2008 Interim Results

Condensed Consolidated Interim Financial Statements as at 28 August 2008

Chairman’s Report

New Europe Property Investments PLC (“the Company”) was incorporated on 23 July 2007 and admitted to the AIM market of the London Stock Exchange on 22 August 2007.
The Company is managed by NEPI Investment Management Limited and invests primarily in the high quality office, retail and industrial property market initially in Romania, although in due course in other Central and Eastern European countries.
The Company’s objective is to enable shareholders to invest in a dividend paying, long term closedended fund that could serve as a vehicle for institutional investors seeking exposure to Central and Eastern European investment opportunities offering stable absolute returns and portfolio diversification.
The two acquisitions mentioned in the Directors’ report for the period ended on 31 December 2007 have been concluded. As a result, the Company now has invested €86.9 million in Romania and Germany, has exposure to 29 properties and more than 160 tenants. The acquisition of the Raiffeissen portfolio has been consolidated for the full period and the German acquisition has been proportionately consolidated beginning with 14 April 2008.
The Company has embarked on a secondary listing of its shares on the Alternative Exchange (“AltX”) of the JSE Limited in South Africa. This process should be concluded towards the end of September 2008 and should improve the depth of the shareholder base, facilitate further trade in the Company’s shares and aims to provide a further source of capital in the future.
The Group achieved distributable earnings per share of 7.48 Euro cents in respect of the six months period ended 28 August 08.
It is the Board’s intention to declare an interim dividend in line with the distributable earnings per share, soon after the Company’s listing in South Africa.

Independent Review Report to New Europe Property Investments PLC

INTRODUCTION

We have been engaged by the Company to review the condensed consolidated set of financial statements in the half-yearly report for the six months ended 30 June 2008 which comprises balance sheet, income statement, statement of changes in equity, cash flow statement and the related explanatory notes. We have read the other information contained in the half-yearly report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.
This report is made solely to the Company in accordance with the terms of our engagement. Our review has been undertaken so that we might state to the company those matters we are required to state to it in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company for our review work, for this report, or for the conclusions we have reached.

DIRECTORS’ RESPONSIBILITIES

The half-yearly report is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the half-yearly report in accordance with the AIM Rules.
As disclosed in note 2, the annual financial statements of the Group are prepared in accordance with IFRS. The condensed set of financial statements included in this half-yearly report has been prepared in accordance with IAS 34 Interim Financial Reporting.

OUR RESPONSIBILITY

Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly report based on our review.

SCOPE OF REVIEW

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the Auditing Practices Board. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

CONCLUSION

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly report for the six months ended 30 June 2008 is not prepared, in all material respects, in accordance with IAS 34 and the AIM Rules.

BALANCE SHEET

INCOME STATEMENT

STATEMENT OF CHANGES IN EQUITY FOR THE PERIOD ENDED 31 DECEMBER 2007

CASH FLOW STATEMENT

1 GENERAL

New Europe Property Investments PLC is a company on 23 July 2007. The Group includes the Company and its wholly owned subsidiaries as set out under “Basis of consolidation” in note 2.1 below.
The consolidated financial statements for the period from 23 July 2007 (date of incorporation) to 31 December 2007 are available upon request from the Company’s registered office at Falcon Cliff, Palace Road, Douglas, Isle of Man IM2 4LB, or at www.nepi.uk.com.

2 ACCOUNTING POLICIES

The condensed consolidated interim financial statements have been prepared in accordance with applicable Isle of Man law and International Financial Reporting Standards (IFRS) IAS 34 Interim Financial Reporting. The statements do not include all of the information required for full annual financial statements, and should be read in conjunction with the consolidated financial statements of the Group for the period from 23 July 2007 (date of incorporation) to 31 December 2007. Except as described below, the accounting policies applied by the Group in these condensed consolidated financial statements are the same as those applied by the Group in its consolidated financial statements of the Group for the period from 23 July 2007 (date of incorporation) to 31 December 2007.

2.1 BASIS OF CONSOLIDATION – JOINTLY CONTROLLED OPERATIONS

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

2.2 SEGMENTAL REPORTING

Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items comprise mainly investments (other than investment property) and related revenue, loans and borrowings and related expenses, corporate assets (primarily the Company’s headquarters) and head office expenses and income tax assets and liabilities. Segment capital expenditure is the total cost incurred during the period to acquire property, plant and equipment and intangible assets other than goodwill.

2.3 SHARE BASED PAYMENT

The fair value of share options granted to key individuals is recognised as an expense, with a corresponding increase in equity, over the period that the participants become unconditionally entitled to the shares. The amount recognised as an expense is adjusted to reflect the actual number of shares that vest. The fair value of share options is measured using a binomial lattice model. Measurement inputs include share price on measurement date, exercise price of the instrument, expected volatility (based on weighted average historic volatility of similar listed companies), expected life of the instrument (considered as vesting period), and the risk free interest rate (based on government bonds).

2.4 GOODWILL

Goodwill arises on acquisition of subsidiaries and joint ventures. Goodwill represents the amount paid in excess over the Group’s interest in the net fair value of the identifiable assets and liabilities of the acquired entity. When the excess is negative (negative goodwill) it is recognised directly in the income statement. Subsequent measurement Goodwill is measured at cost less accumulated impairment losses.

2.5 FINANCIAL INSTRUMENTS

The Group holds derivative financial instruments to hedge its interest rate risk exposures. Derivatives are designated at fair value through profit or loss upon initial recognition and are recognised initially at fair value; attributable transaction costs are charged to the income statement when incurred. Subsequent to initial recognition, changes in fair value are accounted for through the income statement.

3 INVESTMENT IN SUBSIDARIES AND JOINT VENTURES

The Company has an investment of €0.01 in New Europe Property (BVI) Limited, representing one share. The Company also has indirect holdings in the other companies listed in the table below.

The amounts owing by subsidiaries are unsecured and bear interest at rates agreed from time to time. Terms of repayment range between 11 months and 12 years.

4 FINANCIAL RISK MANAGEMENT

During the six months ended 30 June 2008 the Group implemented the following changes to its policies in respect of liquidity risk and interest rate risk.
The Group has capped its interest rate risk by purchasing a derivative financial instrument to cover a notional amount of €7.6 million related to a floating interest rate loan facility concluded with Alpha Bank. As of 30 June 2008 the fair value of the derivative financial instrument amounted to €128,568.

5 LOANS AND BORROWINGS

During the period, the Group contracted bank loan facility agreements with Nord LB Bank and Alpha Bank for an aggregate amount of €21,595,000. Of that amount, €5,041,133 is available for drawdown as at 30 June 2008. A loan from Eurohypo AG Bank for an amount of €15,000,000 has been taken over as a result of the acquisition of General Investment S.R.L. and General Building Management S.R.L.
The facility agreements concluded with Nord LB Bank and Alpha Bank bear interest at a fixed rate of 5.17% p.a. and a floating rate of Euribor1M + 1.9% p.a. respectively. The loan from Eurohypo AG Bank bears interest at a fixed rate of 6.22% p.a. In addition to the bank loans, the Group also obtained financing from the vendors of the German portfolio amounting to €846,836 for a period of five years. Of this amount €250,000 bears interest at a fixed interest rate of 6% p.a. while the balance does not attract interest.
The repayment profile of the group’s outstanding loans is as follows:

As a result of the loan contract concluded with Eurohypo AG Bank, first ranking security interests were created over the real estate properties of General Investment S.R.L. in favour of Eurohypo together with a prohibition to sell, encumber or lease the real estate properties, through mortgage agreements concluded for each individual property. In addition the following security agreements have been concluded in relation to the loan:

• Pledge agreement over the bank accounts of General Investment S.R.L.;
• General security agreement over the assets owned by General Investment S.R.L.;
• Assignment of rental receivable to Eurohypo AG Bank;
• Personal guarantee agreement between Eurohypo AG Bank (as lender) and the Company(as first guarantor).

The Alpha Bank loan has been secured as follows:

• Mortgage over the land and building located in Rasnov;
• Pledge agreement over the bank accounts of NEPI Bucharest Two S.R.L opened with AlphaBank;
• Real movable security over the shares of NEPI Bucharest Two S.R.L;
• Corporate guarantee issued by the Company

6 SHARE CAPITAL AND SHARE PREMIUM

* The issued share capital figure presented excludes shares issued in terms of the share based payment scheme set out in note 7. The ordinary shares carry the right to vote at general meetings, the right to dividends and the right to the surplus assets of the Group on a winding-up. The ordinary shares carry pre-emption rights as well as transfer rights as indicated in the Company’s Admission Document published at the time of admission to the AIM Market of the London Stock Exchange.

7 SHARE BASED PAYMENTS

On 6 June 2008 the Group implemented a share purchase plan that entitles key individuals to acquire shares in the Company.
The purpose of the scheme is to align the interests of directors and key individuals of the Investment Advisor with those of shareholders of the Company. This is achieved by the Company making loans available to allow shares to be purchased by participants in the scheme, the repayment of which can be made in part out of the dividends payable on the shares. 20 percent of the shares initially subscribed for by each participant vest annually.
The Company offers to each participant the immediate right to subscribe for the relevant number of shares at their then market value together with a loan to fund such subscription. Each loan carries interest at the weighted average rate at which the Company is able to borrow money from its bankers. Each loan is repayable in full together with interest in ten years after its relevant subscription date, but can be repaid earlier.
The Company’s recourse against each participant is limited to the shares issued in terms of the scheme.
The Company has security interests over the shares held in the scheme by each participant. The security interests secure the repayment of all principal and interest in respect of each loan made by the Company to each participant under the scheme.
Pending repayment of the loan in respect of the shares subscribed for by a participant, the dividends on such shares will be applied towards payment of interest on that loan. If the dividend amount on the shares exceeds the amount required for the interest payment then the excess will be paid to the participant otherwise the shortfall will be paid by the participant to the Company.
The Group has accounted for the scheme as a share option scheme.
1,355,000 shares were issued as part of the share based payments scheme, at a price of €2.18 each.
The Group accrued interest of €11,811 in respect of the loans granted to participants using the Group’s weighted average cost of debt capital. The accrued interest will be settled from dividend distributions.

The amount of €6,712 represents the pro-rata amount of the fair value of the options at grant date, in relation to the 24 days of the reporting period during which the share scheme shares were in issue.

8 INVESTMENT PROPERTY

Investment property is carried at fair value which is assessed on an annual basis. The majority of the properties (those held in General Investment S.R.L., General Building Management S.R.L. and the two German entities) were purchased close to the period end and the cost of these is deemed to be the fair value, with no requirement for an independent valuation so soon after purchase. The Group obtained independent valuations for purposes of the proposed JSE listing which indicated the value of investment properties to be approximately €90.6 million, compared to current book value of the properties of €87.5 million (including goodwill). However no fair value adjustment was made in accordance with the Group accounting policies to assess fair values on an annual basis. The current book value of assets under development includes two buildings under refurbishment in Constanta and Brasov, part of the portfolio held by General Investment S.R.L.
The Group’s investment properties at the end of the reporting period included office, retail and industrial properties and an immaterial amount of residential property in Germany.
A register of investment property is available for inspection at the registered office of the Company.

9 GOODWILL

The Group acquired two subsidiaries (General Investment S.R.L. and General Building Management S.R.L.) with effect from 1 January 2008. The total consideration paid in cash amounted to €28,243,565.
At the acquisition date, the investment property held by the two acquired companies was adjusted to reflect its fair value, which was determined as follows:

• capitalisation of net operating rental income generated by the rented space to Raiffeisen Bank SA (based on rents payable under the existing lease agreements) at a yield of 7.5%;
• capitalisation of net operating rental income generated by the rented space to other tenants (based on rents payable under the existing lease agreements) at a yield of 8%;
• capitalisation of 75% of the potential operating rental income generated by the vacant spaces (based on market rents) at an average yield of 8%.

The acquisition had the following effect on the Group’s assets:

10 TRADE AND OTHER RECEIVABLES

11 TRADE AND OTHER PAYABLES

The Group has a contingent liability of €1,567,742 in relation to the acquisition of the Rasnov property. The amount represents a portion of the initially agreed purchase price which will become payable once the vendor has completed refurbishment works as agreed in the sale and purchase agreement. The amount of the contingent liability may be higher, depending on the tenant profile of the vacant space as at December 2008.

12 CORPORATE TAX EXPENSES AND DEFERRED TAX

Group subsidiaries are subject to corporate tax on an annual basis. The Romanian subsidiaries carried forward aggregate prior year fiscal losses amounting to €695,000.
The German subsidiaries have not accrued any taxable profits since the commencement of business on 15 April 2008.

RECONCILIATION OF TAX RATE

13 EARNINGS PER SHARE

The calculation of basic earnings per share as at 30 June 2008 was based on the profit attributable to ordinary equity holders of €2,011,162 (2007: €275,746) and the weighted average number of 26,795,000 (2007: 14,686,514) ordinary shares in issue during the period (excluding the share scheme shares).
The calculation of diluted earnings per share as at 30 June 2008 was based on the profit attributable to ordinary equity holders of €2,011,162 (2007: €275,746) and the weighted average number of 26,974,669 (2007: 14,686,514) ordinary shares in issue during the period (including the share scheme shares).
The calculation of distributable earnings per share was based on earnings after tax adjusted as shown in the table below to arrive at the distributable earnings of €2,104,386 (2007: €332,513) and the number of shares in issue at 30 June 2008:

* 1,355,000 shares were issued as part of the share option scheme and are accounted for as treasury shares.

14 FINANCE EXPENSE

15 SEGMENT REPORTING

The Group operates only one business segment, which is the rental of commercial property. As the rental income derived during the period from rental of residential units accounts for less than 1% of total gross rental income, this does not represent a separate business segment.
On a primary basis, the Group operates in the following geographical areas of Europe: Romania and Germany.
The Group’s primary format for segment reporting is based on geographic segments. The above geographic areas represent separate geographic segments. From 15 April 2008, the Group commenced operations in a second geographic segment as a result of its joint acquisition of 6 properties in Germany. The Group’s segmental revenue and results for the period are presented below.

16 ACCOUNTING ESTIMATES AND JUDGEMENTS

The Company’s management, represented by the Investment Advisor, discusses with the Audi Committee the development, selection and disclosure of the Group’s critical accounting policies and estimates and the application of these policies and estimates.

17 RELATED PARTY TRANSACTIONS

Identity of related parties with whom material transactions have occurred
The subsidiaries and Directors are related parties. The subsidiaries of the Company are presented on page 14. The Directors are set out on page 3.
Material related party transactions
Loans to and investments in subsidiaries are set out in note 3.
Fees paid to directors during the period are set out in the table below.

* includes VAT of €1,829
** Mr. Slabbert does not receive a salary or directors’ fee from NEPI. Mr Slabbert has an indirect interest in 25% of the shares in the Investment Advisor and is further indirectly interested in up to €150,000 of annual preferred distributions made by the Investment Advisor.
Fees paid to the Investment Advisor amounted to € 300,618 for the period ended 30 June 2008.
Pursuant to the investment advisory agreement, the Investment Advisor is paid a monthly advisory fee of one percent per annum of the daily average market capitalisation of NEPI, in consideration for performing investment advisory services for the Group, whether itself or through sub-contractors. The Investment Advisor is also entitled to an annual performance fee from the Group of an amount equal to 20 percent of the declarable dividend arising from investment income in respect of the financial year under consideration to the extent that this exceeds an annual 10 percent return on the aggregate capital invested in the company as at the relevant date.