Final Results: financial statements

PLAZA CENTERS N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS IN '000 EUR

NOTE 1 - PRINCIPAL ACTIVITIES AND OWNERSHIP

Plaza Centers N.V. ("the Group" or "the Company") was incorporated and is registered in the Netherlands.  The Company's registered office is at Prins Hendrikkade 48-S, 1012 AC, Amsterdam, the Netherlands. The Company conducts its activities in the field of establishing, operating and selling of shopping and entertainment centers, as well as other mixed-use projects (retail, office, residential) in Central and Eastern Europe (starting 1996) and India (from 2006).

The consolidated financial statements for each of the periods presented comprise the Company and its subsidiaries (together referred to as the "Group") and the Group's interest in associates and jointly controlled entities.

The Company is listed on the Main Board of the London Stock Exchange ("LSE"), the Warsaw Stock Exchange ("WSE") and on the Tel Aviv Stock Exchange ("TASE").  

The Company's immediate parent company is Elbit Ultrasound (Luxembourg) B.V. / S.à r.l. ("EUL"), which holds 44.9% of the Company's shares, as at the end of the reporting period (December 31, 2015 - 44.9%). The Company regards Elbit Imaging Limited ("EI") as the ultimate parent company (refer to note 30 for more details).  For the list of the Group entities, refer to note 35.

NOTE 2 - BASIS OF PREPARATION

a.     Statement of compliance

The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS"), as adopted by the European Union ("EU").

These consolidated financial statements are not intended for statutory filing purposes. The Company is required to file consolidated financial statements prepared in accordance with The Netherlands Civil Code. At the date of approving these financial statements the Company had not yet prepared consolidated financial statements for the year ended December 31, 2016 in accordance with the Netherlands Civil Code.

The consolidated financial statements were authorized for issue by the Board of Directors on May 14, 2017.

b.     Functional and presentation currency

These consolidated financial statements are presented in EURO ("EUR"), which is the Company's functional currency. All financial information presented in EUR has been rounded to the nearest thousand, unless otherwise indicated.

c.    Going concern and liquidity position of the Company

The consolidated financial statements have been prepared on a going concern basis, which assumes that the Group will be able to meet the mandatory repayment obligations of its banking facilities and debentures, and other working capital requirements.

The Group's primary need for liquidity is to repay its debt, fund working capital requirements of the operating shopping centers, develop new shopping centers and fund general corporate purposes. The Group has incurred losses and experienced negative operating cash flows for the past several years, and accordingly, it has taken a number of actions to continue to support its operations and meet its obligations.

NOTE 2 - BASIS OF PREPARATION (Cont.)

As at December 31, 2016 the Group's outstanding obligations to bondholders and banks are EUR 186.4 million and EUR 82.3 million, respectively.

In November 2016, the Group agreed with its bondholders to amend the terms of the early repayment requirement under the original debt restructuring plan (the "Restructuring Plan"). On March 15, 2017, the Group repaid the required minimum early repayment to its bondholders and thus obtained a deferral of one year for the remaining contractual obligations of the debentures.

Information concerning the Group's obligations and commitments to make future payments under contracts such as debt agreements in the next 18 months is aggregated in the following tables.

(*) Out of which EUR 51.8 million  was repaid by the date of approval of these consolidated financial statements.

The Company expects to increase the amount of its liquid balances during the next 18 months, by means of the following actions:

-     Sale of shopping centers in amount of EUR 146 million

-     Sale of plots of lands in amount of EUR 49.5 million

-     NOI and other income EUR 6.7 million

 Management expects that the Group will be able to meet the remaining contractual obligations during the 13 months period following the approval of these consolidated financial statements by a combination of its assets disposal program and cash generated from operating shopping centers. Management further expects that these actions are probable and will be executed in alignment with the anticipated timing of the Group's liquidity needs.

         Management acknowledges that the above expected cash flows are based on forward-looking plans and estimations which rely on the information known to management at the time of the approval of these financial statements. The materialization of the above forecast is not certain and are subject to factors beyond the Company's control. Therefore, delays in the realization of the Group's assets and investments or realization at lower price than expected by management, could have an adverse effect on the Group's liquidity position and its ability to meet its contractual obligations on a timely manner.

NOTE 2 - BASIS OF PREPARATION (Cont.)

         Management further acknowledges that the Company is exposed to foreign currency risk derived from borrowings denominated in currency other than the functional currency of the Group, more specifically, a further devaluation of the EUR against the NIS can significantly increase the remaining contractual obligation to bondholders.

         As discussed in Note 16, at the end of the reporting period the Company is in compliance with all financial covenants required under the Restructuring Plan. However, as of the date of the approval of these consolidated financial statements, the Company is near the minimum ratio required in respect to the Coverage Ratio Covenant.

As disclosed in note 32i. the Company did not publish its financial statements within the deadline set out in the bond trust deeds and has not remedied the situation within the allowed time.  This entitles the Bondholders to declare that all or a part of their respective (remaining) claims become immediately due and payable.  As disclosed in Note 32j the trading of the Company's ordinary shares, Series A Notes and Series B Notes have been suspended from trading on the relevant exchanges.  This may entitle the Bondholders to declare that all or a part of their respective (remaining) claims become immediately due and payable. 

In the case that the Bondholders would declare their remaining claims to become immediately due and payable, the Company would not be in a position to settle those claims and would need to enter to an additional debt restructuring or might cease to be a going concern. As at the date of these financial statements the Bondholders have not taken steps to assert their rights.  

A combination of the abovementioned conditions indicate the existence of a material uncertainty that casts significant doubt about the Company's ability to continue as a going concern.

d. Investment property vs. trading property classification

The Group has designated its properties into three types (completed shopping centers, plots designated for development and plots designated for sale).   In respect of its completed shopping centers the Group is actively seeking buyers.  Therefore, management believes these are appropriately classified as trading properties rather than investment properties.

In respect of plots designated for sale, (which are not intended to be constructed in the near future), the Company is actively seeking buyers and does not hold the plots with the intention to gain from capital appreciation.  Plots designated for construction are intended to be developed and sold as a completed project in the normal course of business once circumstances allow. Therefore, management also believes that these are appropriately classified as trading properties.   

e.     Use of estimates and judgments

The preparation of the consolidated financial statements in conformity with IFRS as adopted by the EU requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expenses.

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 judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only

NOTE 2 - BASIS OF PREPARATION (Cont.)

that period or in the period of the revision and future periods if the revision affects both current and future periods.  Information about other critical judgements in applying accounting policies that have the most significant effect on the amounts recognised in the consolidated financial statements is included in the following notes:

·       Note 8 - Judgements used in determining the net realisable value of trading properties

·       Note 2(d) - Trading property vs. Investment property

Information about assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment within the next financial year are included in the following notes:

·       Notes 8 - key assumptions used in determining the net realisable value of trading properties

·       Note 26 - recognition of deferred tax assets and availability of future taxable profits against which tax losses carried-forward can be used.

Functional currency

The EUR is the functional currency for Group companies (with the exception of Indian companies - in which the functional currency is the Indian Rupee - INR) since it is the currency of the economic environment in which the Group operates. This is because the EUR (and in India the INR) is the main currency in which management determines its pricing with tenants, potential buyers and suppliers, determine its financing activities and budgets and assesses its currency exposures.

Operating cycle determination

The Normal Operating Cycle ("NOC") of the Group is driven by its business model to buy, develop and sell, primarily shopping centers, and comprises the estimated amount of time required to complete the process from the acquisition of undeveloped land through its development, preparation for sale and ultimate disposal. Based on the Group's experience, mainly from the period from 1996-2008, this period of time was three to five years (and in respect of large scale, multi-phase/mixed-use projects, up to eight years). For example, for completed shopping centers, these steps include achieving a stabilized tenants list, improving the tenant mix, increasing occupancy rates, completion of certain tenant improvements and finding the qualified buyers. For plots, this includes obtaining permits, finance and construction.

The Company maintains its existing business model; however following the financial crisis, the level of uncertainty of the actual amount of time needed to complete all steps in the process has become much longer than what the Company believes is a normal level. Over the period 2009 - 2012, the Company has had difficulty selling completed properties at prices reflecting management's view of reasonable estimated values, as well as experienced a lack of available finance for development of plots. The return to what management considers more normal conditions, primarily in the CEE markets where it has properties, have been longer than expected.

In view of the above uncertainties and abnormalities, the Company has taken since 2013 a position of reclassifying its entire trading properties to long term.

Despite of the above, where a sale and purchase agreement exists as of the end of the reporting period, the asset and related liabilities are reclassified as current.  

NOTE 3 -   MEASUREMENT OF FAIR VALUES

A number of the Group's accounting policies and disclosures require the measurement of fair value, 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. The Company's finance department reviews significant unobservable inputs and valuation adjustments. If third party information, such as broker quotes, is used to measure fair values, then the finance department assesses the evidence obtained from the third parties to support the conclusion that such valuations meet the requirements of IFRS, including the level in the fair value hierarchy in which such valuations should be classified.  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)

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

·    Note 11 - Derivatives

·    Note 27 - Financial instruments

NOTE 4 -   CASH AND CASH EQUIVALENTS

The Group's exposure to interest rate risk and a sensitivity analysis for financial assets and liabilities are disclosed in note 27.

NOTE 5 -   RESTRICTED BANK DEPOSITS

NOTE 5 -   RESTRICTED BANK DEPOSITS (Cont.)

(1)  As of December 31, 2016, EUR 4 million and EUR 2.52 million is restricted mainly in respect of bank facilities agreements signed to finance Projects in Poland and Serbia, respectively. These amounts carry an annual interest rate of mainly Overnight rates.   

(2)  Secured tenants deposit in respect of Suwalki and Torun malls.

The Group's exposure to interest rate risk and a sensitivity analysis for financial assets and liabilities are disclosed in note 27.

NOTE 6 -   TRADE RECEIVABLES

(1) Includes EUR 5.6 million from sale of plots (2015- nil).

NOTE 7 -   OTHER ACCOUNTS RECEIVABLES, PREPAYMENTS AND ADVANCES

a.   Other receivables

b.   Prepayments and advances

NOTE 8 - TRADING PROPERTIES

(1)  2016 and 2015 - mainly due to construction activities in Serbia. 

(2)  Includes EUR 5.1 million of non-specific borrowing costs capitalized, using a capitalization rate of 13% (2015: nil).

(3)  Breakdown of write -downs (write-up) of trading properties is presented in the table below.

The 2016 write- downs were caused mainly by the following factors:

·    There were significant decreases in Net Realizable Value of certain projects due to factors listed below.

NOTE 8 - TRADING PROPERTIES (Cont.)

Delays in the commencement of the construction of certain projects designated for development and increase in certain properties' specific risks.

·    In the case of Casa radio project in Romania write-down was recognized primarily due to increased uncertainty over the timing of the project's development as well as discount rate and exit rate assumptions resulting from the bureaucratic deadlock of the Public-Private Partnership agreement ("PPP"). Finally, the fair value of Casa radio has been determined assuming a sale of the project in a limited marketing period taking into account the conditions and liquidity needs of the Company in order to meet its future repayment schedule. Due to this, an additional discount has been applied to the market value of the project.

·    EUR 2.6 million of write-down on Timisoara project, Romania, which reflects change in the concept of the project to a smaller scheme due to growing competition and a shopping mall saturated market.

·    EUR 1.8 million of write-down on two plots held in Romania (Ciuc and Constanta) due to difficulties in realizing these plots of lands for a long period of time (more than two years) and due to the political environment in Romania.

·    EUR 1.1 million write down recorded on Kielce project due to preliminary sale agreement.

·    EUR 0.9 million of write-down on Arena Extension project, in Budapest, Hungary which reflects changes in management's assessment of the existing legal issues relating to the project.

·    EUR 0.8 million write-down on a plot in Brasov which reflects the option of the financing bank to purchase the plot for EUR 1.1 million (refer to Note 29(g)).

·    EUR 0.7 million write-down recorded on Helios Plaza project, in Pireaus, Greece, due to uncertainty in respect of estimated value of the planned sale transaction.

·    EUR 0.4 million write down recorded on Lodz Plaza project which reflects the City Council's decision to reject proposals for a shopping center development. Consequently, management has taken strategic decision not to develop Lodz Plaza shopping center in Lodz and will instead realize the value of the asset through a disposal.

(4)  Including Casa radio in Romania and Belgrade Plaza (Visnjicka) in Serbia.

(5)  Casa radio note

a.   General

In 2006 the Company entered into an agreement according to which it acquired 75% interest in a company ("Project SPV") which is under a PPP agreement with the Government of Romania to develop the Casa radio site in central Bucharest ("Project"). After signing the PPP agreement, the Company holds indirectly 75% of the shares in the Project SPV, the remaining 25% are held by the Romanian authorities (15%) and a third party (10%). 

NOTE 8 - TRADING PROPERTIES (Cont.)

(5) Casa radio note (cont.)

As part of the PPP, the Project SPV was granted with development and exploitation rights in relation to the site for a period of 49 years, starting December 2006 (38 years remaining at the end of the reporting period). As part of its obligations under the PPP, the Project SPV has committed to construct a Public Authority Building ("PAB") measuring approximately 11.000 square meters for the Romanian Government at its own cost.

Large scale demolition, design and foundation works, financed by loans given to the project SPV by the Group were performed on the construction site until 2010, when current construction and development was put on hold due to lack of progress in the renegotiation of the PPP Contract with the Authorities, as discussed in subsection c below, and the global financial crisis. These circumstances (and mainly the bureaucratic deadlock with the Romanian Authorities to deal with the issues specified below) caused the Project SPV not to meet the development timeline of the Project, as specified in the PPP.  However, management believes that it had legitimate reasons for the delays in this timeline, as discussed in subsection c below. 

b.   Obtaining of the Detailed Urban Plan ("PUD") permit

The Project SPV obtained the PUD related to this project in September 2012. Furthermore, on December 13, 2012, the Court took note of the waiver of the claim submitted by certain plaintiffs and rejected the litigation aiming to cancel the approval of the Zonal Urban Plan ("PUZ") related to the Project. The court decision is irrevocable.

As the PUD is based on the PUZ, the risk that the PUD would be cancelled as a result of the cancellation of the PUZ was removed following the date when the PUZ was cleared in court on December 13, 2012.

c.   Discussions with Authorities on construction time table deferral

Following the Court decision with respect to the PUZ, the Project SPV was required to submit a request for building permits within 60 days from the approval date of the PUZ/PUD and commence development of its project within 60 days after obtaining the building permit.  The building permits have not been obtained.

However, due to substantial differences between the approved PUD and stipulations in the PPP agreement as well as changes in the EU directives concerning environmental considerations in buildings used by public authorities the Project SPV attempted to renegotiate the future development of the project with the Romanian Authorities on items such as time table, structure and milestones as well as adaptation of the PAB development to the current EU requirements. Despite several notifications sent to the Romanian Authorities expressing a wish to renegotiate the existing PPP agreement no major breakthrough could be achieved. The Company could be subject to significant delay penalties under the terms of the PPP agreement if it is determined that the Company was at fault in causing the delays.

NOTE 8 - TRADING PROPERTIES (Cont.)

(5) Casa radio note (cont.)

Because of the refusal of the public authorities to cooperate, negotiate and adjust the PPP agreement, the Project SPV was not able to meet its obligations under the PPP. This resulted in a situation where the Project SPV could not "de facto" continue the execution of the Project and created a risk that the public authorities could attempt to terminate the PPP agreement. As of the date of approval of these consolidated financial statements the Project SPV did not receive any termination notification by the public authorities.

The Company believes that although there is no formal obligation for the Romanian Authorities to renegotiate the PPP agreement, such obligation is implicitly provided for the situation when significant unexpected circumstances arise and that the unresponsiveness of the authorities is a violation of the general undertaking to support the Project SPV in the execution of the Project as agreed in the PPP agreement.

The Company believes that the risk that the public authorities may seek to terminate the PPP and/or relevant permits on the basis of the perceived breach of the Company's commitments and/or may seek to impose delay penalties on the basis of the PPP contract is unlikely given the public authorities have not sought to do such since the perceived breach in 2012 and given the Company believes it has basis for counter claims against the relevant public authorities.

In the case of termination for breach under the PPP agreement the relationship and compensation between the parties is to be decided by a competent court of arbitrations. Management believe that, in the case of termination, the Company has a strong case to claim compensation for damages.

During 2016 management has taken a number of steps in order to unblock the development of the project and mitigate the risk of termination of the PPP agreement, including commencing a process to identify third party investors willing and capable to join the Group for the development of the project. Management believes that partnering with reputable investors with considerable financial strength can enhance the Group's negotiation position vis-à-vis the public authorities and assist in advancing an amicable agreement with the relevant authorities with respect to the development of the project.

Management considers the risk of termination of the PPP agreement and/or the imposition of penalties by the authorities to be unlikely and the consolidated financial statements do not include any provision in respect to any potential future penalties in respect to the breach of the PPP agreement.  The increased risk arising from the above matters has been reflected in the valuation of the project.

d.   Co-operation with the Romanian Authorities regarding potential irregularities

In 2015, the Board and Management became aware of certain issues with respect to certain agreements that were executed in the past in connection with the Project. In

NOTE 8 - TRADING PROPERTIES (Cont.)

(5) Casa radio note (cont.)

order to address this matter, the Board appointed the chairman of the Audit Committee to investigate the matters and independent law firms to analyze the available alternatives in this respect. The chairman of the Audit Committee did not conclude the investigation as the person with key information was not available to answer questions. The Board, among other steps, implemented a specific policy in order to prevent the reoccurrence of similar issues and appointed the chairman of the audit committee to monitor the policy's implementation by the Company's management.   In addition, it was decided that certain agreements will be brought to the Board's approval prior to signing.

The Company has approached and is co-operating fully with the relevant Romanian Authorities regarding the matters that have come to its attention and it has submitted its initial findings in March 2016 to the Romanian Authorities. The Company, during this process has been verbally informed by the Romania Authorities that it has received immunity from certain potential criminal charges and received further verbal assurance that the mentioned investigation should have no effect on the Company's existing legal rights to the Project and the PPP Agreement. As this process is still on-going, the Company in unable to comment on any details related to this matter. Management is currently unable to estimate any monetary sanctions in respect to the potential irregularities, consequently no provision has been recorded in connection with these matters.

Elbit, the Company's parent company, announced in March 2016 that it appointed a special committee to examine these matters as they may contain potential violation of the requirements of the U.S. Foreign Corrupt Practices Act (FCPA), including the books and records provisions of the FCPA, and that it has approached and is co-operating fully with the relevant authorities regarding the matters.

e.   Provision in respect of PAB

As mentioned in point a above, when the Company entered into an agreement to acquire 75% interest in the Project SPV it assumed a commitment to construct the PAB at its own costs for the benefit of the Romanian Government. Consequently, the statement of financial position includes a provision in the amount of EUR 13.2 million in respect of the construction of the PAB (December 31, 2015: EUR 14.9 million).

Management believes that the current level of provision is an appropriate estimation in the current circumstances. Upon reaching concrete agreements with Authorities, the Company will be able to further update the provision.

(6)  Security over trading properties

As at December 31, 2016, a total carrying amount of EUR 109 million (December 31, 2015 - EUR 123 million) which represents two operating shopping centers is pledged against secured bank loans of approximately EUR 71 million and one shopping center under construction with carrying amount of EUR 56 million and a pledged against secured bank loans of approximately

NOTE 8 - TRADING PROPERTIES (Cont.)

EUR 11.5 million.

(7) Write-down of trading properties

Trading properties are measured at the lower of cost and net realizable value. Determining net realizable value is inherently subjective as it requires estimates of future events and takes into account special assumptions in the valuations, many of which are difficult to predict.  

Actual results could be significantly different than the Company's estimates and could have a material effect on the Company's financial results.  Trading Properties accumulated write-downs from cost as of December 31, 2016, amounted to EUR 187 million or 41% percent of outstanding trading properties original cost (December 31, 2015 - EUR 230 million or 42% of gross trading property balance).  These valuations become increasingly difficult as they relate to estimates and assumptions for projects in the preliminary stage of development.

Management is responsible for determining the net realizable value of the Group's Trading Properties. In determining net realizable value of the vast majority of Trading Properties, management utilizes the services of an independent third party recognized as a specialist in valuation of properties (As at December 31, 2016, 81.2% of the value of trading properties was based on valuations done by the independent third party valuation service (2015 - 98%).  In certain cases management adjusted the values provided by the external valuator to reflect the Group's specific risks.

The majority of the trading properties were valued using the Residual technique (or the Discounted Cash Flows technique for operating shopping centers) except two projects in a value of EUR 12.1 million which were valued using the comparable method. A description of each

approach is discussed below. The remaining properties were valued by reference to existing or preliminary sale agreements.

All the trading properties carrying amounts equals their net realizable values with the exception of Torun and Suwalki in Poland and Belgrade in Serbia. (2015: Torun and Suwalki in Poland), where the carrying amount reflects the cost.

The Company reviews annually (and in certain cases during the year), the valuation methodologies utilized by the independent third party valuator service for each property.   The main features included in each valuation are:

a.   Completed trading properties (operating shopping centers)

The Net Realizable Value of operating shopping centers reflects rental income from current leases and assumptions about rental income from future leases in the light of current market conditions.

The Net Realizable Value also reflects, on a similar basis, any cash outflows that could be expected in respect of the property. The Group uses professional appraisers for determining the Net Realizable Value of the operating shopping centers.

Independent valuation reports are prepared by Jones Lang LaSalle by using discounted cash flow valuation techniques. The Group uses assumptions that are mainly based on market conditions existing at the reporting date.

NOTE 8 - TRADING PROPERTIES (Cont.)

The principal assumptions underlying management's estimation of Net Realizable Values are those related to the receipt of contractual rentals, expected future market rentals, void periods, maintenance requirements and appropriate discount rates. These valuations are regularly compared to actual market yield data and actual transactions made by the Group and those reported by the market, if available. Expected future rentals are determined on the basis of current market rentals for similar properties in the same location and condition.

b.   Incomplete trading properties (undeveloped plots of lands)

 The net realizable value in case of an undeveloped project is determined by either:

·    comparison with the sale price of land for comparable development ; or 

·    Assessment of the value of the project as completed and deduction of the costs of development (including developer's profit and financing costs), and applying an estimated discount rate, to arrive at the underlying land value. This is known as the residual method.

b1 - Comparable method

Valuation by comparison is essentially objective in that it is based on an analysis of the price achieved for sites with broadly similar development characteristics. Valuation by comparison is generally used if evidence of actual sales can be found and analysed on a common unit basis, such as site area, developable area or habitable room.

Where comparable development cannot be identified in the immediate area of the subject site or when sales information is not clearly available through common channels of information (internet, newspapers, trade journals, periodic market research) it is necessary to look further out for suitable comparable and to make necessary adjustments to the price in order to account for dissimilarities between the comparable development and the subject site. Such adjustments include, but not limited to:

·    Adjustment due to the time of the transaction. Market conditions at the time of the sales transaction of a comparable property may differ from those on the valuation date of the property being valued. Factors that impact market conditions include rapidly appreciating or depreciating property values, changes in tax laws, building restrictions or moratoriums, fluctuations in supply and demand, or any combination or forces working in concert to alter market conditions from one date to another.

·    Adjustment due to asking price and condition of payment. The special motivations of the parties to the transaction in many situations can affect the prices paid and even render some transactions as non-market. Examples of special conditions of sale include a higher price paid by a buyer because the parcel has synergistic, or marriage

value; a lower price paid because a seller was in a hurry to conclude the sale; a financial, business, or family relationship between the parties involved in the transaction, unusual tax considerations; lack of exposure of the property in the (open) market; or the prospect of lengthy litigation proceedings.

·    Adjustment because of size, shape, contiguous and surface area. Where the physical characteristics of a comparable property vary from those of the subject property, each of the differences is considered, and the adjustment is made for the impact of each of these differences on value.

·    Adjustment because of location. The locations of the comparable sale properties and the subject property are compared to ascertain whether location and the immediate

NOTE 8 - TRADING PROPERTIES (Cont.)

environment are influencing the prices paid. The better location a property is located in the more it is worth per square meter; and conversely the worse location a property is in the less it is worth per square meter. An adjustment is made to reflect such differences based on the valuers' professional experience. Extreme location differences may indicate that a transaction is not truly comparable and are disqualified.

b2 - Residual method

The residual method, in contrast, relies on an approach that is a combination of comparison and cost and it requires making a number of assumptions - any of which can affect the outcome in varying degrees.  Having established the development potential a residual valuation can be expressed as a simple equation: (value of completed development) - (development costs + developers profit+ financing cost) = land value. Each element of this equation is discussed in the following paragraphs.

·    Value of completed development

The value of the completed development is the market value of the proposed development assessed on the special assumption that the development is complete as at the date of valuation in the market conditions prevailing at that date.

·    Development costs

The development costs include planning and design costs, construction costs, site related costs, holding costs, finance costs and contingencies.

Some larger schemes such as Casa radio in Romania and Chennai in India are phased over time. Is such case the phasing is reflected in the cash flows as deferral of some of costs to a date when it might be reasonable to expect them to be incurred. Similarly, not all proceeds occur simultaneously.

·    Developer's profit

The nature of the development determines the selection of the profit margin, or rate of return and the percentage to be adopted varies for each case. The developers profit is expressed as a percentage of the Gross Development Value (GDV).

·    Exit Yield represents the capital value of the property at the end of the period of analysis (exit value) expressed in percentage terms. The exit value is the net amount which an entity expects to obtain for an asset at the end of the period of analysis after deducting the expected costs of disposal. Usually the estimation is done through analyzing market evidence and then adjustments are made with regards to the individual property.