ARCO VARA AS - NASDAQ OMX Baltic

Currency exchange risks
During the financial year ended 31 December 2006, seven per cent of the Group’s revenues were
generated in Latvian lats. During the same period, 1.1 per cent of the Group’s revenues were generated
in Ukrainian hryvnia, and 0.05 per cent in Bulgarian levs. In addition, the dividends received from the
Group’s subsidiaries, affiliates and joint ventures are paid in the currencies of the country of
incorporation of these companies. Fluctuations in foreign exchange rates can have a significant impact
on the valuation gain accounted for in the income statement year by year. In order to hedge the
currency risk of the Group companies, the majority of transactions and contracts are in euros or
currencies pegged to the euro. Thus the main currency risk for the Group is that the rate at which these
currencies are pegged to the euro changes or that any of these currencies ceases to be pegged to the
euro. However, the Group is not engaged in exchange rate hedging activities, and thus is exposed to
currency exchange risk. See “Management Discussion and Analysis of the Group’s Financial
Condition and Results of Operations – Factors Affecting Results of Operations – Exchange Rates.”
RISKS RELATING TO THE GROUP’S INDUSTRY
Economic cycles
The property development and construction businesses are cyclical in nature and their profitability
tends to fluctuate due to changes in the property markets, general economic conditions, rental yields,
interest rates and level of fixed capital investment. Rental levels and the market value of properties are
generally affected by overall conditions in the economy, such as growth and absolute levels of GDP,
employment trends, inflation and changes in the interest rates. Revenues from property development
and construction may be adversely affected if economic development slows down or one or more
countries in which the Group or the Joint Ventures operate enters into recession or property prices
decrease or cease to increase. Furthermore, a downturn in general economic conditions in one or more
of the countries in which the Group chooses to invest may have a negative impact on the demand for
its development projects, which in turn could lead to the Group experiencing a loss on such projects or
needing to find an alternative use for its development sites. No assurance can be made that the Group’s
business may not be materially and adversely affected if the economy in Estonia, Latvia, Lithuania,
Ukraine, Bulgaria or in any other country in which the Group chooses to invest slows down or the
property values or housing prices go in decline.
Competition
The Group operates in a highly competitive business environment. The participants in the Central and
Eastern European real estate development and construction industry experience intense competition
from a number of local, national and international real estate development firms, real estate investment
funds, commercial real estate management companies, construction companies, individual investors
and sellers. The barriers to entry are usually low, which gives a competitive advantage to those
companies with better access to financing and expertise on the market conditions.
Competition in the real estate development market may lead to an oversupply of residential or
commercial real estate through over-development and a resulting decline in the value or average sale
price of the properties of the Group or Joint Ventures. Competition may also lead to a significant
increase in prices of land available for development or commercial real estate available for sale,
impeding the acquisition of new assets, any of which could have a material adverse effect on the
Group’s business, results of operations and financial condition.
The construction industry is subject to intense price competition. While quality of design and
workmanship, technological expertise, past performance, health and safety records and quality of
personnel, as well as reputation and experience do impact the customer decisions, price ultimately
remains the decisive factor. Although the Group’s Estonian construction subsidiaries have been issued
ISO qualifications for certain construction management aspects and the Group seeks to maintain its
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