Final Results
Caledonian Trust PLC
19 December 2003
19 December 2003
CALEDONIAN TRUST PLC -RESULTS TO 30 JUNE 2003
Caledonian Trust PLC, the Edinburgh based property investment and development
company, announces its audited Results for the year to 30 June 2003.
CHAIRMAN'S STATEMENT
YEAR ENDED 30 JUNE 2003
Introduction
The Group made a profit of £507,967 in the year to 30 June 2003 compared to
£3,237,578 last year which included £2,589,353 from the sales of investment
property. NAV per share on 30 June 2003 increased by 7.1p to 170.6p compared to
163.5p last year.
Rent and service charges were £962,587, £1,768,109 lower than last year due
primarily to the sales of St Magnus House in April 2002 and Stoneywood during
2002 and the determination of the lease of St Margaret's House, Edinburgh on 28
November 2002. Net interest payable fell by £705,989 due to lower borrowings
and increased interest received of £344,264, while administration expenses fell
by £146,845. On 30 June 2003 bank loans and overdrafts were £3,479,983 and cash
at bank was £5,233,211. During the year average base rate fell to 3.90% from
4.32% last year.
On 30 June 2003 the Group's portfolio comprised by value 57.89% office
investment property (of which 70.58% is open plan) 10.62% retail property,
27.63% development property and 3.86% trading property.
Review of activities
The Group's property activities have been varied. However, there have been no
significant changes to our Edinburgh New Town investment portfolio. The La Tasca
restaurant in South Charlotte Street appears to trade well and is already highly
reversionary. In 61 North Castle Street work started in July 2003 on a
structural overhaul and the redevelopment of the upper two floors and attic into
two large Georgian style flats entering off the original staircase, 59 North
Castle Street. We expect to market these in the Spring.
Our largest investment property in Edinburgh, St Margaret's House, a 92,845 ft2
open-plan office was let to the Scottish Ministers until November 2002 when the
lease determined. The Scottish Parliament operates a dispersal programme whereby
there is a presumption against the location of offices for civil servants in
Edinburgh where new agencies or departments are formed, or where leases on
existing properties determine. In accordance with this policy one of the two
occupiers of St Margaret's House relocated to new purpose-built premises in the
Scottish Borders near Galashiels, and the second occupier, the Registers of
Scotland, has transferred all their staff into their other existing premises.
Plans for refurbishment to varying office specifications are being prepared
together with a proposal to remodel the facade. The building can be easily
subdivided. Each floor of about 11,000 ft2 is virtually self-contained and can
be further subdivided into two wings of 4,500 ft2 and 6,500 ft2 both of which
are capable of further subdivision. The floor to ceiling heights are similar
to those in St Magnus, Aberdeen, where we carried out a full refurbishment
including air handling, suspended ceilings and raised floors to create the BCO
award-wining best office fitout of the year in 2001. Clearly the existing space
can provide an attractive package of offices in different sizes and
specifications to customers' requirements. Total occupation costs, rents, rates
and services are budgeted to be significantly below the current central new
Grade 'A' space. These factors together with very extensive parking of one space
per 500 ft2, a location near to the new Parliament and the city centre and
prominent frontage to the busy A1 will make St Margaret's attractive to a wide
range of occupiers.
Our property at Baylis Road/Murphy Street near Waterloo SE1 where the lease
determines in March 2004 offers a similar redevelopment/ refurbishment potential
to St Margaret's. We have surveyed it and prepared dilapidations schedules and
estimated refurbishment costings. The property at Baylis Road is constructed of
metal columns and concrete floors and so lends itself well to letting as a whole
or in part. Murphy Street is open plan with good access and suitable for office
or distribution use.
I reported last year an investment purchase in Glasgow at 100 West Street,
currently let to Westcars, a Saab franchisee, on a 1.4 acre island site yielding
approximately 7.5%. West Street is in Tradeston, a rapidly improving area
adjacent to the M8 and less than 600 yards from the Broomielaw development,
Glasgow's 'Square Kilometre' financial services zone where 2,000 jobs have been
created since 2001 and 18,000 more are targeted by 2011. This site offers very
considerable long-term development potential.
We continue to develop and extend our residential sites within the Edinburgh
area. At Weir Court, Eskbank, near the City Bypass we completed an elegant
development of five four bedroom houses in November 2002, a completion date
delayed by the appalling weather last year. One house sold before 30 June 2003
and the others subsequently at prices between £280,000 and £360,000. Our second
residential site, for eight detached houses, borders Musselburgh and is within
400 yards of the Main Line station at Wallyford with easy access to the A1 near
the junction with the City Bypass. A large contiguous area should gain
planning permission early in 2004 for private development of 280 houses and this
development should greatly enhance the value on our site. Our third site, lying
just east of Dunbar, should accommodate 17 houses in one area where the
infrastructure is largely in place and about 29 houses in an adjoining area over
which we hold an option. Further extensions of the site are under negotiation.
Work on the extension of the A1 dual carriageway from Haddington to Dunbar is
well advanced and the new dual carriage road should open next summer.
In Edinburgh at Belford Road, where we hold consent for a 22,500 ft2 Grade A
office, several residential appraisals have been made and we hope to use a
recent local precedent to obtain a favourable adjustment to the existing
planning envelope.
We made an opportunistic wholesale purchase of three new Edinburgh flats,
including an exceptional penthouse, in the late summer from a developer anxious
to complete their sales programme. We intend to market these in early Spring.
Economic prospects
World economic conditions appear much more favourable for the UK at present than
they did at this time last year or indeed the previous year. Two years ago the
TMT asset bubble had burst leading to an economic downturn and a full blown
recession in the USA which threatened the world economy. Last year the major
external variables were related to the prospects for, the effects from and the
outcome of a war in Iraq. Major concerns included the economic consequences of a
prolonged rise in the oil price, widespread destabilisation in the Middle East,
the effects of WMD and the possibility of a long 'Vietnam' type war of
attrition. Fortunately the world economy recovered in 2002 and the fears of the
Iraq imbroglio have not materialised.
While economic damage may have been limited, the political and declared security
objectives of the Coalition have not yet been achieved. There objectives are
threatened by a guerrilla war with a disparate assortment of opposition forces
but united by their dislike of the invaders and independent of Saddam with
access to sophisticated weaponry. A guerrilla war would represent a political
failure reinforcing the failure to find WMD or to demonstrate how the success in
Iraq diminishes world terrorist activity. Fortunately the economic consequences
of any political failure are unlikely to be severe and the progress of the UK
economy will be determined by other variables.
Economic conditions appear propitious. In the last quarter the world economy
grew at its fastest pace for twenty years supported by annualised growth in the
US of 8.2%, the euro zone and Japan of 1.5% and the UK of 3.1%. Fears of global
deflation have subsided.
The Economist Intelligence Unit ('EIU') forecasts world growth rising from 3.3%
this year to 3.9% in 2004 and to 4.1% in 2005. The Economist poll of forecasters
reports 2004 growth in the USA as 4.2%, up from 3.9 % last month, and
significantly higher growth in all European Countries than in 2003. The EIU
forecasts OECD growth rising from the current 1.9% to 2.6% in 2005 and EU
recovery from the present sickly 0.6% to 2.3% in 2005. Against this background
Britain's economy is also expected to grow more rapidly rising from an expected
2.0% in 2003 to 2.7% in 2004.
The USA and the UK economic forecasts are highly dependent on a reduction of the
share of consumer expenditure in GDP and an increased share in other sectors.
The USA has enjoyed the biggest fiscal and monetary stimulus in decades
resulting in a change from a budget surplus of 1% of GDP in 2000 to a deficit of
5% this year. In parallel with the fiscal deficit the current account deficit
rose to a record 5.1% of GDP earlier this year. Current low interest rates have
caused a boom in mortgage refinancing which financed consumer spending but in
consequence household debt and debt servicing have risen to record levels. In
spite of the increase in consumer expenditure, US inflation is low because the
recovery is taking place in an economy still operating below capacity in which
rapid gains in productivity are resulting in employment continuing to fall seven
quarters after output started to rise. Low inflation has permitted the Federal
Reserve to commit itself to maintain interest rates at 1% for a 'considerable
period' as it considered that the risks of further disinflation are greater
than inflation.
Several factors are likely to effect a rebalancing of the US economy. The
recent tax cuts represent a one-off boost to the economy. Historically budget
deficits are correlated with long term interest rates and interest rates seem
likely to rise in the medium term. The ratio of house prices to income is
already above the last boom in the late 1980s and approaching that of the
inflationary 1970s, and after these peaks house price inflation fell to 0% and
2% respectively. Fading tax boosts, rising long-term interest rates and the
elimination of house price inflation should curb consumption.
The trade deficit will have contributed to the recent dollar weakness causing a
fall of about 20% against sterling and 31% against the euro since mid 2001. A
dollar fall was presumably the meaning of Alan Greenspan's recent comment that
foreign exchange markets are flexible enough to produce ' a benign resolution of
the US current account imbalance'. Increased exports and decreased imports
should, together with the fading stimulus from deficit funding, curb the growth
in consumer debt and reduce fiscal and foreign exchange deficits. The US Economy
should continue to be managed through the aftermath of the recent recession with
growth in investment and exports replacing reduced consumer growth.
The future progress of the UK economy is highly dependent on the timing and the
extent of the inevitable reduction in the rate of change of house prices.
Changes in the UK housing market are even more significant for the UK economy
than they are for the US economy. The risk of a significant change is also much
greater than in the US as UK houses are estimated by Capital Economics to be 50%
overvalued compared with 15% in the USA.
In the UK house prices have continued to rise rapidly, the reported annual
increase varying between areas and compilers - Nationwide Q3 17.1%, TSB Scotland
Q3 19.2% Edinburgh area Q3 14.8%. New lending and mortgage equity withdrawal
('MEW') have contributed to personal borrowing of £10.7bn in September 2003,
three times the level four years ago and monthly mortgage commitments have
trebled over these years. MEW has also risen sharply from about nil in 1999 to
7% currently. In Nov 2002 the Bank of England expected house prices to be stable
by Nov 2004 and in May 2003 'over the next year or so', but in Nov 2003 reports
'the MPC has revised up its central projection for house price inflation, so
that it slows more gradually during the next two years' i.e. by Nov 2005, a year
later.
Predictions of future house price changes vary. Nationwide suggest 'a gentle
slowdown', Bradford and Bingley a 7% rise and Hometrack a rise of 4%, adding,
'There is more chance of finding Elvis on the moon than there is of a price
crash next year'. The Bank of England says of its central projection 'there are
major risks around the assumed path'. The major risk on one side of the path is
the prospect of continuing rapid rises in house prices making the inevitable
eventual correction even more difficult. The major risk on the other side of the
path is the immediate prospect of a sharp correction. Cheap money has fuelled
the present escalation of house prices just as cheap equity fuelled the TMT
bubble of the late 1990s. On a pessimistic view, just as with the dot-coms, the
hangover from the cheap money party could last many years: falling house prices
could be to the early years of the 21st century what equity prices were to the
last years of the 20th. However the IMF has concluded that housing booms have
been followed by busts only 40% of the time.
The IMF also observes that house price falls are often associated with rises in
interest rates. A recent Economist headline was 'The interest rate squeeze
starts' and the MPC minutes noted that 'interest rates were below plausible
estimates of the neutral rate' i.e. monetary policy is still expansionary.
Indeed not since 1988 has the first rise in rates not presaged further rises.
Real interest rates at less than 1% are close to the lowest since 1981, the
worst recession since WWII and much lower than the 6% prevailing in the 1990s
recession. Indeed the forward sterling market indicates rates of over 5% within
two years.
Past reversals in the direction of change of interest rates have usually taken
place at higher levels, say at 61/2%, equal to a variable borrowing cost of say
8%, where a two % point increase in rates costs 25% more in interest, but, at a
variable cost of 5%, a two% point rise costs 40% more. The annual payment due on
a £100,000 25 year repayment mortgage would rise from £7095 at 5% to £8581 at 7%
or by £1486.
A neutral or natural long term interest rate is approximately 5% which is
broadly equivalent to real economic growth of 2.5% plus 2.5% inflation. In this
context recent and current rates are unsustainably low just as the sterling
market indicates. These interest rate rises, or possibly even their expectation,
will reduce housing demand and prices but the extent of the change is uncertain.
The Bank of England now expects a safe landing with zero house price inflation
by 2005 but other commentators are less sanguine and either expect a sharp fall
next year or like Capital Economics, expect prices to fall 20% over three years.
The sooner prices stabilise the smaller the asset bubble will be and any
correction is likely to be shallower and slower.
The gradual elimination of house price inflation is a 'Goldilocks' scenario,
which according to the OECD would be more likely if interest rates moved very
slowly up but started to do so quickly. However, Capital Economics forecasts
RPIX inflation at about 2% or less in 2004 and 2005, implying lower interest
rates. Contributing to and reinforcing this trend are the possibilities of a
higher exchange rate (reducing prices) and of a move to the HICP target of 2%
which is equivalent to 2.75% RPIX, up from the current 2.5%. In these
circumstances strict observance of the MPC's inflation targeting policy would
result in a continuation of the housing boom already considered economically
undesirable by most commentators and as a dangerous asset bubble by some.
The independence of the MPC has enabled the Bank of England to set interest
rates designed to meet the politically determined objective, an inflation rate
of 2.5% plus or minus RPIX 1% point and the achievement of this target has been
beneficial. However the choice of 21/2% inflation as a target is arbitrary as
there is little evidence that such a rate is 'better' than say 2% or 3% or even
a wider range. Indeed the target has just been arbitrarily changed to an
effective rate of 2.75%! The success of the single policy of targeting inflation
within a narrow limit does not mean that this policy is the optimal policy
especially as inflation now seems less threatening. Previous policies normally
widely applauded at the time, included the gold standard, the money supply, the
exchange rate and shadowing the Mark: now we have an inflation target!
The recent crash in the TMT sector caused by the bursting of an asset bubble
resulted in considerable and widespread economic distress whose worst affects
have been mitigated by an exceptionally expansionary monetary policy which
policy has in turn led to what may prove to be an asset bubble in residential
property prices. As the OECD says 'the biggest domestic risk to the (UK) economy
is the threat of a sudden drop in house prices leading to a sharp retrenchment
of consumer spending which would be all the more likely if house price inflation
were to continue at double digit rates well into next year and reinforces the
case for a continued, but gradual tightening of monetary policy'. A too strictly
limited target may not optimise economic conditions.
The Government has recently committed itself to a vast expansion of the public
sector budgeting 4.5% per annum growth in the three years until 2005-06 and then
2.8% until 2007-08. However as the NHS growth is to be maintained at 7% in real
terms until 2008, less than 2%, half the rate of current expansion, remains for
all other public services, including education currently expanding at 6%. The
PBR estimates that over the period the current trend growth will be 2.75%, and
that the PSNB will be £37bn this year falling slowly to £27bn in 2007. These
2003 PBR estimated deficits represent increases of £10bn on the 2003 Budget
figures and subsequent years are all now significantly higher, the cumulative
increase reaching £34.1bn, and the resulting total estimated borrowing to be
35.5% of GDP in 2008-2009 only 10% below the Chancellor's 40% ceiling. The
Treasury forecasts are based on assumptions of higher growth rates (3-3.5%) than
other commentators, including the Bank of England. More pessimistic growth
assumptions, 2.3% or so would result in the PSNB being higher. The Government
report that the £10bn overshoot in the 2003/2004 PSNB is due to £5.4bn extra
public spending costs including Iraq, plus £5.5bn shortfall in revenues,
partially offset by £0.9bn 'under-spend'. In the current forecasts the PBR
assumes that while the extra spending will persist, tax revenues will return to
the April 2003 prediction. As the FT says 'this forecast opens Mr Brown to the
risk of disappointment'. Earlier this year the EIU said that unless tax
receipts recover faster than currently seems possible ... the Government will
have to choose between raising taxes further or making more modest increases in
public expenditure or else jettison compliance with its self-imposed budgetary
rules. Clearly if there is a sharp contraction in consumer expenditure rather
than a slow down in growth sufficient to allow other sectors to grow more
quickly the PSNB will be even larger.
Government policy is predicated on above average economic growth, the recovery
in tax receipts, the absence of unexpected demands and the successful
rebalancing of the economy away from consumption to other sectors. However if
any one of these variables proves unfavourable, their present policy will be
untenable: one or more of their policies on tax or spending or the Golden Rule
will have to be jettisoned. However with the election due by June 2006 but very
possibly to be held within 18 months, current policies can be maintained, even
if inappropriate, until then. The most immediate risk of economic dislocation is
the outside chance of a sharp correction in the housing market which would
result in much lower growth in the short term. The longer high residential price
inflation persists the greater this risk becomes. Without such a dislocation
growth prospects, until at least the election, are very good.
Property prospects
The CB Hillier Parker 'CBRE' All Property Yield Index fell 0.1% point to 7.1% in
the year to September 2003 due to lower yields in the retail sectors outweighing
a 0.1% point rise in office yields. The ten year Gilts yield was 4.5% increasing
the yield gap to 2.6% points-down from about 2.9% in early 2003, although the
recent rise in gilt yields to 5.1% is likely to have reduced the present gap to
2.0%. The current All Property yield is 0.3% points lower than the recent peak
of 7.4% in Q4 2001 but over 5 years it has risen 0.5% points although gilts have
fallen 1% points.
The yield gap has risen because of relatively poor rental performance. The CBRE
rent index has now fallen for five consecutive quarters giving an annual decline
of 2.7% and reducing the 5 year rental growth to 4% per annum. Since the 1990
market peak the All Property rental index has risen by only 14.5% but in real
terms has fallen by 19.8%. Central London offices have experienced the greatest
fall as rentals have halved in real terms. Retail warehouses have been the
only sector to have risen in real terms and by a significant 41.8%.
The Estates Gazette November 2003 survey reported that 'rental value growth'
was expected to fall 0.6% further in 2004 but to rise by 1.2% in 2005. Yields
were expected to be unchanged in 2004 but to fall slightly in 2005. Cluttons
forecasts a further 5% fall in office rents in 2004 but all sectors to have a 1%
rise in 2005. They forecast that yields will not change in 2004 or 2005. CBRE
expect 2004 to give 'weaker investment performance compared to the last 18
months' due to two important trends. Higher interest rates are likely to reduce
investment demand from highly geared investors, notably private individuals or
syndicates, while the expected slowdown in consumer spending will reduce rental
growth.
The possibility of low rental growth and rising yield has reduced CBRE's
estimate of IPD's Property Total Returns in 2004 to 6%, a return sharply lower
than the 10.6% reported by IPD over the last 12 months and the 10% to 11% over
the last 5,10 and 17 years. Equities have returned -0.6% over the last five
years but 6.5% over 10 years and Gilts about 7.0% and 5.0% respectively. The
recent recovery in the Stock Market has resulted in a 14% rise in equities over
12 months but Gilts have only returned 1.3% due to rising interest rates. This
crossover in property and equity returns could represent a significant change in
returns among sectors.
In Edinburgh, Ryden report take-up of office space in the 6 months to September
2003 was 401,000ft2 up from the 340,000ft2 of the two previous equivalent
periods but significantly below the average of 603,000 ft2 in the earlier four
years. For the third consecutive period Ryden report an increased record
supply, now 2,874,000ft2, of which 70.3% is in units over 10,000ft2, a change
from the previous peak in the early 1990s when only 51.1% was available in such
large units. City centre headline asking rents are down 10% from the peak to £27
and in other areas have fallen at least 20%. Actual rents, after incentives, are
probably significantly less. At these asking levels rents are the same as the
previous peak in 1992 in nominal terms, but represent only 74% of them in real
terms.
In Aberdeen the take-up of 151,256ft2 in the 6 months to September 03 is lower
than last year and in Aberdeen supply levels are at the sixth successive high of
1,227,977ft2 of which a record 59.9% is suites greater than 10,000ft2. Ryden
report business park rents as 'maintained'. Oil prices have been relatively
steady and averaged $28 over the last year, a high figure compared to some
years. In spite of the high prices achieved and forecasts of prices around $20
in 2004 -2005 drilling activity dropped to 33 wells in 2002 compared to about
100 or more each year from 1982 to 1997. The convenor of the Heriot-Watt
Petroleum Engineering Institute said 'The problem for the North Sea is
maintaining that it is still a viable place. You won't find oil if you stop
drilling wells' A likely continuing decline in the North Sea Oil sector will
reduce demand for office space.
Take up of office space in Glasgow, 336,104 ft2 in the 6 month period to
September 2003, is below that of the previous year, but above the previous 6
month period, unlike Edinburgh and Aberdeen. Supply has risen steadily but is
about a third lower than the peak in the early 1990's. Ryden report asking rents
as stable at c£22ft2, but subject to incentives. Several new developments are
nearing completion including the 270,000 ft2 first stage for the new Broomielaw
development on the Clyde, and several more at an earlier stage. Enterprise
Glasgow is promoting the City as a financial services centre but until there is
a substantial recovery in this sector demand will probably be insufficient to
increase rents.
The London office markets have had a torrid time since they peaked in early 2001
with all rents falling 20% to 30%. Jones Lang La Salle ('JLL') report that in
the City and Docklands vacancy rates are nearly 15%, a similar level in the City
to that of 1993, and City rents are expected to fall further. The West End
market is stronger where supply has stabilised at 7% and take-up has increased
and JLL forecast that the bottom of this cycle is approaching and that rents
should rise in 2005.
Over the last year the CBRE All Property Index has shown a fall in rents but no
change in yield. Unsurprisingly the office market has been the worst performing
sector with rents falling and yield rising. Industrials and shops have been
broadly unchanged and only retail warehouses have improved showing both limited
rental growth and a small fall in yield. However the rental value of All
Property and of all sectors except retail warehouses remains lower in real terms
than those in May 1990, the approximate peak of the last cycle. Moreover in 1990
the Hillier Parker All Property yield was 7.6% but the successor CBRE index on
the Hillier Parker basis is now 8.1%. Thus the 'All Property' real rental has
fallen over the cycle while the investment value of those rents has fallen, a
doubly poor performance. Since 1990 property yields have risen 0.5% point
although 10 year Gilts have fallen about 7.5% points.
The Irishman, on being asked the way to Tipperary, famously said 'Well if I was
going to Tipperary, I wouldn't be starting from here'. Returns from property
depend on the starting position. After the 1990 crash the property market turned
in 1993 and since then as the IPD figures demonstrates has given excellent
returns. Thus notwithstanding the indifferent performance of property since 1990
and over the last year, increased private investor investment in commercial
property is widely reported in a variety of forms. This has been encouraged and
facilitated by many factors including severe falls in the equity markets,
pensions and endowment insurance shortfalls, concerns on the quality of reported
earnings, headline company failures and the increased availability of property
investment vehicles and of SIPPs. In contrast to the equity bear market,
property has been perceived as giving a 'safe long-term yield' and in many cases
until now a yield above the cost of borrowing. The increased demand of retail
investors has reduced the yield on secondary investment stock and investors in
this sector have experienced better returns than those indicated in the CBRE
analysis which reports on a 'prime synthetic' portfolio. However, CBRE consider
there 'to be inadequate differential between stocks of differing investment
quality, particularly from private buyers....'. In particular market reports are
that many non traditional investors are buying income, usually secure income,
but under conditions where the long-term capital values are likely to be
impaired: 'jam today'.
However these highly geared syndicates will be finding such purchases much
less attractive and much more difficult to finance, as they are so dependent on
debt. Five year swap rates, an important financing instrument in this market,
which were under 4% in June 2003 are now c5.25% increasing interest costs
excluding the margin by 31%. Bank debt, the main source of funding, has risen by
21% per annum for the last 5 years and real estate's share of lending has
increased from 10.6% in 1997 to 19.9% in early 2003. When Bank policy changes,
funding will be reduced, reinforcing the effect of rising swap rates, and demand
for such investments, backed by high debt levels, will fall. In consequence
yields on the secondary and debt driven and associated markets will return to
their historic position relative to the prime and traditional markets. The prime
market in many sectors is cyclically depressed, especially for offices, and
should recover but the most recent general recovery did not exceed the real
value of the previous cycle. Thus the last cycle has been one that favoured
'trading investors' who bought early and sold before the next downswing.
The next property cycle seems likely to be similar to the last one. Economic
growth should increase demand for space leading to increased rents. However, in
most instances extra supply is readily available due to the present acceptance
of a much wider range of location by office occupiers and the usual generous
supply of industrial and warehousing sites within acceptable distances. Even
retail supply has been relatively generous until recently except for
supermarkets and retail warehouses which have as a result become so valuable or
unobtainable that the expansion of these outlets is inhibited and the site value
has grown rapidly. Thus in most traditional property sectors supply is now
more elastic, albeit with a time lag due to the long production cycle time. In
the circumstances there is little scarcity value and value is largely dictated
by the marginal cost of supply.
Obsolescence is a now major cost. For instance New Town Edinburgh properties
served several generations as offices, being refurbished at each change, but are
now considered unsuitable for most occupiers. Similarly some 'state of the art'
1970s buildings have structural or design characteristics that make them
unsuitable and even those without such deficiencies require large investment,
particularly in services, to bring them up to acceptable, but never top grade,
specification. Landlords' interests have also been damaged by the difficulty in
obtaining full FRI leases and at termination, implementing them. Their extra
costs are at present borne largely by the owners of the property. As a result
of these changes in the market, returns from investment property are becoming
relatively less attractive.
The housing market continues to offer the likelihood of high returns on
investment. In the Edinburgh area, for instance, households are expected to
rise by 65,600 in the 15 years to 2015 or by 19.3%, but supply restrictions are
severe. In the City Centre only a few sites remain, mainly brownfield ones or a
dwindling number of office reconversions. Outside the City Centre development
continues on the very few remaining gap sites and redevelopment occurs on some
industrial and commercial premises. Very large developments including about 5000
houses each are proposed at Granton in North Edinburgh centred on the former Gas
Works site and in the South East Wedge, an area inside the City Bypass in South
Edinburgh and North Midlothian. Further away, large housing estates are being
added to existing settlements usually near good road or rail links where they
sell for up to 40% less than similar centrally located houses. Historically
these very large scale developments fall behind schedule. For example the
initial South East Wedge study reported in Dec 1998 and envisaged adoption of
the relevant two local plans in Oct 2001. More than two years later Shawfair,
the more advanced local plan, awaits adoption and the South East Edinburgh plan
awaits the report of the Public Inquiry. These delays are due to the
convoluted planning system, the need to 'consult' more widely and for longer,
and the need to reconcile or decide between ever more organised and vocal and
often competing interests groups: the LSE is reported as saying 'The
fundamental problem is that 'the richer we are, the nimbier we become''. Such
delays, which seem likely to continue, will constrain the supply of houses and
increase their price.
Glasgow's households are expected to increase by 38,540 over this period. The
city has a huge reserve of brownfield sites over an extensive area available for
development but as in Edinburgh, suitable land close to the City Centre is
scarce. Our site on West Street is already very close to the centre and will
become ever more accessible when the pedestrian bridge 'Neptune's Way' is
completed in 2007 linking Tradeston to the Broomielaw, Glasgow's 'Square
Kilometre' .
Future progress
The Group should make a satisfactory profit in the current year. Rental income
will continue to fall due to our much reduced investment portfolio and vacancies
at prospective development properties, but development profits from residential
property sales will more than compensate for this fall. The full outcome for
the financial year will depend crucially on any net change in valuation.
We continue to pursue our claim for over £4m against the Scottish Ministers for
dilapidations at St Margaret's when the lease determined on 28 November 2002 .
A restricted proof was heard in the Court of Session earlier this month and the
outcome is awaited. Our future interests are concentrated on the acquisition or
creation of development opportunities, realisable within a five year period.
The mid-market price is currently 115p, a disappointing discount of 32.6% to the
NAV of 170.6p. The Board recommends a final dividend of 1.1p and we intend to
increase the dividend at a pace consistent with profitability and with
consideration for other opportunities.
No tax is provided for in the current year. The Group currently has losses and
allowances of almost £1m of which trading losses of over £0.2m will be allowable
against development profits.
Conclusion
Prospects for UK economic growth over the next year are good and should exceed
2.5% unless the current house price bubble deflates quickly and widely. In
Scotland growth will continue at a lower rate than the UK but the predominantly
service-based Edinburgh economy should equal the UK performance.
The Group's portfolio comprises mostly potential developments in areas with
excellent prospects. The Group has substantial cash reserves to effect these
developments, to acquire others and to take advantage of opportunistic
investments. I envisage continued growth in NAV with the level of
profitability dependent on the timing of developments or transactions.
I D Lowe
Chairman
18 December 2003
Consolidated profit and loss account
for the year ended 30 June 2003
2003 2002
Note £ £
Income - continuing operations
Rents and service charges 962,587 2,730,696
Trading property sales 360,000 -
Other trading sales 367,243 340,328
_______ _______
1,689,830 3,071,024
Operating costs
Property rental outgoings - (99,644)
Cost of trading property sales (160,330) -
Cost of other sales (346,761) (396,129)
Administrative expenses 2 (669,265) (816,113)
_______ _______
(1,176,356) (1,311,886)
_______ _______
Operating profit 513,474 1,759,138
Profit on disposal of investment property - 2,589,353
Gain on sale of fixed assets 10,169 -
Interest receivable 344,264 158,527
Interest payable 3 (365,037) (885,289)
_______ _______
Profit on ordinary activities before taxation 502,870 3,621,729
Taxation 6 5,097 (384,151)
_______ _______
Profit for the financial year 507,967 3,237,578
Dividends 7 (241,716) (172,667)
_______ _______
Retained profit for the financial year 16 266,251 3,064,911
Earnings per ordinary share 19 4.41p 27.56p
Diluted earnings per ordinary share 19 4.24p 24.96p
Profit for the financial year is retained as follows:
In holding company 221,669 691,110
In subsidiaries 44,582 2,373,801
_______ _______
266,251 3,064,911
All activities of the group are continuing.
Statement of total recognised gains and losses
for the year ended 30 June 2003
2003 2002
£ £
Profit for the financial year 507,967 3,237,578
Unrealised surplus on revaluation of properties 556,575 450,000
Taxation arising on disposal of previously revalued property - (860,849)
_______ _______
Total gains recognised since the last annual report 1,064,542 2,826,729
Note of historical cost profits and losses
for the year ended 30 June 2003
2003 2002
£ £
Reported profit on ordinary activities before taxation 502,870 3,621,729
Realised surplus on previously revalued property - 7,534,683
______ ______
Historical cost profit on ordinary activities before taxation 502,870 11,156,412
Taxation on profit for year 5,097 (384,151)
Taxation in respect of previously revalued property - (860,849)
Historical cost profit for the year after taxation 507,967 9,911,412
Historical cost profit for the year retained after taxation 266,251 9,738,745
Consolidated balance sheet
at 30 June 2003
Note 2003 2002
£ £ £ £
Fixed assets
Tangible assets:
Investment properties 8 18,607,844 14,404,759
Other assets 9 8,575 10,439
__________ __________
18,616,419 14,415,198
Investments 10 20 20
__________ __________
18,616,439 14,415,218
Current assets
Debtors 11 306,648 2,532,398
Cash at bank and in hand 12 5,233,211 8,762,235
_________ _________
5,539,859 11,294,633
Creditors: amounts falling
due within one year 13 (2,215,551) (3,830,372)
_________ _________
Net current assets 3,324,308 7,464,261
__________ __________
Total assets less current liabilities 21,940,747 21,879,479
Creditors: amounts falling
due after more than one year 13 (2,302,500) (3,064,058)
__________ __________
Net assets 19,638,247 18,815,421
Capital and reserves
Called up share capital 14 2,302,053 2,302,053
Share premium account 15 2,530,753 2,530,753
Capital redemption reserve 15 155,846 155,846
Revaluation reserve 15 563,460 6,885
Profit and loss account 15 14,086,135 13,819,884
_________ _________
Shareholders' funds - equity 19,638,247 18,815,421
These financial statements were approved by the Board of Directors on 18
December 2003 and were signed on its behalf by:
ID Lowe
Director
Consolidated cash flow statement
for the year ended 30 June 2003
2003 2002
note £ £
Net cash inflow from operating activities (a) 691,545 1,972,072
Returns on investments and servicing of finance (b) (62,658) (808,758)
Corporation tax (769,902) (450,000)
Capital expenditure and financial investment (b) (1,387,610) 18,994,560
Equity dividends paid (230,206) (117,653)
__________ __________
Cash (outflow)/inflow before management of
liquid resources and financing (1,758,831) 19,590,221
Financing (b) (1,760,193) (12,197,601)
__________ __________
(Decrease)/increase in cash in period (3,519,024) 7,392,620
Reconciliation of net cash flow to movement in
net debt
(c)
£ £
(Decrease)/increase in cash in period (3,519,024) 7,392,620
Cash outflow from decrease in debt 1,760,193 11,699,736
_________ _________
Movement in net debt in the period (1,758,831) 19,092,356
Net debt at the start of the period 3,512,059 (15,580,298)
_________ _________
Net debt at the end of the period 1,753,228 3,512,058
Notes to the cash flow statement
(a) Reconciliation of operating profit to net cash inflow from
operating activities
2003 2002
£ £
Operating profit 513,474 1,759,138
Profit on disposal of (200,000) 538,102
property
Depreciation charges 4,384 12,717
Decrease /(increase) in 174,500 (266,189)
debtors
(Decrease)/increase in 199,187 (71,696)
creditors
_________ _________
Net cash (outflow)/inflow 691,545 1,972,072
from operating activities
Notes to the cash flow statement (ctd)
(b) Analysis of cash flows
2003 2003 2002 2002
£ £ £ £
Returns on investment and
servicing of finance
Interest received 344,265 158,527
Interest paid (406,923) (967,285)
_________ _________
(62,658) (808,758)
________ _________
Capital expenditure and
financial investment
Purchase of tangible (3,809,029) (194,907)
fixed assets
Sale of investment 2,411,250 19,189,467
property
Sale of fixed assets 10,169 -
_________ ________
(1,387,610) 18,994,560
_________ ___________
Financing
Purchase of ordinary (-) (497,865)
share capital
Debt due within a year
(Decrease)/ Increase (998,635) (11,536,331)
in short-term borrowings
Debt due beyond a year
Increase/(Decrease) (761,558) (163,405)
in long-term borrowings
_________ _________
(1,760,193) (12,197,601)
___________ ___________
(c) Analysis of net debt
At beginning of Cash flow Other non-cash At end of year
year changes
£ £ £ £
Cash at bank and 8,762,235 (3,529,024) - 5,233,211
in hand
Overdrafts (109,729) 10,000 - (99,729)
__________
(3,519,024)
Debt due after (3,064,058) 761,558 - (2,302,500)
one year
Debt due within (2,076,389) 998,635 - (1,077,754)
one year
__________ __________
1,760,193 -
__________ __________ _________ __________
Total 3,512,059 (1,758,831) - 1,753,228
Notes:-
1. The above financial information represents an extract
taken from the audited accounts for the year to 30 June 2003 and does not
contain the full accounts within the meaning of Section 240 of the Companies Act
1985 (as amended). The full accounts for the year ended 30 June 2003 were
reported on by the auditors and received an unqualified report and contained no
statement under section 237 (2) of (3) of the Companies Act 1985 (as amended).
Full accounts will be delivered to the Registrar of Companies.
2. All activities of the group are ongoing. The board recommends
the payment of a 1.1p per share final dividend (2002 : 1p), which will be
payable, subject to shareholders approval, on 26 January 2004 to all
shareholders on the register on 5 January 2004.
3. Earnings per ordinary share
The calculation of earnings per ordinary share is based on the reported profit
of £507,967
(2002 : £3,237,578) and on the weighted average number of ordinary shares in
issue in the year, as detailed below. The calculation of diluted earnings per
ordinary share is calculated adjusting profit for the period in respect of
interest on loan stock deemed to have been converted. The weighted average
number of shares has been adjusted for deemed conversion of loan stock and
deemed exercise of share options outstanding.
2003 2002
Weighted average no. of ordinary shares in issue 11,510,267 11,747,541
during year - undiluted
Weighted average of ordinary shares in issue during 11,980,267 13,586,787
year - fully diluted
4. Copies of the Annual Report and Accounts are being posted to
shareholders on or before 29 December 2003 and will be available free of charge
for one month from the Company's head office, 61 North Castle Street, Edinburgh,
EH2 3LJ.
END
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