Construction and real estate firm LSR Group reported a 99 percent fall in first-half net profit Thursday because of property revaluation amid an increasingly gloomy outlook for the real estate market.

Net profit, to international financial reporting standards, fell to $3 million from $209 million in January through June 2007, as the company recognized a noncash loss of $159 million arising from investment property revaluation.

LSR fell 85 cents to a record low of $4 per Global Depository Receipt in London trading. The shares have declined 72 percent this year.

The company said in a statement that the revaluation was mainly because of changes in the implementation schedule and the construction budget of a major St. Petersburg office project.

Chief financial officer Yelena Tumanova said during a conference call that the company had decided to commission the entire Electric City project at once when it is completed. It earlier planned to bring it into operation in four phases.

"Secondly, the term of the project delivery was postponed to 2011 from 2010, which will delay the start of revenue receipt," Tumanova said.

"Besides, the evaluator has cut its forecast for the project fillability for the first year by 25 percent," she said, adding that deterioration of the external financing environment was among the reasons behind a downward revision of forecasts for LSR's lease revenues.

Ratings agency Fitch warned this week that a general lack of funding could mean that selling property assets will become more difficult for Russian developers and could also be the catalyst for a more general fall in real estate prices.

Renaissance Capital on Thursday cut its target price for LSR to $9.5 from $18.2 but reiterated its "buy" rating on the stock, saying that with a stable cash-flow outlook LSR was well positioned to weather current market turbulence.

"Though longer term, we remain upbeat on real estate's prospects. We believe that restricted access to capital, higher cost of capital and an increase in risk premiums should eventually result in increased cap rates and a more conservative expectation of rental and sale prices," the bank said.

"Consequently, this should put downward pressure on underlying portfolio values."

Excluding the revaluation effect, net profit at LSR rose 96 percent to $124 million, and operating profit increased 89 percent to $205 million.

Reported earnings before interest, taxes, depreciation and amortization rose 83 percent to $243 million, while revenue jumped 53 percent to $940 million.

LSR's gross cash flow rose 77 percent to $243 million. Net cash outflows were $50 million in the first six months of 2008.

The company said its net financing costs increased by 41 percent to $38 million in the first half of 2008 as it borrowed more to finance its investment program.

LSR, majority owned by Andrei Molchanov, raised $772 million in an IPO in November, which valued the company at around $6.8 billion.

Its core business areas are building materials, construction and real estate development, mainly in St. Petersburg as well as in Moscow and Yekaterinburg.

Reuters, Bloomberg