EAST BALKAN PROPERTIES plc

INTERIM REPORT

FOR THE SIX MONTH PERIOD ENDED 30 JUNE 2011

East Balkan Properties plc ("EBP" / "Company" / "Group"), formerly Equest Balkan Properties plc, an Isle of Man registered company for commercial property investments in the Balkan region, announces today its results for the period ended 30 June 2011.

Highlights for the Interim Period

Financial

·      Net Asset Value per share of € 0.39, an increase of 8% from € 0.36 per share at 31 December 2010 (30 June 2010: € 0.41)

·      Pre-tax gain of € 3.6 million (30 June 2010: pre-tax loss of € 2.9 million)

·      Total assets of € 91.5 million (31 December 2010: € 89.4 million)

·      Total liabilities of € 36.9 million (31 December 2010: € 38.3 million)

·      Group cash balance of € 2.6 million (31 December 2010: € 3.3 million)

·      Gearing ratio of 37.3% on total capital of € 87.0 million
       (31 December 2010: 38.3% gearing on € 82.7 million)

·      Net rental income of € 1.1 million (30 June 2010: € 2.3 million)

Strategic

·      Completed exit from controlling interest in marginal assets: Vitantis and Moldova Mall

·      Completed cost reduction program resulting in 54% year on year reduction in administration expenses

·      Completed group wide restructuring of management and service providers

·      Improved operational performance through leasing activity resulting in 83% occupancy at Equest Logistic Center and 92% occupancy achieved in office portfolio

Commenting on the interim results, James Ede-Golightly, non-executive chairman of EBP, said:

"The interim results largely reflect measures undertaken in 2010 to exit marginal assets and to reduce administrative costs. This has allowed East Balkan Properties to report its first interim profit since 2007. However, conditions in the region remain difficult and the group continues to experience net cash outflows.

The ongoing priority is to improve operational performance, to manage working capital, and to realise value from every company asset. Despite continued weakness in the underlying markets, the management and operational teams have made progress in the interim period, and I would like to thank them for their efforts and continuing support."

For further information please contact:    

IOMA Fund and Investment Management Ltd

Graham Smith

grahams@iomagroup.co.im

Tel: +44 1624 681 250

Michael Uhler

michael.uhler@ebp-plc.com

Tel: +49 172 183 3194

Arbuthnot Securities:

Nomad and Broker

Hugh Field

Tel: +44 20 7012 2000

Chairman's Statement

Introduction

The company's goal is to realise maximum value for shareholders from the property portfolio. Having exited control of marginal assets, reduced costs and restructured management, the current focus is on improving the operational performance of each asset while seeking opportunities to sell at acceptable valuations.

EBP's portfolio (excluding cash deposits and other working capital in the holding companies) as at 30 June 2011 can be summarised as follows:

At the operational level, we have signed numerous new leases for our office and logistic premises which should help further stabilise cash flows.  Despite these gains, we do not forecast that capital values have recovered.

Outlook

While some new lease activity is occurring, price sensitivity remains high and existing tenants remain under pressure, limiting the potential for rental growth. A small number of market transactions have been reported in the region in 2011, but access to financing remains constrained by global market conditions, limiting the scope for a recovery in transaction volumes and capital values.        

At EBP, the current leasing activity is expected to provide incremental support to revenues and recovery of property costs; however, the scope for further reductions in administration costs is now limited. Despite this improving financial performance, the group's working capital position remains constrained and group cash balances are expected to decline further in the absence of realisations.      

While capital values have been supported by new lease activity, a continued recovery in the value of the portfolio is not assumed given market conditions. The board and management continue to explore options for the realisation of portfolio assets at acceptable valuations; however, there is insufficient market visibility to commit to the timing or probability of disposals.

Glorient

Within the Glorient portfolio weak economic conditions have led to sustained pressure on tenants and financing discussions have been constrained by the lending restrictions in place in the region. Glorient benefits from many long leases, some of which expire in 2016, and a low level of mortgage leverage. Glorient would seek to offset any concessions granted to tenants with other lease amendments in order to protect the portfolio's value and improve access to finance.

Discussions with our majority partner in Glorient have progressed and resulted in an agreement to appoint Raiffeisen Investments Bulgaria to market the entire Glorient portfolio for sale. This process is at an early stage.  Additionally, we have obtained an agreement with our partner to re-evaluate a dividend policy once the existing bank financing obligations are met. The portfolio carries mortgage debt of € 19.4 million which is amortising rapidly and could be fully repaid from cashflows by late 2013. 

The Directors' valuation at 30 June 2011 is € 108.4 million. This compares to a valuation at 31 December 2010 by CBRE of € 107.5 million. As the Group owns 40% of the equity and shareholder debt, Glorient's NAV contribution to the Group's net assets (consisting of equity and loans) is € 37.5 million and we recognised € 2.0 million contribution to the income for the half-year through share of profits of associates and interest income. 

The table below shows the major tenants in the Glorient portfolio. Nearly all the lease contract were signed for an original 10 year term between 2005 and 2007. The table below shows the portfolio's key metrics as at 30 June 2011.

Despite low leverage, debt service consumes nearly all surplus cash flow due to a high amortisation schedule. Therefore, with limited working capital, distributions to shareholders from operational cash flows are not expected until the full debt repayment is satisfied.  Funding alternatives in the region remain limited.

Equest Logistics

In cooperation with Prime Property Advisers (an affiliate of Knight Frank), we are marketing for sale the logistic warehouses. This is a prime asset with stabilised occupancy and in a strong submarket so there is investor interest and we are reasonably confident that significant capital recovery can be achieved. Given current market conditions, we cannot estimate the timing of completion.

Tenant demand for logistic premises has been growing with lease commitments for 9 bays signed in 2011, bringing forecast warehouse occupancy to 83% by year end. The three largest tenants will account for 42% of the lease premises. Cash flow is also strong and this investment has consistently met all debt service obligations and financial covenant thresholds. 

At the Directors' asset valuation of € 27.2 million at 30 June 2011, Equest Logistic SRL contributes € 10.0 million to Group NAV.

Office Portfolio

At both the 2010 year end and for the current half-year, the value of the office portfolio is below the outstanding debt balance so the NAV contribution is negative, despite the debt being non-recourse to the rest of the group.

At the operational level, recent leases have raised occupancy to 92% and will allow for stepped rent growth over the next 3 years. The properties are now generating some surplus cashflow after debt service.

The portfolio is in loan-to-value covenant breach with its lender, resulting in restrictions on surplus cashflow. The current debt facility matures in September 2012 and we have requested a term extension and provided a business plan (see "Going concern" below).   

At the Directors' valuation of € 11.1 million at 30 June 2011, Domenii Imobiliare SRL and Cartex Construct SRL reduce Group NAV by € 3.0 million.

Shopping Malls - Romania

Our last disposal was the sale of a 51% interest in Vitantis and Moldova Mall which completed in December 2010.  This allowed us to maintain an interest in the assets at minimal cost to the Group. Due to the levels of debt in these investments, their equity contribution to Group NAV has been close to zero since the 2010 interim results, and the Directors continue to place limited value on them as at 30 June 2011.

Other Assets

The Group's remaining holdings consist of various land holdings and two small retail shops. These assets contribute € 9.0 million to Group NAV. All these assets are for sale though no credible offers have developed.

·      In Ploesti to the north west of Bucharest, a 39,200 square meter (sqm) site which is part of a larger assemblage, for which development plans have been suspended. Once valued at about € 154 per square meter, the site is currently being marketed for sale at € 70 per square meter.

·      Simanovci, a 310,900 sqm (76.8 acre) parcel surrounded by rural farmland located west of Belgrade, beyond the airport. Access and visibility are good, but this area has not developed as a logistics submarket.

·      Plot 34, a corner position retail site measuring 5,500 sqm with flat topography situated along a major arterial roadway in New Belgrade. The site is suitable for a small retail and office scheme and is being marketed for sale at € 1.6 million.

·      Eurosalon, a 33,700 sqm (8.3 acre) retail site in Zemun, a northern suburb of Belgrade, for big box retail use. 

·      Krusevac is 1,600 sqm of retail premises in a small retail building anchored by a supermarket. The store was leased to Technomarket Serbia and has been re-let to a discount store operator. 

We also hold a 36.8% interest in these Slovakian assets:

·      In Bratislava, a 26,700 sqm site adjacent to a Carrefour anchored shopping center which is suitable for up to 7,000 sqm of retail premises.

·      In Kosice, an 8,600 sqm outparcel contiguous to a Carrefour anchored shopping center which can be improved with a 3,630 sqm retail building. This corner location site has excellent visibility and Kosice is Slovakia's second largest city so we expect demand to return when the market recovers.

·      Krasovskaya Str is a 520 sqm retail store along a busy arterial route in Bratislava. The shop was leased to Technomarket which went bankrupt in Slovakia and is now vacant.

Financial Results

NAV is € 0.39 per share, up from € 0.36 per share at 31 December 2010. 

In the six months to 30 June 2011, the Company recorded a pre-tax profit of € 3.6 million, compared with a loss of € 2.9 million in the same period in the previous year. This result is attributable mainly to the Group's share of profit in Glorient and a small positive movement in investment valuations.  This gives rise to an earnings per share figure of € 0.03 compared with loss per share of € 0.02 in the same period in the previous year.

Costs & Liquidity

Cost cutting efforts have yielded their expected results and we now believe we are on track to hold central administrative expenses, including asset management fees, to under € 1.2 million per annum.

Excluding bad debts, administrative costs fell to € 0.6 million (first half 2010: € 1.6 million).  At this pace, we will achieve our budget estimates.  We continue to seek cost savings and have opened a Guernsey office to provide a physical location for management of the company.  Until we can sell assets and their related SPV's, further incremental savings are likely to be minimal.

At the asset level, we are pushing down operating costs and improving expense recoveries from our tenants.  While working capital balances are improving, much of the benefits are accruing to accounts blocked by our lenders.

While the Group posted a slight gain for the period, not all of the local companies are showing a profit, due in part to bad debts from tenants and downward pressure on rental income.

Financing

Liquidity has not yet returned to the region and our banks continue to struggle with their own problems.  While we have negotiated modifications and achieved significant restructurings, the lenders continue to press for capital events that will allow them to exit from the region.  Fortunately, we still have many months before refinance deadlines have to be confronted.

While the banking environment remains difficult, we can report significant progress in stabilising our debt obligations and we are meeting our interest and principal payment obligations.

Going Concern

The Group continues to adopt a going concern basis for the preparation of these financial statements.

The Directors believe the Group will be able to manage its business risks for the foreseeable future despite continued challenging economic conditions. After making enquiries and examining major areas which could give rise to significant financial exposures, the Board has a reasonable expectation that the Company and the Group have adequate resources to continue their operations. The Group has primarily mortgage debt facilities secured at the local company level and without any performance or payment guarantees from the Group. In the event of a financing default, each lender only has recourse to the local company assets and cannot seek recourse from the Company. In a distress situation, to limit the financial damage to the Group, underperforming assets could be released back to the appropriate lender, or sold for a nominal value, as was the case with Vitantis and Moldova Mall.

With respect to the Company's cash position, the Board has a reasonable expectation that sufficient liquidity will be available to meet ongoing expenses from a combination of existing cash reserves and cash flow from normal operations.

Financial Statements

Please refer to the accompanying financial statements and the Notes for the details on the financial position of the Group.

James Ede-Golightly

Non-executive Chairman

9 September 2011

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

CONSOLIDATED STATEMENT OF CASH FLOW

NOTES TO THE INTERIM REPORT

1.  General information

East Balkan Properties plc ("the Company") and its subsidiaries (together "the Group")are a property group with a portfolio of development property and investment property assets in South East Europe.

2.  Basis of preparation

This financial information has been prepared in accordance with the recognition and measurement criteria of International Financial Reporting Standards (IFRS) as adopted by the European Union and IFRIC Interpretations. The financial information has been prepared under the historical cost convention. The annual financial statements are prepared in accordance with IFRS as adopted by the European Union.

Except as described below, the accounting policies applied by the Group in these interim consolidated financial statements are the same as those applied by the Group in its consolidated financial statements as at and for the period ended 31 December 2010.

Critical accounting estimates and assumptions

The preparation of condensed consolidated interim financial statements in conformity with IFRSs requires management to make judgements, estimates and assumptions that affect the application of accounting policies and 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 for which form the basis of making the judgements about carrying values of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates.

The principal risks and uncertainties are consistent with those disclosed in preparation of the Group's annual financial statements for the year ended 31 December 2010.

The Group continues to adopt a going concern basis for the preparation of these financial statements and  the Board has a reasonable expectation that sufficient liquidity will be available to meet ongoing expenses from a combination of existing cash reserves, net sales proceeds arising from the disposal program, and cash flow from normal operations.

3. Earnings/(loss) per share

The basic loss per ordinary share is calculated by dividing the net earnings/(loss) attributable to the ordinary shareholders of the Company by the weighted average number of ordinary shares in issue during the year.

The Company has no dilutive potential ordinary shares; the diluted gain or loss per share is the same as the basic gain or loss per share.

4. Administration expenses

5. Property assets

Fair values of the Group's property assets at the half year are determined by the Directors. At 30 June 2011 and 30 June 2010 Directors' valuations were based on their best estimate of market value. At 31 December 2010 Directors' valuations were based on valuations prepared for each individual property asset by independent professionally qualified valuers CB Richard Ellis.

The carrying value and fair value of the Group's property assets in the balance sheet are summarised as follows:

At 30 June 2011 the Group holds two investments that are accounted for as associates: Glorient BG and IBN SRO. The investment in IBN SRO was provided against in full. The Group's share of net assets of Glorient at 30 June 2011 is € 26.5 million (31 December 2010: € 24.5 million) which represents 40% of Glorient.

At 30 June 2011, the Group also held € 12.6 million as loan receivables from associates, of which €10.9 million was from Glorient. These loans are unsecured.

6. Net assets value per share