Annual Financial Report

20 April 2017

UK Commercial Property Trust Limited

(“UKCPT or the “Company”)

ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 31 DECEMBER 2016

UK Commercial Property Trust Limited (FTSE 250, LSE: UKCM), which is advised by Standard Life Investments and owns a diversified portfolio of high quality income producing UK commercial property, announces its final results for the year ended 31 December 2016.

Financial Highlights – Robust financial performance and attractive dividend yield

·     NAV total return of 3.8%, reflecting a robust return set against a background of volatility in the property market.

·     Share price total return of 3.8% , comparing favourably to the FTSE All-Share REIT Index total return of minus 7.0%.

·     Net gearing of 11.4%, one of the lowest in the Company’s peer group.

·     Attractive dividend yield of 4.4% compared to the FTSE All-Share Index yield of 3.5% and FTSE All-Share REIT Index yield of 3.7%.

·     £75million of uncommitted cash resources available for investment at the year end. Access to £50 million revolving credit facility which remains undrawn, providing additional investment potential.

Property Highlights – Value delivery through asset management and positive investment market activity

·     Above benchmark portfolio total return of 4.4%, versus IPD benchmark return of 3.6%.

·     Continuing low void rate of 3.7% compared to benchmark void rate of 6.9%.

·     99% of rent collected within 21 days underlining strength of tenant base and operational effectiveness.

·     Portfolio yield of 4.9% with reversionary yield of 5.8% highlighting the reversionary nature of the portfolio.

·     44 new leases and 25 lease renewals generated over £6.5 million of annual income (after rent free periods and incentives).

·     Disposal of 6 Arlington Street, London, W1 and Dolphin House, Sunbury-on-Thames, for a combined price of £45.6 million, reflecting an aggregate 14% premium to the 31 March 2016 market value.

Commenting on the results, Andrew Wilson, Chairman of UKCPT, said:

“The business is in a robust position and I am pleased to report that the shift in strategy adopted a couple of years ago of reducing the portfolio’s retail weighting and increasing its industrial exposure has begun to bear fruit, with encouraging relative performance. I therefore believe that UKCPT is well positioned to meet the challenges ahead. The Board and

the Manager together have an unerring focus on continuing to deliver value for shareholders.”

Will Fulton, Fund Manager at Standard Life Investments Limited  (UKCPT’s Investment Manager) added:

“We have outperformed our benchmark for the year, reflecting the success of the portfolio repositioning and progress securing income streams. In 2017 we have continued the momentum behind our strategy, with the sale of 13 Great Marlborough Street at a yield of 3.3% with proceeds being recycled into a pre-let distribution warehouse development with a yield on capital of 5.8%. We are confident the Company is in a strong position to continue delivering sustainable income.”

For further information:

Will Fulton/Graeme McDonald, Standard Life Investments
Tel: [phone] 245 3151

Richard Sunderland /Claire Turvey/Polly Warrack, FTI Consulting
Tel: [phone]

PERFORMANCE SUMMARY

CAPITAL VALUES AND GEARING	31 December 2016	31 December 2015	% Change
Total assets less current liabilities (excl Bank loan & swap) (£’000)	1,372,926	1,375,032	(0.2)
Net asset value per share (p)	86.2	86.7	(0.6)
Ordinary Share Price (p)	84.5	85.25	(0.9)
Discount to net asset value (%)	(2.0)	(1.7)	n/a
Gearing (%):  Net*                         Gross**	11.4 18.2	13.4 18.2	n/a n/a
TOTAL RETURN	1 year % return	3 year % return	5 year % return
NAV â€	3.8	35.5	51.9
Share Price â€	3.8	26.0	62.4
MSCI (IPD) Balanced Monthly and Quarterly Funds	3.6	37.2	55.5
FTSE All-Share Real Estate Investment Trusts Index	-7.0	27.3	98.8
FTSE All-Share Index	16.8	19.3	61.8
EARNINGS AND DIVIDENDS	31 December 2016	31 December 2015
Earnings per share	3.48	6.74
Dividends declared per ordinary share (p)	3.68	3.68
Dividend Yield (%) ‡	4.4	4.3
IPD Benchmark Yield (%)	5.1	5.0
FTSE All-Share Real Estate Investment Trusts Index Yield	3.7	3.0
FTSE All-Share Index Yield (%)	3.5	3.7
ONGOING CHARGES AND VOID RATE
As a % of average net assets including direct property costs	1.4	1.5
As a % of average net assets excluding direct property costs	0.9	0.9
Void (%)	3.7	2.8

*       Calculated as net borrowings (gross borrowings less cash, excl swap valuation) divided by total assets less current liabilities (excl cash, borrowings and swaps)

**     Calculated as gross borrowings (excl swap valuation) divided by total assets less current liabilities (excl borrowings and swaps).

†        Assumes re-investment of dividends excluding transaction costs.

‡         Based on an annual dividend of 3.68p per share and the share price at 31 December.

Sources: Standard Life Investments, MSCI Investment Property Databank (“IPD”)

Chairman’s Statement

2016 was a positive and progressive year for UKCPT, and this momentum has continued into 2017. Despite a year of political surprises and associated uncertainty, the business is in a robust position and I am pleased to report that the shift in strategy adopted a couple of years ago of reducing the portfolio’s retail weighting and increasing its industrial exposure has begun to bear fruit, with encouraging relative performance. Our financial position remains strong and, over the course of the year, our portfolio initiatives have added value and driven income to support an attractive level of dividend for shareholders. Furthermore, I am pleased to note that we have an overwhelmingly supportive shareholder base, as evidenced by the successful passing of the Company’s continuation vote, held in November 2016.

The Company’s portfolio produced a total return of 4.4% in the year, well ahead of the IPD benchmark of 3.6%. As expected, the property market continued to slow during the year, particularly in the third quarter as the ramifications of the UK’s EU referendum result were digested. Against this backdrop, we achieved an above benchmark return through the successful implementation of a number of asset management initiatives across the Company’s £1.28 billion portfolio, as well as through net asset value (“NAV”) enhancing sales at Arlington Street, London and Sunbury, Surrey. Just after the year end we announced that we had completed a further NAV accretive disposal, with the sale of an office asset at 13 Great Marlborough Street, London followed shortly thereafter with the recycling of capital into the purchase of a higher yielding opportunity at Burton upon Trent. This acquisition of a pre-let development, due to be completed later this year, secures longer term income in our favoured industrial sector.

This positive portfolio activity underpinned a NAV total return for the year of 3.8%. While this, as for the property sector, was a slightly lower return than seen in previous years, it nonetheless demonstrates the strong defensive qualities of UKCPT, as well as being a positive reflection of the portfolio restructuring that has taken place over the past couple of years. This strong performance was delivered despite pressures on the property sector following a write down in values when the government increased stamp duty in the first half of 2016 and market uncertainties resulting from the EU referendum, including the temporary “gating” of open ended property funds due to unprecedented redemption requests.

The total return to shareholders in 2016 was also 3.8%, with the year-end share price reflecting a 2% discount to the period end NAV. This total return compares favourably to the FTSE All-Share REIT Index of minus 7.0%, and again demonstrates the relative attractiveness of UKCPT, which has a portfolio of 42, well-let properties, with low voids and an excellent history of prompt rent collection, and which is diversified by geography and sector. This, combined with a strong balance sheet, cash resources for further investment, low gearing and low long term borrowing rates, provides excellent foundations for attractive shareholder returns and compares favourably with many other quoted property companies.

Borrowings and Cash

UKCPT is financially well placed. As at 31 December 2016, the Company had low net gearing of 11.4% with a blended rate of interest of 2.89% and a weighted average debt maturity of six years and cash resources of £105 million. Following the transactions in early 2017 as outlined earlier, future capital expenditure and dividend commitments, £75 million is currently available for investment. The Company also has access to a £50 million revolving credit facility which remains undrawn and, therefore, has significant firepower to deploy in portfolio and acquisition opportunities in-line with the Company’s investment policy. Additionally, in an environment where the prospect for further capital growth is under pressure, the Company’s low gearing is a sensible defensive strategy.

Dividends

UKCPT declared and paid its shareholders an attractive dividend in 2016 as follows:

	Payment  Date (2016)	Dividend per share (p)
4th interim for prior period	Feb	0.92
1st interim	May	0.92
2nd interim	Aug	0.92
3rd interim	Nov	0.92
Total		3.68

A fourth interim dividend of 0.92p was paid on 28 February 2017. This annual dividend reflects a yield of 4.4% on the year end share price of 84.5p. It compares favourably to the yield on the FTSE All-Share REIT Index of 3.7% as well as the FTSE All-Share Index yield of 3.5% and the 10 year gilt yield of 1.2%. UKCPT continues to offer investors a sustainable income return underpinned by its well let and diverse portfolio of prime properties.

Continuation Vote

UKCPT’s discount control policy provides that if the market price of its ordinary shares is more than 5 per cent below the published NAV for a continuous period of at least 90 dealing days, following the second anniversary of the Company’s most recent continuation vote in relation to the discount control policy, an extraordinary general meeting (“EGM”) has to be convened. On 11 October 2016, with the discount to published NAV having been more than 5 per cent for more than 90 continuous days, an EGM was convened for 9 November 2016. This continuation vote was passed resoundingly with 99.99% of shareholders voting being in favour of continuation, on 76% turnout.

The Company is not now required to have a continuation vote in relation to its discount control policy for another two years. This vote does not change the current policy on share buybacks, which is set out in the annual report.

Base Erosion and Profit Shifting (“BEPS”)

The Board has noted the announcement in the 2016 Autumn Statement relating to BEPS, including the ramifications for non UK resident property companies and the proposed restriction on interest deductions. Although legislation has not yet been finalised, the proposals as currently drafted are likely to mean that additional tax will have to be paid on the Company’s net rental profits in the medium term. Therefore, the Board is exploring how shareholder value can be protected as far as practicable, including the possibility of joining the UK REIT regime.

Board Succession

Last year’s annual report noted the Board’s intention regarding a phased and orderly succession of its Directors. Therefore John Robertson, who has served on the Board since the launch of the Company in 2006, will retire in December 2017. Mr Robertson has been a major contributor to the Company over his tenure. His breadth and depth of knowledge, integrity and valuable insights will be very much missed. We wish him well on his retirement. Through its Nominations Committee, the Board has instigated a process to appoint a new Director to replace Mr John Robertson on his departure.

It is also my intention to stand down from the Board at the AGM in 2019. In due course a replacement Director will be appointed, with the Board as a whole deciding on a new Chairman nearer the time.

These changes, whilst continuing to refresh the Board, additionally respond to the Company’s changing circumstances but without a sudden loss of invaluable knowledge and collective experience.

Investment Manager

The Board note the recent announcement relating to a proposed merger between Standard Life and Aberdeen Asset Management. It is too early to comment on the potential implications for the Company of the proposed merger and we will monitor the progress of the transaction closely.

Outlook

The political and therefore the economic outlook for 2017 is expected to be dominated by the Article 50 process for the UK to exit the European Union. Additionally, the possibility of changes in the political landscape elsewhere in the world is expected to command the headlines. Notwithstanding the strength of the UK economy since the EU referendum, and the Bank of England’s recent upgrade of its GDP growth forecast for 2017 to 2%, the same as that achieved in 2016, there will continue to be uncertainty at home and abroad. Against this background, commercial UK real estate has many significant benefits as an asset class, not least its ability to produce an attractive and sustainable income stream against a backdrop of limited speculative development, generally low supply and modest gearing levels compared to previous cycles. These should help reduce potential volatility and there also remains a significant gap between the attractive and stable yields currently being earned on real estate and the returns from other mainstream asset classes.

UKCPT is well placed not only in terms of the quality of its property portfolio but also its sound financial base. It has a strong exposure to the favoured industrial sector and limited exposure to potentially underperforming sectors, such as City of London offices, where only 2.2% of the portfolio (by capital value) is located. The Company offers an attractive and sustainable dividend yield, based on rental income from a portfolio with a strong tenant base as ranked by IPD. This is particularly relevant in an environment where interest rates are forecast to remain historically low, particularly in the UK, for sometime to come. The strong balance sheet and low gearing should help minimise volatility in an environment where property values are under pressure. It will also allow the Manager to invest further in the portfolio in order to extract latent value and to act quickly and flexibly should suitable opportunities arise.

I therefore believe that UKCPT is well positioned to meet the challenges ahead. The Board and the Manager together have an unerring focus on continuing to deliver value for shareholders.

Andrew Wilson
Chairman
19 April 2017

Strategic Overview

The purpose of the Strategic Overview is to provide shareholders with details of the Company’s strategy and business model, as well as the principal risks and uncertainties faced by the Company.

Investment Strategy

The Company’s investment strategy is set out in its investment objective and policy below.

The Company’s investment objective is to provide ordinary shareholders with an attractive level of income together with the potential for capital and income growth from investing in a diversified UK commercial property portfolio.

Investment risks to the Group are managed by investing in a diversified portfolio of freehold and long leasehold UK commercial properties. The Group invests in income producing assets in four commercial property sectors: office, retail, industrial and leisure. The Group has not set any maximum geographic exposures within the UK nor any maximum weighting limits in the principal property sectors. No single property shall, however, exceed at the time of acquisition 15 per cent of the gross assets of the Group.

The Group is currently permitted to invest up to 15 per cent of its total assets in indirect property funds including in other listed investment companies. The Group is permitted to invest cash, held by it for working capital purposes and awaiting investment, in cash deposits, gilts and money market funds.

At an EGM of the Company on 28 April 2011 the shareholders of the Company approved a revised gearing policy of the Group amended to read as follows: “Gearing, calculated as borrowings as a percentage of the Group’s gross assets, may not exceed 65 per cent. The Board intends that borrowings of the Group at the time of draw down will not exceed 25 per cent of the Total Assets of the Group. The Board receives recommendations on gearing levels from the Investment Manager and is responsible for setting the gearing range within which the Investment Manager may operate”.

The Group’s performance in meeting its objective is measured against key performance indicators as set out below. A review of the Group’s returns during the year, the position of the Group at the end of the year, and the outlook for the coming year is contained in the Chairman’s Statement and the Investment Manager Review.

Board

The Board of Directors is responsible for the overall stewardship of the Company, including investment and dividend policies, corporate strategy, corporate governance, and risk management. Biographical details of the Directors, all of whom are non- executive, can be found in the annual report and indicate their range of property, investment, commercial and professional experience. The Company has no executive Directors or employees.

Management of Assets and Shareholder Value

The Board has contractually delegated the management of the investment portfolio and other services to Standard Life Investments (Corporate Funds) Limited.

The Company invests in properties which the Investment Manager believes will generate a combination of long-term growth in income and capital for shareholders. Investment decisions are based on analysis of, amongst other things, prospects for future capital growth, sector and geographic prospects, tenant covenant strength, lease length and initial yield. In the year to 31 December 2016 the company generated operating cash flows of £49.4m (2015: £53.6m).

Investment risks are spread through investing in a range of geographical areas and sectors, and through letting properties to low risk tenants. At each Board meeting, the Board receives a detailed portfolio, financial, risk and shareholder presentation from the Investment Manager together with a comprehensive analysis of the performance of the portfolio during the reporting period.

The Board and the Investment Manager recognise the importance of managing the premium/discount of share price to net asset value in enhancing shareholder value. One aspect of this involves appropriate communication to gauge investor sentiment. The Investment Manager meets with current and potential new shareholders, and with stockbroking analysts who cover the investment company sector, on a regular basis. In addition, communication of quarterly portfolio information is provided through the Company’s website, www.ukcpt.co.uk, and the Company also utilises a public relations agency to manage its profile among investors.

Borrowings

As at 31 December 2016 the Group had total borrowing facilities drawn of £250 million, representing a gross gearing level of 18.2% (net gearing of 11.4%) of the year end total assets with a blended fixed interest rate of 2.89% per annum.

Key Performance Indicators

The Company’s benchmark is the MSCI Investment Property Databank (IPD) Monthly and Quarterly Funds. This benchmark incorporates all monthly and quarterly valued property funds and the Board believes this is the most appropriate measure to compare the performance of a quarterly valued property investment Company with a balanced portfolio.

The Board uses a number of performance measures to assess the Company’s success in meeting its objectives. The key performance indicators are as follows:

·     Net asset value and share price total return against the IPD benchmark and other selected comparators.

·     Premium/Discount of share price to net asset value.

·     Dividend per share and dividend yield.

·     Ongoing Charges.

These indicators for the year ended 31 December 2016 are set out in the Performance Summary.

In addition the Board considers specific property KPIs such as void rates, rent collection levels and weighted average lease length on a regular basis.

Principal Risks and Risk Uncertainties

The Board has established a Risk Committee to ensure that proper consideration of risk is undertaken in all aspects of the Company’s business on a regular basis. The Risk Committee meets quarterly, comprises all members of the Board and is chaired by John Robertson. The duties of the Risk Committee include the consideration of matters relating to the risk profile of the Company, including an assessment of risk appetite, risk tolerance and risk strategy, and the regular review of principal risks, seeking assurance that these risks are appropriately rated and ensuring that appropriate risk mitigation is in place. The Committee also reviews emerging risks.

The Board confirms that, through the operation of the Risk Committee, it frequently carries out a robust assessment of the principal risks facing the Company. These risks and how they are mitigated are set out below.

The Company’s assets consist of direct investments in UK commercial property. Its principal risks are therefore related to the commercial property market in general, but also to the particular circumstances of the properties in which it is invested and their tenants. The Manager seeks to mitigate these risks through continual review of the portfolio utilising research produced by the Manager’s in-house research team, detailed reports on the performance of the portfolio, setting of annual asset plans for each asset in the portfolio and also through asset management initiatives. All of the properties in the portfolio are insured, providing protection against risks to the properties and also protection in case of injury to third parties in relation to the properties.

The Board has also identified a number of key specific risks that are reviewed at each quarterly Risk Committee Meeting. These are as follows:

Company objectives

The Company and its objectives become unattractive to investors which may lead to a persistent discount and a continuation vote which may threaten the future solvency and liquidity of the Group.

This risk is mitigated through regular performance reviews of the Company’s portfolio, contact with shareholders, a regular review of share price performance and the level of discount at which the shares trade to and regular meetings with the Company’s broker to discuss these points and address any issues that arise.

The discount control policy of the Company provides that if the market price of the ordinary shares is more than 5 per cent below the published net asset value (as last calculated, adjusted downwards for the amount of any dividend declared by the Company upon the shares going ex-dividend) for a continuous period of 90 dealing days or more, following the second anniversary of the Company’s most recent continuation vote in relation to the discount control policy, the Board will convene an EGM to consider an ordinary resolution for the continuation of the Company. This situation arose in the 90 day period up to 11 October 2016 and, as a result, the Board convened an EGM which was held on 9 November 2016 and, at which, the continuation of the Company was approved with 76% of shareholders voting and, of those who voted, 99.99% voting for the continuation of the Company.

Dividend cover

Dividend cover falls to a level whereby the Company becomes unattractive to investors, for example due to tenant failure or inability to let properties.

This risk is mitigated through regular review of forecast dividend cover, regular contact with shareholders and regular review of tenant mix, risk and profile. Due diligence work on potential tenants is undertaken before entering into new lease agreements and tenants are kept under constant review through regular contact and various reports both from managing agents and from the Manager’s own reporting processes. Contingency plans are put in place at units that have tenants that are believed to be in financial trouble.

The potential introduction of new base erosion and profit shifting regulation (‘BEPS’) has been recognised by the Board as a potential future risk to dividend cover. This risk is considered in more detail in the taxation section below.

Company indebtedness

The Company is unable to service or repay its  debts, threatening the future solvency and liquidity of the Group.

This risk is mitigated by two factors. First of all the Investment Policy of the Company limits gearing to 25 per cent of total assets at the time of draw down. This low gearing limit means it is expected that, barring any unforeseen circumstances, the Group will have adequate assets to service and repay the debt if required. Secondly, the underlying assets themselves are mainly invested in a diversified, prime UK commercial property portfolio underpinned by a strong tenant base. This means that, even in a significant economic downturn, the Board is confident that the assets will still be of sufficient value and generate sufficient income to meet future liabilities.

Taxation

The tax structure of the Group is not optimised or is affected by legislative change, impacting performance and dividend cover.

The Group is currently structured in a tax efficient way which results in rental income the Group generates being offset by expenses and internal loan interest. The terms of the internal loan notes, namely interest rates and loan to value ratios, are crucial in preserving the tax efficiency of the Group. These loan notes were refinanced in September 2016 via a rigorous process to ensure they represent commercially available terms. The result of this loan note refinancing is that the Company is expected to generate future taxable profits. As the Company has over £50 million of unutilised tax losses and it is anticipated that these losses will now be utilised, the Company has recognised a deferred tax asset in the financial statements of £6.5 million. This asset will be written off over the time period in which the losses are utilised or are no longer able to be offset against future profits.

Linked to the above is the announcement in the Autumn Statement relating to base erosion and profit shifting (“BEPS”). The proposals in the Autumn Statement, if implemented, would mean the Group would only be able to deduct interest up to the amount payable on its external borrowings thereby significantly increasing the amount of tax that would be payable once the tax losses have been fully utilised. This would have a material impact on dividend cover. The Board is considering various methods to mitigate the impact of BEPS including a REIT conversion.

Macroeconomic environment

Uncertainty or change in the macroeconomic environment results in property becoming an undesirable asset class, causing a decline in property values.

This risk is managed through regular reporting from, and discussion with, the Manager and other advisors. Macroeconomic conditions form part of the decision making process for purchases and sales of properties and for sector allocation decisions.

Macroeconomic uncertainty increased during 2016, following the UK’s decision to leave the EU and the US presidential election. The Board continues to monitor closely the effect of this on property values and also the impact of any resultant regulatory changes that may impact the Company.

Other risks faced by the Company include the following:

Economic — inflation or deflation, economic recessions and movements in interest rates could affect property valuations, and its bank borrowings.

Strategic — incorrect strategy, including sector and property allocation and use of gearing, could lead to poor returns for shareholders.

Regulatory — breach of regulatory rules could lead to suspension of the Company’s London Stock Exchange Listing, financial penalties or a qualified audit report.

Management and control — changes that cause the management and control of the Company to be exercised in the United Kingdom could lead to the Company becoming liable to United Kingdom taxation on income and capital gains.

Financial — inadequate controls by the Investment Manager or third party service providers could lead to misappropriation of assets. Inappropriate accounting policies or failure to comply with accounting standards could lead to misreporting or breaches of regulations.

Operational — failure of the Investment Manager’s accounting systems or disruption to the Investment Manager’s business, or that of third party service providers, could lead to an inability to provide accurate reporting and monitoring, leading to a loss of shareholders’ confidence.

An additional operational risk is failure by the Investment Manager, or other third party provider, to implement appropriate policies and procedures to manage information and cyber security risk, leading to financial loss and business disruption for the Company.

The Board seeks to mitigate and manage these risks through the operation of the Risk Committee, policy setting and enforcement of contractual obligations. It also regularly monitors the investment environment and the management of the Company’s property portfolio and levels of gearing, and applies the principles detailed in the UK Corporate Governance Code. Details of the Company’s internal controls are described in more detail in the Annual Report.

Viability Statement

The Board considers viability as part of its ongoing programme of monitoring risk. The Board considers five years to be a reasonable time horizon over which to review the continuing viability of the Company, although it does have regard to viability over the longer term, in particular to key points outside this time frame, such as the due dates for the repayment of long-term debt.

The Board has considered the nature of the Company’s assets and liabilities and associated cash flows and has determined that five years is the maximum timescale over which the performance of the Company can be forecast with a material degree of accuracy and so is an appropriate period over which to consider the Company’s viability.

The Board has also carried out a robust assessment of the principal risks faced by the Company, as detailed in this Strategic Review, including periodic continuation votes. The main risks which the Board consider will affect the business model, future performance, solvency, and liquidity are ongoing discounts leading to continuation votes, tenant failure leading to a fall in dividend cover, company indebtedness, taxation and macroeconomic uncertainty. The Board takes any potential risks to the ongoing success of the Company, and its ability to perform, very seriously and works hard to ensure that risks are consistent with the Company’s risk appetite at all times.

In assessing the Company’s viability, the Board has carried out thorough reviews of the following:

·     Detailed NAV, cash resources and income forecasts, prepared by the Company’s Manager, for a five year period under both normal and stressed conditions;

·     The Company’s ability to pay its operational expenses, bank interest, tax and dividends over a five year period;

·     Future debt repayment dates and debt covenants, in particular those in relation to LTV and interest cover;

·     Demand for the Company’s shares and levels of premium or discount at which the shares trade to NAV; and

·     The valuation and liquidity of the Company’s property portfolio, the Manager’s portfolio strategy for the future and the market outlook.

Based on the results of the analysis outlined above, the Board has a reasonable expectation, assuming the periodic continuation vote in 2020 is passed, that the Company will be able to continue in operation and meet its liabilities as they fall due over the five year period of its assessment.

Sustainable Real Estate Investment Policy

The Investment Manager acquires, develops and manages properties on behalf of the Company. It is recognised that these activities have both direct and indirect environmental and social impacts. The Board has adopted the Investment Manager’s own Sustainable Real Estate Investments Policy and associated Environmental Management Systems and is committed to environmental management in all phases of an asset’s cycle — from acquisition through demolition, redevelopment and operational management to disposal. The focus is on energy conservation, mitigating greenhouse gases emissions, maximising waste recycling and water conservation. To facilitate this, the Manager works in partnership with contractors, suppliers, tenants and consultants to minimise those impacts, seeking continuous improvements in environmental performance and conducting regular reviews.

The Company was awarded a Green Star ranking from the Global Real Estate Sustainability Benchmark 2016. A Green Star is awarded to entities that perform well in both categories of the GRESB Assessment: Management & Policy and Implementation & Measurement. Our approach to monitoring and improving the sustainability performance of the assets held by the Company has been highly successful. Energy consumption and greenhouse gas emissions for managed assets in the Company reduced by 6% and 11% respectively in 2015/16 compared with the year before. The Company also achieved its zero waste to landfill target, recovering value from all waste produced.

In conjunction with these environmental principles the Company has a health and safety policy which demonstrates commitment to providing safe and secure buildings that promote a healthy working/ customer experience that supports a healthy lifestyle. The Company, through the Manager, manages and controls health and safety risks systematically as any other critical business activity using technologically advanced systems and environmentally protective materials and equipment. The aim is to achieve a health and safety performance the Company can be proud of and allow the Company to earn the confidence and trust of tenants, customers, employees, shareholders and society at large.

Bribery & Ethical Policy

It is the Company’s Policy to prohibit and expressly forbid the offering, giving or receiving of a bribe in any circumstances. This includes those instances where it may be perceived that a payment, given or received, may be a bribe. The Company has adopted an Anti-Bribery and Corruption Policy to ensure robust compliance with The UK Bribery Act 2010. The Company has made relevant enquiries of its Manager and has received assurances that appropriate anti-bribery and corruption policies have been formulated and communicated to its employees. In addition the Board has adopted an ethical policy which highlights the need for ethical considerations to be considered in the acquisition and management of both new and existing properties.

Approval of Strategic Report

The Strategic Report of the Company comprises the following: Financial and Property Highlights, Performance Summary, Chairman’s Statement, Strategic Overview, and Investment Manager Review. The Strategic Report was approved by the Board on 19 April 2017.

Andrew Wilson                                     Ken McCullagh
Director                                               Director

Investment Manager Review

Over the 12 months ending December 2016, All Property recorded a 3.6% total return as measured by MSCI/IPD’s Balanced Monthly & Quarterly Index. Compared to the 12.7% recorded for 2015 and, following a number of years of strong growth, this reduction was generally anticipated, albeit perhaps accelerated as a result of the EU Referendum result. This lower return represents a transition from a capital growth cycle to one where income dominates – a move away from strong London and South East office returns to a market where industrial stock and long-dated leases are king.

Investment volumes over the year, though down from a £70 billion peak in 2015, remained healthy at £50 billion; it was interesting to see this split more or less evenly between the first and second halves of the year, either side of the EU Referendum. Overseas investment boosted the total, accounting for 43%, with many of those investors attracted by both cheaper sterling and the relative safe haven status of the UK.

Despite the UK government unexpectedly raising Stamp Duty Land Tax in the March 2016 Budget, effectively reducing commercial values by 1%, the first half of the year saw capital maintained – the outcome of the EU Referendum on 23 June was too close to the half year valuation point for the Industry’s valuers to gauge any impact and so their 30 June 2016 figures were caveated with an “uncertainty” clause. The market then fell in the third quarter by 2.5%, valuations largely remaining caveated for uncertainty, only to recover by 1.1% in the final quarter. Overall there was a 1.2% market capital decline in 2016, a year in which the income element of total return remained stable at 4.9%. As for the equity markets, the FTSE All-Share and the FTSE 100 total returns were 16.8% and 19.0% respectively over the calendar year whilst listed real estate equities produced a negative total return of 8.5%.

Review by Sector

Retail – polarised

Retail remained the laggard of the sectors, recording a total return of 1.6% in the 12 months to the end of December 2016. Retail capital growth continued to be weak with values falling by 3.5% over the year and, whilst rents were fairly stable, retail rental growth continued to be considerably weaker than the other two major sectors at 0.5%. This was well below office rental growth at 3.2% and industrial at 3.9%.

Christmas trading was broadly reasonable with most sectors recording an increase in sales compared to last year. There were increases in clothing and footwear (albeit from subdued levels previously), personal goods, food and beverage and leisure and department stores. In contrast, household goods sales were down on the previous year. However, despite the improvement in the value of sales (£ taken), the quantity of goods bought fell which could be down to price increases feeding through via the weakness of sterling and also less discounting in the sector. Consumer confidence remains at relatively low levels and the forward looking indicators for consumer spending, together with actual figures for the three months to the end of February 2017 showing non-food sales at a five year low, suggest that retailers face a more challenging environment in the year ahead. The pressures include higher import prices impacting margins and more forceful cost pressures from the National Living Wage, increased business rates, particularly in London and parts of the South East, higher inflation and, potentially, interest rate increases.

Office – Investment activity rebounds in Central London

In the UK office market, Central London offices experienced the most noticeable slowdown in 2016 compared to the double digit growth the sector delivered in the previous year. Total office returns of 2.4% were recorded over 2016 reflecting pessimistic sentiment following the Referendum vote to leave the EU on top of forecasts which, in the first half of the year, were already switching off any yield price improvement. Through the year, overall, office capital values reduced by 1.6%. Inner London recorded the highest rental growth at 5.2% followed by the South West of the UK and the West End. Yorkshire & Humberside and Scotland witnessed the lowest performance across office segments with the city of Aberdeen a key element behind Scotland’s weaker office performance as a result of its uncertain and dominant oil industry.

The Referendum uncertainty also dampened occupier activity in the office markets, particularly in terms of the outlook for Central London with announcements, and much media speculation, that some of the large investment bank occupiers may start to move a proportion of their investment bankers outside the UK. Generally across Central London and the South East office markets, occupiers have been cautious lately and hence take-up has been below the long term average. Rental incentives have also reportedly started to increase to entice occupiers.

Despite this slowdown in growth, office investment accounted for 43% of overall investment activity in 2016. Central London, where activity rebounded in the final quarter from the low levels witnessed in the third quarter, had the largest share of the overall investment pie at 27% (the same level as 2015). Overseas investors, the majority from the US, Hong Kong, China, Canada and Singapore, continued to account for a significant share of Central London activity in 2016 at close to 70% of all investment in the capital. Office investment outside Central London accounted for 16% of overall activity (up slightly on the 14% share in 2015).

Industrial - Strong returns in the Industrial sector

The industrial sector continues to demonstrate its strength in the current environment. According to the MSCI/IPD Balanced Monthly & Quarterly Index, the industrial sector delivered a total return of 7.3% with capital values having risen by 2.0% on a 12 month basis to the end of December 2016. In comparison, values for assets in the retail and office sectors fell by 3.5% and 1.6% over the same time frame. Industrial rents rose by 3.9% and significantly outperformed all property as a whole.

The sector fundamentals continue to look attractive with demand, driven by retailers’ stronger online sales growth

requiring more distribution space, having reduced supply earlier than expected, leading to higher rental growth

expectations. As building costs increase, supply should be kept under control which will act to balance take-up in the year ahead.  For the wider industrial sector, the pace of manufacturing and industrial activity has held up well due to the weaker pound translating into significantly more letting activity and government incentives to support the sector in the event of the UK leaving the EU.

Portfolio Performance

As identified in our review of the market, real estate returns were lower for 2016 than in recent years. Against this backdrop it is pleasing to report that the Company’s real estate portfolio outperformed its IPD benchmark, generating a total return of 4.4% for the year against 3.6% for its benchmark. An income return of 4.8% countered a decline in capital growth of 0.3%. At 31 December 2016 the portfolio was externally valued by CBRE at £1.28 billion.

The dominant driver of performance was the Company’s South East industrial portfolio – both from the tailwind impact of being intentionally overweight in the sector, by 10.8%, following the 2015 repositioning exercise, and from out-performance from the portfolio’s specific properties against other industrials in the benchmark. Profit from the Company’s two office sales also boosted performance whilst a dampener on what would otherwise have been far stronger outperformance came from the Company’s shopping centre portfolio which, particularly at Swindon following the loss of the Company’s only BHS store, created a material drag.

Projecting forward to a period of slowing capital growth across the whole market, the more prime nature of the Company’s portfolio should stand it in good stead to deliver sustainable income, better protect capital, and, with

cash resources available, acquire new stock fit for the economic environment.

The table below sets out the components of total return of the Company and of the benchmark in each sector for the year to 31 December 2016:

	Total Return		Income Return		Capital Growth
	Fund	Benchmark	Fund	Benchmark	Fund	Benchmark
	%	%	%	%	%	%
Industrials	10.8	7.3	5.4	5.2	5.1	2.0
Office	5.1	2.4	4.6	4.1	0.5	-1.6
Retail	-1.2	1.6	4.6	5.3	-5.6	-3.5
Leisure/Other	3.9	7.2	3.6	5.1	0.3	2.0
Total	4.4	3.6	4.8	4.9	-0.3	-1.2

Source: IPD, Standard Life Investments

Industrial

In common with the wider market, the Industrial sector was the Company’s strongest performer in 2016, boosted by a series of positive asset management leasing initiatives and profit from the sale of Dolphin House, situated on its Dolphin Industrial Estate in Sunbury, being allocated to the industrial return.

The Company has a good mix of prime UK “big box” distribution warehouses and multi-let industrial estates, the latter focused on the four points of the compass in and around London. This dynamic portfolio delivered a total sector return of 10.8%, outperforming the benchmark of 7.3% for the year. In the final quarter of the year the 160,000 sq ft industrial unit formerly occupied by B&Q at Ventura Park, Radlett (north M25), fell vacant, increasing overall portfolio vacancy to 3.7%, still well below the benchmark vacancy rate of 6.9%. Agents report good interest from distribution operators looking to lease the building.

Office

The Company’s well located portfolio of office investments provided a total return of 5.1% against the benchmark of 2.4% for 2016. City of London exposure, of most concern from potential Brexit fallout, was limited to one asset. Whilst this asset accounted for only around 2% of the Company’s whole portfolio and it outperformed its IPD City

of London office benchmark, assisted by leases agreed during the period increasing several rental levels in the holding from £31 psf to circa £53  psf, it remained an overall detractor. In contrast the Company’s West End of London office assets, namely Craven House in Soho, 13 and 15 Great Marlborough Street, and 6 Arlington Street in St James’s, significantly outperformed their IPD benchmark at 2.6%, aided by profit on the Q2 sale of 6 Arlington Street. The regional office holdings in Bristol, Newcastle and Birmingham also helped drive performance.

Retail

The IPD retail sector, with the exception of Central London, underperformed the market in 2016. The Company has a marginal underweight retail position compared to its benchmark but its exposure is still significant at 37% of total portfolio value. Overall total return for the Company’s retail stock was -1.2% against 1.6% for the benchmark.

It is worth delving a little deeper into the generators of this performance and highlighting three very different sub-sectors, or types, of stock held, particularly as when the shopping centres in Swindon and Shrewsbury are excluded from the calculations the overall retail performance in 2016 increases demonstrably from -1.2% to +4.2%.

The Company’s largest exposure, 59% of the retail total, is to a set of well let principally prime retail parks most of which are classified as “Bulky” – so called as town planners allocate these to the sale of bulky retail goods; many commentators feel these bulky parks are more resilient to competition from online retailing compared to their “Fashion” retail park peers. Collectively, these provided the Company with a healthy 5.3% income return.

The second sub-sector, accounting for 14% of our retail exposure, is that of regional shop units, where the Company has a small prime portfolio of assets in good locations in Manchester, Edinburgh and Exeter. Through positive asset management action in these prime locations this sub-sector delivered an excellent total return of 16.0% for the Company compared to 1.4% for the benchmark.

The third sub-sector is shopping centres, where the Company’s holdings in Swindon and Shrewsbury account for 20% of its retail exposure. Whilst this is only 7% of the total portfolio the value of these assets dropped by 20% through the year, with the largest impact felt at Swindon mainly due to the loss of BHS as an anchor tenant at The Parade Shopping Centre.

The ongoing short term strategy for these shopping centres is to maintain and, where possible, improve the net operating income at each centre.

In Shrewsbury, at the Charles Darwin Centre, work on the refurbishment of the main mall has recently completed, transforming the appeal of this area to shoppers and retailers. This, together with the creation of a new anchor unit for Primark, also recently completed and handed over for them to carry out their shop fit, will, aside from improving net operating income in its own right, significantly improve the attractiveness of this shopping centre for other tenants. We expect this will create a snowball of interest, further improving net operating income in what is the Company’s largest current void. Already, new lettings to Smiggle, New Look Menswear and Costa Coffee can be directly attributed to the imminent introduction of Primark and, with their opening in summer 2017, we are analysing the wider strategic options for this asset.

Leisure/Other

The Company’s leisure investments – Cineworld, Glasgow, The Rotunda, Kingston-upon-Thames and Regent Circus, Swindon experienced mixed fortunes in 2016. The cinema in Glasgow outperformed the benchmark, primarily as a result of the value created by extending Cineworld’s lease length from 20 to 35 years.

This strong result was, however, offset by some stubborn vacancies amongst the food units and the out of favour supermarket component in Swindon, together with the performance of the anchor Odeon cinema at Kingston-upon-Thames where, despite continuing to deliver a healthy yield from a well located and popular asset, the rent is not expected to grow. Collectively during the year the Company’s leisure assets returned 3.9% against the benchmark of 7.2%.

Investment Activity

Sales

In line with the Company’s strategy to sell assets expected to underperform in the short to medium term or where non-accretive capital expenditure requirement has the potential to undermine future performance, the Company sold its mixed-use West End asset, 6 Arlington Street, London, W1 and Dolphin House, an office in Sunbury-on-Thames, for a combined price of £45.6 million prior to the UK Referendum on EU membership, representing an aggregate 14% premium to the 31 March 2016 market value.

Sales momentum continued into early January 2017 when the Company took advantage of a special opportunity to sell one of its West End Soho office properties, 13 Great Marlborough Street, to the owner of the adjoining property. The disposal price of £30.5 million, ahead of the year end valuation, equated to a yield of 3.3%. The building is wholly leased to Sony and, with less than two years remaining, the sale removed short term letting risk and the need for potentially significant capital expenditure.

Purchases

No purchases were made during the year. However, shortly after the year end in early February, the Company completed the forward purchase of a pre-let 258,370 sq ft distribution warehouse development reflecting a yield on capital of 5.8%. Located beside Burton upon Trent, equidistant between Nottingham and Birmingham on the  A38 dual carriageway between the M1 and M6 motorways, from which 87% of the UK population can be accessed within a legally continuous 4.5 hour HGV drive time, the tenant, Palletforce Limited, has committed to a 15 year lease at £5.58 psf, or £1.4 million per annum. The lease includes RPI inflation linked rent increases of between 1% and 3% per annum, compounded and payable 5 yearly. Having purchased the land, the balance of the total consideration of circa £22.2 million is payable on completion of the asset, scheduled for summer 2017 – a purchase in line with UKCPT’s strategy to focus its portfolio on assets that deliver a higher and sustainable income.

The acquisition is in line with UKCPT’s strategy to focus its portfolio on assets that deliver a higher and sustainable income, and it is being funded by the proceeds from the £30.5 million sale of 13 Great Marlborough Street, at a 3.3% net initial yield, as mentioned above.

Asset Management Activity

During the year the Company continued its drive  to strengthen income streams, extend lease lengths and add value to the portfolio. Over £6.5 million of annual income was generated after rent free periods and incentives through 44 new leases and 25 lease renewals.

It was good to witness the majority of the seven open market rent reviews within the portfolio generating rental increases this year. The most notable uplift took place at the Wembley distribution facility, Hannah Close, Neasden, let to Marks & Spencer where the rent jumped by 18% to £2.1 million per annum. Overall rent reviews achieved approximately 1% in excess of expected rental value with an increase to rental income of over £527,000 per annum.

There were nine instances of stepped or fixed increases in rent across the portfolio during the year, all of which helped to improve rents by 33%, adding over £435,000 per annum.

With uncertainty in the economy it was pleasing to see the Company’s continuing low void position at 31 December 2016 of 3.7% (of ERV), comfortably below the IPD benchmark void rate of 6.9%.

The Company is pleased to report that on average 99% of rent was collected within 21 days of each quarterly payment date during 2016 with a modest 0.4% of annual rent (£274,287) written off as bad debt for the year.

At Junction 27, Leeds, Dean House, trading as Betta Living, was placed into Administration in November 2016. However, following this tenant failure, new occupier tension emerged over this prime retail park unit which culminated in Carpetright agreeing an Assignment of the Dean House lease, paying the Administrator a premium and an increased rent to the Company.

As steady progress is made towards the delivery of Primark in Shrewsbury (handed over to Primark in early March 2017 with the opening scheduled for summer 2017), three lease renewals completed at the Charles Darwin Shopping Centre, with Claire’s, Grape Tree and Body Shop securing £136,500 per annum of rental income, 11% ahead of ERV. Fashion retailer, Yours, also relocated and upsized in the Centre to facilitate the introduction of Costa Coffee.

In Edinburgh, following the successful letting to Joules in the first half of the year (£320,000 per annum for 10 years) and completion of the lease to Clydesdale Bank Plc (£750,000 per annum for 20 years) in October, contracts were exchanged with Intergen UK Ltd at 81 George Street. Once refurbishment works to the second floor office suite have completed, £325,000 per annum will be secured on a new 10 year lease and Intergen will relocate from the third floor, releasing this for refurbishment in a City starved of prime Grade A city centre office stock. This ongoing active rejuvenation of the property has increased its value, added income and improved the average weighted unexpired lease length.

Just off Carnaby Street at Craven House, Soho, the company renewed the lease with the building’s occupier, Molinare TV & Film Ltd, the postproduction supplier of drama and feature films including Sherlock and Netflix’s The Crown. The new rent of £1,027,250 per annum is an increase of 37% on the previous rent passing.

Within the Retail Warehouse sector at St George’s Retail Park, Leicester, lease renewals took place with Pets at Home and Aldi securing £487,000 per annum (in line with ERV), on new long term leases of 10 and 15 years, respectively. As part of the transaction the units were ‘right-sized’ for the occupiers and re-clad.

In addition, contracts exchanged with Wren Kitchens and Tapi Carpets to occupy 20,000 sq ft of a new 25,000 sq ft development to be built at the reconfigured entrance to the Retail Park. The reconfigured works will assist access and egress to the park and when the new 10 year leases complete they will generate £489,500 per annum after lease incentives. Following the year end, in March, the final smaller unit of 5,000 sq ft has been pre-let to Laura Ashley on a term of 10 years adding a further £110,000 annual rent.

At the start of the year we let the one vacant floor at Eldon House in the City of London to Proclinical, a life sciences recruitment firm, at an annual rent of £266,000 per annum after lease incentives. The letting secured £52 psf per annum, well above the average rental level of £31 psf per annum payable at the time of acquisition. We also regeared Triglyph Property Consultants’ lease, increasing rent from £41,000 per annum to £81,000 per annum, in line with market rent.

In the second part of the year we agreed a 10 year term certain with an existing tenant Stace LLP at an improved level of rent £340,369 per annum, including additional floor space, up from the £189,898 per annum payable under the original lease. Again, this transaction secured £53 psf per annum, up from £32.50 psf per annum payable at the time of acquisition in late 2015.

Two new lettings completed with International Logistic Group (ILG) at Gatwick Gate, Crawley, generating £360,375 per annum, which was 9% ahead of ERV have added value and removed a short term lease expiry spike in the property.

In the regions, a new eight year lease of the entire office at 1 Rivergate, Bristol, was signed with the current sub-tenant, OVO Energy Ltd, which will commence in April 2018 on expiry of the current lease to BT. An increased rent of £1,720,000 per annum will be generated, up from the previous rent of £1,540,000 per annum.

Our focus on extending lease length and improving income was delivered in Glasgow with the extension of Cineworld’s lease from 20 years to an exceptionally long 35 years on its flagship cinema and also with the introduction of 1.5% per annum fixed rental increases, compounded and captured within the lease every five years. The rent passing was also increased from £1,460,000 per annum to £1,545,000 per annum.

A 10 year lease renewal took place with Turley Associates Ltd within 9 Colmore Row, a regional office building located next to Snow Hill railway station in Birmingham, at £105,150 per annum, an increase of 15% over the previous rent passing.

Market Outlook

Despite the uncertainty associated with the political wrangling, UK real estate continues to provide an elevated yield compared to other assets. Furthermore, lending to the sector is at a lower level than the Financial Crisis of 2007/08 and liquidity remains reasonable. In an environment where the economic fundamentals are expected to soften further and with uncertainty remaining high, we expect lower returns from property than has been the case over the last few years.

The steady secure income component generated by the asset class is likely to be the key driver of returns. From a sector perspective, we expect Central London office s to be the most negatively impacted sector in the near term, given the linkages to European markets via cross border trading. We expect industrial, and the best retail assets, to be comparatively resilient with potentially some growth, while long income assets should provide most resilience and our strategy is therefore aligned with this outlook.

Portfolio Strategy

Your Company aims to deliver an attractive level of income, together with the potential for capital and income growth, through investment in a diversified UK commercial property portfolio. Our strategy to achieve this combines investment, divestment, and asset management, including disciplined investment in existing stock where accretive.

UKCPT is in the fortunate position, having planned and executed a number of sales throughout the past year, of having a generous cash position of £75 million (31 December 2016) available for investment into opportunities which fit the Company’s investment policy. This cash available for investment is after allowing for dividend and capital expenditure commitments and, if opportunities arise, the Company has a further £50 million of capital available to be drawn down tactically from its revolving credit facility.

When looking at opportunities to deploy these resources, we have increased our focus on long- term secure income, often found in alternative sectors, which we will look to access provided that they have the potential to be accretive to recurring dividend cover.

Importantly we are also open to exploiting pricing opportunity in the market, across most sectors, with a large team and the resource to react quickly. As the intricacies of the UK leaving the EU unfold, we expect there to be more buying opportunities as the property market waxes and wanes.

Turning to asset management it is noticeable, when compared with the benchmark, that the Company’s portfolio has a low vacancy rate (3.7%). Whilst we are very pleased with the continuance of this low rate, we aim to augment net operating income through a focused strategy on asset management and leasing activity across the portfolio whilst seeking to protect shareholders from the risk of new vacancy by negotiating lease extensions with existing tenants.

As the property market seems firmly positioned in a period where the fundamental attributes of property reassert themselves, where income and income growth will drive returns, we believe the Company is well positioned to meet its objective of providing shareholders with an attractive level of income, together with the potential for capital and income growth from investment in a diversified portfolio of UK commercial property.

Will Fulton
Fund Manager
Standard Life Investments
19 April 2017

Directors’ Responsibility Statement

The Directors are responsible for preparing the Annual Report and the Group financial statements in accordance with applicable Guernsey law and those International Financial Reporting Standards (“IFRS”) as have been adopted by the European Union. They are also responsible for ensuring that the Annual Report includes information required by the Rules of the UK Listing Authority.

The Directors are required to prepare Group financial statements for each financial year which give a true and fair view of the financial position of the Group and the financial performance and cash flows of the Group for that period. In preparing those Group financial statements the Directors are required to:

·     select suitable accounting policies in accordance with IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors and then apply them consistently;

·     present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;

·     provide additional disclosures when compliance with the specific requirements in IFRS is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Group’s financial position and financial performance;

·     state that the Group has complied with IFRS, subject to any material departures disclosed and explained in the financial statements; and

·     prepare the financial statements on a going concern basis unless it is inappropriate to presume that the Group will continue in business.

The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Group and enable them to ensure that the Group financial statements comply with the Companies (Guernsey) Law 2008. They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The Directors are also responsible for ensuring that the Group complies with the provisions of the Listing Rules and the Disclosure Rules and Transparency Rules of the UK Listing Authority which, with regard to corporate governance, require the Group to disclose how it has applied the principles, and complied with the provisions, of the UK Corporate Governance Code applicable to the Group.

We confirm that to the best of our knowledge:

·     the Group financial statements, prepared in accordance with the IFRS, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group and comply with the Companies Law;

·     that in the opinion of the Board, the Annual Report and Accounts taken as a whole, is fair, balanced and understandable and it provides the information necessary to assess the Group’s position, performance, business model and strategy; and

·     the Strategic Report includes a fair review of the progression and performance of the business and the position of the Group together with a description of the principal risks and uncertainties that it faces.

On behalf of the Board

Andrew Wilson
Director
19 April 2017

Consolidated Statement of Comprehensive Income
For the year ended 31 december 2016

		Year Ended 31 December 2016	Year Ended 31 December 2015
	Notes	£’000	£’000
Revenue
Rental income	2	68,573	69,558
(Losses)/Gains on investment properties	9	(5,944)	49,937
Interest income		455	606
Total income		63,084	120,101
Expenditure
Investment management fee	3	(8,870)	(8,832)
Direct property expenses	4	(3,716)	(3,915)
Other expenses	4	(3,362)	(3,669)
Total expenditure		(15,948)	(16,416)
Net operating profit before finance costs		47,136	103,685
Finance costs
Finance costs	5	(8,101)	(8,441)
Loss on derecognition of interest rate swaps		-	(7,403)
		(8,101)	(15,844)
Net profit from ordinary activities before taxation		39,035	87,841
Tax credit/(charge)	6	6,151	(206)
Net profit for the year		45,186	87,635
Other comprehensive income to be reclassified to Profit or Loss in subsequent periods
Net change in fair value of swap reclassified to profit and loss	13	-	7,403
(Loss)/Gain arising on effective portion of interest rate swap	13	(3,913)	1,023
Other comprehensive income		(3,913)	8,426
Total comprehensive income for the year		41,273	96,061
Basic and diluted earnings per share	8	3.48p	6.74p

All of the profit and total comprehensive income for the year is attributable to the owners of the Company. All items in the above statement derive from continuing operations. The accompanying notes are an integral part of this statement. Additional EPRA performance measures are contained later within EPRA Performance Measures.

Consolidated Balance Sheet
As at 31 December 2016

	Notes	2016 £’000	2015 £’000
Non-current assets
Investment properties	9	1,242,274	1,311,695
Deferred tax asset	6	6,515	-
Interest rate swap	13	-	3,038
		1,248,789	1,314,733
Current assets
Investment properties held for sale	9	28,350	-
Trade and other receivables	11	16,035	11,379
Cash and cash equivalents		104,893	75,786
		149,278	87,165
Total assets		1,398,067	1,401,898
Current liabilities
Trade and other payables	12	(25,141)	(23,828)
Interest rate swap	13	(1,340)	(2,879)
		(26,481)	(26,707)
Non-current Liabilities
Bank Loan	13	(248,532)	(248,004)
Interest rate swap	13	(2,414)	-
		(250,946)	(248,004)
Total liabilities		(277,427)	(274,711)
Net assets		1,120,640	1,127,187
Represented by:
Share capital	14	539,872	539,872
Special distributable reserve		590,594	587,284
Capital reserve		(6,072)	(128)
Revenue reserve		-	-
Interest rate swap reserve		(3,754)	159
Equity shareholders’ funds		1,120,640	1,127,187
Net asset value per share		86.2p	86.7p

The accompanying notes are an integral part of this statement.

Consolidated Statement of Changes in Equity
For the year ended 31 December 2016

	Notes	Share Capital	Special Distributable Reserve	Capital Reserve	Revenue Reserve	Interest Rate Swap Reserve	Total
		£’000	£’000	£’000	£’000	£’000	£’000
At 1 January 2016		539,872	587,284	(128)	-	159	1,127,187
Net profit for the year		-	-	-	45,186	-	45,186
Other comprehensive income		-	-	-	-	(3,913)	(3,913)
Dividends paid	7	-	-	-	(47,820)	-	(47,820)
Transfer in respect of losses on investment properties	9	-	-	(5,944)	5,944	-	-
Transfer to special distributable reserve	1(o)	-	3,310	-	(3,310)	-	-
At 31 December 2016		539,872	590,594	(6,072)	-	(3,754)	1,120,640
FOR THE YEAR ENDED 31 DECEMBER 2015
		Share Capital	Special Distributable Reserve	Capital Reserve	Revenue Reserve	Interest Rate Swap Reserve	Total
		£’000	£’000	£’000	£’000	£’000	£’000
At 1 January 2015		539,872	597,406	(50,065)	-	(8,267)	1,078,946
Net profit for the year		-	-	-	87,635	-	87,635
Other comprehensive income		-	-	-	-	8,426	8,426
Dividends paid	7	-	-	-	(47,820)	-	(47,820)
Transfer in respect of gains on investment properties	9	-	-	49,937	(49,937)	-	-
Transfer from special distributable reserve	1(o)	-	(10,122)	-	10,122	-	-
At 31 December 2015		539,872	587,284	(128)	-	159	1,127,187

The accompanying notes are an integral part of this statement.

Consolidated Cash Flow Statement
For the year ended 31 December 2016

	Year ended 31 December 2016 £’000	Year ended 31 December  2015 £’000
Cash flows from operating activities
Net profit for the year before taxation	39,035	87,841
Adjustments for:
Losses/(Gains) on investment properties	5,944	(49,937)
Movement in lease incentive	(2,271)	(776)
Movement in provision for bad debts	(75)	(132)
(Increase)/Decrease in operating trade and other receivables	(2,310)	155
Increase in operating trade and other payables	1,421	790
Finance costs	8,125	8,280
Loss on derecognition of interest rate swaps	-	7,403
Cash generated by operations	49,869	53,624
Tax paid	(453)	-
Net cash inflow from operating activities	49,416	53,624
Cash flows from investing
Purchase of investment properties	(1,911)	(149,379)
Sale of investment properties	45,595	163,999
Capital expenditure	(8,558)	(11,147)
Net cash inflow from investing activities	35,126	3,473
Cash flows from financing activities
Net proceeds from utilisation of bank loan	-	18,177
Dividends paid	(47,820)	(47,820)
Bank loan interest paid	(6,467)	(5,285)
Payments under interest rate swap arrangement	(1,148)	(2,359)
Swap breakage costs	-	(7,403)
Net cash (outflow) from financing activities	(55,435)	(44,690)
Net increase in cash and cash equivalents	29,107	12,407
Opening balance	75,786	63,379
Closing cash and cash equivalents	104,893	75,786
Represented by:
Cash at bank	44,821	20,379
Money market funds	60,072	55,407
	104,893	75,786

The accompanying notes are an integral part of this statement.

Notes to the Accounts

1. Accounting Policies

A summary of the principal accounting policies, all of which have been applied consistently throughout the year, is set out below.

(a)  Basis of Accounting

The consolidated accounts have been prepared in accordance with International Financial Reporting Standards issued by the International Accounting Standards Board (the IASB), interpretations issued by the IFRS Interpretations Committee that remain in effect, and to the extent that they have been adopted by the European Union, applicable legal and regulatory requirements of Guernsey law and the Listing Rules of the UK Listing Authority. The audited Consolidated Financial Statements of the Group have been prepared under the historical cost convention as modified by the measurement of investment property and derivative financial instruments at fair value. The consolidated financial statements are presented in pound sterling.

New and amended standards and interpretations

The accounting policies adopted are consistent with those of the previous financial year. There have been other new and amended standards issued or have come into effect in the European Union from 1 January 2015  but either these were not applicable or did not have a material impact on the annual consolidated financial statements of the Group and hence not discussed and are detailed below:

– Annual Improvements to IFRSs 2010-2012 Cycle

– Annual Improvements to IFRSs 2011-2013 Cycle

– Annual Improvements to IFRSs 2014-2016 Cycle

(b)  Significant accounting judgements, estimates and assumptions

The preparation of the Group’s financial statements requires management to make judgements, estimates and assumptions that affect the amounts recognised in the financial statements. However, uncertainty about these judgements, assumptions and estimates could result in outcomes that could require a material adjustment to the carrying amount of the asset or liability affected in the future.

Key Estimation Uncertainties

Fair value of investment properties: Investment property is stated at fair value as at the balance sheet date as set out in note 1(h) and note 9 to these accounts.

The determination of the fair value of investment properties requires the use of estimates such as future cash flows from the assets. The estimate of future cash flows includes consideration of the repair and condition of the property, lease terms, future lease events, as well as other relevant factors for the particular asset.

These estimates are based on local market conditions existing at the balance sheet date.

(c)  Basis of Consolidation

The consolidated accounts comprise the accounts of the Company and its subsidiaries drawn up to

31 December each year. Subsidiaries are consolidated from the date on which control is transferred to the

Group and cease to be consolidated from the date on which control is transferred out of the Group.

The Jersey Property Unit Trusts (“JPUTS”) are all controlled via voting rights and hence those entities

are consolidated.

(d)  Functional and Presentation currency

Items included in the financial statements of the Group are measured using the currency of the primary economic environment in which the Company and its subsidiaries operate (“the functional currency”) which is pounds sterling. The financial statements are also presented in pounds sterling. All figures in the financial statements are rounded to the nearest thousand unless otherwise stated.

(e)  Revenue Recognition

Rental income, excluding VAT, arising from operating leases (including those containing stepped and fixed rent increases) is accounted for in the Statement of Comprehensive Income on a straight line basis over the lease term. Lease premiums paid and rent free periods granted, are recognised as assets and are amortised over the non-cancellable lease term.

Interest income is accounted on an accruals basis and included in operating profit.

(f)  Expenses

Expenses are accounted for on an accruals basis. The Group’s investment management and administration fees, finance costs and all other expenses are charged through the Statement of Comprehensive Income. Service charge costs, to the extent they are not recoverable from tenants, are accounted for on an accruals basis and included in operating profit.

(g)  Taxation

Current income tax assets and liabilities are measured at the amount expected to be recovered from or paid to taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the reporting date. Current income tax relating to items recognised directly in equity is recognised in equity and not in profit or loss. Positions taken in tax returns with respect to situations in which applicable tax regulations are subject to interpretation are periodically evaluated and provisions established where appropriate.

Deferred income tax is provided using the liability method on all temporary differences at the reporting date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred income tax assets are recognised only to the extent that it is probable that taxable profit will be available against which deductible temporary differences, carried forward tax credits or tax losses can be utilised. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities. In determining the expected manner of realization of an asset the directors consider that the Group will recover the value of investment property through sale. Deferred income tax relating to items recognised directly in equity is recognised in equity and not in profit or loss.

(h) Investment Properties

Investment properties are initially recognised at cost, being the fair value of consideration given, including transaction costs associated with the investment property. Any subsequent capital expenditure incurred in improving investment properties is capitalised in the period during which the expenditure is incurred and included within the book cost of the property.

After initial recognition, investment properties are measured at fair value, with the movement in fair value recognised in the Statement of Comprehensive Income and transferred to the Capital Reserve. Fair value is based on the external valuation provided by CBRE Limited, chartered surveyors, at the Balance Sheet date. The assessed fair value is reduced by the carrying amount of any accrued income resulting from the spreading of lease incentives and/or minimum lease payments.

On derecognition, gains and losses on disposals of investment properties are recognised in the Statement of Comprehensive Income and transferred to the Capital Reserve.

Recognition and derecognition occurs on the unconditional exchange of signed contracts between a willing buyer and a willing seller.

Investment property is transferred to current assets held for sale when it is expected that the carrying amount will be recovered principally through sale rather than from continuing use. For this to be the

case, the property must be available for immediate sale in its present condition, subject only to terms

that are usual and customary for sales of such property and its sale must be highly probable.

The Group has entered into forward funding agreements with third party developers in respect of certain properties. Under these agreements the Group will make payments to the developer as construction progresses. The value of these payments is assessed and certified by an expert.

Investment properties are recognised for accounting purposes upon completion of contract. Properties purchased under forward funding contracts are recognised at certified value to date.

(i)  Operating Lease Contracts – the Group  as Lessor

The Group has entered into commercial property leases on its investment property portfolio. The Group has determined, based on an evaluation of the terms and conditions of the arrangements that it retains all the significant risks and rewards of ownership of these properties and so accounts for leases as operating leases. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognised as an expense on a straight-line basis over the lease term.

(j)  Share Issue Expenses

Incremental external costs directly attributable to the issue of shares that would otherwise have been avoided are written off to capital reserves.

(k)  Segmental Reporting

The Directors are of the opinion that the Group is engaged in a single segment of business being property investment in the United Kingdom. The directors are of the opinion that the four property sectors analysed throughout the financial statements constitute this single segment, and are not separate operating segments as defined by IFRS 8 Operating Segments.

(l)  Cash and Cash Equivalents

Cash and cash equivalents are defined as cash in hand, demand deposits, and other short-term highly liquid investments readily convertible within three months or less to known amounts of cash and subject to insignificant risk of changes in value.

(m) Trade and Other Receivables

Trade receivables, which are generally due for settlement at the relevant quarter end are recognised and carried at the original invoice amount less an allowance for any uncollectable amounts. An estimate for doubtful debts is made when collection of the full amount is no longer probable, debts are over 90 days old or relate to tenants in administration. Bad debts are written off when identified.

(n)  Trade and Other Payables

Rental income received in advance represents the pro-rated rental income invoiced before the year end that relates to the period post the year end. VAT payable is the difference between output and input VAT at the year end. Other payables are accounted for on an accruals basis and include amounts which are due for settlement by the Group as at the year end and are generally carried at the original invoice amount. An estimate is made for any services incurred at the year end but for which no invoice has been received.

(o)  Reserves

Share Capital

This represents the proceeds from issuing ordinary shares.

Special Distributable Reserve

The special reserve is a distributable reserve to be used for all purposes permitted under Guernsey law, including the buyback of shares and the payment of dividends.

Capital Reserve

The following are accounted for in this reserve:

– gains and losses on the disposal of investment properties;

– increases and decreases in the fair value of investment properties held at the year end.

Revenue Reserve

Any surplus arising from the net profit on ordinary activities after taxation and payment of dividends is taken to this reserve, with any deficit charged to the special distributable reserve.

Interest Rate Swap Reserve

Any surplus/deficit arising from the marked to market valuation of the swap instrument is credited/charged to this account.

Treasury Share Reserve

This represents the cost of shares bought back by the Company and held in Treasury. The balance within this reserve is currently nil.

(p)  Interest-bearing borrowings

All bank loans and borrowings are initially recognised at cost, being the fair value of the consideration received net of arrangement costs associated with the borrowing. After initial recognition, all interest bearing loans and borrowings are subsequently measured at amortised cost. Amortised cost is calculated by taking into account any loan arrangement costs and any discount or premium on settlement.

On maturity, bank loans are recognised at par, which is equivalent to amortised cost. Bank loans redeemed before maturity are recognised at amortised cost with any charges associated with early redemptions being taken to the Statement of Comprehensive Income.

(q)  Derivative financial instruments

The Group uses derivative financial instruments to hedge its risk associated with interest rate fluctuations.

Derivative instruments are initially recognised in the Balance Sheet at their fair value split between current and non-current. Fair value is determined by reference to market values for similar instruments. Transaction costs are expensed immediately.

Gains or losses arising on the fair value of cash flow hedges in the form of derivative instruments are taken directly to Other Comprehensive Income. Such gains and losses are taken to a reserve created specifically for that purpose, described as the Interest Rate Swap Reserve in the Balance Sheet.

On termination the unrealised gains or losses arising from cash flow hedges in the form of derivative instruments, initially recognised in Other Comprehensive Income, are transferred to profit or loss.

The Group considers its interest rate swap qualifies for hedge accounting when the following criteria

are satisfied:

– The instrument must be related to an asset or liability

– It must change the character of the interest rate by converting a variable rate to a fixed rate or vice versa;

– It must match the principal amounts and maturity date of the hedged item; and

– As a cash flow hedge the forecast transaction (incurring interest payable on the bank loan) that is subject to the hedge must be highly probable and must present an exposure to variations in cash flows that could ultimately affect the profit or loss. The effectiveness of the hedge must be capable of reliable measurement and must be assessed as highly effective on an ongoing basis throughout the financial reporting periods for which the hedge was designated.

If a derivative instrument does not satisfy the Group’s criteria to qualify for hedge accounting that instrument will be deemed as an ineffective hedge.

Should any portion of an ineffective hedge be directly related to an underlying asset or liability, that portion of the derivative instrument should be assessed against the Group’s effective hedge criteria to establish if that portion qualifies to be recognised as an effective hedge.

Where a portion of an ineffective hedge qualifies against the Group’s criteria to be classified as an effective hedge that portion of the derivative instrument shall be accounted for as a separate and effective hedge instrument and treated as other comprehensive income.

Gains or losses arising on any derivative instrument or portion of a derivative instrument which is deemed to be ineffective will be recognised in profit or loss. Gains and losses, regardless of whether related to effective or ineffective hedges, are taken to a reserve created specifically for that purpose described in the balance sheet as the Interest Rate Swap Reserve.

(r)  New standards, amendments and interpretation not yet effective

There are a number of new standards, amendments and interpretations that have been issued but are not yet effective for this accounting year and have not been adopted early. Those standards which may affect the Group are listed below.

IFRS 9 Financial Instruments

In July 2014, the IASB published the final version of IFRS 9 ‘Financial Instruments’ which replaces the existing guidance in IAS 39 ‘Financial Instruments: Recognition and Measurement’. The IFRS 9 requirements represent a change from the existing requirements in IAS 39 in respect of financial assets. The standard contains two primary measurement categories for financial assets: amortised cost and fair value. A financial asset would be measured at amortised cost if it is held within a business model whose objective is to hold assets in order to collect

contractual cash flows, and the asset’s contractual terms give rise on specified dates to cash flows that

are solely payments of principal and interest on the principal outstanding. All other financial assets would be measured at fair value.

The standard eliminates the existing IAS 39 categories of held to-maturity, available-for-sale and loans and receivables.

For financial liabilities, IFRS 9 largely carries forward without substantive amendment the guidance on classification and measurement from IAS 39. The main change is that, in cases where the fair value option is taken for financial liabilities, the part of a fair value change due to an entity’s own credit is recorded in other comprehensive income rather than in profit or loss.

The standard introduces new requirements for hedge accounting that align hedge accounting more closely with risk management and establishes a more principles-based approach to hedge accounting. The standard also adds new requirements to address the impairment of financial assets and means that a loss event will no longer need to occur before an impairment allowance is recognised.

The standard will be effective for annual periods beginning on or after 1 January 2018, and is required

to be applied retrospectively with some exemptions. The Group is yet to assess IFRS 9’s full impact but it

is not currently anticipated that this standard will have any material impact on the Group’s financial

statements as presented for the current year.

IFRS 15 – Revenue from Contracts

IFRS 15 Revenue from Contracts with Customers (effective 1 January 2018, and endorsed by the EU

31 October 2016) specifies how and when an entity should recognise revenue from contracts and

enhances the nature of revenue disclosures.

The Group notes lease contracts within the scope of IAS 17 are excluded from the scope of IFRS 15. Rental income derived from operating leases is therefore out with the scope of IFRS 15. The group therefore does not anticipate IFRS 15 having a material impact on the Group’s financial statement as presented for the current year.

The group notes under specific circumstances, certain elements of contracts the group may enter (for example, rental guarantees provided when selling a property) potentially fall within the scope of IFRS 15.

The group does not have any contracts in place at 31 December 2016 it believes meet these specific criteria, but will review again at 31 December 2017.

The standard permits a modified retrospective approach. Financial statements will be prepared for the year of adoption (from 1 January 2018) by recognising a cumulative catch-up adjustment to opening retained earnings

The group has not implemented the standard in advance of the effective date and it does not intend to do so.

IFRS 16 – Leases

IFRS 16 Leases (effective 1 January 2019) sets out the principle for the recognition, measurement,

presentation and disclosure of leases for both the Lessee and Lessor.

As at the date of authorisation of these financial statements IFRS 16 has not yet been endorsed or adopted by the EU. The impact of this standard has not yet been assessed by the Group in full, but the Group is aware lessor accounting remains substantially unchanged and any impact is expected to be insignificant. A full impact assessment will however be concluded in due course.

Annual Improvements to IFRS

In addition to the above, Annual Improvements to IFRS 2012–2014 Cycle (effective 1 January 2016) have not been adopted early.

2. Rental Income

	Year ended 31 December 2016 £’000	Year ended 31 December 2015 £’000
Rental Income	68,573	69,558

Included within rental income is amortisation of lease premiums and rent free periods granted.

BHS occupied one of the Company’s retail units at The Parade, Swindon. Their lease contained rent free periods and fixed uplifts through to 2046. Due to BHS entering administration in the year, the lease was terminated resulting in a lease incentive asset of £2,426,000 being written off within rental income.

3. Fees

	Year ended 31 December 2016 £’000	Year ended 31 December 2015 £’000
Investment management Fee	8,870	8,832

The Group’s Investment Manager throughout the year was Standard Life Investments (Corporate Funds) Limited, who received an aggregate annual fee from the Group at an annual rate of 0.65 per cent of the Total Assets. The Investment Manager is also entitled to an administration fee which was reduced from £172,000 per annum to £100,000 per annum from 30 June 2015. The total paid in relation to this fee in the year was £100,000 (2015: £136,000). Both fees are payable quarterly in arrears. The Investment

Management agreement is terminable by either of the parties to it on 12 months’ notice.

4. Expenses

Direct Property Expenses	Year ended 31 December 2016 £’000	Year ended 31 December 2015 £’000
Direct operating expenses arising from investment property that generated rental income during the period	3,716	3,915

Other Expenses	Year ended 31 December 2016 £’000	Year ended 31 December 2015 £’000
Professional fees (incl valuation fees)	2,547	2,886
Movement in bad debt provision	75	(132)
Directors’ fees	215	196*
Administration fee	100	136
Administration and company secretarial fees	85	85
Regulatory fees	277	318
Auditor’s remuneration for:
Statutory audit	63	71
Non audit services – tax compliance and advisory services ad	-	60
Other expenses	-	49
	3,362	3,669

* This figure excludes NIL (2015: £25,000) payable to directors for additional work undertaken in relation to the debt refinancing.  This cost has been allocated to loan set up fees and will be amortised over the lifetime of the loans.

5. Finance costs

	Year ended 31 December 2016 £’000	Year ended 31 December 2015 £’000
Interest on principal loan amount	6,063	5,677
Amounts payable in respect of interest rate swap arrangement	1,197	1,972
Facility Fees	331	282
Amortisation of loan set up fees	510	510
	8,101	8,441

6. Taxation

UK Commercial Property Trust Limited owns five Guernsey tax exempt subsidiaries, UK Finance Holdings Limited (UKFH), UK Commercial Property GP Limited (GP), UK Commercial Property Holdings Limited (UKCPH), UK Commercial Property Estates Limited (UKCPEL) and UK Commercial Property Estates Holdings Limited (UKCPEH). GP and UKCPH are partners in a Guernsey Limited Partnership (“the Partnership”) and own five Jersey Property Unit Trusts. UKCPEL owns three Jersey Property Unit Trusts. The Partnership, UKCPH and UKCPEL own a portfolio of UK properties and derived rental income from those properties. As the Partnership and the unit trusts are income transparent for UK tax purposes, the partners and unit holders are liable to UK income tax on their share of the net rental profits of the Partnership and unit trusts respectively.   The entities directly owning UK property are also liable to UK income tax on their own net UK rental profits.  All entities subject to UK income tax have elected to receive rental income gross under HMRC’s non-resident landlord scheme. 

A reconciliation of the income tax charge applicable to the results from ordinary activities at the statutory income tax rates to the charge for the year is as follows:

	Year ended	Year ended
	31 December 2016	31 December 2015
	£’000	£’000
Net profit before tax	39,035	87,841
UK income tax at a rate of 20 per cent	7,807	17,568
Effect of:
Capital loss / (gains) on investment properties not taxable	2,554	(9,436)
Lease incentive adjustment not allowable for tax purposes	454	155
Capital gains realised not taxable	(1,819)	(706)
Income not taxable	(91)	(121)
Intercompany loan interest	(11,126)	(13,373)
Expenditure not allowed for income tax purposes	2,585	3,169
Deferred tax asset not provided for	-	2,950
Total current tax charge	364	206
Net deferred tax asset	(6,515)	-
Total tax (credit)/charge	(6,151)	206

The components of the tax charge in the consolidated income statement are as follows:

Reconciliation of current corporation and withholding tax in the consolidated income statement	Year ended 31 December 2016 £’000	Year ended 31 December 2015 £’000
Corporation tax charge in the year	117	129
Withholding tax charge in the year	374	77
Adjustment in respect of prior year over provisions	(127)	-
Total current tax charge	364	206

Reconciliation of deferred tax in the consolidated income statement	Year ended 31 December 2016 £’000	Year ended 31 December 2015 £’000
Deferred tax asset on tax losses	(8,428)	-
Deferred tax asset in respect of capital allowance timing differences	(337)	-
Deferred tax liability in respect of capital allowance timing differences	2,250	-
	(6,515)	-

The company owns one UK Limited Company, Brixton Radlett Property Limited (“BRPL”). As the losses of the Group cannot be used to offset the profits of BRPL, the profits of this Company are subject to corporation tax in the UK, at a rate of 20% during the period of ownership. In addition, as the inter- company debt in BRPL is payable to a Guernsey entity, withholding tax of 20% is suffered on the payment of this interest. It is estimated that for the year ended 31 December 2016 the total amount payable in corporation tax and withholding tax is £117,000 and £374,000 respectively, of which £117,000 remained payable at the year end.

The components of the deferred tax asset in the consolidated balance sheet are as follows:

Reconciliation of deferred tax in the consolidated balance sheet	Year ended 31 December 2016 £’000	Year ended 31 December 2015 £’000
Deferred tax asset on tax losses	8,428	-
Deferred tax asset in respect of capital allowance timing differences	337	-
Deferred tax liability in respect of capital allowance timing differences	(2,250)	-
	6,515	-

The Group has unused tax losses carried forward of £50,437,000 (2014/2015: £33,204,000) based on the 2015/2016 tax returns to 5 April 2016.  This figure is estimated to be £52,256,319 as at 31 December 2016, of which £10,118,753 have not been recognised in these financial statements as they relate to one group company that is not expected to recover its tax losses in the foreseeable future.

Deferred tax asset

During the year the Group refinanced all inter-company loans, the majority of which were due to expire on 30 September 2016. All loans were re-financed for a 12 year duration, at rates ranging from 4% to 4.43%. As a result of the refinance, the Group forecasts it will begin to utilise tax losses within certain subsidiaries built up since inception to offset future taxable profits. A deferred tax asset of £8,428,000 (2015:£nil) has therefore been recognised in the year.

A deferred tax asset of £337,000 (2015: £nil) has also been recognised in the year, on capital allowance balances of sold properties, where the group has retained the right to claim capital allowances after sale. A deferred tax liability of £2,250,000 (2015: £nil) has been recognised in the year, relating to capital allowances booked on properties remaining in the portfolio as at 31 December.

IAS 12 Income Taxes allows deferred tax assets and liabilities to be offset. A net deferred asset of £6,515,000 (2015: £nil) is therefore included in the consolidated balance sheet.

The Company and its subsidiaries are exempt from Guernsey taxation on non-Guernsey source income (which includes relevant Guernsey bank interest) under the Income Tax (Exempt Bodies) (Guernsey) Ordinance, 1989 as amended.  A fixed annual fee of £1,200 per company is payable to the States of Guernsey in respect of this exemption. No charge to Guernsey taxation will arise on capital gains.

7. Dividends

Dividends on Ordinary Shares: 2015 Fourth interim of 0.92p per share paid	Year ended 31 December 2016 £’000	Year ended 31 December 2015 £’000
26 February 2016 (2014 Fourth interim: 0.92p)	11,955	11,955
2016 First interim of 0.92p per share paid
31 May 2016 (2015 First interim: 0.92p)	11,955	11,955
2016 Second interim of 0.92p per share paid
31 August 2016 (2015 Second interim: 0.92p)	11,955	11,955
2016 Third interim of 0.92p per share paid
30 November 2016 (2015 Third interim: 0.92p)	11,955	11,955
	47,820	47,820

A fourth interim dividend of 0.92p was paid on 28 February 2017 to shareholders on the register on 16 February 2017. Although this payment relates to the year ended 31 December 2016, under International Financial Reporting Standards it will be accounted for in the year ending 31 December 2017.

8. Basic and diluted Earnings per Share

The earnings per share (EPS) are based on the net profit for the year of £45,186,000 (2015: profit £87,635,000) and on 1,299,412,465 (2015:1,299,412,465) ordinary shares, being the weighted average number of shares in issue during the year. As there are no dilutive instruments outstanding, basic and diluted earnings per share are identical.

9. Investment Properties

Freehold and Leasehold properties	Year ended 31 December 2016 £’000	Year ended 31 December 2015 £’000
Opening valuation	1,311,695	1,265,231
Purchases at cost	1,911	149,379
Capital expenditure	8,558	11,147
(Loss)/Gain on revaluation to fair value	(12,769)	47,185
Disposals at prior year valuation	(36,500)	(160,471)
Adjustment for lease incentives	(2,271)	(776)
Total Fair value at 31 December	1,270,624	1,311,695
Less: reclassified as held for sale	(28,350)	-
Fair value as at 31 December	1,242,274	1,311,695
(Losses)/Gains on investment properties at fair value Comprise
Valuation gains	(12,769)	47,185
Movement in provision for lease incentives	(2,271)	(776)
Gain on disposal	9,096	3,528
	(5,944)	49,937
Gains on investment properties sold
Original cost of investment properties sold	(22,790)	(152,457)
Sale proceeds	45,595	163,999
Profit/(loss) on investment properties sold	22,805	11,542
Recognised in previous periods	13,709	8,013
Recognised in current period	9,096	3,529
	22,805	11,542

Given the objectives of the Group and the nature of its investments, the Directors believe that the Group has only one asset class, that of Commercial Property.

CBRE Limited, (the “Property Valuer”) completed a valuation of Group investment properties as at 31 December 2016 on the basis of fair value in accordance with the requirements of the Royal Institution of Chartered Surveyors (RICS) ‘RICS Valuation – Professional Standards global, January 2014’ and ‘RICS Valuation – Professional Standards UK, January 2014 (revised April 2015)’ (the ‘Red Book’). For most practical purposes there would be no difference between Fair Value (as defined in IFRS 13) and Market

Value. The Property Valuer, in valuing the portfolio, is acting as an ‘External Valuer’, as defined in the Red Book, exercising independence and objectivity. The Property Valuer’s opinion of Fair Value has been primarily derived using comparable recent market transactions in order to determine the price that would be received to sell an asset in an orderly transaction between market participants at the valuation date. The fair value of these investment properties amounted to £1,280,755,000 (2015:£1,319,555,000). The difference between the fair value and the value per the consolidated balance sheet at 31 December 2016 consists of accrued income relating to the pre-payment for rent-free periods recognised over the life of the lease totalling £10,131,000 (2015: £7,861,000) which is separately recorded in the accounts as a current asset. The Group has entered into leases on its property portfolio as lessor (See note 19 for further information).

·     No one property accounts for more than 15 per cent of the gross assets of the Group.

·     All leasehold properties have more than 60 years remaining on the lease term.

·     There are no restrictions on the realisability of the Group’s investment properties or on the remittance of income or proceeds of disposal.

However, the Group’s investments comprise UK commercial property, which may be difficult to realise.

The property portfolio’s fair value as at 31 December 2016 has been prepared adopting the following assumptions:

•              That, where let, the Estimated Net Annual Rent (after void and rent free period assumptions) for each property, or part of a property, reflects the terms of the leases as at the date of valuation. If the property, or parts thereof, are vacant at the date of valuation, the rental value reflects the rent the Property Valuer considers would be obtainable on an open market letting as at the date of valuation.

•              The Property Valuer has assumed that, where let, all rent reviews are to be assessed by reference to the estimated rental value calculated in accordance with the terms of the lease. Also there is the assumption that all tenants will meet their obligations under their leases and are responsible for insurance, payment of business rates, and all repairs, whether directly or by means of a service charge.

•              The Property Valuer has not made any adjustments to reflect any liability to taxation that may arise on disposal, nor any costs associated with disposals incurred by the owner.

•              The Property Valuer assumes an initial yield in the region of 3 to 7 per cent, based on market evidence, for the majority of the properties, with the reversionary yield being in the region of 4 to 7 per cent.

•              The Property Valuer takes account of deleterious materials included in the construction of the investment properties, in arriving at its estimate of Fair Value, when the Investment Manager advises of the presence of such materials.

The majority of the leases are on a full repairing basis and as such the Group is not liable for costs in respect of repairs or maintenance to its investment properties.

The following disclosure is provided in relation to the adoption of IFRS 13 Fair Value Measurement. All properties are deemed Level 3 for the purposes of fair value measurement and the current use of each property is considered the highest and best use. There have been no transfers from Level 3 in the year. The fair value of completed investment property is determined using a yield methodology. Under this method, a property’s fair value is estimated using explicit assumptions regarding the benefits and liabilities of ownership over the asset’s life including an exit or terminal value. As an accepted method within the income approach to valuation, this method involves the projection of a series of cash flows on a real property interest. To this projected cash flow series, an appropriate, market-derived discount rate (capitalisation rate) is applied to establish the present value of the cash inflows associated with the real property. The duration of the cash flow and the specific timing of inflows and outflows are determined by events such as rent reviews, lease renewal and related lease up periods, re-letting, redevelopment, or refurbishment. The appropriate duration is typically driven by market behaviour that is a characteristic of the class of property. In the case of investment properties, periodic cash flow is typically estimated as gross income less vacancy, non-recoverable expenses, collection losses, lease incentives, maintenance cost, agent and commission costs and other operating and management expenses. The series of periodic net cash inflows, along with an estimate of the terminal value anticipated at the end of the projection period, is then discounted. Set out below are the valuation techniques used for each property sector plus a description and quantification of the key unobservable inputs relating to each sector. There has been no change in valuation technique in the year.

Sector	Fair Value at	Valuation Techniques techniques	Unobservable inputs	Range
	31/12/16 (£m)			(weighted average)
Industrial	405.9	Yield methodology	Annual rent per sq ft	£5-£19 (£9)
			Capitalisation rate	4.7%-7.1% (5.6%)
Office	263.9	Yield methodology	Annual rent per sq ft	£15-£58 (£38)
			Capitalisation rate	3.8%-7.7% (5.4%
Retail	474.0	Yield methodology	Annual rent per sq ft	£2-£306 (£63)
			Capitalisation rate	3.8%-12.9% (5.5%)
Leisure	126.8	Yield methodology	Annual rent per sq ft	£13-£35 (£25)
			Capitalisation rate	5.1%-6% (5.4%)

Sensitivity analysis

The table below presents the sensitivity of the valuation to changes in the most significant assumptions underlying the valuation of investment property.

Sector	Assumption	Movement	Effect on valuation
Industrial	Capitalisation rate	+50 basis points	Decrease £34.9m
		-50 basis points	Increase £42.4m
Office	Capitalisation rate	+50 basis points	Decrease £25.9m
		-50 basis points	Increase £31.9m
Retail	Capitalisation rate	+50 basis points	Decrease £42.6m
		-50 basis points	Increase £48.0m
Leisure	Capitalisation rate	+50 basis points	Decrease £15.2m
		-50 basis points	Increase £9.1m

Investment property valuation process

The valuations of investment properties are performed quarterly on the basis of valuation reports prepared by independent and qualified valuers and reviewed by the Property Valuation Committee

of the Company.

These reports are based on both:

·     Information provided by the Investment Manager such as current rents, terms and conditions of lease  agreements, service charges and capital expenditure. This information is derived from the Investment Manager’s financial and property management systems and is subject to the Investment Manager’s overall control environment.

·     Assumptions and valuation models used by the valuers — the assumptions are typically market  related, such as yields. These are based on their professional judgment and market observation.

The information provided to the valuers and the assumptions and valuation models used by the valuers are reviewed by the Investment Manager. This includes a review of fair value movements over the period.

Asset held for sale

The asset shown on the Balance Sheet as held for sale at the year end is 13 Great Marlborough Street, London. The asset is shown at fair value in the Balance Sheet as a held for sale asset and continues to be valued by CBRE Limited using the method described in this note. The held for sale asset is included in the investment property table shown in this note. Any unrealised gain and loss on this assets is shown in the investment property table and in the consolidated statement of comprehensive income as gains/(losses) on investment properties.

The asset was sold by the Group on 13 January 2017 for a consideration of £30.5 million.

10. Investment in Subsidiary Undertakings

The Company owns 100 per cent of the issued ordinary share capital of UK Commercial Property Finance Holdings Limited (UKCFH), a company incorporated in Guernsey whose principal business is that of a holding company.

The Company owns 100 per cent of the issued share capital of UK Commercial Property Estates Holdings Limited (UKCPEH), a company incorporated in Guernsey whose principal business is that of a holding company. UKCPEH Limited owns 100 per cent of the issued share capital of UK Commercial Property Estates Limited, a company incorporated in Guernsey whose principal business is that of an

investment and property company. UKCPEH also owns 100% of Brixton Radlett Property Limited, a UK company, whose principal business is that of an investment and property company.

UKCFH owns 100 per cent of the issued ordinary share capital of UK Commercial Property Holdings Limited (UKCPH), a company incorporated in Guernsey whose principal business is that of an investment and property company.

UKCFH owns 100 per cent of the issued share capital of UK Commercial Property GP Limited, (GP), a company incorporated in Guernsey whose principal business is that of an investment and property company.

UKCPT Limited Partnership, (GLP), is a Guernsey limited partnership, and it holds a portfolio of properties. UKCPH and GP, have a partnership interest of 99 and 1 per cent respectively in the GLP. The GP is the general partner and UKCPH is a limited partner of the GLP.

UKCFH owns 100 per cent of the issued share capital of UK Commercial Property Nominee Limited, a company incorporated in Guernsey whose principal business is that of a nominee company.

In addition the Group wholly owns eight Jersey Property Unit Trusts (JPUTs) namely 176-206 High Street Kensington Unit Trust (wound up March 2017), Junction 27 Retail Unit Trust, Charles Darwin Retail Unit Trust, St Georges Leicester Unit Trust, Kew Retail Park Unit Trust, Pride Hill Retail Unit Trust, Riverside Mall Retail Unit Trust and Rotunda Kingston Property Unit Trust. The principal business of the Unit Trusts is that of investment in property.

11. Trade and Other receivables

	2016 £’000	2015 £’000
Rents receivable (net of provision for bad debt  - see below)	2,603	1,163
Lease Incentive	10,131	7,860
Other Debtors and prepayments	3,301	2,356
	16,035	11,379

Provision for Bad Debts as at 31 December 2015/2014	586	718
Movement in the year	75	(132)
Provision for Bad Debts as at 31 December 2016/2015	661	586

The ageing of these receivables is as follows:

	2016 £’000	2015 £’000
Less than 6 months	302	321
Between 6 and 12 months	211	145
Over 12 months	148	120
	661	586

Other debtors include tenant deposits of £3,038,000 (2015 – £2,323,000). All other debtors are due within one year. No other debts past due are impaired in either year.

12. Trade and Other payables

	2016 £’000	2015 £’000
Rental income received in advance	14,093	12,062
Investment Manager fee payable	2,256	2,266
VAT payable	590	1,230
Corporation and withholding tax payable	117	206
Other payables	8,085	8,064
	25,141	23,828

Other payables include tenant deposits of £3,038,000 (2015 – £2,323,000). The Group’s payment policy is to ensure settlement of supplier invoices in accordance with stated terms.

13. Bank Loan and Interest rate swaps

	2016	2015
	£’000	£’000
Total Facilities available	300,000	300,000
Drawn down:
Barclays facility	150,000	150,000
Cornerstone facility	100,000	100,000
Set up costs incurred	(4,536)	(4,627)
Accumulated amortisation of set up costs	2,474	1,964
Accrued variable rate interest on bank loan	594	667
Total due	248,532	248,004

(i) Barclays Facility

The Group has a five year £150 million facility, maturing in April 2020, with Barclays Bank plc initially taken out in May 2011 and extended in April 2015. As at 31 December 2016 this entire loan was drawn down. The bank loan is secured on the property portfolio held by UKCPEL. Under bank covenants related to the loan UKCPEL is to ensure that at all times:

·     The loan to value percentage does not exceed 60 per cent.

·     Interest cover at the relevant payment date is not less than 160 per cent UKCPEL met all covenant tests during the year.

Interest rate exposure is hedged by the purchase of an interest rate swap contract. The notional amount of the swap and the swap term matches the loan principal and the loan term. As at 31 December 2016 the Group had in place one interest rate swap totaling £150 million with Barclays Bank plc (2015: £150 million). The interest rate swap effectively hedges the current drawn down loan with Barclays Bank plc.

Interest on the swap is receivable at a variable rate calculated on the same LIBOR basis as for the bank loan (as detailed below but excluding margins) and payable at a fixed rate of 1.30 per cent per annum on the £150 million swap. The fair value of the liability in respect of the interest rate swap contract at 31 December 2016 is £3,754,000 (2015: Asset of £159,000) which is based on the marked to market value.

Interest is payable by UKCPEL at a rate equal to the aggregate of LIBOR, mandatory costs of the Bank and a margin. The applicable margin is fixed at 1.5 per cent per annum and this was the applicable margin as at 31 December 2016 (2015: 1.50per cent).

In addition to the above UKPCPEL has a £50 million revolving credit facility (“RCF”) with Barclays Bank plc at a margin of 1.50 per cent above LIBOR available for four years but cancellable at any time. The RCF has a non-utilisation fee of 0.6 per cent per annum charged on the proportion of the RCF not utilised on a pro-rata

basis. At 31 December 2016 the RCF remained unutilised.

(ii) Cornerstone Facility

The Group has a twelve year £100 million loan which is due to mature in April 2027 with Cornerstone Real Estate Advisers LLP, a member of the MassMutual Financial Services Group. The loan was taken out by UK Commercial Property Finance Holdings Limited (UKCFH). As at 31 December 2016 this entire loan was drawn down. The bank loan is secured on the portfolio of eight properties held within the wider Group. Under bank covenants related to the loan UKCFH is to ensure that at all times:

·     The loan to value percentage does not exceed 75 per cent.

·     Interest cover at the relevant payment date and also projected over the course of the proceeding 12 months is not less than 200 per cent.

UKCFH met all covenant tests during the year.

Interest is payable by UKCFH at a fixed rate equal to the aggregate of the equivalent 12 year gilt yield, fixed at the time of drawdown and a margin. This resulted in a fixed rate of interest payable of 3.03 per cent per annum. There are no interest rate swaps in place relating to this facility.

Swap Instruments

As at 31 December 2016 the Group had in place an interest rate swap instrument totalling £150 million which was deemed to be an effective hedge as per note 1(q).

The revaluation of this swap at the year end resulted in a loss on interest rate swaps of £3.9 million (2015: gain £1.0 million). Of the total loss arising on interest rate swaps, £3.9 million related to effective hedge instruments (2015: gain £1.0 million) which is credited through Other Comprehensive Income in the Statement of Comprehensive Income.

The valuation techniques applied to fair value the derivatives include the swap models including the CVA/DVA swap models, using present value calculations. The model incorporates various inputs including the credit quality of counterparties and forward rates.

The fair value of the interest rate swaps as at 31 December 2016 amounted to a liability of £3,754,000 (2015: Asset of £159,000). Based on current yield curves and non-performance risk, £1.3 million (2015: £2.9m) of this value is a liability which relates to the next 12 months and is therefore classified as a current liability. The remainder is classified as a long term liability.

14. Share capital accounts

			2016	2015
			£’000	£’000
Share capital
Opening balance			539,872	539,872
Share Capital as at 31 December 2016			539,872	539,872
(number of shares in issue at the year end being 1,299,412,465 (2015: 1,299,412,465)) of 25p each.

Ordinary shareholders participate in all general meetings of the Company on the basis of one vote for each share held. The Articles of Association of the Company allow for an unlimited number of shares to be issued, subject to restrictions placed by AGM resolutions. There are no restrictions on the shares in issue.

15. Net Asset Value per Share

The net asset value per ordinary share is based on net assets of £1,120,640,000 (2015: £1,127,187,000) and 1,299,412,465 (2014: 1,299,412,465) Ordinary Shares, being the number of Ordinary Shares in issue at the year end.

16. Related Party Transactions

No Director has an interest in any transactions which are or were unusual in their nature or significant to the nature of the Group.

Standard Life Investments (Corporate Funds) Limited, as the Manager of the Group for the period received fees for their services as investment managers. Further details are provided in note 3. The total management fee charged to the Statement of Comprehensive Income during the year was £8,870,000 (2015: £8,832,000) of which £2,256,000 (2015: £2,266,000) remained payable at the year end. The Investment Manager also received an administration fee of £100,000 (2015: £136,000), of which £25,000

(2015: £25,000) remained payable at the year end.

The Directors of the Company are deemed as key management personnel and received fees for their services. Further details are provided in the annual report. Total fees for the year were £211,000 (2015: £221,000) none of which remained payable at the year end (2015: nil).

The Group invests in the Standard Life Investments Liquidity Fund which is managed by Standard Life Investments Limited. As at 31 December 2016 the Group had invested £60.1 million in the Standard Life Investments Liquidity Fund (2015: £55.4 million). No additional fees are payable to Standard Life as a result of this investment.

17. Financial Instruments and Investment Properties

The Group’s investment objective is to provide ordinary shareholders with an attractive level of income together with the potential for income and capital growth from investing in a diversified UK commercial property portfolio.

Consistent with that objective, the Group holds UK commercial property investments. The Group’s financial instruments consist of cash, receivables and payables that arise directly from its operations and loan facilities and swap instruments.

The main risks arising from the Group’s financial instruments are credit risk, liquidity risk, market risk and interest rate risk. The Board reviews and agrees policies for managing its risk exposure. These policies are summarised below and remained unchanged during the year.

Fair value hierarchy

The following table shows an analysis of the fair values of investment properties recognized in the balance sheet by level of the fair value hierarchy:

Explanation of the fair value hierarchy:

Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date.

Level 2 – Use of a model with inputs (other than quoted prices included in level 1) that are directly or indirectly observable market data.

Level 3 – Use of a model with inputs that are not based on observable market data.

Investment Properties

31 December 2016	Level 1	Level 2	Level 3	Total fair value
	£'000	£'000	£'000	£'000
Investment properties	-	-	1,270,624	1,270,624
31 December 2015	Level 1	Level 2	Level 3	Total fair value
	£'000	£'000	£'000	£'000
Investment properties	-	-	1,311,695	1,311,695

The lowest level of input is the underlying yield on each property which is an input not based on observable market data.

The following table shows an analysis of the fair values of loans recognised in the balance sheet by level of the fair value hierarchy:

Bank Loans
31 December 2016	Level 1	Level 2	Level 3	Total fair value
	£'000	£'000	£'000	£'000
Bank loans	-	263,943	-	263,943
31 December 2015	Level 1	Level 2	Level 3	Total fair value
	£'000	£'000	£'000	£'000
Bank loans	-	245,009	-	245,009

The lowest level of input is the interest rate payable on each borrowing which is a directly observable input.

The following table shows an analysis of the fair values of financial instruments recognised in the balance sheet by level of the fair value hierarchy:

31 December 2016	Level 1	Level 2	Level 3	Total fair value
	£’000	£’000	£’000	£’000
Interest rate swap	-	(3,754)	-	(3,754)
Trade and other receivables	-	16,035	-	16,035
Trade and other payables	-	(25,141)	-	(25,141)
31 December 2015	Level 1	Level 2	Level 3	Total fair value
	£’000	£’000	£’000	£’000
Interest rate swap	-	159	-	159
Trade and other receivables	-	11,379	-	11,379
Trade and other payables	-	(23,828)	-	(23,828)

The lowest level of input is the three month LIBOR yield curve which is a directly observable input.

The carrying amount of trade and other receivables and payables is equal to their fair value, due to the short term maturities of these instruments. Expected maturities are estimated to be the same as contractual maturities.

The fair value of investment properties is calculated using unobservable inputs as described in note 9.

The fair value of the derivative interest rate swap contract is estimated by discounting expected future cash flows using current market interest rates and yield curves over the remaining term of the instrument.

The fair value of the bank loans are estimated by discounting expected future cash flows using the current interest rates applicable to each loan.

There has been no transfers between levels in the year for items held at fair value.

Real Estate Risk

The Group has identified the following risks associated with the real estate portfolio:

•             The cost of any development schemes may increase if there are delays in the planning process. The Group uses advisers who are experts in the specific planning requirements in the scheme’s location in order to reduce the risks that may arise in the planning process;

•             A major tenant may become insolvent causing a significant loss of rental income and a reduction in the value of the associated property (see also credit risk below). To reduce this risk, the Group reviews the financial status of all prospective tenants and decides on the appropriate level of security required via rental deposits or guarantees;

•              The exposure of the fair values of the portfolio to market and occupier fundamentals such as tenants                financial position.

Credit risk

Credit risk is the risk that an issuer or counterparty will be unable or unwilling to meet a commitment that it has entered into with the Group.

At the reporting date, the maturity of the Group’s financial assets was:

Financial Assets 2016
	3 months or less	More than 3 months but less than one year	More than one year	Total
	£’000	£’000	£’000	£’000
Cash	104,893	-	-	104,893
Rent receivable	2,603	-	-	2,603
Other debtors	3,301	-	-	3,301
	110,797	-	-	110,797
Financial Assets 2015
	3 months or less	More than 3 months but less than one year	More than one year	Total
	£’000	£’000	£’000	£’000
Cash	75,786	-	-	75,786
Rent receivable	1,163	-	-	1,163
Other debtors	2,356	-	-	2,356
	79,305	-	-	79,305

In the event of default by a tenant, the Group will suffer a rental shortfall and incur additional costs, including legal expenses, in maintaining, insuring and re-letting the property until it is re-let. The Board receives regular reports on concentrations of risk and any tenants in arrears. The Investment Manager monitors such reports in order to anticipate and minimise the impact of defaults by tenants.

The Company has a diversified tenant portfolio. The maximum credit risk from the rent receivables of the Group at 31 December 2016 is £5,641,000 (2015: £1,163,000). The Group holds rental deposits of £3,038,000 (2015: £2,323,000) as collateral against tenant arrears/defaults. All tenant deposits are in line with market practice. There is no residual credit risk associated with the financial assets of the Group. Other than those included in the provision for bad debts, no financial assets past due are impaired.

All of the cash is placed with financial institutions with a credit rating of A or above. £60.1 million (2015: £55.4 million) of the year end cash balance is held in the Standard Life Investments Liquidity Fund, which is a money market fund and has a triple A rating. Bankruptcy or insolvency of a financial institution may cause the Group’s ability to access cash placed on deposit to be delayed or limited. Should the credit quality or the financial position of the banks currently employed significantly deteriorate, the Investment

Manager would move the cash holdings to another financial institution subject to restrictions under the loan facility.

Liquidity Risk

Liquidity risk is the risk that the Group will encounter difficulty in realising assets or otherwise raising funds to meet financial commitments. While commercial properties are not immediately realisable, the Group has sufficient cash resources to meet liabilities.

The Group’s liquidity risk is managed on an ongoing basis by the Investment Manager investing in a diversified portfolio of prime real estate and placing cash in liquid deposits and accounts. This is monitored on a quarterly basis by the Board. In certain circumstances, the terms of the Group’s bank loan entitles the

lender to require early repayment, and in such circumstances the Group’s ability to maintain dividend levels and the net asset value attributable to the ordinary shares could be adversely affected.

As at 31 December 2016 the cash balance was £104,893,000 (2015: £75,786,000).

At the reporting date, the contractual maturity of the Group’s liabilities, which are considered to be the same as expected maturities, was:

Financial Liabilities 2016	3 months or less £’000	More than 3 months but less than one year £’000	More than one year £’000	Total £’000
Bank loan	1,783	5,447	285,710	292,940
Other creditors	23,941	-	-	23,941
	25,724	5,447	285,710	316,881
Financial Liabilities 2015	3 months or less £’000	More than 3 months but less than one year £’000	More than one year £’000	Total £’000
Bank loan	1,803	5,423	292,390	299,616
Other creditors	22,324	-	-	22,324
	24,127	5,423	292,390	321,940

The amounts in the table are based on contractual undiscounted payments.

Interest rate risk

The cash balance as shown in the Balance Sheet, is its carrying amount and has a maturity of less than one year.

Interest is receivable on cash at a variable rate ranging from 0.2 per cent to 0.6 per cent at the year end and deposits are re-priced at intervals of less than one year.

An increase of 1 per cent in interest rates as at the reporting date would have increased the reported profit by £1,049,000 (2015: increased the reported profit by £758,000). A decrease of 1 per cent would have reduced the reported profit by £1,049,000 (2015: decreased the reported profit by £758,000). The effect on equity is nil (excluding the impact of a charge in retained earnings as a result of a change in net profit).

As the Group’s bank loans have been hedged by interest rate swaps or are at fixed rates, these loans are not subject to interest rate risk.

As at 31 December 2016 the Group had in place a total of £150 million of interest rate swap instruments (2015: £150 million). The values of these instruments are marked to market and will change if interest rates change. It is estimated that an increase of 1 per cent in interest rates would result in the swap asset increasing by £4.8 million (2015: £6.0 million) which would increase the reported other comprehensive income by the same amount. A decrease of 1 per cent in interest rates would result in the swap asset decreasing by £4.9 million (2015: £6.3 million) which would decrease the reported other comprehensive income by the same amount. The other financial assets and liabilities of Group are non-interest bearing and are therefore not subject to interest rate risk.

Foreign Currency Risk

There was no foreign currency risk as at 31 December 2016 or 31 December 2015 as assets and liabilities of the Group are maintained in pounds Sterling.

Capital Management Policies

The Group considers that capital comprises issued ordinary shares, net of shares held in treasury, and long-term borrowings. The Group’s capital is deployed in the acquisition and management of property assets meeting the Group’s investment criteria with a view to earning returns for shareholders which are typically made by way of payment of regular dividends. The Group also has a policy on the buyback of shares which it sets out in the Directors’ Authority to Buy Back Shares section of the Directors’ Report.

The Group’s capital is managed in accordance with investment policy which is to hold a diversified property portfolio of freehold and long leasehold UK commercial properties. The Group invests in income producing properties. The Group will principally invest in four commercial property sectors: office, retail, industrial and leisure. The Group is permitted to invest up to 15 per cent of its Total Assets in indirect property funds and other listed investment companies. The Group is permitted to invest cash, held by it for working capital purposes and awaiting investments, in cash deposits, gilts and money market funds.

The Group monitors capital primarily through regular financial reporting and also through a gearing policy. Gearing is defined as gross borrowings divided by total assets less current liabilities. The

Group’s gearing policy is set out in the Investment Policy section of the Report of the Directors. The Group is not subject to externally imposed regulatory capital requirements but does have banking

covenants on which it monitors and reports on a quarterly basis. Included in these covenants are requirements to monitor loan to value ratios which is calculated as the amount of outstanding debt

divided by the market value of the properties secured. The Group’s Loan to value ratio is shown below.

The Group did not breach any of its loan covenants, nor did it default on any other of its obligations under its loan arrangements in the year to 31 December 2016.

	2016	2015
	£’000	£’000
Carrying amount of interest-bearing loans and borrowings	248,532	248,004
External valuation of completed investment property (excluding lease incentive adjustments)	1,280,755	1,319,555
Loan to value ratio	19.4%	18.8%

The Group’s capital balances are set out in the Consolidated Statement of Changes in Equity and are regarded as the Group’s equity and net debt.

18. Capital Commitments

The Group had contracted capital commitments as at 31 December 2016 of £15.9 million (31 December 2015 — £13m), which included:

·     £7.1m capital works required relating to an agreement for lease with Primark Stores Ltd at Shrewsbury.

·     £1.1m capital works for the refurbishment of 81/85 George Street, Edinburgh.

·     £6.1m capital works building pre-let additional units at St George’s Retail Park, Leicester

·     £1.6m for capital works across 16/20 High Street & 1/3 Bedford Street, Exeter, Cineworld Complex Glasgow, Junction 27 Retail Park, Birstall, Leeds and Great Lodge Retail Park, Tunbridge Wells.

19. Lease Analysis

The Group leases out its investment properties under operating leases.

The future income under non-cancellable operating leases, based on the unexpired lease length at the year end was as follows (based on total rentals):

	2016 £000	2015 £000
Less than one year	66,458	68,413
FTSE Real Estate Investment Trusts Index	202,552	224,019
FTSE All-Share Index	273,746	341,092
Total	542,756	633,524

The largest single tenant at the year end accounted for 5.8 per cent (2015: 6.98 per cent) of the current annual rental income.

The unoccupied property expressed as a percentage of annualised total rental value was 3.7 per cent (2015: 2.8 per cent) at the year end.

The Group has entered into commercial property leases on its investment property portfolio. These properties, held under operating leases, are measured under the fair value model as the properties are held to earn rentals. The majority of these non-cancellable leases have remaining non-cancellable lease terms of between 5 and 15 years.

Analysis of the nature of investment properties and leases are provided in Annual Report.

20. Service charge

The Group’s managing agents Jones Lang LaSalle manage service charge accounts for all the Group’s properties. The Group pays the service charge on any vacant units. Service charges on rental properties are recharged to tenants. The total service charge incurred in the year to 31 December 2016 was £7.4 million (2015: £5.4 million). Of this figure, the service charge paid by the Group in respect of void units was £1.7 million (2015: £1.4 million) and is included in direct property expenses.

21. Events After the Balance Sheet Date

On 13 January 2017, the Group completed the sale of 13 Great Marlborough Street, W1 an office asset in London’s Soho, for £30.5m, at an initial yield of 3.3%.

On 8 February 2017, the Group completed the forward purchase of a pre-let 258,370 sq ft distribution warehouse development in Burton upon Trent for a total consideration of circa £22.2 million, reflecting

a yield on capital of 5.8%.

EPRA Performance Measures

One of EPRA’s aims is to improve the transparency, comparability and relevance of the published results of listed real estate companies in Europe. EPRA performance measures calculated in line with ‘Best Practice Recommendation Guidelines – November 2016’ are therefore disclosed below:

EPRA performance measures: Summary Table

	31 December 2016	31 December 2015
	£'000	£'000
EPRA earnings	51,130	45,101
EPRA earnings per share (pence per share)	3.9	3.5
EPRA NAV	1,124,394	1,127,028
EPRA NAV per share	86.5	86.7
EPRA NNNAV	1,136,051	1,124,192
EPRA NNNAV per share	87.4	86.5
EPRA Net Initial Yield	4.8%	4.7%
EPRA topped-up Net Initital Yield	5.0%	4.9%
EPRA Vacancy Rate	3.7%	2.8%
EPRA Cost Ratios - including direct vacancy costs	23.3%	23.6%
EPRA Cost Ratios - excluding direct vacancy costs	18.5%	18.9%

	31 December 2016	31 December 2015
EPRA Earnings	£'000	£'000
Earnings per IFRS income statement	45,186	87,635
Adjustments to calculate EPRA Earnings exclude:
Net changes in value of investment properties	15,040	(46,409)
Gain on disposal of investment properties	(9,096)	(3,528)
Close-out costs of interest rate SWAP	-	7,403
EPRA Earnings	51,130	45,101
Basic number of shares	1,299,412,465	1,299,412,465
EPRA Earnings per share (pence per share)	3.93	3.47

	31 December 2016	31 December 2015
EPRA Net Asset Value	£'000	£'000
IFRS NAV	1,120,640	1,127,187
Exclude
Fair value of financial instrument	3,754	(159)
	1,124,394	1,127,028
EPRA NAV per share	86.5	86.7

	31 December 2016	31 December 2015
EPRA Triple Net Asset Value (NNNAV)	£'000	£'000
EPRA NAV	1,124,394	1,127,028
Fair value of financial instruments	(3,754)	159
Fair value of debt	15,411	(2,995)
EPRA NNNAV	1,136,051	1,124,192
EPRA NNNAV per share	87.43	86.52
Fair value of debt per financial statements	263,943	245,009
Carrying value	248,532	248,004
Fair value of debt adjustment	15,411	(2,995)

	31 December 2016	31 December 2015
EPRA Net Initial Yield and ‘Topped Up’ NIY Disclosure	£'000	£'000
Investment property - wholly owned	1,280,755	1,319,555
Allowance for estimated purchasers' costs	87,101	75,186
Gross up completed property portfolio valuation	1,367,856	1,394,741
Annualised cash passing rental income	69,047	69,342
Property outgoings	(3,474)	(3,767)
Annualised net rents	65,573	65,575
Add: notional rent expiration of rent free periods or other lease incentives	3,169	2,078
Topped-up net annualised rent	68,742	67,653
EPRA NIY	4.8%	4.7%
EPRA “topped up” NIY	5.0%	4.9%

	31 December 2016	31 December 2015
EPRA Cost Ratios	£'000	£'000
Administrative / property operating expense line per IFRS income statement	15,948	16,416
EPRA Costs (including direct vacancy costs)	15,948	16,416
Direct vacancy costs	(3,267)	(3,290)
EPRA Costs (excluding direct vacancy costs)	12,681	13,126
Gross Rental income less ground rent costs	68,573	69,558
EPRA Cost Ratio (including direct vacancy costs)	23.3%	23.6%
EPRA Cost Ratio (excluding direct vacancy costs)	18.5%	18.9%

This Annual Financial Report announcement is not the Company's statutory accounts for the year ended 31 December 2016. The statutory accounts for the year ended 31 December 2016 received an audit report which was unqualified.

The Annual Report will be posted to shareholders in April 2017 and additional copies will be available from the Manager (Tel. [phone]) or by download from the Company's webpage (www.ukcpt.co.uk).

Please note that past performance is not necessarily a guide to the future and that the value of investments and the income from them may fall as well as rise. Investors may not get back the amount they originally invested.