Final Results

RNS Number : 7577P

Standard Life Invs Property Inc Tst

30 March 2009

 



STANDARD LIFE INVESTMENTS PROPERTY INCOME TRUST

ANNUAL FINANCIAL REPORT

FOR THE YEAR ENDED 31 DECEMBER 2008

Financial Highlights

- Dividend of 6.76p paid during the 12 months to 31 December 2008

- Dividend re-based to an annualised level of 4p per share with the first quarterly interim dividend of 1p per share paid in February 2009

- Net Asset Value per share decreased by 44.7% during the year to 61.7p- Open market value of property portfolio as at 31 December 2008: £123.0m*

- Two properties disposed of during the year for £19.9m, one property purchased for £7.5m (excluding sales and purchase costs)

Financial Summary
	31 December 2008	31 December 2007	% Change
IFRS Net Asset Value per share**	62.7p	113.3p	-44.7%
Published adjusted IFRS Net Asset Value per share***	61.7p	111.6p	-44.7%
Share price	49.7p	77.8p	-36.1%
Value of total assets	£169.0m	£219.4m	-23.0%
Loan to value****	32.4%	27.9%	-
Cash balance*****	£44.5m	£34.5m	-
Dividends per share******	6.760p	6.760p	0.0%

* As valued by the Group's independent property valuer, Jones Lang LaSalle Limited.

** Calculated under International Financial Reporting Standards.*** Calculated under International Financial Reporting Standards, adjusted to include the dividend declared in respect of the quarter ending 31 December 2008.**** Calculated as bank borrowings less full cash balance (excluding tenant deposits) as a percentage of the open market value of the property portfolio as at 31 December 2008. As disclosed in Note 12 to the Consolidated Financial Statements, this calculation method differs from the method to be applied in assessing whether the Company has complied with the financial covenants in its current loan agreement.

***** Excluding tenant deposits. A breakdown and explanation of cash balances can be found in Note 10 to the Consolidated Financial Statements. 

****** Dividends paid during the 12 months to 31 December 2008

Extracts from Chairman's Statement

'The comments the Board made in the interim report remain as relevant, if not more so, in the current environment. The UK economy has continued to deteriorate and the banking sector shows no sign of recovering from the impact of the global financial crisis. Transactional activity in the property market has slowed and values have continued to fall. Over the course of 2009 increasing numbers of property owners are expected to suffer liquidity issues and economic fallout resulting in distressed sales and buying opportunities. The Company is well-positioned to take advantage of any opportunities that may be suited to its portfolio.

Performance: Property Income and Total Return

The Company generated a property income return of 6.5% on its properties which was comparable with the IPD Monthly Index of 5.5% in respect of the year ended 31 December 2008. The total return numbers were hit hard given the significant falls in commercial property values experienced during 2008. The Company's total return on property (only) was -20.4% compared with the IPD Monthly Index of -23.3%.  The Board and Manager, however, made a deliberate decision to hold substantial cash balances and the Company's overall total return (including cash) was -15.1%. 

Performance: Net Asset Value

The Company's published net asset value fell over the reporting period from 111.6p per share to 61.7p. The vast majority of the decline in published net asset value related to the fall in the valuation of the Company's commercial property, including the impact of gearing, which accounted for 85% or 42.4p of the fall in net asset value over the year. The other major negative during the year was the impact of the valuation of the interest rate swap which the Company put in place to fix the borrowing rate at launch for the majority of its borrowings. The significant reduction in interest rates during the period impacted the asset value by 7.0p, accounting for 14.2% of the net asset value reduction.

Dividends

A dividend of 1.69p per share was declared in respect of each of the first three quarters of the year, followed by a fourth quarter declared dividend of 1p per share. On 11 November 2008, the Board announced a rebasing of future dividends to an annualised level of 4p per share. The Board has always targeted a high level of dividend cover and continues to believe that this is an appropriate discipline for the Company to follow. The Company's decision to sell properties in 2007 (and early 2008) proved to have been right.  However, the collapse of the banking sector and the significant reduction in interest rates which followed was an unforeseen blow to the Company's income return on its cash position. The Board also considered it prudent to assume a reduction in the level of rental income recoverable for 2009 when making its dividend decision in light of both current market conditions and the future outlook for UK commercial property. Should the Company's forecasts for 2009 prove to be overly conservative this will not preclude payment of a further special or enhanced dividend by the Company in early 2010 commensurate with its policy as an income fund.

Management Fees and Other Expenses

At the same time that the Board announced a rebasing of its dividends the Investment Manager agreed to reduce its management fee to 75 bps (from 85 bps), effective in the quarter ended 31 December 2008, of gross asset value until such time as the published net asset value per share returns to the launch level of 97p per share. This followed an announcement in June 2008 that the management fees on cash would be reduced to 20bps on any cash balance exceeding more than 10% of total assets, effective from 1 July 2008. This action was in recognition of the cash being held for substantially longer than originally anticipated. All other expenses have been kept under tight review and are being reduced where possible.

Loan to Value Ratio

The Company was in compliance with its banking covenants as at 31 December 2008 and the Board is confident that this should continue to be the case for 2009.  The Company is able to manage compliance with its loan to value covenant by either placing cash deposits with the Company's lender (The Royal Bank of Scotland plc) in order to increase gross secured assets or by using cash to repay a portion of the borrowings.  If the Company was to use all its uncommitted cash resources to repay bank borrowings then the market value of its investment properties would need to fall by more than 25% before it would be unable to comply with its loan to value covenant. The Investment Manager remains in regular contact with the Company's bankers in light of events in the banking sector. The Company's borrowing facilities do not mature until 2013 which leaves the Company well placed given the lack of credit available in the banking sector. As a reminder to shareholders £72m of the Company's borrowings are at a fixed rate of interest until 2013 and the rate on the remaining £12.4m varies with LIBOR plus a margin. Currently the rate payable on the £12.4m is 2.0% and this is being rolled over monthly. The fixed rate was negotiated down by 0.1% to 5.015% plus a margin of 60 bps, equating to an annual saving of £72,000 (applicable from 1 January 2009).

Discount and Share Price

The discount to published net asset value ended the year at 19.4% having started the year at 30.3%. The share price fell by 36.1% during the year to 49.7p.  At the date of writing the share price is 28.2p equivalent to a discount to the 31 December 2008 NAV of 54.3%.

Dividend Yield

The current share price represents an attractive prospective dividend yield of 14%. The published net asset value would have to fall by a further 54.3% to reach the current share price providing some protection for new purchasers. The current dividend yield compares favourably with bank deposit rates of around 1% and redemption yields on UK gilts of under 3.5%.

Investment Outlook

The Board and the Investment Manager anticipate another challenging year for property investors. The fundamentals supporting the market should recover towards the latter part of the year if the significant global fiscal stimuli coupled with unprecedented monetary easing and anticipated gradual thawing of credit markets restore confidence and liquidity to financial markets as anticipated and help to reduce the general mood of caution prevailing across asset classes. However, uncertainty remains elevated and the de-leveraging process currently underway in the markets looks likely to play out further.Asset management initiatives will remain critical to preserving property values and rents. With the Company's cash position of £44.5m at the year end the Company is well placed to take advantage of attractive buying opportunities that may arise. The Company should be in a good position to negotiate beneficial terms from sellers to enhance income returns for the benefit of shareholders.

David Moore

Chairman

Extracts from Investment Manager's Report

'2008 was a dismal year for the UK commercial property market with the IPD Monthly Index suffering the lowest total return in its history at -23.3%. The final quarter in particular saw a rapid fall in capital values at -15%.

Since the peak of the market in June 2007 capital values fell by 35% to the end of December 2008, a period of only eighteen months. To put this into context, in the early 90's recession the property market fell by 27% over forty two months. The rapid and severe correction in part reflects the scale of price adjustment required to get back to fair value, but also reflects the transparency and liquidity of the UK commercial property market. In the early 90's many funds were only valued annually, and often internally, whereas now external valuations on a quarterly or even monthly basis are common place. Although the price correction was initially driven by the banking crisis, the current pricing falls reflect market concern over the occupational market and the tenant's ability to pay rent.

At the end of 2008 the yield margin of property over gilts had reached a level of over 300 bps which began to suggest fair value, however concern was focussed on the occupational demand for property as both the service sector and retail sectors have declined as the economy has slowed down, and supply has increased.  

The listed sector did not fare any better in 2008 although it showed some resilience in the first quarter of 2008. The negative sentiment over the economic outlook and growing concerns over banking covenants meant that the FTSE/EPRA NAREIT price index fell by 48.5% over 2008 and discounts in the REIT sector widened to an average of 31.5%.

Property Investments as at 31 December 2008

Name	Location	Sub-sector	Market Value £
Hollywood Green	London	Leisure	12-14m
Clough Road Retail Park	Hull	Retail Warehouses	10-12m
White Bear Yard	London	Standard Office	6-8m
Drakes Way	Swindon	Standard Industrial	6-8m
2-4 Bucknall Street	London	Standard Office	6-8m
Ocean Trade Centre	Aberdeen	Industrial Park	6-8m
Bathgate Retail Park	Bathgate	Retail Warehouses	4-6m
Century Plaza	Edgeware	High Street Retail	4-6m
Chancellors Place	Chelmsford	Standard Office	4-6m
Marsh Way	Rainham	Standard Industrial	4-6m
Interfleet House	Derby	Office Park	4-6m
Pit Hey Place	Skelmersdale	Distribution Warehouse	4-6m
Farah Unit, Crittal Road	Witham	Standard Industrial	2-4m
Turin Court	South Manchester	Standard Office	2-4m
Windsor Court & Crown Farm	Mansfield	Standard Industrial	2-4m
Phase II, Telelink	Swansea	Office Park	2-4m
Esporta	Chislehurst	Leisure	2-4m
Coal Road	Leeds	Standard Industrial	2-4m
De Ville Court	Weybridge	Standard Office	2-4m
31-32 Queens Square	Bristol	Standard Office	2-4m
Halfords	Paisley	Retail Warehouses	2-4m
Wardley Industrial Estate	Manchester	Retail Warehouses	2-4m
Eurolink Normanton	Leeds	Industrial Park	2-4m
Easter Park	Bolton	Distribution Warehouse	2-4m
Lister House	Leeds	Standard Office	1-2m
Unit 14 Interlink Park	Bardon	Distribution Warehouse	1-2m
Portrack Lane	Stockton on Tees	Distribution Warehouse	1-2m

Outlook

2009 is likely to be another challenging year for UK commercial property. Despite the major price correction seen so far in this cycle (-35% to December 2008) we expect the final peak to trough fall to be approximately 50%. The first half of 2009 is likely to see the majority of the remaining fall in values, with continued outward yield shift. Negative rental growth will further impact on values.  

The medium term outlook is slightly better, with income dominating the make-up of total return, and economic recovery coming through in 2010 as a result of the large scale government stimulus. Retaining a strong income stream through active management and tenant retention will be important drivers of performance.  

Portfolio Valuation

The investment properties were valued at £123.0m at the end of the year and the Company had cash holdings of £44.5m (excluding tenant deposits) representing 27% of the Company's portfolio value.  

The valuations were undertaken by Jones Lang LaSalle Limited who were appointed in December 2007. At the end of the year the Company's property portfolio initial yield was 8.0% and the equivalent yield was 8.4%. This compares to 6.4% and 6.7% respectively at the end of December 2007. The Company's void level of 5.1% at the end of December 2008 included two units still let to Administrators, but where no rental income is expected. Although the void level increased over the year from 1.2% at the end of December 2007, levels still remain well below the IPD Monthly Index of 9.7%.

Purchases

Following completion of the purchase of a £7.5m (excluding purchase costs) industrial unit in the first quarter of 2008 (exchanged in fourth quarter of 2007) no further purchases have been made. With hindsight, the timing of this purchase was poor, although it is a good quality asset and was attractively priced at the time, the extent of the market fall in 2008 was greater than forecast.

After the reporting period the Company exchanged contracts to purchase a Grade A office building in Uxbridge for £11m. The purchase price shows a net initial yield of 9.95% based on an annual rent of £1.1m. The office, which was built in 2001, extends to 51,000sqft on ground to fourth floors, with 2 levels of underground parking. The purchase price represents less than the rebuilding cost of the building. The purchase adds significantly to the revenue account, and provides scope for strong future capital growth.

Sales

The Company completed the sale of Wellington House, London for £17.65m in the first quarter of 2008. At the time it was the biggest asset in the Company, and with the deterioration of the occupier and investment market since the sale the Company has benefited from holding cash.  

During the third quarter of 2008 a small plot of storage land was sold to the tenant for £0.27m, and in December 2008 a vacant logistics unit was sold to an owner/occupier for £2.25m. The unit had previously been let on a long lease to Innovate Logistics, which had been rated as a low risk 5A1 tenant by Dun & Bradstreet prior to going into administration.

Asset Management

During the course of 2008 the focus of activity was on securing the Company's rental income stream as much as possible. As well as removing two break clauses with DSG at Clough Road, Hull (securing the income stream to 2021) the Company completed four new leases, two lease renewals, and agreed terms with two tenants to extend their leases.

Gearing

There has been much focus on gearing levels in the sector over the course of 2008. Having repaid £9.85m of debt under the Company's revolving credit facility at the end of 2007 the Company has retained its main facility with The Royal Bank of Scotland plc of £84.4m termed out to December 2013. The Company has an interest rate swap in place for £72m of this debt fixing the interest rate at 5.72%. The valuation of the swap has been adversely impacted by the fall in expected interest rates and over the course of 2008 had a total impact on the NAV of -6.3%.  The value of the swap will tend towards zero as it moves towards maturity in 2013. The fixed interest rate applicable to the £72m hedged portion of the loan facility was reduced in December 2008 to 5.62% at no cost to the Company. At the same time the Company moved to resetting the interest rate on its loan facility monthly (previously reset quarterly), thereby affecting the interest payable on the un-hedged part of the loan facility (£12.4m). This has benefited the Company in the early part of 2009 and will continue to do so if one month Libor remains below the three month rate.

As part of the calculation of the loan to value bank covenant, cash deposited with RBS is counted as a secured asset. The cash deposited can still be used to acquire property, or could be used instead to actually repay some of the debt. If the Company repaid £12.4m of the bank facility (being the amount of borrowings where the interest rate is not fixed via the interest rate swap), and the remaining cash is included in the secured assets, the loan to value ratio would be 47% and the value of the current property portfolio would have to fall by more than 16% to reach the loan to value covenant level (55%). If the Company used all of its cash holdings to repay part of the borrowings, including crystallizing the relevant proportion of the interest rate swap liability, then the loan to value ratio would be 41%, and the value of the property portfolio would need to fall by more than 25 % to reach the covenant level.

Company Strategy

During the course of 2008 the main aim of the Company was to make sure that it was in a good position to survive the downturn and emerge stronger. Now that we get closer to the bottom of the cycle the focus will change slightly to ensuring the Company is well placed to participate in the market recovery when it happens. There will undoubtedly be some great opportunities to acquire some grade A commercial property in 2009 at distressed prices. Such acquisitions will bolster the revenue account (with income yields substantially higher than the return on cash) and will also give the Company access to top quality property that will give above market returns in the recovery.'

Statement of Directors' Responsibilities

The Directors are responsible for preparing Financial Statements for each year which give a true and fair view, in accordance with applicable Guernsey law and International Financial Reporting Standards, of the state of affairs of the Group and of the profit or loss of the Group for that year. In preparing those Financial Statements, the Directors are required to:

• Select suitable accounting policies and then apply them consistently;

• Make judgements that are reasonable and prudent;

• State whether applicable accounting standards have been followed, 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 confirm that they have complied with the above requirements in preparing the Financial Statements.

The Directors are responsible for keeping proper accounting records, which disclose with reasonable accuracy at any time, the financial position of the Group and to enable them to ensure that the 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, error and non compliance with law and regulations.

The maintenance and integrity of the Company's website is the responsibility of the Directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any change that may have occurred to the Financial Statements since they were initially presented on the website. Legislation in Guernsey governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Statement under the Disclosure and Transparency Rules 4.1.12

The Directors each confirm to the best of their knowledge that:

(a) the Consolidated Financial Statements, prepared in accordance with applicable accounting standards, give a true and fair view of the assets, liabilities, financial position and net return of the Group; and

(b) the Annual Report includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties faced.

Approved by the Board on 30 March 2009.David Moore     Chairman

AUDITED FINANCIAL STATEMENTS

Consolidated Income Statement

For the year to 31 December 2008

			2008		2007
	Note		£		£
Rental income			11,526,263		14,298,488
Unrealised loss arising on adjustment to fair value of investment properties	8		(39,982,011)		(19,149,762)
Realised loss on disposal of investment properties			(4,002,729)		(1,411,753)
Investment management fees	5		(1,485,501)		(1,963,426)
Head lease payments			(33,537)		(285,706)
Other direct property costs			(740,196)		(396,478)
Directors' fees and subsistence	28		(103,786)		(84,658)
Valuation fees	5		(31,006)		(55,073)
Auditors' fees			(41,125)		(50,000)
Other administration expenses			(238,666)		(204,314)
Operating loss			(35,132,294)		(9,302,682)
Finance costs - net
Interest payable	6		(5,451,343)		(5,828,933)
Interest receivable			2,314,517		998,718
Loss for the year	19		(38,269,120)		(14,132,897)
Loss per share for the year  attributable to the equity holders of the Company
Basic and diluted	22		(36.80)		(13.59)
			pence		pence

All items in the above Consolidated Income Statement derive from continuing operations.

The notes are an integral part of the Consolidated Financial Statements.

Consolidated Balance Sheet as at 31 December 2008

		2008	2007
	Note	£	£
ASSETS
Non-current assets
Freehold investment properties	8	107,006,879	142,151,538
Leasehold investment properties	8	14,403,182	39,800,604
		121,410,061	181,952,142
Current assets
Trade and other receivables	9	2,534,822	2,230,660
Cash and cash equivalents	10	45,089,452	35,171,457
		47,624,274	37,402,117
Total assets		169,034,335	219,354,259
EQUITY
Capital and reserves attributable
to Company's equity holders
Share capital	17	1,040,000	1,040,000
Share premium	18	5,217,022	5,217,022
Retained earnings	19	1,717,458	2,576,775
Capital reserves	20	(36,661,539)	14,635,767
Other distributable reserves	21	93,916,114	94,371,577
Total equity		65,229,055	117,841,141
LIABILITIES
Non-current liabilities
Bank borrowings	12	84,432,692	84,432,692
Interest rate swap	13	7,575,201	262,635
Redeemable preference shares	14	8,046,510	7,591,047
Leasehold obligations	15	17,682	4,029,314
		100,072,085	96,315,688
Current liabilities
Trade and other payables	11	3,732,695	4,912,163
Leasehold obligations	15	500	285,267
		3,733,195	5,197,430
Total liabilities		103,805,280	101,513,118
Total equity and liabilities		169,034,335	219,354,259

Approved by the Board of Directors on 30 March 2009

The notes are an integral part of these Consolidated Financial Statements.

Consolidated Statement of Changes in Equity

For the year ended 31 December 2007

	Share capital	Share premium	Retained earnings	Capital reserves	Other distributable reserves	Total equity
	£	£	£	£	£	£
Opening balance 1 January 2007	1,040,000	5,217,022	2,748,875	35,961,779	94,801,259	139,768,935
Loss for the year	-	-	(14,132,897)	-	-	(14,132,897)
Unrealised loss arising on adjustment to fair value of investment properties	-	-	19,149,762	(19,149,762)	-	-
Realised loss on disposal of investment properties	-	-	1,411,753	(1,411,753)	-	-
Transfer between reserves	-	-	429,682	-	(429,682)	-
Movement on revaluation of interest rate swap	-	-	-	(764,497)	-	(764,497)
Dividends	-	-	(7,030,400)	-	-	(7,030,400)
Balance at 31 December 2007	1,040,000	5,217,022	2,576,775	14,635,767	94,371,577	117,841,141

Consolidated Statement of Changes in Equity

For the year ended 31 December 2008

	Share capital	Share premium	Retained earnings	Capital reserves	Other distributable reserves	Total equity
	£	£	£	£	£	£
Opening balance 1 January 2008	1,040,000	5,217,022	2,576,775	14,635,767	94,371,577	117,841,141
Loss for the year	-	-	(38,269,120)	-	-	(38,269,120)
Unrealised loss arising on adjustment to fair value of investment properties	-	-	39,982,011	(39,982,011)	-	-
Realised loss on disposal of investment properties	-	-	4,002,729	(4,002,729)	-	-
Transfer between reserves	-	-	455,463	-	(455,463)	-
Movement on revaluation of interest rate swaps	-	-	-	(7,312,566)	-	(7,312,566)
Dividends	-	-	(7,030,400)	-	-	(7,030,400)
Balance at 31 December 2008	1,040,000	5,217,022	1,717,458	(36,661,539)	93,916,114	65,229,055

The notes are an integral part of these Consolidated Financial Statements. 

Standard Life Investments Property Income Trust Limited
Consolidated Cash Flow Statement
For the year ended 31 December 2008
			2008		2007
	Note		£		£
Cash flows from operating activities
Cash generated from operations	25		7,438,723		10,221,975
Interest paid			(4,997,375)		(6,738,057)
Net cash generated from operating activities			2,441,348		3,483,918
Cash flows from investing activities
Purchase of investment properties			(7,825,782)		-
Capital expenditure on investment properties			(84,982)		(189,200)
Retentions received relating to property purchase			110,000		-
Proceeds from disposal of investment properties	25		19,993,294		41,053,247
Interest received			2,314,517		998,718
Net cash generated from investing activities			14,507,047		41,862,765
Cash flows from financing activities
Repayments of bank borrowings	12		-		(9,850,000)
Dividends paid to the Company's shareholders	23		(7,030,400)		(7,030,400)
Net cash used from financing activities			(7,030,400)		(16,880,400)
Net increase in cash and cash equivalents in the year			9,917,995		28,466,283
Cash and cash equivalents at beginning of year			35,171,457		6,705,174
Cash and cash equivalents at end of year	10		45,089,452		35,171,457
The notes are an integral part of these Consolidated Financial Statements.

NOTES TO THE FINANCIAL STATEMENTS

1 GENERAL INFORMATION

Standard Life Investments Property Income Trust Limited ('the Company') and its subsidiary (together the 'Group') carries on the business of property investment through a portfolio of freehold and leasehold investment properties located in the United Kingdom. The Company is a limited liability company incorporated and domiciled in Guernsey, Channel Islands. The Company has its primary listing on the London Stock Exchange with a secondary listing on the Channel Islands Stock Exchange.

The address of the registered office is Trafalgar Court, Les Banques, St Peter Port, Guernsey.

These audited Consolidated Financial Statements were approved for issue by the Board of Directors on 30 March 2009.

2 ACCOUNTING POLICIES

Basis of preparation

The audited Consolidated Financial Statements of the Group have been prepared in accordance with and comply with International Financial Reporting Standards ('IFRS'), and all applicable requirements of The Companies (Guernsey) Law, 2008. The audited Consolidated Financial Statements have been prepared under the historical cost convention as modified by the measurement of investment property and derivative financial instruments at fair value.

The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group's accounting policies.  The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the Consolidated Financial Statements, are disclosed in Note 4.

Standards, amendments and interpretations effective in 2008

IFRIC 11, 'IFRS 2 - Group and treasury share transactions', provides guidance on whether share-based transactions involving treasury shares or involving group entities should be accounted for as equity-based or cash-settled share-based payment transactions in the stand-alone accounts of the parent and group companies.  This interpretation does not have an impact on the Group's Consolidated Financial Statements.

Standards, amendments and interpretations effective in 2008 but not relevant

IFRIC 12, 'Service concession arrangements' , IFRIC 13 'Customer loyalty programmes' IFRIC 14, and 'IAS 19 - The limit on a defined benefit asset, minimum funding requirements and their interaction'

Standards, amendments and interpretations to existing standards that are not yet effective and have not been early adopted by the Group

IAS 1 (revised), 'Presentation of financial statements' (effective from 1 January 2009). The revised standard will prohibit the presentation of items of income and expenses in the statement of changes in equity, requiring 'non-owner changes in equity' to be presented separately from owners changes in equity. All non-owner changes in equity will be required to be shown in a performance statement, but entities can choose to present one or two performance statements.  The Group will apply IAS 1 (revised) from 1 January 2009.

IAS 39 (amendment), 'Financial instruments: Recognition and measurement' (effective from 1 January 2009). This amendment clarifies that it is possible for there to be movements into and out of the fair value through profit or loss category where a derivative commences or ceases to qualify as a hedging instrument in a cash flow hedge. The Group will apply the IAS 39 (amendment) from 1 January 2009.

IAS 23, (Amendment), 'Borrowing costs' (effective from 1 January 2009). It requires an entity to capitalise borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset (one that takes a substantial period of time to get ready for use or sale) as part of the cost of that asset. The option of immediately expensing those borrowing costs will be removed. The Company will apply IAS 23 (Amended) from 1 January 2009, but it is currently not applicable to the Company as there are no qualifying assets.

IFRS 8, 'Operating segments' (effective from 1 January 2009). IFRS 8 replaces IAS 14 and aligns segment reporting with the requirements of the US standard SFAS 131, 'Disclosures about segments of an enterprise and related information'. The new standard requires a 'management approach', under which segment information is presented on the same basis as that used for internal reporting purposes. The Company will apply IFRS 8 from 1 January 2009. The expected impact of this standard is still being assessed in detail by management.

IFRIC 14, 'IAS 19 - The limit on a defined benefit asset, minimum funding requirements and their interaction' (effective from 1 January 2009). The Company will apply IFRIC 14 from 1 January 2009, but it is not expected to have any impact on the Company's financial statements.

Segmental reporting

A business segment is a group of assets and operations engaged in providing products or services that are subject to risk and returns that are different from those of other business segments. The Directors consider that different business segments exist for different types of investment property. The four main investment types that the Group invests in are the retail, office, industrial and other sectors.

The Directors consider that the Group operates in one geographical area, the United Kingdom.

Segmental analysis is shown in Note 26.

Basis of consolidation

The audited Consolidated Financial Statements comprise the financial statements of Standard Life Investments Property Income Trust Limited and its only material wholly owned subsidiary undertaking, Standard Life Investments Property Holdings Limited, a company with limited liability incorporated and domiciled in Guernsey, Channel Islands.

Subsidiaries are entities over which the Group has the power to govern the financial and operating polices generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group and they are de-consolidated from the date that control ceases.

The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Group's share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the Consolidated Income Statement as negative goodwill.

Intercompany transactions, balances and unrealised gains and losses on transactions between Group companies are eliminated on consolidation. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.

Functional and presentation currency

Items included in the financial statements of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates ('the functional currency'). The Consolidated Financial Statements are presented in pounds sterling, which is the Company's and the Group's functional and presentation currency.

Revenue recognition

Revenue is recognised as follows;

a) Bank interest

Bank interest income is recognised on an accruals basis.

b) Rental income

Rental income from operating leases is net of sales taxes and VAT and is recognised on a straight line basis over the lease term.  The cost of any lease incentives provided are recognised over the lease term, on a straight line basis as a reduction of rental income. The resulting asset is reflected as a receivable in the Consolidated Balance Sheet. The valuation of investment properties is reduced by the total of the unamortised lease incentive balances. Any remaining lease incentive balances in respect of properties disposed of are included in the calculation of the profit or loss arising at disposal.

Contingent rents, being those payments that are not fixed at the inception of the lease, for example increases arising on rent reviews, are recorded as income in periods when they are earned. Rent reviews which remain outstanding at the year end are recognised as income, based on estimates, when it is reasonable to assume that they will be received.

Surrender premiums received by the Group following the break of a lease are recognised as income to the extent that there are no obligations directly related to that surrender, for example where the payment received is directly connected to dilapidation obligations where the Group will not incur such obligations.

c) Property disposals

Where revenue is obtained by the sale of properties, it is recognised when the significant risks and returns have been transferred to the buyer. This will normally take place on exchange of contracts unless there are significant conditions attached. For conditional exchanges sales are recognised when these conditions are satisfied.

Expenditure

All expenses are accounted for on an accruals basis. The investment management and administration fees, finance (including interest on the bank facility and the finance cost of the redeemable preference shares) and all other expenses are charged through the Consolidated Income Statement as and when incurred. Costs incurred directly in the arranging of new leases and those paid or incurred in renegotiating an existing lease to amend its terms are capitalised and amortised over the average lease length on the property. Incentives paid to new tenants are amortised over the length of the lease being agreed. Surrender premiums paid to tenants or incurred by the Group following the break of a lease are recognised immediately in the Consolidated Income Statement.

Taxation

The Company and its wholly owned Guernsey registered subsidiary, Standard Life Investments Property Holdings Limited, have obtained exempt company status in Guernsey so that they are exempt from Guernsey taxation on income arising outside Guernsey and bank interest arising in Guernsey. Each Company is, therefore, only liable to an annual exemption fee of £600. 

With effect from 1 January 2008 the exempt company regime was, for the most part, abolished and the standard rate of income tax in Guernsey moved from 20% to 0%, however Collective Investment Schemes remain eligible to apply for exemption status. The Directors intend to conduct the Group's affairs such that the Company and its Guernsey registered subsidiary continue to remain eligible for exemption.

No charge to Guernsey taxation will arise on capital gains derived from the disposal of the investment properties.

Standard Life Investment Property Holdings Limited is subject to United Kingdom income tax on assessable income arising from the United Kingdom investment properties held.

Deferred income tax

A 'blended' approach is taken when estimating the amount of deferred income tax arising from the temporary difference between the tax bases of the assets and liabilities and their carrying amounts in the financial statements. This blended approach involves assessing the expected manner of recovery of this temporary difference. The depreciable amount of the temporary difference is treated as recoverable through use of the asset and the residual value element of the temporary difference is treated as recoverable through disposal of the asset. Recovery through use of the asset implies the appropriate tax rate is the income tax rate applicable to the Group's Schedule A business whereas recovery through disposal of the asset implies the appropriate tax rate is the capital gains tax rate applicable to the Group.

Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.

Freehold investment properties

Freehold investment properties are initially recognised at cost, being the fair value of the consideration given, including transaction costs associated with the acquisition of the investment property. After initial recognition, freehold investment properties are measured at fair value, with movements in value recognised as unrealised gains and losses in the Consolidated Income Statement. Fair value is based upon the market valuations of the properties as provided by Jones Lang LaSalle Limited, a firm of independent chartered surveyors, at the balance sheet date, suitably adjusted to account for unamortised tenant lease incentives.

Leasehold investment properties

Leasehold investment properties held which meet the criteria of an investment property as defined by IAS 40 but held by the Group under a finance lease, are initially recognised at cost, being the fair value of the consideration given together with the discounted present value of all minimum lease payments (ie. head lease payments). After initial recognition, leasehold investment properties are measured at market value with movements in value recognised as unrealised gains and losses in the Consolidated Income Statement. Fair value as disclosed in the Consolidated Financial Statements is based on the market valuations of the properties as provided by Jones Lang LaSalle Limited, a firm of independent chartered surveyors, as at the balance sheet date as suitably adjusted for unamortised tenant incentives and the discounted present value of minimum lease payments.

Property acquisitions

Acquisitions of investment properties are considered to have taken place on exchange of contracts unless there are significant conditions attached. For conditional property exchanges acquisitions are recognised only when these conditions are satisfied.

Trade receivables

Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments (more than 30 days overdue) are considered indicators that the trade receivable is impaired. The amount of the provision is the difference between the asset's carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The carrying amount of the asset is reduced through use of an allowance account, and the amount of the loss is recognised in the Consolidated Income Statement. When a trade receivable is uncollectible, it is written off against the allowance account for trade receivables. Subsequent recoveries of amounts previously written off are credited in the Consolidated Income Statement.

Trade payables

Trade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest rate method.

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.

Provisions

Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events and it is probable that an outflow of economic resources will be required to settle the obligation and the amounts are capable of being reliably estimated.

Share capital

Ordinary shares are classified as equity. Preference shares, which are redeemable on a specific date, are classified as liabilities.

Dividends

Dividend distributions to the Group's shareholders are recognised as a liability in the Group's consolidated financial statements in the year in which the dividends are approved by the Board of Directors. The redeemable preference shareholders are not entitled to payment of any dividends.

Borrowings and interest expense

All loans and borrowings are initially recognised at the fair value of the consideration received, less issue costs where applicable.  After initial recognition, all interest-bearing loans and borrowings are subsequently measured at amortised cost.  Amortised cost is calculated by taking into account any discount or premium on settlement. Borrowing costs are recognised within finance costs in the Consolidated Income Statement as incurred. Finance costs relating to the redeemable preference shares are recognised in the Consolidated Income Statement using the effective interest rate method. The effective interest rate is the rate that exactly discounts estimated cash payments throughout the expected life of the redeemable preference shares to the net carrying value of the financial liability. The effective interest rate is 6% per annum in respect of the redeemable preference shares.

Accounting for derivative financial instruments and hedging activities

Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured at their fair value. The fair value of interest rate swaps is calculated as the present value of the estimated future cash flows. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group documents at the inception of the transaction the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedging transactions. The Group also documents its assessment both at hedge inception and on an ongoing basis of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are recognised as gains or losses in equity. The gains or losses relating to the ineffective portion are recognised immediately in the Consolidated Income Statement.

The fair value of derivative financial instruments used for hedging purposes is discussed in Note 13. Movements on the hedging reserve in shareholders' equity are shown in the capital reserves as per Note 20. The full fair value of a hedging derivative is classified as a non-current asset or liability when the remaining maturity of the hedged item is more than 12 months, and as a current asset or liability when the remaining maturity of the hedged item is less than 12 months.

When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in the Income Statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the Income Statement within 'Other gains/(losses) - net'.

3 FINANCIAL RISK MANAGEMENT

The Group's activities expose it to various financial risks: credit risk, market risk (including currency risk, fair value interest rate risk, cash flow interest rate risk and price risk) and liquidity risk. The financial risks relate to the financial instruments set out by category in the following table:

As at 31 December 2008	Loans and receivables	Derivatives used for hedging	Other financial liabilities at amortised cost
	£	£	£
Financial Assets
Cash and cash equivalents	45,089,452	-	-
Trade and other receivables	2,534,822	-	-
Financial Liabilities
Bank borrowings	-	-	84,432,692
Redeemable preference shares	-	-	8,046,510
Interest rate swap	-	7,575,201	-
Finance lease obligations	-	-	18,182
Trade and other payables	-	-	1,490,878
As at 31 December 2007	Loans and receivables	Derivatives used for hedging	Other financial liabilities at amortised cost
	£	£	£
Financial Assets
Cash and cash equivalents	35,171,457	-	-
Trade and other receivables	2,230,660	-	-
Financial Liabilities
Bank borrowings	-	-	84,432,692
Redeemable preference shares	-	-	7,591,047
Interest rate swaps	-	262,635	-
Finance lease obligations	-	-	4,314,581
Trade and other payables	-	-	2,197,880

The Group's policy for managing the risks associated with these financial instruments is set out below.

Credit risk

Credit risk is the risk that a counterparty will be unable to meet a commitment that it has entered into with the Group. In the event of default by an occupational tenant, the Group will suffer a rental income shortfall and incur additional related costs. The Investment Manager regularly reviews reports produced by Dun and Bradstreet and other sources to be able to assess the credit worthiness of the Group's tenants and aims to ensure that there are no excessive concentrations of credit risk and that the impact of default by a tenant is minimised. In addition to this, the terms of the Group's bank borrowings require that the largest tenant accounts for less than 20% of the Group's total rental income, that the five largest tenants account for less than 50% of the Group's total rental income and that the ten largest tenants account for less than 75% of the Group's total rental income. The maximum credit risk from the tenant arrears of the Group at the financial year end was £681,888 (2007: £1,072,308).

With respect to credit risk arising from other financial assets of the Group, which comprise cash and cash equivalents, the Group's exposure to credit risk arises from default of the counterparty bank or investment fund with a maximum exposure equal to the     carrying value of these instruments. As at 31 December 2008 £30,610,098 (2007: nil) was placed on deposit with The Royal Bank of Scotland plc ('RBS'), £9,800,976 (2007: £30,971,442) was invested with Standard Life Investments (Global Liquidity Funds) plc and £4,057,928 (£2007: 3,576,904) was held with Citibank. Standard Life Investments (Global Liquidity Funds) plc is a liquidity fund rated Aaa by Moody's and provides instant access to funds. As described in Note 12, the purpose of the deposits placed with RBS is to increase the amount of assets qualifying as secured assets when determining the loan to value percentage as defined in the loan agreement with RBS. The credit risk associated with the cash deposits placed with RBS is mitigated by virtue of the Group having a right to off-set the balance deposited against the amount borrowed from RBS should RBS be unable to return the deposits for any reason.

Currency risk

The Group is not exposed to foreign currency risk.

Price risk

The Group is not exposed to market price risk with respect to financial instruments.

Cash flow and fair value interest rate risk

As described above the Group invests cash balances with Standard Life Investments (Global Liquidity Funds) plc, RBS and Citibank.  These investments expose the Group to cash flow interest rate risk as the Group's income and operating cash flows will be affected by movements in the market rate of interest. There is considered to be no fair value interest rate risk in respect of these deposits.

The bank borrowings as described in Note 12 also expose the Group to cash flow interest rate risk. The Group's policy is to manage its cash flow interest rate risk using interest rate swaps, in which the Group has agreed to exchange the difference between fixed and floating interest amounts based on a notional principal amount (see Note 12). The Group has floating rate borrowings of £84,432,692, £72,000,000 of which has been fixed via its interest rate swaps, with the result that £12,432,692 of its borrowings remain subject to movement in market interest rates and to cash flow interest rate risk.

The bank borrowings are carried at amortised cost and the Group considers this to be a close approximation to fair value. The fair value of the bank borrowings is not affected by changes in the market interest rate. The fair value of the interest rate swaps is however exposed to changes in the market interest rate as their fair value is calculated as the present value of the estimated future cash flows under the agreements. The accounting policy for recognising the fair value movements in the interest rate swaps is described in Note 2.

The redeemable preference shares are carried in the financial statements at amortised cost, representing a redemption yield of 6% (see Note 14). This carrying value is considered by the Group to be a close approximation to fair value.

Trade and other receivables and trade and other payables are interest free and have settlement dates within one year.

At 31 December 2008, if market rate interest rates had been 100 basis points higher/lower with all other variables held constant, the loss for the year would have been £320,363 (2007: £221,157 lower/higher) lower/higher as a result of the higher/lower interest income on cash and cash equivalents as compensated by a higher/lower interest expense on unhedged floating rate bank borrowings. The Capital Reserve would have been £3,326,338 higher / £3,508,561 lower (2007: £3,377,532 higher / £3,597,791 lower) as a result of an increase/decrease in the fair value of the derivative designated as a cash flow hedge of floating rate borrowings.

The following table sets out the carrying amount of the Group's financial instruments to which an interest rate applies:

As at 31 December 2008
		Fixed rate	Variable rate	Weighted average interest rate
		£	£	£
Cash and cash equivalents -RBS 5/11/08		9,000,000		5.450%
Cash and cash equivalents - RBS 24/12/08		2,229,000		2.680%
Cash and cash equivalents - RBS 30/12/08		19,300,000		2.580%
Cash and cash equivalents - Other		-	14,560,452	5.170%
Bank borrowings		72,000,000	-	5.715%
Bank borrowings		-	12,432,692	6.691%
Redeemable preference shares		8,046,510	-	6.000%
As at 31 December 2007
		Fixed rate	Variable rate	Weighted average interest rate
		£	£	£
Cash and cash equivalents		-	35,171,457	5.040%
Bank borrowings		72,000,000	-	5.715%
Bank borrowings		-	12,432,692	6.541%
Redeemable preference shares		7,591,047	-	6.000%

Liquidity risk

Liquidity risk is the risk that the Group will encounter difficulties in realising assets or otherwise raising funds to meet financial commitments as and when they fall due.  The investment property in which the Group invests is not traded in an organised public market and therefore is illiquid. As a result, the Group may not be able to liquidate its investment property investments quickly at an amount close to their fair value in order to meet liquidity requirements.

The following table sets out the maturities of financial instruments held by the Group based on the remaining period at the balance sheet date to the contractual maturity date:

	2008	2007
	£	£
Financial assets - current
Trade receivables - maturity within one year	2,534,822	2,230,660
Cash and cash equivalents - maturity within one year - deposited with RBS	30,610,098	-
Cash and cash equivalents - maturity within one year - other deposits	14,479,354	35,171,457
	47,624,274	37,402,117
Financial liabilities - non-current
Bank borrowings - maturity within 2-5 years	84,432,692	84,432,692
Redeemable preference shares - maturity within 2-5 years	8,046,510	7,591,047
Interest rate swaps - maturity within 2-5 years	7,575,201	262,635
	100,054,403	92,286,374
Finance lease liabilities
Maturity between 1 and 2 years	487	267,580
Maturity between 2 and 5 years	1,383	707,211
Maturity over 5 years	15,812	3,054,523
	17,682	4,029,314
Financial liabilities - current
Trade and other payables - maturity within one year	1,490,878	2,197,880
Finance lease liabilities - maturity within one year	500	285,267
	1,491,378	2,483,147

The Group's liquidity position is regularly monitored by management and is reviewed quarterly by the Board of Directors. The liquidity of the Group is affected by the way in which the Group's loan to value covenant is managed (see Note 12). Cash and cash equivalents placed with RBS in order to comply with the loan to value covenant will be used to meet liabilities which result in the reduction of bank borrowings with RBS or in the acquisition of a secured asset as defined in the Group's loan agreement with RBS.

Capital risk

The Group's objectives when managing capital are to safeguard the Group's ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital.

In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares, sell assets or use existing cash held to reduce debt.

Consistent with others in the industry, the Group monitors capital on the basis of the gearing ratio. This ratio is calculated as net debt divided by total capital. Net debt is calculated as total borrowings (including bank borrowings and redeemable preference shares as shown in the Consolidated Balance Sheet) less cash and cash equivalents. Total capital is calculated as equity, as shown in the Consolidated Balance Sheet, plus net debt.

The gearing ratios at 31 December 2008 and at 31 December 2007 were as follows:

	2008	2007
	£	£
Total borrowings	92,479,202	92,023,739
Less: cash and cash equivalents (excluding rent deposit balances)	(44,469,002)	(34,548,346)
Net debt	48,010,200	57,475,393
Total equity	65,229,055	117,841,141
Total capital	113,239,255	175,316,534
Gearing ratio	42%	33%

4 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS

The Group makes estimates and assumptions concerning the future. The resulting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are outlined below.

Fair value of investment properties

In determining the fair value of its investment properties the Group uses the market value for existing use as provided by its appointed independent valuer Jones Lang LaSalle Limited on a quarterly basis. The valuation of investment property is inherently difficult due to the individual nature and circumstance of each property. Valuations will not necessarily reflect the actual sales price, even if a sale were to occur shortly after the valuation date. The valuation provided at 31 December 2008 is also subject to higher than normal levels of uncertainty as a result of the continued turmoil and instability in the financial markets. There are low levels of liquidity in the UK real estate market and transaction levels are significantly reduced, resulting in a lack of clarity as to pricing levels and the market drivers. This, combined with a weakening of sentiment towards UK real estate, has resulted in a continual reappraisal of UK commercial property prices. In this environment, prices and values are going through a period of heightened volatility whilst the market absorbs the various issues and reaches its conclusions. As a result there is less certainty with regard to valuations with the result that market values can change rapidly in the current market conditions.  The Directors are of the opinion that the investment properties have been disclosed in the Consolidated Financial Statements at their fair value as at 31 December 2008.

5 FEES

Investment management fees

On 19 December 2003 Standard Life Investments (Corporate Funds) Limited ('the Investment Manager') was appointed as Investment Manager to manage the property assets of the Group.

Under the terms of the Investment Management Agreement the Investment Manager is entitled to receive a fee at the annual rate of 0.85% of the total assets, payable quarterly in arrears. On 1 July 2008 a supplemental agreement to the Investment Management Agreement was put in place to amend the fee basis to be 0.85% per annum of the total assets except where cash balances exceed 10% of total assets. The fee applicable to the amount     of cash exceeding 10% of total assets is altered to be 0.20% per annum, payable quarterly in arrears. The Investment Manager has also agreed to reduce its charge to 0.75% of the total assets of the Group until such time as the net asset value per share returns to the launch level of 97p. This is applicable from the quarter ended 31 December 2008 onwards and does not affect the reduced fee of 0.20% on cash holdings above 10% of total assets. The total fees charged for the year ended 31 December 2008 amounted to £1,485,501 (2007: £1,963,426). The amount due and payable at the year end amounted to £274,175 excluding VAT (2007: £523,515 excluding VAT).

Administration, secretarial and registrar fees    

On 19 December 2003 Northern Trust International Fund Administration Services (Guernsey) Limited ('Northern Trust') was appointed administrator, secretary and registrar to the Group. Northern Trust is entitled to an annual fee, payable quarterly in arrears, of £65,000. Northern Trust is also entitled to reimbursement of reasonable out of pocket expenses. Total fees charged for the year ended 31 December 2008 amounted to £82,664 (2007: £74,399). The amount due and payable at the year end amounted to £16,250 excluding VAT (2007: £21,371 excluding VAT).                        Valuation fees    

On 4 December 2007, Jones Lang LaSalle Limited ('the Valuer'), Chartered Surveyors, was appointed as valuer in respect of the assets comprising the property portfolio. The Valuer is entitled to an annual fee of 0.017% of the average portfolio value calculated over the preceding quarter and a start up fee of 0.0225% of the value of each property added to the portfolio. The total valuation fees charged for the year ended 31 December 2008 amounted to £31,006 (2007: £55,073). The amount due and payable at the year end amounted to £5,690 excluding VAT (2007: £7,573 excluding VAT).

6 INTEREST PAYABLE

	2008	2007
	£	£
Interest payable in relation to redeemable preference shares	455,463	429,682
Other interest payable	4,995,880	5,399,251
	5,451,343	5,828,933

7 TAXATION

Current income tax

A reconciliation of the income tax charge applicable to the loss from ordinary activities at the UK statutory income tax rate to the income tax charged in the Consolidated Income Statement for the year is as follows:

	2008	2007
	£	£
Loss before income tax	(38,269,120)	(14,132,897)
Tax calculated at UK statutory income tax rate of 20% (2007: 22%)	(7,653,824)	(3,109,237)
Losses arising on investment property not subject to tax	8,796,948	4,523,533
Holding company profits not subject to tax	(1,171,565)	(1,258,729)
Income not subject to tax	(484,147)	(222,288)
Expenditure not allowed for income tax purposes	15,400	3,499
Capital and other allowances	(311,173)	(491,143)
Tax loss not utilised	821,157	554,365
Current income tax charge	-	-

Deferred Tax

	2008	2007
	£	£
Unrealised gain to be recovered through use of asset	-	834,156
Accumulated Schedule A loss at 31 December	(11,509,918)	(7,463,154)
Taxable unrealised gain after utilised Schedule A losses	-	-

At the balance sheet date provision has been made for deferred tax on all temporary differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes, in accordance with the accounting policy detailed above in Note 2.

8  FREEHOLD AND LEASEHOLD INVESTMENT PROPERTIES

	2008	2008	2008
	Freehold	Leasehold	Total
	£	£	£
Market value as at 31 December 2007	142,650,000	35,550,000	178,200,000
Capital expenditure and property additions	(93,430)	7,825,782	7,732,352
Carrying value of disposed investment properties	(160,000)	(23,836,023)	(23,996,023)
Unrealised loss arising on adjustment to fair value of investment properties	(34,891,229)	(5,090,782)	(39,982,011)
Movement in lease incentive debtor	1,089,659	(63,977)	1,025,682
Market value at 31 December 2008	108,595,000	14,385,000	122,980,000
Adjustment for lease incentives	(1,588,121)	-	(1,588,121)
Discounted present value of minimum lease payments	-	18,182	18,182
Fair value at 31 December 2008	107,006,879	14,403,182	121,410,061
	2007	2007	2007
	Freehold	Leasehold	Total
	£	£	£
Market value as at 31 December 2006	196,165,000	43,190,000	239,355,000
Capital expenditure and property additions	176,339	3,650	179,989
Carrying value of disposed investment properties	(38,755,000)	(3,710,000)	(42,465,000)
Unrealised loss arising on adjustment to fair value of investment properties	(15,185,665)	(3,964,097)	(19,149,762)
Movement in lease incentive debtor	249,326	30,447	279,773
Market value at 31 December 2007	142,650,000	35,550,000	178,200,000
Adjustment for lease incentives	(498,462)	(63,977)	(562,439)
Discounted present value of minimum lease payments	-	4,314,581	4,314,581
Fair value at 31 December 2007	142,151,538	39,800,604	181,952,142

Investment properties were revalued at the year end by Jones Lang LaSalle Limited, Chartered Surveyors on the basis of the market value for existing use. In accordance with the accounting policy in Note 2, the market values of leasehold investment properties have been adjusted to reflect the discounted present value of minimum lease payments to reflect their fair value in accordance with IFRS. The market value for existing use provided by Jones Lang LaSalle Limited at the year end was £122,980,000 (2007: £178,200,000) however an adjustment has been made for lease incentives of £1,588,121 (2007: £562,439) that are already accounted for. The market values provided by Jones Lang LaSalle Limited are subject to the uncertainties in the real estate market referred to in Note 4.

9 TRADE AND OTHER RECEIVABLES                        

	2008	2007
	£	£
Trade receivables	780,527	1,114,361
Less: provision for impairment of trade receivables	(98,639)	(42,053)
Trade receivables (net)	681,888	1,072,308
Other receivables	1,852,934	1,158,352
Total trade and other receivables	2,534,822	2,230,660

The estimated fair values of receivables are the discounted amount of the estimated future cash flows expected to be received and approximate their carrying amounts.

The trade receivables above relate to rental income receivable from tenants of the investment properties. When a new lease is agreed with a tenant the Investment Manager performs various money laundering checks and makes a financial assessment to determine the tenant's ability to fulfil its obligations under the lease agreement for the foreseeable future. The majority of tenants are invoiced for rental income quarterly in advance and will be issued with invoices at least 21 days before the relevant quarter starts. Invoices become due on the first day of the quarter and are considered past due if payment is not received by this date.    Other receivables are considered past due when the given terms of credit expire.

Amounts are considered impaired when it becomes unlikely that the full value of a receivable will be recovered. Movement in the balance considered    to be impaired has been included in other direct property costs in the Consolidated Income Statement.

As of 31 December 2008, trade receivables of £98,639 (2007: £42,053) were impaired and provided for.

The ageing of these receivables is as follows:

	2008	2007
	£	£
0 to 3 months	38,476	-
3 to 6 months	60,163	26,257
Over 6 months	-	15,796
	98,639	42,053

As of 31 December 2008, trade receivables of £681,888 (2007: £1,072,308) were past due but not impaired.

The ageing of these receivables is as follows:

	2008	2007
	£	£
0 to 3 months	681,888	1,072,308

10 CASH AND CASH EQUIVALENTS

	2008	2007
	£	£
Cash held at bank	4,057,928	3,576,904
Cash held on deposit with RBS	30,610,098	-
Cash invested in Standard Life Investments (Global Liquidity Funds) plc	9,800,976	30,971,442
Rental deposits held on behalf of tenants	620,450	623,111
	45,089,452	35,171,457

£9,000,000 was placed on deposit with RBS on 5 November 2008 for a fixed period of 3 months and will provide a return of 5.45% per annum. £2,229,000 was placed on deposit with RBS on 24 December 2008 for a fixed period of 3 months and will provide a return of 2.68% per annum. £19,300,000 was placed on deposit with RBS on 30 December 2008 for a fixed period of 3 months and will provide a return of 2.58% per annum. 

As described in Note 12, cash was deposited with RBS during the year in order to satisfy the loan to value covenant that the Group is required to meet under its bank borrowing obligations.

For details of cash invested in Standard Life Investments (Global Liquidity Funds) plc see Note 28.

Cash held on behalf of tenants as a rental deposit is restricted and available to the Group only in the event of a tenant's default on their rental income obligation.

11 TRADE AND OTHER PAYABLES    

	2008	2007
	£	£
Trade payables	274,175	523,515
Rental deposits due to tenants	620,450	623,111
Other payables	372,870	454,842
Interest payable on bank borrowings	-	1,495
VAT payable	198,562	501,684
Deferred rental income	2,241,817	2,714,283
Retentions relating to property purchase	24,821	93,233
	3,732,695	4,912,163

12 BANK BORROWINGS                        

	2008	2007
	£	£
Loan facility	84,432,692	89,432,692
Opening bank borrowings drawn down	84,432,692	94,282,692
Amounts repaid during year	-	(9,850,000)
Closing bank borrowings drawn down	84,432,692	84,432,692

On 19 July 2006 the Company entered into an amended and restated loan agreement (amending the agreement dated 4 December 2003) with RBS. The facility made available to the Company is in two Tranche's - Tranche A and Tranche B. Tranche A is a term loan facility up to the amount of £84,432,692 and is repayable on 29 December 2013. Tranche B was revolving credit facility up to the value of £5,000,000 which expired in July 2008.                        

Interest is payable on Tranche A at a rate equal to the aggregate of LIBOR, a margin of 0.6% per annum and the lender's mandatory costs rate of approximately 0.01%. The all in interest rate on the loan drawn down at the balance sheet date was 2.7500% (2007: 6.6117%). During the year to 31 December 2008 the LIBOR rate used was the 3 month rate, from 1 January 2009 the 1 month LIBOR rate will be used.  As described in Note 13, £72m of the loan facility is hedged via interest rate swaps which result in the interest rate being a fixed rate of 5.7150% for the £72m portion of the loan (fixed rate of 5.115% plus a margin of 0.60%).

Under the terms of the loan facility there are certain events which would entitle RBS to terminate the loan facility and demand repayment of all sums due. Included in these events of default is the financial undertaking relating to the loan to value percentage. The loan agreement notes that the loan to value percentage is calculated as the Loan Amount divided by the Gross Secured Assets Value, and that this percentage should not exceed 55% at any time. The loan to value percentage is to be calculated upon the acquisition of a new property and quarterly with reference to that quarter's investment property valuation. The Loan Amount is defined as the amount of loan advances received by the Group and not repaid at the calculation date. The Gross Secured Assets Value is defined as the value of the Group's investment properties (as per the most recent valuation) plus any cash balances placed with RBS. The Group can therefore manage its obligations regarding the loan to value covenant by placing cash deposits with RBS and thereby increasing the Gross Secured Assets Value or by repaying the Loan Amount. As at 31 December 2008 the Group's loan to value percentage as per the RBS term loan facility was as follows:                    

	2008	2007
	£	£
Loan Amount	84,432,692	84,432,692
Investment property valuation	122,980,000	178,200,000
Cash held on deposit with RBS	30,610,098	-
Gross Secured Assets Value	153,590,098	178,200,000
Loan to value percentage	55%	47%

Other loan covenants that the Group is obliged to meet include the following:

- that the projected net rental income is not less than 170% of the projected finance costs for any three month period

- that the largest single asset accounts for less than 15% of the Group's total portfolio valuation

- that sector weightings are restricted to 55%, 45% and 45% for the Office, Retail and Industrial sectors respectively    

- that the largest tenant accounts for less than 20% of the Group's total rental income

- that the five largest tenants account for less than 50% of the Group's total rental income    

- that the ten largest tenants account for less than 75% of the Group's total rental income    

All of the above covenants are being satisfied by the Group as at 31 December 2008.

The loan facility is secured by fixed and floating charges over the assets of the Company and its wholly owned subsidiary, Standard Life Investments Property Holdings Limited.

The carrying value of the bank borrowings noted above is considered to be a close approximation to fair value and is deemed by the directors to be the fair value.

13 INTEREST RATE SWAPS

The Company has two interest rate swap agreements with RBS. The first swap agreement was entered into on 29 December 2004 and has an end date of 29 December 2013. Under this first swap the Company has agreed to receive a floating interest rate linked to 3 month Libor and pay a fixed interest rate of 5.115%. The second swap agreement was entered into on 19 December 2008 and has a start date of 1 January 2009 and an end date of 29 December 2013. Under this second swap the Company has agreed to pay a floating interest rate linked to 3 month Libor and receive a floating interest rate linked to 1 month Libor plus a margin of 0.1%. Both agreements are for a notional principal amount of £72,000,000. These swap agreements together qualify as an effective cash flow hedge and fair value changes are taken to equity. The effective interest rate of the combined swap agreements will be 5.015%. The effective interest rate for 2008 was 5.115% (2007: 5.115%).

	2008	2007
	£	£
Opening fair value of derivative financial instruments at 1 January	(262,635)	501,862
Movement in revaluation of interest rate swaps	(7,312,566)	(764,497)
Closing fair value of derivative financial instruments at 31 December	(7,575,201)	(262,635)

14 REDEEMABLE PREFERENCE SHARES

The Company issued 6,000,000 25p redeemable zero dividend preference shares ('redeemable preference shares') at a value of £1 on 19 December 2003.  The redeemable preference shares will be redeemed by the Company on the tenth anniversary of    admission at a redemption price of £1.7908. The redeemable preference shares cannot be redeemed earlier.  The redemption price represents a redemption yield of 6% per annum on the issue price of £1.

	2008	2007
	£	£
Proceeds from issue of redeemable preference shares	6,000,000	6,000,000
Accrued finance cost charged to Consolidated Income Statement for the year	455,463	429,682
Accrued finance cost charged to Consolidated Income Statement in previous periods	1,591,047	1,161,365
Closing liability to redeemable preference shareholders	8,046,510	7,591,047

As a return of capital and in accordance with the articles of the Company, the holders of the redeemable preference shares are entitled to the payment of 25p per share increased at the rate of 21.8% per annum compounded daily from the date of admission up to the tenth anniversary of admission.  

The carrying value noted above is considered to be a close approximation to fair value and is deemed by the Directors to be the fair value.

15 LEASEHOLD OBLIGATIONS

At 31 December 2008 the Group owned four leasehold properties at a market value for existing use of £14,385,000 (2007: five properties at a market value for existing use of £35,550,000) as valued by the independent valuers Jones Lang LaSalle Limited. In accordance with the accounting policy for leasehold investment property to be carried at fair valuation, an adjustment is required to reflect the discounted present value of the minimum lease payments.

	2008	2007
	£	£
Leasehold obligations due:
Less than one year	500	285,267
Between one and five years	1,870	974,791
Over five years	15,812	3,054,523
Total due after one year	17,682	4,029,314
Total present value of minimum lease payments	18,182	4,314,581

16 LESSOR ANALYSIS    

Lessor length

At the year end the total contractually agreed rental income based on the leases in operation is as follows:

	2008	2007
	£	£
Less than one year	9,827,434	12,158,260
Between one and five years	38,297,903	42,229,586
Over five years	41,366,164	69,005,983
Total due after one year	79,664,067	111,235,569
Total	89,491,501	123,393,829

The largest single tenant at the year end accounts for 6.51% (2007: 9.84%) of the current annual passing rent.

17 SHARE CAPITAL

	2008	2007
	£	£
Authorised
130,000,000 ordinary shares of 1p each	1,300,000	1,300,000
Allotted, called up and fully paid:
104,000,000 (2007: 104,000,000) ordinary shares of 1p each	1,040,000	1,040,000

18 SHARE PREMIUM

	2008	2007
	£	£
Opening / closing balance	5,217,022	5,217,022

19 RETAINED EARNINGS

	2008	2007
	£	£
Opening balance	2,576,775	2,748,875
Loss for the year	(38,269,120)	(14,132,897)
Transfer from other distributable reserves (see Note 21)	455,463	429,682
Unrealised loss arising on adjustment to fair value of investment properties transferred to capital reserves	39,982,011	19,149,762
Realised loss on disposal of investment properties transferred to capital reserves	4,002,729	1,411,753
Dividends paid	(7,030,400)	(7,030,400)
Closing balance	1,717,458	2,576,775

This is a distributable reserve.

20 CAPITAL RESERVES

	2008	2007
	£	£
Opening balance	14,635,767	35,961,779
Movement in revaluation of interest rate swap	(7,312,566)	(764,497)
Unrealised loss arising on adjustment to fair value of investment properties	(39,982,011)	(19,149,762)
Realised loss on disposal of investment properties	(4,002,729)	(1,411,753)
Closing balance	(36,661,539)	14,635,767

21 OTHER DISTRIBUTABLE RESERVES

	2008	2007
	£	£
Opening balance	94,371,577	94,801,259
Transfer to retained earnings*	(455,463)	(429,682)
Closing balance	93,916,114	94,371,577

* this is a transfer to move redeemable preference share finance costs from the retained earnings reserve to the other distributable reserve

22 LOSS PER SHARE

Basic and diluted loss per ordinary share is calculated by dividing the loss attributable to equity holders of the Company by the weighted average number of ordinary shares issued in the year.

	2008	2007
Loss for the year	£ (38,269,120)	£ (14,132,897)
Ordinary shares issued	104,000,000	104,000,000
Loss per ordinary share (pence)	(36.80)	(13.59)

There is no difference between the basic loss per ordinary share and the diluted loss per ordinary share.

23 DIVIDENDS

The interim dividends paid to date in 2008 are as follows (2007: £7,030,400) :

£1,757,600 (1.69p per ordinary share) paid in February relating to the quarter ending 31 December 2007

1,757,600 (1.69p per ordinary share) paid in May relating to the quarter ending 31 March 2008

£1,757,600 (1.69p per ordinary share) paid in August relating to the quarter ending 30 June 2008

£1,757,600 (1.69p per ordinary share) paid in December relating to the quarter ending 30 September 2008

Total for year £7,030,400

A further dividend of £1,040,000 (2007: £1,757,600) in respect of the quarter to 31 December 2008 has been approved and was paid in February 2009. 

These consolidated financial statements do not reflect this dividend, however, the published net asset value as at 31 December 2008 does.

24 RECONCILIATION OF CONSOLIDATED NET ASSET VALUE TO PUBLISHED NET ASSET VALUE

The net asset value attributable to Ordinary Shares is published quarterly and is based on the most recent valuation of the investment properties and calculated on a basis which adjusts the underlying reported IFRS numbers. The adjustment made is to include a provision for payment of a dividend in respect of the quarter then ended.    

	2008	2007
	£	£
Total equity per audited consolidated financial statements	65,229,055	117,841,141
Adjustments:
Dividend in respect of the quarter ending 31 December	(1,040,000)	(1,757,600)
Published net asset value	64,189,055	116,083,541

25 CASH GENERATED FROM OPERATIONS                    

	2008	2007
	£	£
Loss for the year	(38,269,120)	(14,132,897)
Movement in trade and other receivables	(304,162)	13,541
Movement in trade and other payables	(1,109,561)	(1,050,399)
Interest payable	5,451,343	5,828,933
Interest receivable	(2,314,517)	(998,718)
Unrealised loss arising on adjustment to fair value of investment properties	39,982,011	19,149,762
Realised loss on disposal of investment properties	4,002,729	1,411,753
Cash generated from operations	7,438,723	10,221,975
In the Consolidated Cash Flow Statement, proceeds from sale of investment properties comprise:
Carrying value of disposed investment properties (Note 8)	23,996,023	42,465,000
Realised loss on disposal of investment properties	(4,002,729)	(1,411,753)
Proceeds from disposal of investment properties	19,993,294	41,053,247

26 SEGMENTAL REPORTING

The Group is organised into four main business segments determined in accordance with the type of investment property:

Retail - mainly shops and retail warehouse parks

Office - mainly in large cities

Industrial - distribution warehouses and industrial units

Other - leisure centres and cinema complexes

Segmental analysis by business segment

2008
	Retail	Office	Industrial	Other	Total
	£	£	£	£	£
Rental income	2,461,524	3,570,863	4,050,117	1,315,805	11,526,263
Unrealised loss arising on adjustment
to fair value of investment properties	(11,497,082)	(13,032,617)	(10,832,312)	(4,600,000)	(39,982,011)
Realised loss on disposal of investment properties	-	(503,884)	(3,498,845)	-	(4,002,729)
Property related expenditure	(220,662)	(215,284)	(306,528)	(62,265)	(804,739)
Segment result	(9,256,220)	(10,072,968)	(10,587,568)	(3,346,460)	(33,263,216)
Non-property related expenditure					(1,869,078)
Operating loss					(35,132,294)
Finance costs - net					(3,136,826)
Loss for the year					(38,269,120)
Fair value of investment properties	25,378,954	37,206,538	42,408,216	16,416,353	121,410,061
Other current and non-current assets					2,534,822
Cash and cash equivalents					45,089,452
Total assets					169,034,335
Leasehold obligations	-	(18,182)	-	-	(18,182)
Bank borrowings					(84,432,692)
Other current and non-current liabilities					(19,354,406)
Total liabilities					(103,805,280)

There were no transactions between the business segments.            

2007
	Retail	Office	Industrial	Other	Total
	£	£	£	£	£
Rental income	2,423,244	6,532,162	3,955,836	1,387,246	14,298,488
Unrealised loss arising on adjustment to fair value of investment properties	(3,745,000)	(9,693,162)	(4,351,600)	(1,360,000)	(19,149,762)
Realised loss on disposal of investment properties	-	(859,040)	(552,713)	-	(1,411,753)
Property related expenditure	(136,481)	(449,803)	(134,570)	(16,403)	(737,257)
Segment result	(1,458,237)	(4,469,843)	(1,083,047)	10,843	(7,000,284)
Non-property related expenditure					(2,302,398)
Operating loss					(9,302,682)
Finance costs - net					(4,830,215)
Loss for the year					(14,132,897)
Fair value of investment properties	39,674,425	69,870,477	51,307,240	21,100,000	181,952,142
Other current and non-current assets					2,230,660
Cash and cash equivalents					35,171,457
Total assets					219,354,259
Leasehold obligations	-	(4,314,581)	-	-	(4,314,581)
Bank borrowings					(84,432,692)
Other current and non-current liabilities					(12,765,845)
Total liabilities					(101,513,118)

27 SERVICE CHARGE

The Group has appointed various managing agents to deal with the service charge at the investment properties.                        

	2008	2007
	£	£
Total service charge expenditure incurred	776,303	696,905
Total service charge billed to tenants	684,643	790,072
Service charge billed to the Group in respect of void units	66,458	24,802
Service charge due from/(to) tenants as at 31 December	25,202	(117,969)
	776,303	696,905

28 RELATED PARTY DISCLOSURES                        

Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial or operational decisions.                        

Redeemable preference shares

On 19 December 2003 the Company issued 6,000,000 25p redeemable zero dividend preference shares for £6,000,000 to The Standard Life Assurance Company. On 10 July 2006 these shares were transferred to Standard Life Assurance Limited. These shares have a nominal value of £1,500,000 and are redeemable by the Company at a price of £1.7908 . These shares do not carry any voting rights. See Note 14.  

Ordinary share capital

Standard Life Investment Funds Limited held 21,769,609 of the issued ordinary shares throughout the year on    behalf of its Unit Linked Property Funds (2007: 21,769,609). This equates to 20.9% (2007: 20.9%) of the ordinary share capital, however, Standard Life Investments Funds Limited is not considered to exercise control of the Group. Those parties related to the Investment Manager waived their rights to commission on the initial purchase of these shares in order to maintain the fairness of the transaction to all parties. Standard Life Investments Funds Limited received a payment of a dividend of 6.76p per share in the year to 31 December 2008 (2007: 6.76p per share).

Cash held on deposit with related parties

As at 31 December 2008, £9,800,976 (2007: £30,971,442) was invested in Standard Life Investments (Global Liquidity Funds) plc, a liquidity fund that is rated Aaa by Moody's. The interest earned on this investment during the year was £2,129,534 (2007: £847,126) representing an average rate of 5.44% (2007: 5.72%).

Standard Life plc is the ultimate controlling party of the Investment Manager, Standard Life Investments (Corporate Funds) Limited. Standard Life Investments (Global Liquidity Funds) plc is an entity that is also managed within the Standard Life plc group.

Directors

The Directors each hold the following number of Ordinary Shares in the Company:                        

	2008	2007
David Moore	15,000	15,000
Richard Barfield	30,000	30,000
John Hallam	15,000	15,000
Shelagh Mason	15,000	15,000
Paul Orchard-Lisle	25,000	25,000

No Director has any interest in any transactions which are or were unusual in their nature or conditions or significant to the business of the Group and which were effected by any member of the Group since its date of incorporation. Total fees relating to the Directors in the year under review were £103,786 (2007: £84,658), being £100,000 (2007: £80,000) in respect of fees and £3,786 (2007: £4,658) in respect of subsistence.      Each Director received a payment of a dividend of 6.76p per share during the year to 31 December 2008 (2007: 6.76p per share).

Investment Manager

Standard Life Investments (Corporate Funds) Limited is the Investment Manager. Transactions with the Investment Manager in the year are detailed in Note 5.

29 EVENTS AFTER THE BALANCE SHEET DATE

On 18 March 2009 the Group exchanged contracts to purchase Capital Court, Uxbridge for a price of £11.0m.  The property is a freehold office in the town centre of Uxbridge.  This purchase price represents a net initial yield of 9.95%.            

Additional Notes to the Annual Financial Report

This Annual Financial Report announcement is not the Company's statutory accounts for the year ended 31 December 2008. The statutory accounts for the year ended 31 December 2008 received an audit report which was unqualified and did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report.

The statutory accounts for the financial year ended 31 December 2008 were approved by the Directors on 30 March 2009. The Company's AGM is to be held on the 27 May 2009. The Annual Report and Notice of AGM will be sent to shareholders in April 2009 and can be downloaded from the Company's website hosted by the Investment Manager (www.standardlifeinvestments.co.uk/its).

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.

END

 

END

 

 

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