Interim Results

RNS Number : 2606C

China Real Estate Opportunities Ltd

29 August 2008

 



CHINA REAL ESTATE OPPORTUNITIES LIMITED

INTERIM MANAGEMENT REPORT

FOR THE SIX MONTH PERIOD 

TO 30 JUNE 2008

China Real Estate Opportunities ('CREO' or the 'Company'), an AIM-listed company established to acquire both investment and development properties in China, today announces its interim results for the period ended 30 June 2008.

Highlights

• The property portfolio value has grown by 18 per cent since December 2007 to £712 million from £606 million benefiting from valuation gains and the strength of the RMB against sterling;

• Diluted EPRA NAV per share of £9.74, an increase of 16.8% since 31 December 2007. NAV per share has increased by 26.8% since the Company floated at £7.68 in July 2007;

• The asset management activities of the Company are achieving positive results as reflected in the continuing low vacancy levels, strong rental growth and independent valuation increases.  
  

Ray Horney, Chairman of CREO, commented:

'The first half of 2008 has been a period of significant activity as the Company moves forward with both its development and asset management programs. Externally, challenges are evident in the debt and equity markets, but in conjunction with the Investment Manager, Treasury Holdings China, CREO is exploring a number of options to underpin the short to medium term growth of the portfolio.

'The acquisitions pipeline remains strong with opportunities continuing to emerge as local players encounter financing and liquidity issues.'

CREO  Ray Horney, Chairman  Tel: + 44 (0)1273 775 225	Treasury Holdings China Richard David, Managing Director Tel: [phone]
Landsbanki Securities (UK) Limited  Paul Fincham, Jonathan Becher, Robert Naylor Tel: + 44 (0)20 7426 9000	Treasury Holdings Group Guy Leech, Group Finance Director Tel: + 353 1 6189300
Bankside Consultants  Simon Rothschild, Oliver Winters Tel: + 44 (0)20 7367 8888	Murray Consultants  Ed Micheau Tel: + 353 1 498 0300

  CHINA REAL ESTATE OPPORTUNITIES LIMITED

INTERIM MANAGEMENT REPORT

FOR THE SIX MONTH PERIOD 

TO 30 JUNE 2008

I am pleased to report on the activities of your Company during the first six months of 2008. During the period under review, the Company has consolidated its position within the Chinese property market in a time of significant uncertainty in the global equity and debt markets. China has also experienced upheaval, largely as a result of a series of natural disasters during the first half of the year, which has contributed to substantial challenges on the economic front and for the first time in a decade, the government is dealing with a high inflationary environment.

At this time I would like to express sincere sympathies and best wishes on behalf of the Company to those adversely affected by the severe snow storms, earthquake and flooding across China in the past six months. You will be pleased to know that the Company, in conjunction with its investment manager, Treasury Holdings China Limited and its staff, has set up a dedicated charity, the CREO Foundation for the Children of China, and has contributed in excess of Renminbi (RMB) 1 million (approximately £85,000) to the relief efforts across China.

On the business front, your Company has focused on consolidating its existing portfolio and continues to make solid progress with its asset management and development programmes. This is reflected in the CB Richard Ellis independent valuation of the individual assets which secured an increase of 11.3 per cent to RMB 10.4 billion for the portfolio as at 30 June 2008 including the acquisition in February 2008 of the additional two sites at the Tangdao Bay development for RMB 138 million (CREO's 50 per cent share). On a currency adjusted basis this has been further assisted by the continued strength of the RMB, which has appreciated by 7 per cent against sterling in the six months to 30 June 2008 resulting in a portfolio value of £762 million (net per accounts of £712 million), a 19.6 per cent increase over the 31 December 2007 valuation of £635 million.

The above has resulted in a 16.8 per cent increase in the NAV per share in the six month period from £8.34 to £9.74. Since 30 June 2008, the value of the Reinminbi has appreciated by a further 8 per cent against sterling and further RMB gains are expected with forward currency markets anticipating appreciation of 4 per cent to 5 per cent over the next 12 months.

Since my last report to you as at 31 December 2007 I am pleased to confirm the following in respect of the portfolio:

• The development at Tangdao Bay has increased to a projected gross floor area of approximately 430,000 square metres of mixed-use facilities, up from 180,000 square metres of solely residential space. This is a result of the acquisition of the two adjoining properties and gives exclusive access to the foreshore marina facility;

• Construction of the Beijing Logistics Park is expected to commence in the fourth quarter of 2008 with completion due by June 2009. All the necessary construction approvals have been secured and the construction company has been appointed through public tender;

• The site for the City Center Extension (formerly referred to as CC3) is cleared and available for redevelopment with the design and planning process continuing;

• Construction at the City Center Development (formerly referred to as CC5) is expected to commence in the fourth quarter of 2008;

• The refurbishment programme for Central Plaza is well advanced and we are receiving very positive feedback from existing and prospective tenants; and

• Generally, the asset management activities of the Company are achieving positive results as reflected in the continuing low vacancy levels, strong rental growth and independent valuation increases.  

The Company continues to establish a strong pipeline of assets targeted for acquisition and we anticipate being in a position to make progress in the near future regarding the expansion of the portfolio.

The Chinese market 

Nationally, China has faced significant challenges in the first half of 2008. Natural disasters have placed considerable strain on the country's resources whilst also putting significant pressure on the agricultural sector. The combined effects have been a significant cause of escalating inflation which peaked at an annualised rate of 8.1 per cent as at 29 February 2008, representing a sharp increase in the past 18 months (annualized inflation was less than 3 per cent as recently as February 2007). Despite surging commodity prices and China's recent decision to slash oil subsidies by 18 per cent, thereby increasing petrol prices for consumers, China has made good progress in containing inflation recording an annualised rate of 6.3 per cent as at 31 July 2008. Many experts predict that inflation will continue its downward trend across the remainder of 2008. 

In the first half of 2008 both the Chinese and Hong Kong stock exchanges have witnessed declines of more than 45 per cent and 20 per cent respectively. Real estate stocks domestically and abroad have not been immune to these pressures, which in turn have had a negative impact on the performance of the local property markets. The onset of an inflationary environment and continued strong increases in commodity prices, lack of market liquidity and the national impact of the earthquakes of May 2008 have combined to create further negative sentiment in the sector. 

The primary impact has been in the residential sector with numerous developers failing to meet sales targets and witnessing declining values in regional land banks. However the commercial property sector has generally withstood these adverse fluctuations with both the Beijing and Shanghai office and retail markets recording strong rental growth, low vacancies and stronger leasing activity in quality managed portfolios. In June 2008 it was reported that 'The Center', a Shanghai Grade A office building, was sold at a price in excess of RMB 50,000 per square metre and a gross yield of less than 6 per cent, confirming continuing strong interest in quality commercial real estate from institutional investors. 

Portfolio review 

Period end independent valuations of the Company's real estate portfolio, carried out by CB Richard Ellis in accordance with the RICS Appraisal and Valuations Standard (5th Edition), show an aggregate gross value of RMB 10.4 billion (£762 million). This compares favourably with both the 31 December 2007 valuations of RMB 9.3 billion (£635.4 million) and the valuation at the launch of the Company in July 2007 of RMB 8.6 billion (£566.7 million).  

Projects	CREO Fair Value at Acquisition  (July '07)	Year-End Valuations  (Dec '07)	Mid-Year Valuations  (Jun '08)
	£	£	£
City Center 1	£399,678,850	£450,552,901	£534,589,581
City Center Development 4	£4,794,067	£5,706,485	£6,873,923
Central Plaza	£96,957,357	£104,914,676	£117,461,598
Treasury Building	£36,590,203	£41,092,150	£45,826,154
Beijing Logistics Park	£5,949,626	£6,477,816	£7,068,226
Tangdao Bay 2/3	£22,765,585	£26,621,160	£50,042,160
Total	£566,735,688	£635,365,188	£761,861,642
Notes
1. Includes City Center 1 and City Center extension
2. Represents CREO's 50 per cent interest in the joint venture
3. Includes the acquisition of sites B & C in February 2008 for RMB 138m (CREO 50 per cent share)
4. Represents CREO's 5 per cent interest in the joint venture

There has been considerable activity across the portfolio in the past six months. In respect of the stabilised assets, occupancy rates remain strong, averaging more than 90 per cent for the three Shanghai based assets: City Center, Central Plaza and Treasury Building. Leasing activity continues to reflect a strong rental market, with rent increases averaging more than 15 per cent for individual renewals. This is reinforced by market data from Jones Lang LaSalle which reflects an annual increase in Grade A office rents of 13 per cent since 30 June 2007.

As to the development assets, Beijing Logistics Park has received all necessary approvals for commencement of construction in this site adjoining the Beijing International airport. In the lead-up to the Beijing Olympics, the government placed a temporary halt on construction activity in highly visible areas but commencement of construction is now planned for the fourth quarter of 2008. 

The relocation of the former residents of the City Center Extension (formerly CC3) site was completed during the first half of the year. Discussions are continuing with the planning authorities regarding design approvals. The recent 20 per cent increase in land value reported by CB Richard Ellis at 30 June gives considerable support to the viability of the development, and is a reflection of the growing importance of the Hong Qiao area to Shanghai's burgeoning commercial activity.

International design firm RTKL has been appointed as master-planner to the Tangdao Bay project following the consolidation of the site in February 2008 with the acquisition of the adjoining plots. The design programme is well advanced and the Qingdao government continues to make progress on its upgrade of the city infrastructure and broadening of the economy which will provide a strong foundation for the development and its likely end users. 

Financial review 

The Group has adopted, for the first time, EPRA Earnings per Share and Net Assets Value per Share calculations. EPRA is the European Public Real Estate Association and it represents the publicly traded real estate sector in Europe. EPRA strives to establish best practices in accounting, reporting and corporate governance, to provide high quality information to investors and to create a framework for debate and decision-making on the issues that determine the future of the sector. 

	June  2008	December 2007
Gross Rental Income (£ million)	14.2	9.2
Property portfolio value (£ million)	712.1	605.9
Net debt (£ million)	174.9	149.6
Net assets (£ million)	384.8	331.3
Diluted EPRA net asset value per share (£)	9.74	8.34

The property portfolio value as presented in the accounts has grown by 18 per cent since 31 December 2007, benefiting from valuation gains and the strength of the RMB against sterling. This has translated into an increase in the Diluted EPRA NAV of 16.8 per cent up to £9.74. At flotation, in July 2007, NAV was £7.68 displaying a growth of 26.8 per cent over twelve months.

As at 30 June 2008, net debt had risen to £174.9 million, an increase of £25.3 million since 31 December 2007. This largely reflects capital and operating expenditure and financing costs. The loan portfolio comprises two thirds offshore and one third China onshore funding.  The currency breakdown of the loans is US Dollars (68 per cent), Renminbi (26 per cent) and Euro (6 per cent).  The interest rates on non-Renminbi loans are hedged for the duration of the loans.

Outlook

The first half of 2008 has been a period of significant activity as the Company moves forward with both its development and asset management programs. Externally, challenges are evident in the debt and equity markets, but in conjunction with the Investment Manager, Treasury Holdings China, CREO is exploring a number of financing structures to underwrite the short to medium term growth of the portfolio. The acquisitions pipeline remains strong with opportunities continuing to emerge as local players encounter financing and liquidity issues. 

As a final note, Beijing has, this month, hosted the 2008 Olympics, an historic and proud achievement for the country, further positioning China in the global environment, which can only assist your Company with its growth ambitions.

Ray Horney

Chairman

28 August 2008  Principal Risks and Uncertainties for the remaining six months of the financial year

The most significant risks to the growth of CREO's business relates to the political and regulatory environment in China. Against that, significant potential for growth exists within the Chinese market and, therefore, the greater risk for the Company is its ability to conclude these deals within reasonable timeframes. However, the high quality of CREO's portfolio and the continuing tenant demand for our product means that the prospects for growth in the short to medium term remain positive.

China is not immune to the vagaries of the international credit markets and as such financing of new ventures carries a higher level of completion risk and cost. Similarly, as outlined above in regard to regulatory risk, historically the Chinese authorities have utilised the banking sector through reduction in loan quotas to slow economic activity. Therefore whilst low loan to value ratios within the CREO portfolio provide flexibility within its financing structure, the attitude of the relevant financial institutions both domestically and offshore dictate the company's ability to consummate financing transactions in an efficient manner. 

Responsibility Statement

We confirm that to the best of our knowledge:

(a) the condensed set of interim financial report has been prepared in accordance with International Accounting Standard 34 'Interim Financial Reporting'; and

(b) the interim management report includes a fair review of the information required by Sections DTR 4.2.7R and DTR 4.2.8R of the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority.

By order of the Board

Ray Horney 

Chairman

  China Real Estate Opportunities Limited

Consolidated balance sheet as at 30 June 2008

		30 Jun 2008	31 Dec 2007
		£'000	£'000
	Note	(Unaudited)	(Audited)
Assets
Non-current assets
Investment properties	5	570,004	497,133
Properties under development	6	111,482	87,280
Property, plant and equipment		____568	____567
		682,054	584,980
Other non-current assets
Investment in joint venture	7	30,630	21,504
Deferred tax assets	8	303	254
		712,987	606,738
Current assets
Financial assets available-for-sale		2,644	2,567
Trade and other receivables		20,137	11,542
Restricted cash		14,987	17,786
Cash and cash equivalents		63,317	79,210
		101,085	111,105
Total assets		814,072	717,843
Liabilities
Non-current liabilities
Interest-bearing loans and borrowings	9	(253,235)	(246,635)
Deferred tax liabilities	8	(113,719)	(92,835)
		(366,954)	(339,470)

Consolidated balance sheet as at 30 June 2008

		30 Jun 2008	31 Dec 2007
		£ 000	£'000
	Note	(Unaudited)	(Audited)
Current liabilities
Land appreciation tax payable		(4,122)	(9,192)
Income tax payable		(279)	(308)
Trade and other payables		(57,889)	(37,564)
		(62,290)	(47,064)
Total liabilities		(429,244)	(386,534)
Net assets		384,828	331,309
Equity
Issued capital		-	-
Share premium		251,517	250,858
Reserves		88,861	39,352
Retained earnings		44,450	41,099
Total equity attributable to shareholders of the Company	10	384,828	331,309
Net asset value per share:
- basic	11	£7.58	£6.54
- diluted	11	£7.48	£6.46
- diluted EPRA	11	£9.74	£8.34

Consolidated income statement

for the six months ended 30 June 2008

		Six months ended 30 Jun 2008	From 5 Dec 2006 to 30 Jun 2007
		£'000	£'000
	Note	(Unaudited)	(Unaudited)
Gross rental income		11,977	-
Service charge income on principal basis		2,245	-
Service charge expenses on principal basis		(1,898)	-
Property operating expense		(642)	-
Net rental income	2	11,682	-
Valuation gains on investment property	5	34,615	-
Administrative expenses		(26,093)	(3,173)
Net operating profit/(loss) before net financing costs		20,204	(3,173)
Financial income		5,932	105
Financial expenses		(10,458)	-
Net financing (expenses)/ income		(4,526)	105
Share of the loss of joint venture	7	(637)	-
Profit/(loss) before tax		15,041	(3,068)
Income tax expense	3	(10,974)	(67)
Profit/(loss) for the period		4,067	(3,135)
Attributable to:
Equity holders of the parent		4,067	(3,135)
Profit/(loss) for the period		4,067	(3,135)
Earnings per share:
Basic earnings/ (loss) per share	4	£0.08	(£0.19)
Diluted earnings/ (loss) per share	4	£0.08	(£0.19)

Consolidated statement of cash flows

for the six months ended 30 June 2008

		Six months ended 30 Jun 2008	From 5 Dec 2006 to 30 Jun 2007
		£'000	£'000
	Note	(Unaudited)	(Unaudited)
Operating activities
Profit/(loss) for the period		4,067	(3,135)
Equity settled share based transactions	10	1,624	1,496
Depreciation of properties, plant and equipment		23	-
Net financial expenses		4,526	(105)
Change in fair value of investment properties	5	(34,615)	-
Share of loss of joint venture	7	637	-
Income tax expense	3	10,974	67
		(12,764)	(1,677)
Income tax paid		(8,253)	-
Decrease in trade and other receivables		(6,064)	-
Increase in trade and other payables		18,675	170
Cash flows used in operating activities		(8,406)	(1,507)
Investment activities
Refundable deposits paid		-	(25,887)
Decrease in restricted cash		2,799	-
Addition to tangible assets		(3,526)	-
Interest received		1,588	105
Cash flows from/(used in) investing activities		861	(25,782)
Financing activities
Loan from Real Estate Opportunities Limited (REO)		-	17,706
Proceeds from share issue	10	73	10,647
Interest paid		(8,421)	-
Cash flows from/(used in) financing activities		(8,348)	28,353
		______	______
Net (decrease)/increase in cash and cash equivalents		(15,893)	1,064
		______	______
Cash and cash equivalents at 30 June		63,317	1,064
		______	______

The cash balance of £78.3m at 30 June 2008 includes restricted cash of £15m. The restricted cash is deposited in interest reserve accounts to repay borrowing commitments as they become due.

Consolidated statement of recognised income and expense

for the six months ended 30 June 2008

			Six months ended 30 Jun 2008		From 5 Dec 2006 to 30 Jun 2007
			£'000		£'000
	Note		(Unaudited)		(Unaudited)
Currency translation differences	10		29,319		-
Revaluation of property under development and property in joint venture net of tax	10		18,436		-
			______		______
Net gain recognised directly in equity			47,755
Profit/(loss) for the period	10		4,067		(3,135)
			______		______
Total recognised income and expenses for the period			51,822		(3,135)
			______		______
Reconciliation of movements in shareholders' funds for the six months ended 30 June 2008
			Six months ended 30 Jun 2008		From 5 Dec 2006 to 30 Jun 2007
			£'000		£'000
	Note		(Unaudited)		(Unaudited)
Total recognised income and expenses for the period			51,822		(3,135)
Transactions with shareholders
- Issue of new shares	10		-		13,030
- Share options exercised	10		73		-
- Equity settled share based transactions	10		1,624		1,496
			______		______
Movement in shareholders' funds for the period			53,519		11,391
Opening shareholders' funds - equity			331,309		-
			______		______
Closing shareholders' funds - equity			384,828		11,391
			______		______

China Real Estate Opportunities Limited

Notes to the Consolidated Financial Statements

for the six months ended 30 June 2008

1.    Basis of preparation

The interim financial report of the Company for the six months ended 30 June 2008 comprises the Company and its subsidiaries and the Group's interests in a joint venture.

This interim financial report has been prepared in accordance with International Accounting Standard ('IAS') 34, 'Interim financial report' promulgated by the International Accounting Standards Board ('IASB'). The preparation of an interim financial report in conformity with IAS 34 requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses on a year to date basis. Actual results may differ from these estimates.

The interim financial report contains consolidated financial statements and selected explanatory notes. The notes include an explanation of events and transactions that are significant to an understanding of the changes in financial position and performance of the Group since the 2007 annual financial statements. The interim financial report does not include all of the information required for a full set of financial statements prepared in accordance with International Financial Reporting Standards ('IFRS').

The interim financial report is unaudited, but has been reviewed by KPMG in accordance with International Standard on Review Engagements 2410, 'Review of interim financial information performed by the independent auditor of the entity' issued by the International Federation of Accountants.  

The accounting policies used in the interim financial report are consistent with those followed in the preparation of the Group's annual financial statements for the period ended 31 December 2007.

The interim financial report is presented in pounds sterling, rounded to the nearest thousand. It is prepared on the historical cost basis except for the following assets and liabilities which are stated at fair value: derivative financial instruments, financial assets available-for-sale, investment properties and properties under development.

2.    Segment reporting

Primary and secondary segments

Since China is the sole location of the Group's property portfolio, these financial statements and related notes represent the results and the financial position of the Group's primary business segment.

The secondary reporting format by property use is shown below:

	Offices £'000	Retail £'000	Car Parking   £'000	Others £'000	Total £'000
Group property assets	347,912	204,055	18,037	111,482	681,486
Joint venture net property assets	-	-	-	30,630	30,630
Total property assets	347,912	204,055	18,037	142,112	712,116
Additions	184	-	-	3,342	3,526
Net rental and related income	8,296	2,790	414	182	11,682

3.    Income tax expense 

	Six months ended 30 Jun 2008	From 5 Dec 2006 to 30 Jun 2007
	£'000	£'000
i) Income tax in the consolidated income statement
represents:
Current tax
Provision for PRC enterprise income tax	(658)	-
Provision for withholding income tax	(193)	-
Luxembourg wealth tax	-	(67)
	(851)	(67)
Deferred tax
Benefit of tax losses utilised	(85)	-
Fair value movement of financial derivatives	(14)	-
Revaluation of investment properties	(10,024)	-
	(10,123)	-
Total	(10,974)	(67)

As a collective investment fund under the Collective Investment Funds (Jersey) Law l968, the Company, and its Jersey subsidiaries, are entitled to exempt company status in Jersey under the provisions of article 123(A) of the Income Tax (Jersey) Law 1961 on payment of an annual fee which is currently £600 per company. The Company and its Jersey subsidiaries have obtained exempt company status for the year ending 31 December 2008, and accordingly, income and capital gains of the Company, other than Jersey source income (excluding bank deposit interest), are exempt from taxation in Jersey for the financial year 2008.

With effect from 3 June 2008, the income tax rate for companies in Jersey was reduced from 20% to 0% and exempt company status for all new companies was abolished. The existing exempt company status of the Company and its Jersey subsidiaries will remain in place until 31 December 2008, at which time they will move to a 0% rate of income tax.

Pursuant to the PRC tax rules and regulations, the Group's PRC subsidiaries are subject to PRC income tax at a rate of 25%.

(ii) Reconciliation between tax expense and   accounting profit at applicable tax rate:	Six months ended 30 Jun 2008	From 5 Dec 2006 to 30 Jun 2007
	£'000	£'000
Profit before taxation	15,041	(3,068)
	______	______
Notional tax on profit before tax, calculated at the rates applicable to profits in the tax jurisdiction  concerned	(3,760)	-
Effect of non-deductible expenses	(7,021)	-
	______	______
	(10,781)	-
Withholding income tax	(193)	-
Luxembourg wealth tax	-	(67)
	______	______
Total	(10,974)	(67)
	______	______

Profit before tax of the Group for the six months ended 30 June 2008 was mainly generated by Shanghai Hua Tian Property Company Ltd., Shanghai Central Land Estate Company Limited and Shanghai Vision Honest Real Estate Development Company Limited which are subject to PRC income tax rates of 25%.

4.    Earnings per share

The calculation of the basic earnings per share was based on the profit attributable to ordinary shareholders of £4.1m (loss for the period ended 30 June 2007: £3.1m) and the weighted average number of ordinary shares outstanding during the period ended 30 June 2008 of 50.7m (period ended 30 June 2007:16.5m). Diluted earnings per share is computed by dividing the profit attributable to ordinary shareholders by the weighted average number of Ordinary Shares outstanding and, when dilutive, adjusted for the effect of all potentially dilutive share options.

	Six months ended 30 Jun 2008	From 5 Dec 2006 to 30 Jun 2007
	£'000	£'000
Profit/(loss) attributable to ordinary shareholders	4,067	(3,135)
	_________	_________
i)   Basic earnings per share
Weighted average number of shares for the period (basic)	50,720,919	16,468,508
	_________	________
Basic earnings/ (loss) per share	£0.08	(£0.19)
	_________	_________
ii)    Diluted earnings per share
Weighted average number of ordinary shares (basic)	50,720,919	16,468,508
Effect of share options in issue	752,593	67,381
	_________	________
Weighted average number of ordinary shares (diluted)	51,473,512	16,535,889
	_________	________
Diluted earnings/ (loss) per share	£0.08	(£0.19)
	_________	______
iii)    Diluted EPRA earnings per share
Profit/(loss) attributable to ordinary shareholders (diluted)	4,067	(3,135)
Revaluation movement on investment properties	(34,615)	-
Movement in fair value of financial instruments	(969)	-
Deferred tax	10,048	-
	_________	__________
	(21,469)	(3,135)
Weighted average number of ordinary shares (diluted)	51,473,512	16,535,889
	_________	_________
Diluted EPRA loss per share	(£0.42)	(£0.19)
	_________	_________

The European Public Real Estate Association (EPRA) issued Best Practice Policy Recommendations in November 2006, which gives guidelines for performance measures. The EPRA earnings exclude investment property revaluations, movement in fair value of financial instruments and their related tax consequences.

5.    Investment properties

	2008	2007
	£'000	£'000
Balance at 1 January 2008/ 5 December 2006	497,133	-
Acquisitions through business combinations	-	412,400
Additions	184	326
Foreign currency adjustments	38,072	13,052
Fair value adjustments	34,615	71,355
	______	______
Balance at 30 June/ 31 December	570,004	497,133

At 30 June 2008 the investment properties and properties under development (Note 6) were revalued at fair value. The valuations were undertaken by independent international valuation firm CB Richard Ellis and carried out in compliance with the Royal Institute of Chartered Surveyors Practice Standards. The fair values are based on market values, being the estimated amount for which a property could be exchanged on the date of valuation between a willing buyer and a willing seller in an arm's length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion. The valuations are prepared by considering the aggregate of the net annual rents receivable from the properties and, where relevant, associated costs. The rental yields applied per the valuations for the office and retail properties in China were estimated to each be in the range of 5% - 10% p.a.

The revaluation gains of £34.6m have been taken to the consolidated income statement for the period.

All the investment properties are rented out under operating leases.

As at 30 June 2008 investment properties with a total carrying value of £570m were pledged as collateral for the Group's borrowings.

6.    Properties under development

	2008	2007
	£'000	£'000
Balance at 1 January 2008/ 5 December 2006	87,280	-
Acquisitions through business combinations	-	48,277
Acquisitions of land use right	-	6,294
Additions	3,342	6,507
Foreign currency adjustments	6,929	2,288
Fair value adjustments (Note 10)	13,931	23,914
	_______	_______
Balance at 30 June/ 31 December	111,482	87,280

At 30 June 2008 the properties under development were revalued at fair value. The valuations were undertaken by independent international valuation firm CB Richard Ellis (Note 5). The revaluation gains of £13.9m have been credited directly to equity.

The Group has not capitalised any interest in the period.

7.     Investment in joint venture

Joint venture	Country	Ownership
		2008
		%
Qingdao Shangshi CREO Real
Estate Company Limited	People's Republic of China	50

The Group has a 50% interest in a joint venture Qingdao Shangshi CREO Real Estate Company Limited whose principal activity is real estate development. The Group entered into a joint venture agreement with SIIC Shanghai (Holdings) Company Limited ('SIIC') and Shanghai Shangshi City Development & Investment Company Limited ('SSCD') dated 15 May 2007 to govern the relationship of the parties over their interests in Qingdao Shangshi CREO Real Estate Company Limited. Qingdao Shangshi CREO Real Estate Company Limited holds the land use rights in respect of a development site at Tangdao Bay in the Province of Shandong.

Summary of financial information on joint venture (50%)
	30 Jun	31 Dec
	2008	2007
	£'000	£'000
Non-current assets	50,059	26,615
Current assets	19	5,237
Non-current liabilities	(4,380)	(1,543)
Current liabilities	(15,068)	(8,805)
	______	______
Net assets	30,630	21,504
	______	______
Income	3	9
Expenses	(640)	(184)
	______	______
Net loss	(637)	(175)
	______	_____
Movement in investment in joint venture
	2008	2007
	£'000	£'000
Balance at 1 January 2008/ 5 December 2006	21,504	-
Acquisition	-	16,164
Share of revaluation of properties (Note 10)	7,988	4,924
Share of loss of joint venture	(637)	(175)
Foreign currency gains	1,775	591
	______	______
Balance at 30 June/ 31 December	30,630	21,504

The property of the joint venture was revalued at fair value at 30 June 2008. The valuations were undertaken by independent international valuation firm CB Richard Ellis. Qingdao Shangshi CREO Real Estate Company Limited was successful at auction in purchasing two additional sites in November 2007. The Sales and Purchase Agreements for the sites were signed in January 2008 and the land use right certificate was obtained in April 2008. These sites were accounted for at fair value and included as part of non-current assets at 30 June 2008.

8.     Deferred tax assets and liabilities 

	Assets	Liabilities
	2008	2008
	£'000	£'000
Pre-operating expenses	133	-
Fair value change in investment properties	-	(94,342)
Fair value change in properties under development	-	(19,377)
Fair value change in financial derivatives	151	-
Deductible tax loss	19	-
	_______	_______
Deferred tax assets/ (liabilities)	303	(113,719)

The PRC income tax rate of 25% would be charged if the Group decided to realise its investment properties and properties under development at the period end valuations through the sale of the underlying assets after the period end. Apart from the deferred tax liability that arises on revaluation gains there are two deferred tax assets that relate to derivatives and losses carried forward within the individual PRC entities.

Deferred tax liabilities
	2008	2007
	£'000	£'000
Balance at 1 January 2008/ 5 December 2006	(92,835)	-
Acquisition through business combinations	-	(65,182)
Recognition of deferred tax liabilities	(13,507)	(23,817)
Foreign currency adjustments	(7,377)	(3,836)
	______	______
Balance at 30 June/ 31 December	(113,719)	(92,835)
	______	______

Deferred tax assets
	2008	2007
	£'000	£'000
Balance at 1 January 2008/ 5 December 2006	254	-
Acquisition through business combinations	-	156
Recognition of deferred tax assets	133	153
Foreign currency adjustments	1	-
Realisation for the period	(85)	(55)
	_______	______
Balance at 30 June / 31 December	303	254
	______	______

Unrecognised deferred tax liability

Pursuant to the new PRC Corporate Income Tax Law which took effect from 1 January 2008, a 10% withholding tax was levied on dividends declared to foreign enterprise investors from the PRC effective from 1 January 2008. A lower withholding tax rate may be applied if there is a tax treaty arrangement between the PRC and the jurisdiction of the foreign enterprise investors. On 22 February 2008, Caishui (2008) No. 1 was promulgated by the PRC tax authorities to specify that dividends declared and remitted out of the PRC from the retained earnings as at 31 December 2007 determined based on the relevant PRC tax laws and regulations are exempted from the withholding tax. 

As at 30 June 2008, no deferred withholding tax is accrued for as in the opinion of the directors of the Company, the Group expects not to pay dividends out of the recognised but undistributed profits of the Group's PRC subsidiaries for the period from 1 January 2008 to 30 June 2008 within the next twelve months.

9.    Interest-bearing loans and borrowings

The carrying value of Group loans is set out below:
	2008	2007
	£'000	£'000
Bank borrowings - secured	(254,841)	(248,574)
Less: Loan issue costs	1,606	1,939
	(253,235)	(246,635)
Long-term loans
	2008	2007
	£'000	£'000
Principal
Balance at 1 January 2008/ 5 December 2006	(248,574)	-
Additions	-	(248,574)
Foreign currency adjustments	(6,267)	-
Balance at 30 June / 31 December	(254,841)	(248,574)
Issue costs
Balance at 1 January 2008/ 5 December 2006	1,939	-
Additions	-	2,308
Amortisation	(333)	(369)
Balance at 30 June/ 31 December	1,606	1,939
Including:
Bank borrowings within the PRC	(84,604)	(81,038)
Bank borrowings outside of the PRC	(170,237)	(167,536)
Balance at 30 June/ 31 December	(254,841)	(248,574)

The secured bank loans borrowed within the PRC as at 30 June 2008 were secured by the Group's investment properties with a total carrying amount of £570m. The secured bank loans borrowed outside of the PRC as at 30 June 2008 were secured by the equity interests of certain subsidiaries of the Company. 

There were no loans repaid or refinanced in the six month period to 30 June 2008. The maturity dates of the existing loans remain unchanged. 

10.    Capital and reserves

    Reconciliation of movement in Group capital and reserves

	Share premium account	Translation reserve	Revaluation reserve	Share option reserve	PRC statutory reserve	Retained earnings	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 5 December 2006	-	-	-	-	-	-	-
Loss for the period to 30 June 2007	-	-	-	-	-	(3,135)	(3,135)
Issue of new shares	13,030	-	-	-	-	-	13,030
Equity settled share based transactions	-	-	-	1,496	-	-	1,496
Balance at 30 June 2007	13,030	-	-	1,496	-	(3,135)	11,391
Profit for the period to 31 December 2007	-	-	-	-	-	44,234	44,234
Revaluation of properties under development
- Group	-	-	23,914	-	-	-	23,914
- Group deferred tax	-	-	(5,781)	-	-	-	(5,781)
- Joint venture	-	-	4,924	-	-	-	4,924
Exchange differences	-	10,888	-	-	-	-	10,888
Issue of new shares	251,553	-	-	-	-	-	251,553
Purchase of own shares	(15,255)	-	-	-	-	-	(15,255)
Equity settled share based transactions	-	-	-	5,271	-	-	5,271
Share options exercised	1,530	-	-	(1,360)	-	-	170
Balance at 31 December  2007	250,858	10,888	23,057	5,407	-	41,099	331,309
Profit for the period to 30 June 2008	-	-	-	-	-	4,067	4,067
Transfer	-	(316)	316	-	716	(716)	-
Revaluation of properties under development
- Group	-	-	13,931	-	-	-	13,931
- Group deferred tax	-	-	(3,483)	-	-	-	(3,483)
- Joint venture	-	-	7,988	-	-	-	7,988
Exchange differences	-	29,319	-	-	-	-	29,319
Equity settled share based transactions	-	-	-	1,624	-	-	1,624
Share options exercised	659	-	-	(586)	-	-	73
Balance at 30 June 2008	251,517	39,891	41,809	6,445	716	44,450	384,828

Share capital and share premium reserve

The authorised share capital of the Company is unlimited. The issued share capital of the Company at 30 June 2008 is 50,762,385 ordinary shares of no par value. 

Ordinary share capital in thousands of shares
Shares as at 5 December 2006	-
Issued to CREO SA	18,400
On issue as at 30 June 2007 - fully paid	18,400
Issued for non-cash consideration	2,133
Issued through public offering	32,095
Options exercised	200
Share buyback	(2152)
On issue at 31 December 2007 - fully paid	50,676
Options exercised	86
On issue at 30 June 2008 - fully paid	50,762

Translation reserve

The translation reserve comprises all foreign exchange differences arising from the translation of the financial statements of foreign operations as well as the translation of the liabilities that hedge the Company's net investment in a foreign subsidiary. 

Revaluation reserve

The revaluation reserve relates to properties under development of the Group and of the joint venture. 

Share option reserve

There were 86,200 options exercised in the 6 months ended 30 June 2008 at an exercise price of £0.85. 

PRC statutory reserve

Transfers from retained earnings to PRC statutory reserves were made in accordance with the relevant PRC rules and regulations and the articles of association of the Company's subsidiaries incorporated in the PRC and were approved by the respective boards of directors. These PRC entities are required to transfer at least 10% of their profit after taxation, as determined under accounting principles generally accepted in the PRC to the reserve fund until the balance of such reserve fund is equal to 50% of the registered capital. This fund is non-distributable other than upon liquidation. Transfers to this fund must be made before distribution of dividends to the equity holders. 

Dividends

Dividends have not been provided for and there are no income tax consequences. 

11.    Net asset value per share

The net asset value (NAV) per share as at 30 June 2008 and 31 December 2007 were as follows: 

	30 Jun 2008	31 Dec 2007
	£'000	£'000
Net assets attributable to shareholders	384,828	331,309
Proceeds from exercise of share options	7,669	7,924
Adjusted net assets	392,497	339,233
Number of shares in issue
Ordinary shares - basic	50,762,385	50,676,185
Ordinary shares - diluted	52,488,185	52,523,185

. 

The dilution effect for June 2008 above assumes 803,800 options at the strike price of £0.85, 892,000 options at a strike price of £7.56 and 30,000 options at a strike price of £8.065 are exercised
Net asset value per ordinary share:
- basic	£7.58	£6.54
- diluted	£7.48	£6.46
Diluted EPRA net asset value per share
	30 Jun	31 Dec
	2008	2007
	£'000	£'000
Adjusted diluted net assets per above	392,497	339,233
Fair value of financial instruments	4,958	5,927
Deferred tax	113,568	92,682
Diluted EPRA net assets	511,023	437,842
Diluted number of shares in issue per above	52,488,185	52,523,185
Diluted EPRA NAV per share
Ordinary shares - diluted	£9.74	£8.34

The EPRA NAV per share excludes the mark to market of financial instruments which are economically effective hedges and deferred taxation on revaluations on properties and properties under development and financial instruments, and is calculated on a fully diluted basis.  

12.    Capital commitments

	30 Jun	31 Dec
	2008	2007
	£'000	£'000
Contracted but not provided	1,926	1,688
Authorised but not contracted	86,789	53,526
	88,715	55,214

Contracted capital commitments relate to the refurbishment of City Centre 1 of Shanghai Hua Tian Property Development Company Limited and Central Plaza of Shanghai Central Land Estate Limited.

In connection with its joint venture company, Qingdao Shangshi CREO Real Estate Company Limited, the Company has agreed together with the joint venture partner to increase the total share capital from RMB 500 million to RMB 1.1 billion.

Deferred consideration for City Centre Phase 3

As part of the June 2007 share purchase agreement for the City Centre property, an amount of £14m, less certain related costs incurred, is payable to the vendor upon the execution of certain conditions and events. The potential liability becomes payable upon the granting of various regulatory approvals required for the substantial expansion of the floor areas of one phase of the property acquired. The anticipated expansion of the floor area of the property has been valued by CB Richard Ellis at 30 June 2008 at £23.46m. The directors believe that the conditions of the share purchase agreement will be executed and the deferred consideration will become payable. 

13.    Related parties

In accordance with the agreements with Treasury Holdings China Limited (THCL) and Treasury Holdings detailed in the 2007 Annual Financial Statements, the Company incurred/ accrued the following fees in the 6 months to 30 June 2008: 

(a)    Investment advisory agreement with THCL

(i)    Development management fees of £1.19m

(ii)    Project management fees of £1.36m 

(iii) Performance fees for the six months ended 30 June 2008 of £15.45m. 

The performance fee is based on annual increases in the net asset value per ordinary share. At 31 December 2007 the calculation of the 2007 performance fee was based on the movement in the adjusted NAV. However, from 2008 onwards all calculations will be benchmarked with the performance of the Group as assessed on an EPRA NAV basis.  

(b)    Property management agreement with THCL

Property management fees of £2.72m. 

(c)    Accounting services agreement with Treasury Holdings

Fees of £75,000 in accounting services fees were incurred during the period and are payable to Treasury Holdings in accordance with the accounting services agreement dated 25 June 2007 pursuant to which Treasury Holdings provides certain accounting administrative services to the Group for an annual fee of £150,000 per annum. 

14.    Post balance sheet events

In full consideration for the 2007 performance fee due to THCL, Investment Adviser to CREO, and in accordance with the terms of the investment advisory agreement between CREO and THCL, THCL elected to receive the 2007 performance fee of £3.5m due from CREO in the form of ordinary shares in CREO. Ordinary shares of 420,653 were issued to THCL on 3 July 2008. 

 

END

 

 

IR SEMFMASASEDA