Half-yearly Report

CLS Holdings plc ("CLS", the "Company", or the "Group") Interim Report 2007 For the six month period ended 30 June 2007 FINANCIAL HIGHLIGHTS * Adjusted NAV per share* of 868.6 pence, up 5.4 per cent (Statutory NAV per share of 695.4 pence, up 12.7 per cent) from December 2006. * Operating profit (excluding gains on investment properties) £22.8 million, down 10.9 per cent. * Profit before tax (including gains on investment properties) £31.9 million, down 43.8 per cent. * Intended distribution for the interim period to 30 June 2007 of £9.3 million by way of tender offer buy-back on the basis of 2 for 91 at 600 pence per share, representing a distribution of 13.2 pence per share. * Property portfolio (including share of JVs) valued at £1.2 billion, up 5.2 per cent from 31 December 2006. * Net rental income £32.4 million, down 2.4 per cent, largely due to the successful sale of the Solna portfolio. * Annualised added value to shareholders 15.2 per cent based on increase in adjusted NAV per share and distributions in the year (31.2 per cent added value based on statutory NAV). * Cash and cash equivalents £100.8 million. Results at a glance The following results and ratios show various key data with respect to the results to June 2007: 30-Jun-07 30-Jun-06 Up / £m £m (Down) INCOME STATEMENT Net Rental Income 32.4 33.2 (2.4%) Other operating income and associate 2.8 1.7 64.7% company results Gains on sale of investment properties 0.1 0.1 0.0% Overhead and Property Expenses (12.5) (9.4) 33.0% Operating profit (excluding gains/losses 22.8 25.6 (10.8%) on investment properties) Net Finance cost (19.0) (17.9) 6.1% Change in fair value of interest rate swap 4.6 - - Underlying profit (excluding gains on 8.4 7.7 9.1% investment properties) Fair value gains on investment properties 23.5 52.0 (54.9%) Non-recurring finance costs - (2.9) (100.0%) Profit before tax 31.9 56.8 (43.8%) Tax - current (1.3) (0.6) 116.7% Tax - deferred 27.6 (18.7) - Discontinued operations - (2.5) (100.0%) Profit for the period 58.2 35.0 66.3% Adjusted earnings per share* (on 9.8 p 9.0 p 8.9% continuing operations) Earnings per share * 80.6 p 43.9 p 83.6% Operating Interest Cover * 1.3 times 1.5 times BALANCE SHEET 30-Jun-07 31-Dec-06 Up / £m £m (Down) Property portfolio 1,202.4 1,143.5 5.2% Borrowings (715.9) (683.8) 4.7% Cash 100.8 157.6 (36.0%) Other (96.3) (169.2) (22.0%) Net asset value 491.0 448.1 9.6% Share Capital 19.6 20.0 (2.0%) Reserves 471.4 428.1 10.1% Shareholders' funds 491.0 448.1 9.6% Adjusted NAV per share * 868.6 p 824.4 p 5.4% Statutory NAV per share * 695.4 p 617.3 p 12.7% Distribution per share from tender offer 13.2 p 69.9 p (81.1%) buy-backs Adjusted gearing * 101.2% 88.9% 12.3% Statutory gearing * 126.4% 118.7% 7.7% Adjusted solidity * 43.8% 44.3% (0.5%) Statutory solidity * 35.0% 33.1% 1.9% Shares in issue (000's) - excluding 70,602 72,605 (2.8%) treasury shares IAS 32 fair value adjustment after tax * (17.7) p (21.6) p (18.1%) Adjusted Net Assets * £613.3 m £598.6 m 2.4% Statutory Net Assets £491.0 m £448.1 m 9.6% * See glossary of terms BUSINESS HIGHLIGHTS Six months to 30 June 2007 PROPERTY ACQUISITIONS * Acquisition of Hans Bockler Strasse in Bochum comprising 25,115 sq m (270,460 sq ft) of office space and retail space, together with 643 car parking spaces. The purchase price including costs was £12.3 million and at the time of acquisition 39 per cent of the building was let to the City of Bochum and 42 per cent of space was vacant. The initial yield was 6.0 per cent. * Acquisition of office property, 6 rue Van Gogh, Paris for £3.5 million at an initial yield of 7.6 per cent. * Acquisition of office property known as Fangdieckstrasse 75-75B Lurup, Hamburg for £11.0 million. The initial yield was 7.3 per cent. CORPORATE PROPERTY INVESTMENTS * Increase in stake in Bulgarian Land Development plc from 17.0 per cent to 28.7 per cent acquired for £7.2 million. * Acquisition of 27.7 per cent of the share capital of Catena AB at a cost of £26.6 million. Catena is a listed Swedish commercial real estate company owning 30 properties throughout Sweden, Denmark and Norway, whose main tenant is Bilia, the leading Nordic car sales and service company. Since 30 June CLS has acquired further shares and now holds 29.1 per cent of the share capital of Catena AB. Chairman's Statement Introduction The Group has consolidated its strong financial position during the first half of the year and, through active management, the portfolio has yielded further growth which is reflected in an increase in our adjusted net assets per share, showing an increase of 5.4 per cent to 868.6 pence per share (statutory NAV per share of 695.4 pence, up 12.7 per cent). Since reporting the year end results, I am pleased to be able to tell you that the Group has made solid progress in its core business: * We have made three direct property acquisitions at a cost of £26.8 million, one in France and two in Germany. * We have acquired a 29.1 per cent stake in the Swedish listed real estate company, Catena AB and increased our investment in the AIM listed Bulgarian Land Development plc to 28.7 per cent of the equity and now hold two seats on its Board. * We have reduced vacant space particularly in the UK portfolio through a new letting to British Sky Broadcasting at Great West House in August 2007. * We have completed the final infill at Spring Gardens, Vauxhall which has contributed to a further increase in value to the property of £6.8 million and, in early September, enabled a cash release of £36.8 million through refinancing. * On 8 September we sold the majority of our portfolio of unlisted UK equity investments which has released further cash of £7.0 million. Our long-term core business objective of controlled growth is coupled with an adherence to strict investment criteria. We have therefore refrained from chasing yield compression through the purchase of increasingly expensive office buildings in our traditional European markets. This has prompted us to investigate new opportunities to find potential added value in new markets and products and we will continue to look for new opportunities that fit our investment criteria. The market A change in market sentiment emerged during the latter part of the first half of 2007, particularly in the UK, as interest rates increased and some institutions reallocated the weighting of their portfolios away from real estate. This less optimistic outlook may continue for some time due to the recent concerns in the global finance market triggered by the falls in US residential prices and defaults in US sub-prime mortgage lending. However the very conditions that have caused this period of volatility and uncertainty in the lending and investment environment are at the same time likely to provide us with new investment opportunities. Notwithstanding the concerns of the financial market, the underlying fundamentals driving demand for office space have remained strong and look set to continue. Asset security is paramount CLS is well placed to withstand this more testing environment for the following reasons: * We have secure and substantially long-term revenue streams amounting to £69 million p.a, of which one third is let to government bodies. * The general underlying financial strength of our commercial tenant base is healthy. * We continue to maintain a relatively low vacancy rate which at 30 June 2007 was 6.5 per cent. * At 30 June 2007 cash at bank was in excess of £100 million. Since then we have secured a further £36.8 million through the refinancing of Spring Gardens, Vauxhall. * Substantially all of our properties, including joint ventures, are held individually, each within a separate corporate structure, financed by a non-recourse loan. * Loans maturing within the next 12 months amount to only £29.9 million, 4.2 per cent of the loan portfolio. * All of our floating rate net debt is capped, at an average rate of 4.9 per cent. * The Company's management has long experience of operating within various property cycles. Returns The annualised added value to shareholders was 15.2 per cent (30 June 2006: 27.7 per cent) based on the aggregation of the May 2007 distribution to shareholders and the increase in the adjusted net assets of the Group. In line with other listed property companies, our shares have fallen approximately 31.3 per cent from their 2007 high and our shares are currently trading at a discount to adjusted NAV per share of 38.5 per cent, based on a share price of 535 pence. The increased discount is due to institutional re-rating of property stocks and a fall in global stock markets over recent months. This is something over which we have little control; our concern is to build long-term added value within a secure European portfolio. Assuming our tender offer buy-back distribution proposal is accepted this November, we will have distributed £22.6 million to shareholders. Adjusting for the special element of last year's distribution, this will show an increased distribution of 20.7 per cent compared to an average annual increase in distributions over the previous 5 years of 11.1 per cent. Environmental initiatives We are fully committed to the provision of environmentally safe and energy efficient buildings. The Shard, for instance, is designed to incorporate a host of environmental and energy saving features including a cooling radiator, an externally ventilated cladding system and combined heat and power boilers that comply with latest sustainability proposals. Our award winning development at Solna, Stockholm, which was completed just prior to being sold last year, incorporated geothermal heating and cooling systems for one of the principal buildings, cutting its heating and cooling costs by 30 per cent. We were also accredited the Swedish P-Mark environmental building specification for the working environment, in particular fresh air circulation and quality, sound proofing and illumination. We are hoping to utilise a low energy screen at One Leicester Square to promote public awareness of environmental issues and have applied to Westminster Council for the appropriate permission. The London Bridge Quarter Project We have continued to work with our partners to progress the London Bridge Quarter project which encompasses The Shard and New London Bridge House. Operational progress has proceeded according to programme and we are ready to commence demolition works at The Shard. Negotiations in respect of the funding for the project are at an advanced stage but have, unfortunately, been affected by the recent adverse credit markets. It is hoped that the funding can be finalised in the near future in conjunction with a restructuring of the shareholding structure. We will not commence any major development works until the loan finance has been secured. As at 30 June 2007, the adjusted net asset value of £613.3 million included £ 59.0 million in respect of The Shard and New London Bridge House, equating to 83.6 pence or 9.6 per cent of overall adjusted NAV per share of 868.6 pence. The charge to Finance expense for the six months included £2.3 million representing our one third share of interest expense charged to the project. We have to date invested cash of £10.5 million into the project from our own resources and have not entered into any guarantees relating to London Bridge Quarter. The future We have a secure income stream generated by a diverse well located portfolio. We will continue to improve the quality of our portfolio through creative management, working in close co-operation with our tenants. It is our aim to continue to reduce the vacant space within the portfolio, particularly at the newly refurbished Great West House in the UK and at Bochum in Germany. A number of properties, particularly in the UK, lend themselves to redevelopment and we are progressing plans in accordance with a scheduled development portfolio programme which is expected to add value over the coming years. We will continue to selectively acquire assets in our main European markets and to look for new investment opportunities both in terms of product and location. The current uncertainty in the market is likely to yield profitable opportunities and we are well placed to take swift advantage of them as and when they arise. The Board In May 2007 Malcolm Cooper joined the Board as a non-executive director. Malcolm is Group Tax and Treasury director of National Grid plc. I would like to give my warm thanks to Keith Harris who retired from the Board of CLS in May after 13 years of service. Keith has been a great support since CLS was floated in 1994 and I am very grateful to him for all that he has done during that time. I am also pleased to announce that the Board was further strengthened by the appointment of Anders Böös as a non-executive director on 13 September 2007. Anders is well known and highly regarded within the Scandinavian business community and also has extensive commercial experience within the UK. He is the Chairman of Cision AB and IFS AB, both of whom have large UK operations. Financial Income Statement Profit before taxation for the six months amounted to £31.9 million, including fair value gains on investment properties of £23.5 million. It can be seen from the summarised geographical income statement set out below that there was a reduction in profit before taxation of £24.9 million, this being because it is compared to the exceptionally high result of £56.8 million for the previous period. This was largely influenced by a reduced gain from increases in the fair value of properties compared to the previous period, which were £28.5 million lower at June 2007 compared with June 2006, compensated for in part by a fair value gain on an interest rate swap of £4.6 million, the net of which showed a period on period reduction of £23.9 million. Fair value adjustments in respect of property within the income statement have brought a degree of volatility to our reported results together with net interest charges, derivatives and deferred taxation. In addition, the method of calculation for the estimate of deferred tax has been revised to include the effect of indexation allowance available if a property in the UK was to be sold, which has resulted in a credit to the income statement in the period of £ 35.7 million. The impact of these adjustments and other significant movements compared to the previous period is explained in the notes set out below: June UK France* Germany Sweden Equity June 2007 Invest. 2006 £m £m £m £m £m £m £m Net rental income 32.4 15.0 10.9 4.5 2.0 - 33.2 Other income 3.0 0.3 0.1 - 0.2 2.4 2.1 Net rental and other income 35.4 15.3 11.0 4.5 2.2 2.4 35.3 Fair value gains on 23.5 2.0 12.8 7.3 1.4 - 52.0 investment property Gain from sale of investment - - - - - - 0.1 properties Gain from sale of 0.1 - - - 0.1 - - subsidiaries Operating expenses (12.5) (5.7) (1.5) (1.1) (0.6) (3.6) (9.4) Operating profit 46.5 11.6 22.3 10.7 3.1 (1.2) 78.0 Share of associates' losses (0.2) - - - - (0.2) (0.3) Net interest payable and (14.4) (6.7) (3.4) (3.0) (0.9) (0.4) (17.9) related charges Non-recurring interest charge - - - - - - (3.0) Profit/(loss) on ordinary 31.9 4.9 18.9 7.7 2.2 (1.8) 56.8 activities before tax Taxation - current (1.3) - (0.9) - (0.2) (0.2) (0.6) Taxation - deferred 27.6 32.1 (6.0) (2.9) (0.6) - (18.7) Discontinued operations - - - - - - (2.5) Retained profit/(loss) 58.2 42.0 12.0 4.8 1.4 (2.0) 35.0 * Includes the results of Luxembourg Balance sheet Total UK France Germany Sweden Equity Invest. June 2007 £m % £m % £m % £m % £m % £m % Investment 1,202.4 100 652.4 54.2 334.2 27.8 165.8 13.8 50.0 4.2 - - Properties Loans* (694.7) 100 (364.9) 52.5 (196.8) 28.3 (94.9) 13.7 (28.8) 4.2 (9.3) 13 Equity in 507.7 100 287.5 56.6 137.4 27.1 70.9 14.0 21.2 4.2 (9.3) (1.9) Property Assets Other 105.6 100 20.1 19.0 16.2 15.3 (8.9) (8.4) 21.9 20.7 56.3 53.3 Net 613.3 100 307.6 50.2 153.6 25.0 62.0 10.1 43.1 7.0 47.0 7.7 Adjusted Equity Equity in 42.2% 44.1% 41.1% 42.8% 42.4% - Property as a percentage of Investment *A loan amounting to £21.2m in respect of the purchase of shares in Catena AB was excluded from property loans and included within Other, where the investment to which the loan relates is classified. Net rental income Net rental income of £32.4 million decreased by £0.8 million compared to the six months ended 30 June 2006. The reduction reflected a loss of £6.2 million in rent due to the sale of two of our three Swedish properties during 2006. Our Solna property was sold in August 2006 with Lövgärdet having been sold in January 2006. During 2006 we steadily built a portfolio of German office properties which contributed net rental income of £4.5 million in the period to 30 June 2007, an increase of £3.4 million. Rental income from the UK portfolio increased by £0.7 million, mainly resulting from further lettings at One Leicester Square and Chancel House. The French portfolio generated additional income of £0.5 million, principally as a result of indexation. Other income Other income of £3.0 million (30 June 2006: £2.1 million) included a £3.2 million contribution from Lunarworks, the Swedish youth community web site operator (30 June 2006: £1.1 million) whose results were fully consolidated from May 2006. This was offset by provisions of £0.8 million in respect of unlisted investments, principally Tenison, a software company, which has since been sold. Also included in other income was insurance commission of £0.2 million and lease surrender, dilapidations and retail income of £0.2 million, and other charges of £0.3 million. Operating expenses, as set out in the summary table above, comprise administrative expenditure and net property expenses. Administrative expenditure Administrative expenditure amounted to £11.2 million (30 June 2006: £7.8 million), an increase in reported expenditure of £3.4 million. Of this increase, £1.6 million was due to the inclusion of the operating costs for Lunarworks for a full 6 months in 2007 whereas it was fully consolidated for two months of the previous period. In addition, there was a write off of capitalised fees relating to the London Bridge Quarter joint venture of £1.3 million and an increase of £0.5 million in respect of professional fees incurred principally relating to our interest in the investment. Net property expenses Net property expenses amounted to £1.3 million in the six months (30 June 2006: £1.6 million). The main elements of expenditure were UK void rates costs of £ 0.2 million, marketing, letting and legal fees of £0.3 million, depreciation of equipment of £0.1 million, irrecoverable property management costs of £0.3 million and other recoverable costs of £0.2 million. Gains from sale of investment property The small gain of £0.1 million (30 June 2006: £0.1 million) related to the partial release of provisions in respect of the sales of our properties in Solna, Stockholm, and Le Foch and Paul Doumer in Paris, in 2006. Finance Income Interest income of £1.7 million (30 June 2006: £1.3 million) reflected the higher average cash balance held (approximately £129 million), which was largely due to the receipt of net cash proceeds from the sale of Solna. The average cash balance held for the same period in 2006 was approximately £103 million. The weakening of the Swedish Krona against sterling was the principal cause of an adverse foreign exchange movement of £0.9 million in relation to monetary assets held in Swedish Kronor. The euro rate had not changed significantly since the year end. Finance Expense Interest payable of £16.1 million (30 June 2006: £19.2 million) comprised the following: 2007 2006 £m £m Loans and bank interest 19.3 18.5 Joint venture loan interest 2.3 0.7 Amortisation of the issue cost of 0.8 0.5 loans Change in fair value of interest (1.0) (0.5) rate caps Profit on disposal of Spring (0.7) - Gardens swap Change in fair value of swaps (4.6) - 16.1 19.2 The increase in joint venture interest reflected the interim refinancing of the London Bridge Quarter project in September 2006 to fund the occupation of and development preparation at Southwark Towers and New London Bridge House. The gain in the fair value of interest rate caps relating to floating rate debt amounted to £1.0 million and resulted from the increase in interest rates during the period. In April the company entered into a 20 year interest rate swap at 4.64 per cent covering a notional loan value of £106 million. Due to the increase in interest rates over the period to June 2007, the fair value of the swap, which had no intrinsic value at inception, had increased to £4.6 million at 30 June 2007. The counterparty may cancel the swap after five years. Variations in fair value will continue to be charged to the income statement during the life of the swap. The fair value will vary according to its remaining life and changes in interest rates relative to the swap rate. On expiry or cancellation the value will revert to zero. At the period end, gross floating rate loans totalled £358.9 million, 50.1 per cent of the total loan book. The impact of the interest rate swap effectively changed the fixed/floating ratio to 60:40 on 10 July 2007 when it became effective. All floating rate debt was hedged by interest rate caps at an average cap rate of 5.6 per cent for Sterling, 4.5 per cent for Swedish Kronor and 4.7 per cent for Euro (excluding bank margin). The average life of interest rate caps was 3.4 years. The average cost of borrowing, inclusive of the cost of fixed rate borrowings, interest rate caps and amortisation of arrangement fees, was 7.6 per cent on the UK debt, 5.4 per cent for Sweden, 4.6 per cent for France and 5.0 per cent for Germany. Adjusted gearing increased from 88.9 per cent to 101.2 per cent. Taxation The Group's current taxation charge continues to benefit from the utilisation of losses and from significant capital allowances and amortisation deductions. The method of calculation for the estimate of deferred tax has been revised to include the effect of indexation allowance available if a property in the UK was to be sold. The change in estimate has resulted in a credit to the income statement in the period of £35.7 million. In total there is an IAS 12 deferred tax credit of £27.6 million for this period (30 June 2006: charge £18.7 million). In practice, as a result of its corporate structure, the Group is unlikely to suffer the potential liability in full even if all of its properties were to be sold. For overseas properties, we plan to make corporate disposals, as opposed to property disposals, which would result in smaller tax liabilities than those calculated under IAS12. On a disposal, the Group intends to make the election available to ensure that there is no claw-back of capital allowances previously claimed in respect of UK properties. At 30 June 2007 the deferred tax liability, taking into account the election in respect of capital allowances, would be £15.1 million (30 June 2006: £15.9 million) less than the provision calculated under IAS 12. A reduction in the main rate of UK corporation tax from 30% to 28% which will be effective from 1 April 2008 was included in the Finance Act 2007 that was enacted in July. This 2% fall in UK tax rates has resulted in a reduction in deferred tax assets and liabilities at 30 June 2007. The Income Statement credit of £27.6 million for the UK for the period to 30 June 2007 incorporates £5.4 million due to the effect of the change of tax rate on the opening balance. Buy-backs and dividends The current share price is at a discount of 37.4 per cent to adjusted net asset value per share and we consider it appropriate to continue to distribute by way of tender offer buy-back. We therefore propose a tender offer buy-back of shares on the basis of 600 pence per share for 2 in 91 shares held. This will enhance net asset value per share and is equivalent in cash terms to an interim net dividend of 13.2 pence per share. Share capital No. of shares No. of shares Million Million 2007 (six months) 2006 (full year) Opening shares for NAV purposes 72.6 80.1 Tender offer buy-back (1.8) (7.4) Buy-backs in the market for (0.2) (0.3) cancellation Shares issued for exercise of options - 0.2 Closing shares for NAV purposes 70.6 72.6 Shares held in Treasury by the 7.7 7.5 Company Closing shares in issue 78.3 80.1 Options to purchase 405,000 shares were held by directors at 30 June 2007. At 31 December 2006 there were 80,081,836 ordinary shares in issue, of which 7,477,168 were held within the Company as Treasury shares. The number of shares at that date, used as a base for the purpose of calculating NAV or Earnings per share and participating in the subsequent tender offer buy-backs, was 72,604,668 as Treasury shares are excluded from such calculations. Since the year end, the Company has completed the 2006 year end tender offer buy-back of 1,770,565 shares which were cancelled (a distribution of £13.3 million) and re-purchased 262,367 shares in the market at a cost of £1.7 million. All of the shares purchased in the market were transferred to Treasury. Further to the exercise of share options, 30,000 shares were issued from Treasury. The number of shares in issue at 30 June 2007 (excluding 7,709,535 shares held as Treasury shares) was 70,601,736. Total shares in issue at 30 June 2007, including Treasury shares, were 78,311,271. Since 30 June a further 60,000 shares were purchased in the market at a cost of £0.3m. If the current tender offer proposal to buy back 1,550,367 shares is accepted, ordinary shares in issue for the purposes of NAV and Earnings per share will have been reduced by a further 2.3 per cent to 68,991,369 shares, an overall reduction during 2007 of 3,613,299 shares (including market purchases of 322,367 shares), equivalent to 5.0 per cent of opening shares. Investment Property The value of our portfolio is now £1,202.4 million and has increased by a net £ 58.9 million (5.2 per cent) since 31 December 2006. The analysis of the net increase is shown below: Group UK France Germany Sweden £m £m £m £m £m Opening assets 1,143.5 640.4 318.3 135.1 49.7 Purchases 26.8 - 3.5 23.3 - Redevelopment 10.5 10.0 0.1 0.4 - Revaluation 23.5 2.0 12.8 7.3 1.4 Foreign exchange (1.9) - (0.5) (0.3) (1.1) Closing assets 1,202.4 652.4 334.2 165.8 50.0 Three new properties were purchased in the period at a total cost of £26.8 million. A 25,115 sq m office property in Bochum was purchased at a cost of £ 12.3 million in the first quarter 2007, followed by a second quarter purchase of a 12,698 sq m office building in Hamburg, known as Fangdieckstrasse at a cost of £11.0 million. The majority of redevelopment costs were incurred in the UK in respect of Spring Gardens and the London Bridge Quarter, for which one third of expenditure in the joint venture was consolidated into the results of the Group. Cash Cash at bank amounted to £100.8 million at 30 June 2007 compared to £157.6 million at 31 December 2006, a reduction of £56.8 million, the reasons for which were as follows: 2007 2006 Cash in £m £m From operations 6.3 23.5 Receipts of property and investment - 14.0 sales New loans raised - direct property 33.9 91.6 New loans raised - indirect property 21.2 - 61.4 129.1 Cash out Net interest payments 18.3 17.6 Scheduled loan repayments 23.3 42.4 Purchase of own shares 15.0 13.7 Payments for property and investment 13.9 55.8 purchases Refurbishment costs 9.8 16.9 Indirect property investments and 37.9 6.7 other (118.2) (153.1) Movement in cash (56.8) (24.0) Debt Structure Net debt amounted to £615.1 million (31 December 2006: £526.2 million) comprising: £m Fixed rate debt 357.0 Floating rate debt 358.9 715.9 Cash 100.8 Net debt 615.1 The gross interest-bearing debt of the Group at 30 June 2007 was £715.9 million (31 December 2006: £683.8 million). The debt maturity is set out below: £m Under 1 year 29.9 Over 1 year less than 5 years 356.2 Over 5 years 335.0 Arrangement fees (5.2) Total 715.9 New loan finance raised amounted to £55.1 million and included re-financing in the UK of £25.9 million and financing of an acquisition in France of £8.0 million, which raised an additional £33.9 million. New funds raised also included £21.2 million relating to the purchase of shares in Catena AB. Scheduled loan repayments amounted to £23.3 million. The fair value of the Group's fixed rate debt was in excess of book value by an amount of £17.3 million (31 December 2006: £22.4 million). If we were to hold loans at fair value, the notional after tax adjustment to NAV, at a corporation tax rate of 28 per cent (31 December 2006: 30 per cent) would be £12.5 million or 17.7 pence per share (31 December 2006: £15.7 million or 21.6 pence per share). Gearing adjusted for IAS 12 deferred tax, at 30 June 2007 was 101.2 per cent (31 December 2006: 88.9 per cent), statutory gearing was 126.4 per cent (31 December 2006: 118.7 per cent). Non interest-bearing debt at 30 June 2007, represented by short-term creditors, amounted to £72.1 million (31 December 2006: £66.1 million). Effect of foreign exchange translation on overseas net assets The net assets of the Group were reduced by £1.5 million due to the effect of translating the net assets of the Group's continental European operations, which are denominated in foreign currency, into sterling. The Swedish Krona weakened against sterling by 2.4 per cent during the six months to 30 June 2007 which was the main reason for the adverse movement. The euro exchange rate did not vary significantly to that of the year end. Property The valuation of the Group's portfolio at 30 June 2007, was undertaken by Allsop & Co. in respect of the UK and Swedish properties and by DTZ Debenham Tie Leung in respect of the German and French properties. The portfolio value amounted to £1,202.4 million (31 December 2006: £1,143.5 million). The portfolio comprises 102 properties of which 44 are located in the UK, 40 in France, 16 in Germany, 1 in Sweden and 1 in Luxembourg, with a total lettable area of 490,161 sq.m (5,276,051 sq. ft.). UK The value of our UK portfolio, including joint ventures, increased by £12.0 million or 1.9 per cent at the half year, from £640.4 million to £652.4 million. The uplifts have been principally driven by capital spend and rental growth rather than any further yield compression. The increases in base rates since January did not materially affect appetite for well let commercial real estate, particularly in the core West End and City markets. In the first half of 2007 the volume of money seeking real estate assets remained high and this, together with strong leasing markets sustained prime office yields at around 3.5 per cent in the West End and 4.25 per cent in the City. Towards the end of the period to 30 June however there were indications that investors and the funding institutions were becoming more cautious and this has more recently created a less buoyant market and with greater levels of uncertainty. Strengthening tenant demand in the core areas is also beginning to move out to the non-core areas where enquiry levels are beginning to rise. A strong occupational market remains therefore an important driver for the market as a whole into the second half of 2007. At Spring Gardens, Vauxhall we completed the construction of the two final infill buildings in April. Together these add 2,448 sq m (26,384 sq ft), increasing the office space on the estate from 15,909 sq m (171,244 sq ft) to 18,357 sq m (197,592 sq ft). At June the first annual RPIX indexation uplift also took effect (in respect of Units 3 to 5) which when added to the new rent due from the two new infills takes the overall rent from the estate to £6,469,784 per annum (£352 per sq m / £32.74 per sq ft). The other ongoing improvements to the Spring Gardens Estate are the new restaurant and gymnasium and a new Security Lodge. The restaurant and gym are due to complete in September this year and completion of the new Security Lodge is scheduled for 2008. In March we secured an important new letting at Great West House. British Sky Broadcasting took the entire 13th floor in GW1 measuring 473 sq m (5,087 sq ft) and make a welcome return to the building following the completion of the extensive refurbishment works. Our letting activity has continued positively during the first half of 2007 with a further 6 floors measuring 2,941 sq m (31,662 sq ft) having been signed since 30 June 2007. In total this represents 54 per cent of the vacant space in the building and reduces the remaining vacant space to 3,478 sq m (37,434 sq ft) or 24.3 per cent of the total. At Coventry House in Haymarket SW1, the electronic sign on the roof of the property overlooking Piccadilly Circus has been renewed and re-let to a new sponsor. The replacement high definition sign was launched in February and is expected to increase our estimated revenue by 42 per cent to approximately £ 0.7m per annum. During the first half of the year we have also been investigating the options for our Hoskyns House site in Vauxhall where the current occupational leases expire in 2009. The property currently comprises a series of low rise office and warehouse buildings. Located close to Vauxhall Mainline and Underground Stations, the site has the scope to be redeveloped to provide a higher density of new building and a mix of uses including commercial, residential, retail and leisure. All such redevelopment options, together with the ongoing discussions with our existing occupiers will continue into the second half of 2007. We have continued to work with our joint venture partners to carry forward the London Bridge Quarter Project, comprising the London Bridge Tower (The Shard) and the adjoining 25 London Bridge Street. Once complete these two Renzo Piano designed buildings will provide 176,514 sq m / 1,900,000 sq ft gross of high quality office, hotel, residential, retail and leisure uses immediately adjacent to London Bridge Mainline and Underground Station. At London Bridge Tower (The Shard), PwC will be vacating the existing office building on the site this month thus allowing the enabling and demolition works to begin in the final half of the year. At 25 London Bridge Street, a revised planning application was submitted in April and was subsequently passed for approval by Southwark Council at Committee in early July. This new application achieves the same gross floor area but within an entirely new roof profile, incorporating two new roof terraces and improved external facades. The funding options for both projects are under review with a view to achieving completion before 2012. During the first half the vacancy rate across the UK portfolio has reduced from 8.2 per cent to 6.5 per cent assisted by a number of new lettings and lease renewals having been achieved at Cambridge House, Hammersmith (586 sq m / 5,087 sq ft to The Prostate Cancer Charity); CI Tower, New Malden (497 sq m / 5,350 sq ft to Lactalis (UK) Limited); Quayside Fulham (258 sq m/ 2,780 sq ft to Action to Knowledge and JM King) and Vista, Heathrow (355 sq m / 3,823 sq ft to Crane Software UK Limited and Seppic UK). We look forward to continuing to build on the successful lettings achieved in the first half of the year and reducing the vacancy rate still further. Of equal importance is to continue to work with our existing tenants, accommodating their space needs with flexible leases that continue to add value to the portfolio. This is particularly important in secondary locations where yields are more volatile and sensitive to the prospects for rental growth. The portfolio continues to offer some exciting refurbishment and redevelopment opportunities for the years ahead. France In its 10th year of operation, our French division, Citadel, now holds a portfolio of 40 properties valued at £334.2 million, an increase of £15.9 million (5.0 per cent) over the value at 31 December of £318.3 million. The first half of the year continued to see strong demand from investors in commercial property with prime Paris yields as low as 4 per cent. The increasingly competitive investing environment has caused us to investigate regional markets and the possibility of investment in a number of development schemes. However one building was purchased in April 2007 in an eastern suburb of Paris, Van Gogh is a 2,573 sq m multi-let office property which was purchased at a cost of £3.5 million and showed an initial yield of 7.6 per cent. Rental indexation showed further strong growth in the first half of the year with annualised increases of 6.9 per cent in the first quarter and 7.6 per cent in the second quarter for those leases falling due for indexation adjustments in those quarters. The annualised rent for the Citadel portfolio at 30 June 2007 was £22.5 million compared to £20.8 million at 31 December 2006. Our vacancy rate is at an historically low level of 1.8 per cent, partly as a result of our proactive interaction in accommodating the changing occupational demands of our tenants and our continuing programme of improvement to our properties and the facilities that they offer. During the six months we have upgraded air conditioning and reception facilities in a number of our properties, entered into 11 new leases over 1,909 sq m and negotiated a significant lease surrender with our main tenant at Le Forum, Lyon in combination with a new letting over 4,200 sq m and major renovation programme within the property. Germany The German portfolio continued to expand in the first half of 2007 and the value stood at £165.8 million at 30 June 2007 (31 December 2006: £135.1 million). We made two acquisitions in the period, the first of which being Rathaus Center, Hans-Böckler-Straße 19, Bochum which was purchased at a cost of £12.3 million at an initial yield of 6.0 per cent. The anchor tenant in the 25,115 sq m building is the City of Bochum who currently lease 39 per cent of the building. The property is 42 per cent vacant and plans are at an advanced stage to redevelop and let the vacant areas. Our second acquisition was Fangdieckstraße 75, Hamburg, comprising 11,587 sq m of multi-let offices. The property was acquired at a cost of £11.0 million at an initial yield of 7.3 per cent. Similar investment dynamics are at play in Germany as in France which has prompted us to cast our net wider to investigate niche opportunities. We have now established strong professional teams located in our offices based in Luxembourg and Hamburg. Sweden Subsequent to the sale of Solna Business Park and Lövgärdet the Group has retained its initial investment in Sweden at Vänerparken which is valued at £50 million (31 December 2006: £49.7 million). The university will vacate 11,780 sq m in August 2008. However we are working closely with the city of Vänersborg to utilise the space for alternative purposes. Rent, book value and yields are analysed by location as set out below: Annual Net Book Yield Yield Contracted Rent Rent Value on net when at 30 June 2007 rent fully let £m % £m % £m % % % UK London 0.2 0.3% 0.2 0.3% 3.1 0.3% 6.5% City Fringes London Mid 7.0 10.1% 7.0 10.5% 112.7 9.4% 6.2% town London 3.3 4.8% 3.3 4.9% 71.3 5.9% 4.6% West End London 4.6 6.6% 3.5 5.2% 86.8 7.2% 4.0% West London 10.6 15.3% 10.5 15.7% 187.7 15.6% 5.6% South Bank London 2.2 3.2% 2.2 3.3% 134.2 11.2% 1.6% South Bank - JVs London 1.5 2.2% 1.5 2.2% 23.5 2.0% 6.4% South West London 2.1 3.0% 2.1 3.1% 31.2 2.6% 6.7% North West Outside 0.2 0.3% 0.2 0.4% 1.9 0.2% 10.5% London Total UK 31.7 45.8% 30.5 45.5% 652.4 54.4% 5.5% 6.3%* Sweden Sweden 4.7 6.8% 3.9 5.8% 50.0 4.2% 7.8% Vänersborg Total 4.7 6.8% 3.9 5.8% 50.0 4.2% 7.8% 7.9% Sweden France 17.7 25.6% 17.7 26.5% 271.0 22.5% 6.5% Paris France 2.9 4.2% 2.9 4.3% 39.4 3.3% 7.4% Lyon France 0.6 0.9% 0.6 0.9% 7.9 0.7% 7.6% Lille France 0.5 0.7% 0.5 0.8% 6.3 0.5% 7.9% Antibes Total 21.7 31.4% 21.7 32.5% 324.6 27.0% 6.7% 6.8% France Luxembourg 0.8 1.2% 0.8 1.2% 9.6 0.8% 8.3% Total 0.8 1.2% 0.8 1.2% 9.6 0.8% 8.3% 8.6% Luxembourg Germany 2.3 3.3% 2.2 3.3% 40.2 3.3% 5.5% Berlin Germany 2.3 3.3% 2.2 3.3% 35.8 3.0% 6.1% Hamburg Germany 4.3 6.2% 4.1 6.1% 68.0 5.7% 6.0% München Germany 0.7 1.0% 0.7 1.0% 11.8 1.0% 5.9% Bochum Germany 0.5 0.7% 0.5 0.7% 8.1 0.7% 6.2% Stuttgart Germany 0.2 0.3% 0.2 0.3% 1.9 0.2% 10.5% Düsseldorf Total 10.3 14.8% 9.9 14.7% 165.8 13.9% 6.0% 6.7% Germany Group 69.2 100.0% 66.8 100.0% 1,202.4 100.0% 6.0% 6.6% Total at 30 June 2007 Conversion rates : SEK/GBP 13.7101 Euro/GBP 1.4872 (*) Yields based on receivable rent and potential rents have been calculated on the assumption that book values at 30 June 2007 will increase by anticipated refurbishment expenditure of approximately £3.1 million in respect of projects in the UK. Rent analysed by length of lease and location is set out below: Contracted Contracted Unlet Total Total Aggregate but not Rental income Space producing At ERV Sq. m Sq. ft (000) (000) £m £m £m £m % UK >10 yrs 64.1 690.0 14.5 0.9 15.4 44.9% UK 5-10 yrs 25.5 274.9 5.0 5.0 14.7% UK < 5 yrs 54.8 589.8 11.3 11.3 33.1% Development 2.0 21.7 0.1 0.1 0.3% property Vacant 12.4 132.9 2.4 2.4 7.0% Total UK 158.8 1,709.3 30.8 0.9 2.5 34.2 100.0% Sweden 5-10 yrs 29.4 316.2 3.5 3.5 74.1% Sweden < 5 yrs 15.0 161.4 1.2 1.2 25.1% Vacant 0.8 9.0 0.1 0.1 0.8% Total Sweden 45.2 486.6 4.7 0.1 4.8 100.0% France > 10 yrs 2.8 30.1 0.5 0.5 2.1% France 5-10 yrs 67.1 722.3 10.8 10.8 49.0% France < 5 yrs 72.0 774.8 10.4 10.4 47.1% Vacant 2.2 24.1 0.4 0.4 1.8% Total France 144.1 1,551.3 21.7 0.4 22.1 100.0% Luxembourg < 5 3.7 39.8 0.8 0.8 100.0% yrs Total 3.7 39.8 0.8 0.8 100.0% Luxembourg Germany > 10 10.8 116.2 1.0 1.0 9.2% yrs Germany 5-10 56.4 607.1 4.5 4.5 39.8% yrs Germany < 5 yrs 54.4 585.5 4.8 4.8 42.1% Vacant 16.7 180.2 1.0 1.0 8.9% Total Germany 138.3 1,489.0 10.3 1.0 11.3 100.0% Group > 10 yrs 77.7 836.3 16.0 0.9 16.9 23.0% Group 5-10 yrs 178.4 1,920.5 23.8 23.8 32.6% Group < 5 yrs 199.9 2,151.3 28.5 28.5 39.0% Development 2.0 21.7 0.1 0.1 0.1% property Vacant 32.1 346.2 3.9 3.9 5.3% Group Total 30 490.1 5,276.0 68.3 0.9 4.0 73.2 100.0% June 2007 Equity investments At 30 June 2007 the Group owned a portfolio of listed and unlisted equity investments valued at £42.8 million (31 December 2006: £16.2 million). The principal reason for the increase in the investment since the year end was the acquisition of 27.7 per cent of the share capital in Catena AB which forms £26.6 million of the above investment portfolio value. Catena is a Nordic real estate group, quoted on the Stockholm stock exchange. It owns 30 properties valued at £169.9 million located throughout Sweden, Denmark and Norway. The Group's main tenant is Bilia, the leading Nordic car sales and service company. In February 2007 we increased our stake in Bulgarian Land Development Ltd from 17.0 per cent to 28.7 per cent at a cost of £7.2 million and in addition to the Board seat we already occupied, we also took chairmanship of the Board. BLD commenced its first development project in February of this year, constructing 202 villas and apartments on the Black Sea coast. To date, the company has secured forward sales of 50 per cent of the development. Due to the size of the holding and the influence we exercise, we have treated the company as an associate and the investment of £11.2 million is therefore not included in the equity investments balance. Lunarworks AB, the youth web community became a subsidiary of the Group in April 2006, contributed £0.6 million to profit before taxation for the six months to 30 June 2007 and is strongly cash generative. On 7 September 2007, we completed the sale of the bulk of our UK portfolio of unlisted equity investments to Azini Capital Partners LLP thereby releasing cash of £7.0 million. Conclusion The strong investment market we have seen in previous years has continued during the first half of this year and we have enhanced our portfolio through selective acquisition and active management. The future investment environment is not so clear. However we are able to look forward with confidence which is based on a strong portfolio that is performing well and is actively managed by a highly skilled and motivated team. We also hold cash assets in excess of £100 million giving us both security and the ability to take swift advantage of future opportunities. S. A. Mortstedt Executive Chairman 17 September 2007 Un-audited Consolidated Income Statement for the six months ended 30 June 2007 30 June 30 June 31 Dec 2007 2006 2006 £000 £000 £000 Continuing operations : Rental and similar revenue 33,771 35,908 69,804 Service charge and similar revenue 4,495 3,552 6,779 Total rental revenue 38,266 39,460 76,583 Service charge expense and similar charges (5,869) (6,312) (11,080) Net rental income 32,397 33,148 65,503 Net income from non-property activities - - 4,465 Other operating income 3,041 2,045 2,718 Administrative expenses (11,170) (7,787) (17,539) Net property expenses (1,344) (1,581) (3,495) Operating profit before net gains on investment 22,924 25,825 51,652 properties Net gain from fair value adjustment on 23,477 51,956 162,060 investment property Profit on disposal of associate/part share - - 3,721 joint venture Profit/(loss) from sale of subsidiaries 127 - (1,797) Profit/(loss) from sale of investment property 38 124 (952) Operating profit 46,566 77,905 214.684 Finance income 1,655 1,333 8,335 Finance expense (16,087) (19,213) (39,948) Non-recurring finance expense - (2,917) (5,251) Total finance expense (16,087) (22,130) (45,199) Share of loss of associates (217) (350) (1,206) Profit before income tax 31,917 56,758 176,614 Taxation - current (1,344) (589) (1,225) Taxation - deferred 27,651 (18,723) (19,058) Tax credit/(charge) on profit 26,307 (19,312) (20,283) Profit for the period from continuing 58,224 37,446 156,331 operations Discontinued operations : Loss for the period from discontinued - (2,465) (2,538) operations - post tax Profit for the period 58,224 34,981 153,793 Attributable to : Equity holders of the Company 58,224 34,981 153,793 Basic Earnings per Share 80.6p 43.9p 196.7p Diluted Earnings per Share 80.1p 43.7p 195.6p Unaudited Consolidated Balance Sheetas at 30 June 2007 30 June 30 June 31 Dec 2007 2006 2006 ASSETS £000 £000 £000 Non-current assets Investment property 1,202,387 917,975 1,143,451 Property, plant and equipment 2,259 9,301 1,995 Intangible assets 17,051 18,512 18,846 Investment in associates 11,505 541 - Available-for-sale financial assets 42,811 16,967 16,193 Derivative financial instruments 5,335 677 1,072 Deferred income tax 3,765 8,898 4,536 Trade and other receivables 338 948 787 1,285,451 973,819 1,186,880 Current assets Trade and other receivables 16,416 8,339 9,204 Derivative financial instruments 1,962 1,429 943 Cash and cash equivalents 100,807 87,524 157,571 119,185 97,292 167,718 Assets held for sale Investment property - 238,884 - Other non-current assets - 378 - Current assets - 9,045 - - 248,307 - Total assets 1,404,636 1,319,418 1,354,598 LIABILITIES Non- current liabilities Trade and other payables - 90 - Deferred income tax liabilities 126,063 160,939 154,922 Borrowings, including finance leases 687,514 582,660 657,485 Derivative financial instruments (413) 182 - 813,164 743,871 812,407 Current liabilities Trade and other payables 70,395 31,031 66,892 Current income tax liabilities 1,704 1,993 818 Derivative financial instruments - 3 - Borrowings, including finance leases 28,401 24,892 26,342 Liabilities held for sale Borrowings, including finance leases - 126,532 - Trade and other payables - 16,774 - - 143,306 - Total liabilities 913,664 945,096 906,459 NET ASSETS 490,972 374,322 448,139 EQUITY Capital and reserves attributable to the Company's equity holders Share capital 19,577 21,382 20,021 Other reserves 112,245 115,292 112,174 Retained earnings 360,046 238,544 316,840 491,868 375,218 449,035 Equity minority interests (896) (896) (896) TOTAL EQUITY 490,972 374,322 448,139 Un-audited Consolidated Statement of Changes in Equity Attributable to equity Minority Total holders of the Company Interest Share Other Retained capital reserves earnings £000 £000 £000 £000 £000 Balance at 1 January 2007 20,020 112,173 316,842 (896) 448,139 Arising in the period:- Fair value gains/(losses) - available-for-sale - 1,374 - - 1,374 - cash flow hedges - (343) - - (343) Currency translation differences - (1,465) - (1,465) on foreign currency net - investments Expenses of share issue / (443) 506 (85) - (22) purchase of own shares Purchase of own shares - - (14,935) - (14,935) Net gains / (losses) recognised (443) 72 (15,020) - (15,391) directly in equity Profit for the period - - 58,224 - 58,224 Total increase in equity for the (443) 72 43,204 - 42,833 period At 30 June 2007 19,577 112,245 360,046 (896) 490,972 Un-audited Consolidated Cash Flow Statement for the six months ended 30 June 2007 30 June 30 June 31 Dec 2007 2006 2006 £000 £000 £000 Cash flows from operating activities Cash generated from operations 6,325 23,517 61,572 Interest paid (20,858) (18,628) (41,641) Income tax paid (458) (395) (2,206) Net cash (outflow)/inflow from operating activities (14,991) 4,494 17,725 Cash flows from investing activities Purchase of investment property (13,906) (43,193) (123,533) Capital expenditure on investment property (8,899) (15,597) (49,128) Proceeds from sale of investment property - 3,433 3,608 Purchases of property, plant and equipment (812) (1,319) (1,029) Proceeds from sale of property, plant and 190 451 433 equipment Purchase of available-for-sale financial assets (29,892) (5,742) (6,746) Purchase/sale of interests in joint venture/ (7,918) (972) 2,141 associate Purchase of subsidiary undertaking net of cash - (11,705) (12,082) acquired Sale of subsidiary undertakings - 10,122 121,218 Interest received 2,590 1,398 5,084 Net cash outflow from investing activities (58,647) (63,124) (60,034) Cash flows from financing activities Issue of shares 65 - 293 Purchase of own shares (15,020) (13,690) (54,209) New loans 55,064 92,519 218,503 Issue costs of new loans (157) (876) (858) Interest rate caps sold/purchased 243 (936) (923) Repayment of loans (23,321) (42,366) (81,088) Net cash inflow from financing activities 16,874 34,651 81,718 Net (decrease)/increase in cash and cash (56,764) (23,979) 39,409 equivalents Cash and cash equivalents at beginning of 157,571 118,162 118,162 period Cash and cash equivalents at end of period 100,807 94,183 157,571 Basis of Preparation The income statement and balance sheet have been prepared in accordance with the recognition and measurement criteria of the applicable International Accounting Standards ('IAS') and International Financial Reporting Standards ('IFRS') issued by the International Accounting Standards Board ('IASB') and endorsed by the European Union ('EU'). These standards are collectively referred to as 'IFRS'. They have been prepared in a manner consistent with the accounting policies, presentation and principles for recognising assets, liabilities, income and expense applied in the latest Group published annual accounts as at 31 December 2006 other than the change made in relation to deferred tax accounting as described in the Taxation section above. The information in this interim statement is unaudited and does not constitute statutory accounts within the meaning of Section 240 of the Companies Act 1985. The statutory accounts as at 31 December 2006 have been reported on by the Company's auditors and delivered to the Registrar of Companies. The report of the auditors was unqualified and did not contain a statement under Section 237 (2) or (3) of the Companies Act 1985. The interim report sets out the results for the six months to 30 June 2007 and unless otherwise stated, comparisons are to the six months ended 30 June 2006. GLOSSARY OF TERMS Net rent Net rent is defined as contracted rent less net service charge costs Yield Yields on net rents have been calculated by dividing the net rent by the book value Contracted rent Contracted rent is defined as gross annualised rent supported by a signed contract Estimated rental value (ERV) The ERV of lettable space as determined biannually by the Company's valuers. This may be different from the rent currently being paid. Underlying profit Underlying profit is the profit before tax excluding net gains/losses from fair value adjustment on investment properties, profit/losses disposal of joint ventures, subsidiaries, investment properties, and exceptional items. Adjusted net assets = Net assets excluding deferred tax liabilities and deferred tax assets Statutory net asset value = Net assets (NAV) per share Number of ordinary shares in free issue Adjusted NAV per share = Net assets + deferred tax liabilities - deferred tax assets Number of ordinary shares in free issue Statutory Gearing = Total gross borrowings - cash Net assets Adjusted Gearing = Total gross borrowings - cash Net assets + deferred tax liabilities - deferred tax assets Earnings per share (EPS) = Profit after tax attributable to ordinary shareholders Weighted average number of ordinary shares in free issue Adjusted EPS = Profit after tax attributable to ordinary shareholders excluding deferred tax and fair value gains on investment properties Weighted average number of ordinary shares in free issue Statutory Solidity = Total equity Total assets Adjusted Solidity = Total equity+ deferred tax liabilities - deferred tax assets Total assets - deferred tax assets Annualised added value to = Pro-rated Movement in adjusted NAV + shareholders Distributions Opening adjusted NAV Underlying profit = Profit before tax before fair value gains on investment properties and non-recurring finance costs IAS 32 fair value = Group fixed rate loans after tax adjustment after tax Number of ordinary shares in free issue Operating interest cover = Profit before tax - net gains from fair value adjustment on investment properties Net interest payable - change in fair value of interest rate swap and joint venture interest INDEPENDENT REVIEW REPORT TO CLS HOLDINGS PLC Introduction We have been instructed by the company to review the financial information for the six months ended 30 June 2007 which comprise the income statement, the balance sheet, the statement of changes in equity and the cash flow statement. We have read the other information contained in the interim report and considered whether it contains any apparent misstatements or material inconsistencies with the financial information. This report is made solely to the company in accordance with Bulletin 1999/4 issued by the Auditing Practices Board. Our work has been undertaken so that we might state to the company those matters we are required to state to them in an independent review 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 formed. Directors' responsibilities The interim report, including the financial information contained therein, is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the interim report in accordance with the Listing Rules of the Financial Services Authority which require that the accounting policies and presentation applied to the interim figures are consistent with those applied in preparing the preceding annual accounts except where any changes, and the reasons for them, are disclosed. Review work performed We conducted our review in accordance with the guidance contained in Bulletin 1999/4 issued by the Auditing Practices Board for use in the United Kingdom. A review consists principally of making enquiries of group management and applying analytical procedures to the financial information and underlying financial data and, based thereon, assessing whether the accounting policies and presentation have been consistently applied unless otherwise disclosed. A review excludes audit procedures such as tests of controls and verification of assets, liabilities and transactions. It is substantially less in scope than an audit performed in accordance with International Standards on Auditing (UK and Ireland) and therefore provides a lower level of assurance than an audit. Accordingly, we do not express an audit opinion on the financial information. Review conclusion On the basis of our review we are not aware of any material modifications that should be made to the financial information as presented for the six months ended 30 June 2007. (Signature) Deloitte & Touche LLP Chartered Accountants London 17 September 2007 Directors, Officers and Advisers Directors Sten Mortstedt (Executive Chairman) Per Sjöberg (Chief Executive Officer) Dan Bäverstam (Chief Financial Officer) Steven Board FCCA (Chief Operating Officer) Thomas Thomson BA (Non-executive Vice Chairman) Anders Böös ^ (Non-executive Director) Malcolm Cooper ^ (Non-executive Director) James Dean FRICS * # ^ (Non-executive Director) Thomas Lundqvist * ^ (Non-executive Director) Bengt Mörtstedt Juris Cand (Non-Executive Director) * = member of Remuneration Committee ^ = member of Audit Committee # = senior independent director Company Secretary Steven Board FCCA Registered Office 26th Floor, Portland House Bressenden Place London SW1E 5BG Registered Number 2714781 Registered Auditors Deloitte & Touche LLP Chartered Accountants 180 The Strand London WC2R 1BL Registrars and Transfer Office Computershare Investor Services Plc P O Box 82 The Pavillions Bridgewater Road Bristol BS99 7NH Shareholder helpline: 0870 889 3286 Clearing Bank Royal Bank of Scotland Plc 24 Grosvenor Place London SW1X 7HP Financial Advisers NCB Corporate Finance 51 Moorgate London EC2R 6BH Joint Stockbrokers NCB Corporate Finance 51 Moorgate London EC2R 6BH KBC Peel Hunt 111 Old Broad Street London EC2N 1PH CLS Holdings plc on line: www.clsholdings.com e-mail: enquiries@clsholdings.com

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