 100% 1,734 Ticaret Limited Sirketi ("EEPF Susam Sokak") Property Investment Gateway Properties SRL Romania 100% Property Investment - Sarnia Eastern Property (Cyprus) Limited Cyprus 100% Investment Holding Co. 1 Sarnia Eastern Property (Cyprus) No 2 Cyprus 100% Investment Holding Co. 1 Limited Sarnia Eastern Property (Malta) Limited Malta 100% Investment Holding Co. 2 Sarnia Real Estate (Cyprus) Limited Cyprus 100% Investment Holding Co. 1 Southern Properties EOOD Bulgaria 100% Property Investment 2 Southern Properties SRL Romania 100% Property Investment - ---------- 5,547 ---------- Sarnia Eastern Property (Cyprus) Limited and Sarnia Real Estate (Cyprus) Limited each have a 50% shareholding in Gateway Properties SRL. At 3 July 2007 the 100% shareholding in Southern Properties EOOD was transferred to Sarnia Eastern Property (Cyprus) Limited (50%) and Sarnia Real Estate (Cyprus) Limited (50%). All other companies are wholly owned by Eastern European Property Fund Limited. 12. Loans to subsidiary undertakings During the period to 31 March 2007, Eastern European Property Fund Limited made loan facilities available to its subsidiary undertakings. Details of these are shown below: 31 March 2007 Interest-free Interest-bearing Total loan Accrued Interest loan loan interest rate £'000 £'000 £'000 £'000 % Dogu Avrupa 276 3,793 4,069 170 18.0 EEPF Susam Sokak 1,864 583 2,447 16 18.0 Sarnia Eastern Property (Cyprus) Limited 4 - 4 - n/a Sarnia Eastern Property (Malta) Limited 6 7 13 - LIBOR + 3.0% Sarnia Real Estate (Cyprus) Limited 4 - 4 - n/a Sarnia Real Estate (Cyprus) No 2 Limited 3 - 3 - n/a Southern Properties EOOD - 3,054 3,054 43 7% Southern Properties SRL 2,988 - 2,988 - n/a ---------- ---------- ---------- ---------- Total loans to subsidiary undertakings at 31 5,145 7,437 12,582 229 March 2007 ---------- ---------- ---------- ---------- The loans to Dogu Avrupa and EEPF Susam Sokak are repayable on 30 June 2008 and were made in Turkish Lire. The loan to Southern Properties EOOD is repayable on demand and is denominated in Euros. The loan to Sarnia Eastern Property (Malta) Limited is repayable on demand and is denominated in Sterling. 13. Trade and other receivables Group Company 31 March 2007 31 March 2007 £'000 £'000 VAT control account 193 - Short term loan (1) 352 - Other debtors and prepayments 214 67 ---------- ---------- 759 67 ---------- ---------- (1) The Bulgarian subsidiary, Southern Properties EOOD, has granted a loan to the company which is performing the reconstruction of 24 George Washington Street, Sofia. The loan will be closed upon delivery of the completed works, certified by an affirmative report of "Advisory Engineering Group" Limited, which has undertaken to perform the supervision of the project. 14. Trade and other payables Group Company 31 March 2007 31 March 2007 £'000 £'000 Directors' fees 22 22 Management fee 41 41 Performance fee 241 241 Other creditors and accruals 142 85 ---------- ---------- 446 389 ---------- ---------- 15. Non-current liabilities Group Company 31 March 2007 31 March 2007 £'000 £'000 Rents received in advance 72 - ---------- ---------- 16. Taxation The taxation charge in the Consolidated Income Statement is made up as follows: 27 February 2006 to 31 March 2007 £'000 Other taxes and duties charged overseas 72 Overseas corporate tax 30 Deferred taxation (note 17) 707 Withholding tax 20 ---------- 829 ---------- The following table provides a reconciliation of the Guernsey statutory tax rate to the effective rate on profit from operating activities: 27 February 2006 to 31 March 2007 £'000 Net profit from operating activities 4,139 Company's Guernsey rate (as exempt from Guernsey tax) - Taxation 829 ------------ Effective tax rate 20.0% ------------ Company's Guernsey rate (as exempt from Guernsey tax) 0.0% Supplementary overseas taxes at higher rates 20.0% ------------ Effective tax rate 20.0% ------------ Overseas corporate tax has arisen in the Turkish subsidiary EEPF Susam Sokak Gayrimenkul ve Turiszm Ticaret Limited Sirketi ("Susam Sokak"). Profits of TRY 148,718 have been taxed at 20% and then adjusted for disallowable expenses of TRY 834. Other taxes and duties charged overseas relate to taxes imposed in the Turkish subsidiaries for expenses such as environment tax, withholding tax and stamp tax. Withholding tax has been deducted from interest receivable in relation to the loan interest payable by the Turkish and Bulgarian subsidiaries at a rate of 15%. 17. Deferred tax assets and liabilities Deferred tax assets and liabilities are attributable to the items detailed in the table below: 31 March 2007 £'000 Deferred tax asset arising on tax losses 161 Deferred tax liability arising on investment gains (868) ------------ (707) ------------ The deferred tax assets arising on tax losses arose as follows: Subsidiary Tax losses Tax rate Deferred tax asset Deferred tax asset '000 '000 £'000 Dogu Avrupa TRY 1,909 20% TRY 382 136 EEPF Susam Sokak TRY 221 20% TRY 44 16 Southern Properties EOOD BGN 260 10% BGN 26 9 ------------ 161 ------------ The deferred tax liabilities arising on investment gains arose as follows: Unrealised gain Tax rate Deferred tax Deferred tax liability liability '000 '000 £'000 Dogu Avrupa USD 3,973 20% USD 795 (416) EEPF Susam Sokak USD 2,833 20% USD 567 (297) Southern Properties EOOD EUR 1,420 10% EUR 142 (95) Southern Properties SRL EUR 556 16% EUR 89 (60) ------------ (868) ------------ The differences between the deferred tax assets and liabilities in the Consolidated Income Statement and the Consolidated Balance Sheet are accounted for by the translation of foreign currency balances in relation to deferred taxation at the average rate of exchange for the Consolidated Income Statement and the rate ruling on the balance sheet date for the Consolidated Balance Sheet. 18. Share Capital 31 March 2007 £'000 Authorised: 200,000,000 Ordinary Shares of 1 pence each 2,000 ------------ Issued and fully paid: 20,000,000 Ordinary Shares of 1 pence each 200 ------------ On 23 March 2006, the Company raised gross proceeds of £20 million (net proceeds of £19.1 million) through the issue of 20,000,000 Ordinary Shares of 1 pence each at 100 pence each. All the Ordinary Shares were admitted to trading on AIM, a market operated by the London Stock Exchange, on 23 March 2006. On 23 March 2006, as stated in the Admission Document, the Company cancelled all of its share premium account (as approved by the Royal Court of Guernsey on 24 March 2006), transferring it to a distributable reserve. By written resolution on 13 March 2006 the Company resolved to authorise it to utilise the distributable reserves to buy back up to 14.99% of the Ordinary Shares (2,998,000 Ordinary Shares) issued at the Placing for cancellation. No Shares were purchased for cancellation during the period. In accordance with The Companies (Purchase of Own Shares) (Treasury Shares) Ordinance 2006, at the forthcoming Annual General Meeting the Board is seeking to renew the authority to purchase up to 10% of the Ordinary Shares in issue and hold them as Treasury Shares until a time when they are either re-issued or cancelled. 19. Duration of the Company At the Annual General Meeting of the Company to be held in 2013, a special resolution shall be proposed that the Company ceases to continue as an investment company. If that resolution is passed, the Directors are required to formulate proposals to put to Shareholders to reorganise, unitise or reconstruct the Company or to wind the Company up. If the resolution to cease being an investment company is not passed, a similar resolution will be proposed at every fifth Annual General Meeting thereafter. 20. Net asset value per Ordinary Share The net asset value, in pence per Ordinary Share, is based on the net assets attributable to equity shareholders of £22,401,000 and on 20,000,000 Ordinary Shares in issue at the end of the period. 21. Related parties The relationship and transactions between the Group, CSPFM, and Elysium and Active Property Investments Limited are disclosed in the Report of the Directors and note 2. The Directors are not aware of any ultimate controlling party. The transactions between the Company and the subsidiary undertakings and loans and loan interest due to the Company from the subsidiaries are detailed in note 12. 22. Maturity of financial liabilities At 31 March 2007 the Group had no financial liabilities. The maturity of the Group's total liabilities at 31 March 2007 was as follows: 31 March 2007 £'000 In one year or less 535 Between two and five years 940 ------------ 1,475 ------------ 23. Analysis of assets and liabilitiesThe principal investment objective of the Group is to provide a high level of income and potential for significantcapital growth by investing in property in a range of sectors in the major urban centres of Turkey, Romania, Bulgariaand the Ukraine. Consistent with that objective, the Group holds investment property. In addition, the Group holdscash and liquid resources as well as having creditors that arise directly from its' operations. The main price risks arising from the Group's assets are market price risk, liquidity risk, credit risk and foreigncurrency risk. For a more complete list of the risks facing the Group, please refer to the risk warning in theAdmission Document. The Board reviews and agrees policies for managing its risk exposure. These policies are summarised below and haveremained unchanged during the period under review. Market price risk The Group's exposure to market price risk will mainly arise as a result of fluctuations in the value of the Group'sportfolio of investment properties. The Board have contracted with CSPFM and Active Property Investments Limited toprovide up to date information regarding the market in which the properties are invested. The properties are valued ona six monthly basis by independent property valuers DTZ Debenham Tie Leung in order that the Board can respond to anyadverse effects on a timely basis. Further risks associated with the ownership of property are detailed below. Liquidity risk The Group has invested in investment properties, which, by their nature, are illiquid. However, the Group maintainssufficient cash balances to meet its working capital requirements and is in the process of obtaining bank financing tofund further purchases of investment properties. Credit risk The risk of financial loss due to a counterparty's failure to honour its obligations arises principally in connectionwith property leases, the investment of surplus cash and transactions where the Group sells properties with an elementof deferred consideration. Tenant rent payments are monitored regularly and appropriate action is taken to recover monies owed or if necessary toterminate the lease. Deferred consideration terms are only agreed with counterparties approved by the Board or wheresome additional security is available. Funds may be invested and derivative transactions contracted only with banksand financial institutions with a high credit rating. Interest rate risk The group's exposure to interest rate risk is on its cash balances. These are held on short term deposits earninginterest at floating rates. The Company has additional exposure to interest rate risk arising form the loans to subsidiaries. The terms of theseloans are disclosed in Note 12. Foreign exchange risk The Group conducts business in jurisdictions that will generate revenue, expenses and liabilities in currencies otherthan Sterling. As a result, the Group is subject to the effects of exchange rate fluctuations with respect to any ofthese currencies. As stated in the Admission Document, the Group reports its consolidated results and its consolidated financial positionin Sterling. The Group invests primarily in US Dollars, Euros or local currency in the Target Countries. Accordingly,it generates revenue in currencies other than Sterling declares its dividends in Sterling and the amount received byShareholders will be an amount in Sterling. As a consequence, Shareholders will experience fluctuations in the marketprice of their Ordinary Shares as a result of movements in the exchange rate between Sterling and US Dollars, Euros andany other local Target Country currencies. Such movements in the exchange rate may also adversely affect the amount ofdividends paid. In addition, the amount of any dividends declared by the Company will be determined based on theresults of the Group's operations. Although US Dollars, Euros and local currencies of the Target Countries are freely convertible into other currencies,exchange rate fluctuations and currency devaluation could have a material effect on the Net Asset Value of the Group'sproperty investments, which will be expressed in Sterling. As stated in the Admission Document, on an on-going basis, the Group does not intend to hedge the exchange rate riskbetween Sterling, and US Dollars, Euros and local currencies in the Target Countries. The Group has investmentproperty, and rental agreements denominated in currencies other than Sterling, (the functional and presentationalcurrency). In order to manage the Group's exposure to foreign exchange risk, rather than purchase properties in local currency;the Group has purchased the properties and subsequently values the properties in either US dollars or Euros. Thisremoves the volatility of and reduces the foreign exchange exposure that may be experienced with the less stable localcurrencies, namely the Bulgarian Lev, Romanian RON, and Turkish Lira. The accounts prepared by the Maltese and Cypriotsubsidiaries are prepared in Sterling. Possible adverse economic and political conditions The financial operations of the Group may be adversely affected by general economic conditions and particularly byeconomic conditions in the Target Countries. The returns that are likely to be achieved on an investment in propertyor land in the Target Countries will be materially affected by the political and economic climate in Eastern Europe,particularly in the Target Countries. In particular, changes in the rates of inflation and interest rates in theTarget Countries may affect the income generated by, and capital value of, the Property Portfolio. The property and land markets in which the Group invests are relatively immature and the economies of the TargetCountries are not as fully developed as those in Western Europe. Further, those countries carry risks of political,legal and economic instability, which could adversely affect the Group's results or operations. With any investment ina foreign country there exists the risk of adverse political or regulatory developments including, but not limited to,nationalisation, confiscation without fair compensation, terrorism, war or currency restrictions. The latter may beimposed to prevent capital flight and may make it difficult or impossible to exchange local currency into foreigncurrency or to repatriate foreign currency. Further, deterioration in the Western European economies can be expected to have an adverse effect on the economies ofthe Target Countries and potentially on property values and the level of rents in the Target Countries. Risks of property ownership Investments in property may be difficult, slow or impossible to realise. The Ordinary Shares will be subject to thegeneral risks incidental to the ownership of real or heritable property, including changes in the supply of or demandfor competing investment properties in an area, changes in interest rates and the availability of mortgage funds,changes in property tax rates and landlord/tenant or planning laws, credit risks of tenants and borrowers andenvironmental factors. The marketability and value of any properties owned by the Group will, therefore, depend onmany factors beyond the control of the Group and there is no assurance that there will be either a ready market for anyproperties held by the Group or that such properties will be sold at a profit or will yield a positive cash flow. Changes in law relating to foreign ownership of property in any of the jurisdictions in which the Group invests mightalso have an adverse effect on the net returns from the Property Portfolio. Property investment risk The performance of the Group could be adversely affected by a downturn in the property market in terms of capital valueor weakening of rental markets. In the event of default by a tenant, the Group may suffer a rental shortfall and incuradditional costs including legal expenses and costs of maintaining, insuring and re-letting the property. Any futureproperty market recession could materially adversely affect the value of the properties. Returns from an investment in property depend largely upon the amount of rental income generated from the property andthe expenses incurred in the development or redevelopment and management of the property, as well as changes in itsmarket value. Rental income and the market value for properties are generally affected by overall conditions in the local economy,such as growth in GDP, employment trends, inflation and changes in interest rates. Changes in GDP may also impactemployment levels, which in turn may impact demand for premises, especially for office space for commercialenterprises. Furthermore, movements in interest rates may also affect the cost of financing for real estate companies. Both rental income and property values may also be affected by other factors relevant to the real estate market, suchas competition from other property owners and developers, the perceptions of prospective tenants on the attractiveness,convenience and safety of properties, the inability to collect rents because of the bankruptcy or insolvency of tenantsor otherwise, the periodic need to renovate, repair or re-lease space and the costs thereof, the costs of maintenanceand insurance, and increased operating costs. In addition, the owner must meet certain significant expenditures,including operating expenses, even if the property is vacant. Investments in property are relatively illiquid and more difficult to realise than investments in equities or bonds. 24. Capital commitments On 15 December 2006, a wholly-owned subsidiary, Southern Properties EOOD, purchased 24 George Washington Street in Sofia for EUR 4.8 million, although only EUR 1.4 million was paid on completion. A further EUR 520,000 was paid to the developer on 16 January 2007 with the remaining EUR 2.88 million to be paid on completion of the building contract. There is an overrun on the building contract on which the Group is entitled to damages equivalent to EUR 40,000 per month. All contracted capital commitments have been provided for. 25. Company Income Statement Note 27 February 2006 to 31March 2007 £'000 Income Interest receivable on inter-company loans 12 245 Bank interest receivable 579 ------------ Total income 824 ------------ Expenses Administrator's fees 2 (131) Management fees 2 (340) Performance fee 2 (241) Other operating expenses (187) ------------ Total expenses (899) ------------ Loss before taxation (75) Taxation (20) ------------ Loss for the period (95) ------------ 26. Company Statement of Changes in Equity Share Share Distributable Non-distributable Note capital premium reserves reserves Total £'000 £'000 £'000 £'000 £'000 Gross proceeds of placing 18 200 19,800 - - 20,000 Issue costs 18 - (909) - - (909) Cancellation of share premium 18 - (18,891) 18,891 - - account Profit/(loss) for the period - - 486 (581) (95) ---------- ---------- ---------- ---------- ---------- Net assets at 31 March 2007 200 - 19,377 (581) 18,996 ---------- ---------- ---------- ---------- ---------- 27. Company Balance Sheet Note 31 March 2007 £'000 Non-current assets Investments in subsidiary undertakings 11 5,547 ---------- Current assets Loan to subsidiary undertakings 12 12,582 Interest receivable from subsidiary undertakings 12 229 Trade and other receivables 13 67 Cash and cash equivalents 960 ---------- 13,838 ---------- Total assets 19,385 Current liabilities Trade and other payables 14 (389) ---------- Net assets 18,996 ---------- Capital and reserves Called-up share capital 18 200 Share premium 18 - Distributable reserves 19,377 Non-distributable reserves (581) ---------- Total equity shareholders' funds 18,996 ---------- 28. Company Cash Flow Statement 27 February 2006 to 31 March 2007 Note £'000 Loss for the period (95) Increase in trade and other receivables (67) Increase in interest receivable from subsidiary undertakings (229) Increase in trade and other payables 389 ---------- Net cash outflow from operating activities (2) Investing activities Investment in subsidiary undertakings 11 (5,547) Loans to subsidiary undertakings 12 (12,582) ---------- Net cash outflow from investing activities (18,129) Financing activities Issue of shares 20,000 Share issue costs (909) ---------- Net cash inflow from financing activities 19,091 ---------- Increase in cash and cash equivalents 960 ---------- 29. Fair values The fair values of financial assets and liabilities are not materially different from their carrying value in the results. 30. Operating leases The Group leases out its investment property under operating leases. At 31 March 2007, the future minimum lease receipts under non-cancellable leases were as follows: 27 February 2006 to 31 March 2007 £'000 Less than one year 424 Between one and five years 1,039 More than five years - ---------- 1,462 ---------- The total above comprises the total contracted rent receivable as at 31 March 2007. For further information please contact: Bob LockerCollins Stewart Property Fund Management LimitedTel: +44 1895 846 464 Jonny SloanCollins Stewart Europe LimitedTel: +44 (0) 20 7523 8000 This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Eastern European Property