ARCO VARA AS - NASDAQ OMX Baltic

costs, construction quality and timing issues as opposed to exclusively relying on contracting external
builders. Management believes this enables Arco Vara to offer a compelling value proposition without
sacrificing the profit margins of its development activities.
Arco Vara aims to be an efficient developer and does not intend to build a portfolio of commercial
properties. Its strategy in commercial property development is focused solely on development, and the
Group usually engages in close-ended commercial development projects that either have a visible exit
strategy or have already been pre-sold. Management plans to keep the cash flow generating properties
of the Group and the Joint Ventures for their future development potential.
The Group’s current Baltic development portfolio consists of development projects in Estonia and
Latvia. Arco Vara and the Joint Ventures have secured a number of sites for development in recent
years, including 7 cash flow generating projects and 14 projects currently under development or
expected to reach their construction phase between 2007 and 2009. Management estimates that these
14 development projects will require investment of approximately EEK 8,135 million, and believes
that the successful completion of these projects will form the platform for the Arco Vara’s growth in
the short to medium term.
Arco Vara expects to focus on fewer large-scale developments by selling some of its smaller sites. In
2007, the Group expects to sell such residual properties for an aggregate consolidated amount of
approximately EEK 200 million. Such properties are currently classified under property investment or
inventories. In addition, the Group expects to continue looking for opportunities for property
development in Lithuania, where thus far it has not been active.
Ukraine, Romania and Bulgaria
Arco Vara believes that new markets in the Ukraine, Romania and Bulgaria present attractive
development opportunities and yields, both in the residential and commercial property segments.
The Group expects these countries to experience robust growth in property development similar to that
of the Baltic countries with the emergence of favourable mortgage loans and the accession to
European Union. The Group’s development strategy will focus only on capital cities, where
purchasing power tends to be higher than in the regional centres. Unlike in the Baltic countries, the
Group will initially only consider projects which already have received building and other permits for
development. While this conservative approach may imply lower profit margins, it also lowers the
risks associated with bureaucracy such as a failure to obtain zoning and building permits.
Similar to its approach in the Baltic region, the Group’s long-term goal is to focus on large-scale
residential development, which it considers its core competence. However, particularly in the initial
stage, it will also consider opportunities for commercial property development for leisure, office and
retail use. On 27 April 2007, Arco Vara acquired rights to what it expects to be the Group’s first
residential development project in Sofia, Bulgaria – see “Management’s Discussion and Analysis of
the Group’s Financial Condition and Results of Operations – Recent Developments”. In addition, the
Group is currently considering several other potential development projects in the capital cities of its
new markets and may initiate a number of them during 2007.
Construction services
The Group considers its own construction capacity vital for continual business development and a key
factor to success given the Group’s focus on large-scale development projects. Arco Vara’s
construction activity currently focuses on project management and engineering. However, the Group
aims to expand its construction services business vertically by hiring construction employees or
acquiring smaller construction companies, with a focus on Estonia and Latvia. The Group has no plans
to expand its construction operations into Lithuania, Ukraine, Bulgaria or Romania as Management
does not consider launching construction activities necessary to compete in those markets.
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