Final Results

Land Securities PLC 23 May 2001 PART 1 LAND SECURITIES 23 May 2001 Announcement of Preliminary Results 31 March 2001 Highlights * concluded our strategic review and restructured the Group into Portfolio Management and Development business units * completed the acquisition of Trillium and created our Total Property Services business unit * broadened our skill base by appointing three new executive directors * invested £577.8m on acquisitions and developments for the investment property business * increased the development programme spend to £2bn * accelerated the portfolio rationalisation by selling 72 properties for £ 431.2m * appointed preferred bidder for BBC property partnership contract Since the year end * appointed preferred bidder for BT property partnership contract * completed acquisition of Whitecliff Properties for £63.4m Extract from the Corporate Review: 'We are excited by the opportunities being presented by the transformation of our industry. While maintaining focus on our core activities, we are seeking new ways to improve the accommodation and services we offer to the commercial community and to enhance the fabric of our urban environment. We believe that through these actions we will convince investors to have greater confidence in the capacity of the sector to deliver enhanced returns.' For further information: Land Securities PLC Ian Henderson/Jim Murray/Emma Denne (020) 7413 9000 Financial Dynamics Stephanie Highett (020) 7831 3113 23 May 2001 Preliminary Announcement of the results for the year ended 31 March 2001 Financial Highlights 2001 2000 Change % ------- ------- -------- Net property income £497.5m £457.2m +8.8 Revenue profit (pre-tax) £308.9m £301.7m +2.4 Pre-tax profit £314.6m £327.7m -4.0 Adjusted earnings per share 43.44p 40.86p +6.3 Earnings per share 44.57p 45.44p -1.9 Dividends per share 32.50p 31.00p +4.8 * Adjusted dividend cover (times) 1.34 1.37 Dividend cover (times) 1.37 1.52 Diluted net assets per share 1154p 1090p +5.9 Properties £8,229.0m £7,453.7m Borrowings £1,757.1m £1,556.3m Equity shareholders' funds £6,150.9m £5,781.8m + Gearing (net) 28.1% 24.5% + Interest cover (times) 3.04 3.11 *Excludes results of property sales and bid costs. + See glossary. Investment Business Property Highlights Analysis of valuation Investment Business surplus/ Portfolio valuation £m Total % (deficit)% at 31 March 2001 -------- -------- ----------- Offices West End and Victoria 1,922.2 24.3 13.3 City and Midtown 1,503.1 19.0 6.5 Elsewhere in the United Kingdom 193.1 2.4 4.3 Shops and shopping centres Shopping centres 1,348.8 17.1 (2.8) Central London shops 663.9 8.4 .4 Other in-town shops 674.3 8.5 (4.2) Retail warehouses and food superstores Parks 738.4 9.3 3.8 Other 222.2 2.8 .1 Warehouses and industrial 367.5 4.7 4.3 Hotels, leisure and residential 272.4 3.5 (1.0) TOTAL VALUATION 7,905.9 100.0 3.9 The portfolio valuation figures given above relate to the investment business comprising investment and development properties. The figures exclude properties owned by Land Securities Trillium. The portfolio valuation figures include a one third apportionment of the valuation attributed to properties owned by the Birmingham Alliance limited partnerships and a one half apportionment in relation to property owned by the Gunwharf Portsmouth limited partnership. VALUATION Portfolio valuation The investment portfolio was valued by Knight Frank at just over £7.9bn at 31 March 2001. After adjusting for sales, acquisitions and expenditure the value increased by 3.9%. Detailed breakdowns by sector, including comprehensive analyses of the Group's valuation and rental income, are shown below and in the Portfolio Management Review. The last 12 months have been characterised by a mixture of very good and satisfactory rental growth, despite an increasing wariness from investors about future rental growth prospects. This has resulted in valuation yields rising with a consequent negative effect on capital values. This trend has been evident for shops and shopping centres for the whole of the last 12 months and has extended, to a lesser degree, to all sectors of the market over the last six months. In most sectors, the positive impact of rental growth exceeded the negative impact of yield change. However, this was not the case for shops and shopping centres, for which institutional investors have moved from being net buyers to net sellers. Across our portfolio, the benefits of diversification were manifest and the strong rental growth experienced on central London offices more than offset the negative impact of the adverse yield movement for shops and shopping centres. After excluding those properties in the schedule of developments and refurbishments which were producing less than half of their anticipated income at 31 March, together with other vacant pre-development holdings, the value of the portfolio at 31 March 2001 was £7.36bn. At the same date, the annual rent roll, net of ground rents and excluding the same properties, was £496.1m, 6.7% of this figure. % yield on 1991 1992 1993 1994 1995 present income at 31 March 8.4 9.3 9.9 8.2 8.1 % yield on 1996 1997 1998 1999 2000 2001 present income at 31 March 8.3 7.8 6.8 6.6 6.5 6.7 Yield on present income by sector at 31 March2001 % Offices 6.9 Shops and shopping centres 6.7 Retail warehouses and food superstores 6.0 Warehouses and industrial 7.7 Hotels, leisure and residential 6.5 % Portfolio by value and number of properties at 31 March 2001 £m Value % No. of properties 0 - 10 7.7 162 10 - 25 13.5 68 25 - 50 21.1 45 Over 50 57.7 48 100.0 323 ==== === % Rental value growth % by sector for 12 months to 31 March 2001 Offices 24.8 Shops and shopping centres 2.8 Retail warehouses and food superstores 5.7 Warehouse and industrial 3.8 Hotels, leisure and residential 3.8 Investment portfolio 12.0 CHAIRMAN'S STATEMENT It has been a year of solid progress for Land Securities during which we began to implement significant changes to the company based on developing three distinct business units: Portfolio Management, Development and Land Securities Trillium - a total property services business. We have taken important steps towards achieving our key objectives by increasing our development activity, acquiring Trillium, several large properties and, since the year end, Whitecliff Properties. All of the company's activities are geared to enhancing shareholder value. While we have been repositioning the company, we have continued to maximise the value from the existing portfolio and this is reflected in the sound results achieved. The process of change is covered in more detail in the Corporate Review. The Group increased revenue profit by £7.2m to £308.9m. The pre-tax profit of £314.6m was £13.1m less than the total for the previous year because of the exceptional level of profits from property sales in that period. Diluted net assets per share increased by 64p to 1154p per share following a valuation uplift of 3.9%. The Group invested £577.8m on developments and property acquisitions, acquired Trillium for £340.4m, inclusive of £170.9m of assumed net debt, and has sold properties for £431.2m. The Board recommends a final dividend of 23.85p per share, an increase of 4.8% over last year, making a total distribution for the year of 32.50p, also an increase of 4.8%. The dividends paid and proposed will be covered 1.34 times after excluding the effect of property sales and bid costs. The economic environment has become more uncertain with a downturn in the US economy and deflation in Japan. Although we are not immune from what is happening elsewhere in the world, the UK economy continues to be reasonably robust, with low unemployment and inflation under control. There is evidence that companies are cutting costs in response to lower levels of activity. Job cuts announced to date should not have a significant impact on our core office market but the situation is being actively monitored. The decline in the valuation of technology, media and telecommunication stocks was dramatic and has underlined the advantages of property as a solid investment. Direct commercial property has generated total returns slightly in excess of UK equities over the past five years and significantly better returns over the last three years. The quoted property sector continues to contract as management, disillusioned by the discount to net asset values at which property company shares trade, take their companies private. We have elected to follow a different course and have taken significant steps to become the occupiers' partner of choice in the provision of real estate accommodation and services. We believe that by fulfilling the total property needs of occupiers, we will be able to grow our business and our earnings. There have been several changes to your Board. We were saddened by the death of Sir Alistair Grant in January after a courageous battle against cancer and will miss his wise counsel. After a successful 31-year career with the Group, Keith Redshaw retired from the Board as an executive director in March this year. I would like to add my thanks to those of his colleagues and extend my best wishes to Keith for the future. Your Board has been further strengthened by the appointment of Peter Walicknowski as director of strategy and business development and of Giles Henderson as a non-executive director. Giles was senior partner at Slaughter and May and brings with him a wealth of expertise to the group. Manish Chande joined the Board when we acquired Trillium and Francis Salway, who joined the group in September last year to head up our new Portfolio Management business unit, was appointed to the Board on April 2. Jim Murray announced last year his intention not to seek re-election at the next AGM and while he continues to serve I would like to take this opportunity to thank him for his most valuable contribution to the group and the property sector over the past twenty years. We will be making an announcement in respect of his replacement shortly. I welcome all the employees who have joined us from Trillium and Whitecliff Properties. I am encouraged by the professional and enthusiastic way in which our employees are responding to change and seizing opportunities presented. I should like to thank them for all they have achieved over the past year. During an active year business initiatives have been bold, directed by Ian Henderson and his team comprising experienced Land Securities directors, augmented by several new executives who bring different skills and thinking to the Group. It is important that any organisation which is undergoing change has a combination of experience and new skills. The Company has made acquisitions, has acquired new mandates and is, as a result, strengthened. Its finances are sound and the future outlook is improved as more opportunities are created in an ever-changing environment. CORPORATE REVIEW More than 12 months ago we defined the principles to guide your company into a new era of market leadership and to take advantage of the growth opportunities within our sector. The arguments for pursuing this course are compelling. Inflation remains subdued while investors require improved real returns and occupiers demand a broader range of services. Asset accumulation alone will no longer deliver the necessary returns on equity to satisfy investors. We are reporting on a period of transition during which we have implemented a new structure and introduced additional skills to ensure delivery of our strategy. The objective is to become the preferred provider of commercial real estate and associated occupational services. We are looking beyond the bricks and mortar and seeking to access more of the expenditure generated by the occupier. The Group's sizeable asset base will underpin total return which we aim to enhance by applying intellectual capital as a driver and not just financial capital. An important part of the delivery of this strategy was the acquisition of Trillium last November. We identified the opportunity to acquire this business through working with Trillium on joint venture PFI bids for the London Underground and BBC property partnerships. This acquisition created our third business unit, Land Securities Trillium, which focuses on the provision of total property services. Trillium, one of the leading providers of total property services, has been the owner and manager of the DSS estate since April 1998. Through working with Trillium we recognised the synergies from combining our asset-based property expertise with an innovative service-based culture. It is encouraging that Land Securities Trillium became the preferred partner for the BBC and BT property portfolios in March and April 2001 respectively. The next 12 months will be a period of consolidation during which we will focus on exploiting our competitive advantage. This will come from integrating our core competencies and strengths under one brand to create, manage, service, finance and add value to individual properties or portfolios for the company, for partners and customers. This differentiates us from competitors in our sector and should make us the provider of choice for commercial real estate and related services. The three new business units, supported by Shared Services, will promote operating efficiencies and flexibility. Within each business unit we will also be able to assess the individual risk and allocate our capital resources more effectively. The new structure allows for more effective performance measurement against external benchmarks and internal target rates of return. As part of this process we will be joining the Investment Property Databank (IPD) performance measurement and benchmarking service. To promote the efficient utilisation of our balance sheet and to manage diversification of risk we have created an Investment Committee to assess requests for capital from the business units. These are measured against their required rates of return which are derived from the Group's weighted average cost of capital. Recommendations by the Investment Committee are then put to the Board for approval. We believe that this approach will maximise the returns from our existing equity and promote the more efficient recycling of capital. We have also formed a Senior Executive Group which meets regularly to exchange information, to explore new business opportunities and to maximise the benefits of collaboration between business units. The structure is now in place to move your company forward. Looking to the future we see potential new opportunities. Rapid changes in technology and competitive pressures make it increasingly difficult for the corporate occupier to predict its long term property requirements. Businesses need to adopt new approaches to their procurement of property and Land Securities can lead in the development of a range of alternative solutions to meet their needs. Investment in risk management skills will enable us to price and manage the potential risk which arises from giving occupiers more flexibility. One way of achieving this is through developing partnerships with service providers. Another example is the proposal for the BT transaction which assumes the establishment of a joint venture partnership through a special purpose vehicle, which would involve a limited amount of equity participation for your Group. In response to increasing demand from business for greater flexibility in the provision of office accommodation we are developing a product called LandFlex which will provide office occupiers with a wider choice. LandFlex will be introduced with the refurbishment of Empress State Building at Earls Court in West London. While some of the expectations surrounding new technology have not been met, the business community now has an infrastructure of marketing and work practices strongly influenced by IT. We are exploiting these advances through a number of initiatives including: - A revenue-sharing partnership with a US company, Intellispace, to install and supply broadband capability to our commercial buildings; - A fee-earning contract with TYCO for seven of our shopping centres to be fitted with installations to improve mobile phone coverage for shoppers; - The development of websites for six of our larger shopping centres; - The evaluation of smart card and in-centre mobile phone marketing schemes; - The launch of Landscape, an innovative fee-earning software solution for managing the tax reporting requirements of large UK property portfolios, as a joint venture with Deloitte & Touche and Flint House Limited. Through the acquisition of Trillium we believe that we have gained first-mover advantage in the growing market of private and public property outsourcing. We are also beginning to see synergies with Land Securities Trillium in terms of opening up opportunities across our existing portfolio. While this market is relatively new and the speed at which it will grow is difficult to assess, our experience is that both corporate and public sector organisations are examining the outsourcing of property as a way to release capital and management time to focus on their core businesses. This trend may even be accelerated in times of economic slowdown. The Development unit will focus on major opportunities which, because of their size or complexity, give the Group a competitive advantage to deliver significant development profits. This strategy is demonstrated by the acquisition of Whitecliff Properties, which brings with it one of the largest regeneration schemes in Europe and has short, medium and long term opportunities for generating value. Our role will be one of master planner and land developer but as each individual phase is brought to fruition we may bring in partners to share in the risk and capital commitment. We still face a number of challenges. Despite the important role that property plays in generating wealth for the UK, the Chancellor continues to demonstrate his indifference to our industry by the disproportionate burden of stamp duty levied on property as compared to equities. The Government appears to be struggling to find a solution to long term planning for, and investment in, the UK's infrastructure. London's position as a leading financial centre is threatened by its outdated transport system. We are also concerned that the viability of urban regeneration is undermined by the tortuous and under-resourced planning system. As one of the industry's leaders, we have a responsibility to highlight these issues with local and central government. We aim to take advantage of our strengths and size to access new sectors and earnings streams and to focus on those areas in which we can become one of the dominant players. We will also concentrate on extracting above average returns from the existing portfolio while we continue to reposition the business. We are excited by the opportunities being presented by the transformation of our industry. While maintaining focus on our core activities, we are seeking new ways to improve the accommodation and services we offer to the commercial community and to enhance the fabric of our urban environment. We believe that through these actions we will convince investors to have greater confidence in the capacity of the sector to deliver enhanced returns. PORTFOLIO MANAGEMENT We have a diversified asset base focused on four sectors of the market which benefit from constraints on the supply of new accommodation. We value our occupiers as much as our buildings, and we seek to strengthen relationships with occupiers by direct management of the portfolio. Sector focus Land Securities has a diversified but focused investment portfolio. This gives protection against the negative effects on valuation and share price which can arise from focusing exclusively on a single sector of the market if that sector enters a phase of underperformance. Our four core areas of investment are: Central London offices and shops Shopping centres Retail warehouses South East industrial Properties falling within these four categories make up almost 85% of the total portfolio. During the last 12 months we have continued our sales strategy to increase our focus on these four core areas of activity. Each of these sectors of the market is characterised by constraints on the supply of land, which will drive rental growth. The scale of our activities is such that we hold market leading positions in three of these four sectors. We have the advantages of sector focus but with the additional benefits arising from diversification. During the year we have restructured our portfolio management team to facilitate performance benchmarking and to increase the emphasis on the recycling of capital. We have made new internal appointments for the positions of heads of London and Retail portfolio management. We have also rationalised our property management structure with the closure of our Birmingham and Kingston management offices. Portfolio valuation by location at 31 March 2001 £m % West End & Victoria 2,731.4 34.6 City & Midtown 1,576.5 19.9 Greater London & Home Counties 1,033.2 13.1 E. & W. Midlands & E. Anglia 509.4 6.5 Wales & South West 429.0 5.4 North, N.W., Yorkshire & Humberside 975.7 12.3 Scotland & N. Ireland 650.7 8.2 7,905.9 100.0 ====== ===== Rental income and portfolio valuation by type at 31 March 2001 Rental income Valuation Total Total % % Offices - central London 41.4 43.3 elsewhere in the UK 3.0 2.4 Central London shops 7.8 8.4 Other in-town shops 10.1 8.5 Shopping centres 17.9 17.1 Retail warehouses and food superstores 10.6 12.1 Warehouses and industrial 6.0 4.7 Hotels, leisure and residential 3.2 3.5 100.0 100.0 ==== ==== The generation of rental growth Across all sectors of our portfolio, we recognise that we cannot rely on overall market movements to generate rental growth or, certainly, rates of rental growth which exceed market norms. We have been driving rental growth by negotiating early surrenders of existing leases at many of our multi-tenanted properties and reletting at record rental levels both for the property and for the locality. To ensure that we have the greatest opportunity to apply our asset management skills in this way, we have been and are continuing to sell a number of single-tenanted and smaller multi-tenanted properties. Investment activity Purchases Over the last 12 months, we acquired a total of 12 property interests at an aggregate cost of £383.4m. Almost 90% of this sum related to four properties: One New Change, London EC4 (office and retail) 10/30 Eastbourne Terrace, Paddington, London W2 (office) 49 Leadenhall Street, London EC3 (office) and Gunwharf Quays, Portsmouth (retail). All three London office acquisitions offer the potential for refurbishment or redevelopment in the medium term. As the outstanding term on the existing leases on these properties is 10 years or less, some potential purchasers would have found it difficult to raise debt to finance these acquisitions on attractive terms; our balance sheet strength gave us competitive advantage in these situations. One New Change was acquired last autumn and provides 32,650 square metres ('m2 ') of offices and over 2,400 m2 of retail on a site of 1.1 hectares opposite St Paul's Cathedral in the City. Existing leases expire mainly in 2006, which then offers the opportunity for either a refurbishment or redevelopment. As well as being a prime location for offices, the site also benefits from having a retail frontage onto Cheapside which is the highest rented shopping pitch in the City. We believe that we can enhance the retail value of the site by either refurbishment or redevelopment. The total cost including stamp duty was in excess of £185m, giving us an initial yield of 7.2% which, based upon current rental values, is expected to rise to 8.2% by 2002. At Eastbourne Terrace we acquired a 16,780 m2 freehold office building for over £50m. The property is let at a rent of approximately £268 per m2 to show a yield of 8.6%. The lease structure provides us with the opportunity for redevelopment in 2010 in an area of central London which is enjoying significant regeneration and rental growth. We invested over £65m to acquire a 12,230 m2 office building at 49 Leadenhall Street to show a yield of 7.4%. The property adjoins one of our existing holdings and the combination of the two sites gives the potential to increase the floor area significantly on redevelopment. At Gunwharf Quays in Portsmouth we have acquired a 50% interest in a new mixed-use development fronting the harbour. The main element of the scheme is a designer outlet centre, which is combined with leisure facilities, restaurants and waterfront offices. Our joint interest is held by way of a limited partnership with the Berkeley Group. Part of the purchase price has been paid and the balance is to be paid at future dates dependent upon lettings and the completion of further phases. Our total commitment to the scheme is estimated to be over £80m to show an effective minimum yield of 7%. This retail investment is consistent with our view that, aside from convenience shopping trips, retailing is becoming a leisure activity with the strongest rental growth likely to emerge from locations and schemes which offer an enhanced experience by way of complementary leisure activities or a high quality environment. Sales During the year we sold 72 properties for a total of £431.2m. The majority of the sales were small retail holdings which included 48 retail properties in high street locations for an aggregate figure of £109m and small shopping centres in Newbury, Maghull and Tamworth for approximately £43m. The two major office sales were over-rented buildings in the City of London at King William Street EC4 and Gresham Street EC2 which were sold for an aggregate of £130m. In the industrial sector, we sold three large single-tenanted properties at Weybridge, Hinckley and Banbury to which we could not expect to add significant further value. We also took the opportunity to sell industrial properties located outside our core area of focus of the South East, including holdings in Northampton, Rochdale and Glasgow. Many of the properties sold during the year were acquired by private property companies or individuals taking advantage of the availability of bank finance to raise a high proportion of the purchase price by way of debt. From our perspective, the properties sold were characterised by having below average prospects for future rental growth. Over the last three years the Group's sales programme has reduced the number of individual property holdings from over 650 to 323. The ongoing programme will include further sales of smaller property holdings over the next 12 months. Thereafter, most of the remaining small holdings will offer marriage value opportunities and will be held until these can be realised. Offices - Valuation at 31 March 2001 - £3,618.4m - Rental income for year to 31 March 2001 - £221.5m - 45.7% of Group valuation - 44.4% of Group rental income - 0.4% voids by rental income - 18.7% reversionary - Average unexpired lease term of 8.25 years Valuation Rental income % % West End & Victoria 53.1 46.7 City & Midtown 41.6 46.4 Elsewhere 5.3 6.9 100.0 100.0 ==== ==== Valuation by Valuation by location at location at 31 March 2001 31 March 2001 £m % West End & Victoria 1,922.2 53.1 City & Midtown 1,503.1 41.6 Greater London & Home Counties 134.1 3.7 Elsewhere in the U.K. 59.0 1.6 3,618.4 100.0 ===== ==== This portfolio, almost 95% of which is located in central London, was valued at just over £3.6bn at 31 March 2001. After allowing for sales and capital expenditure during the period the capital value increased by 9.9%. On a similar like for like basis, the rental value of the portfolio increased by 24.8%. The fact that rental values have increased significantly more than capital values is healthy in terms of future performance prospects. We expect a valuation boost in future years when the prospective reversionary income is converted into actual income following rent reviews. For the third year in succession central London offices have shown the highest rate of rental growth of all the recognised sub-sectors of the market in the UK. However, prime rents are still approximately 20% below 1989 levels in real terms. The London office market now enjoys the lowest vacancy rates since the late 1980s but, unlike at that time, the speculative development pipeline is now modest in size. We expect rental growth to remain positive for central London offices in the short to medium term, but to be lower than over the last three years. The sustained period of rental growth has resulted in significant increases in rent from many of the reviews concluded during the last 12 months. An example is Westminster City Hall in Victoria Street, SW1 where the rent has more than doubled over the last five years. We have also been actively managing our multi-tenanted office holdings to drive rental growth. At Portland House in Victoria (27,610 m2) and Moorgate Hall in the City (6,090 m2), we accepted surrenders of leases of individual floors and relet at rents which were 70% and 29% respectively above the rental values at 31 March 2000. We also accepted a surrender of two floors at Veritas House in the City prior to reletting at a rent 30% above the prior year end rental value; subsequently we marketed the property for disposal and completed the sale in April 2001. Looking forward, we are conscious of the increasing demand from businesses for greater flexibility in the provision of office accommodation. Land Securities Trillium offers flexibility across the whole of a company's portfolio within a long term contract by allowing the company to vacate a proportion of its accommodation each year. The Portfolio Management unit is tackling the challenges of flexibility for occupiers through its LandFlex concept. We are proposing to grant office occupiers short leases on a service charge inclusive basis and we are working with Land Securities Trillium to develop a business model for the provision of additional office services. We intend to apply the model, first to our proposed refurbishment of Empress State Building at Earls Court in West London, a 27 storey tower block with the potential to provide over 27,000 m2 of offices. Tenants in the building will be offered broadband capability through our partnership with Intellispace, which already provides this facility at Portland House in Victoria. The broadband service will soon be introduced to ten other multi-let buildings in our London office portfolio. We expect to focus the LandFlex concept on buildings of 10,000 m2 or more which offer scale advantages in terms of the staffing numbers required to provide differentiated levels of services to occupiers. The size of these complexes will reduce the risk associated with short leases as no single occupier will be dominant and a significant demand for vacated space will be generated by occupiers already within the buildings. We expect that, for the most part, the buildings will be located in central but slightly off-prime locations. The leasing product will thereby add greater value to the underlying bricks and mortar. We are taking advantage of the specialist expertise within Land Securities Trillium to assess whether unitary charging within a long term contract can be applied to any of the properties within our London investment portfolio. We believe that there will be relatively few opportunities where existing leases are in place, but we anticipate that the ability to offer the Land Securities Trillium unitary charge product will increase our competitive advantage when seeking occupiers for major new development schemes in London. Shops & shopping centres - Valuation at 31 March 2001 - £2,687.0m - Rental income for year to 31 March 2001 - £178.7m - 34.0% of Group valuation - 35.8% of Group rental income - 1.2% voids by rental income - 11.4% reversionary - Average unexpired lease term of 11 years Valuation Rental income % % Shopping centres 50.2 50.0 Central London shops 24.7 21.8 Other in-town shops 25.1 28.2 100.0 100.0 ==== ==== Valuation by Valuation by location location at 31 March at 31 March 2001 2001 £m % West End & Victoria 597.2 22.2 City & Midtown 66.7 2.5 Greater London & Home Counties 289.2 10.8 E. & W. Midlands & E. Anglia 324.8 12.1 North, N.W., Yorkshire & Humberside 552.3 20.5 Wales & South West 331.0 12.3 Scotland & N. Ireland 525.8 19.6 2,687.0 100.0 ===== ==== The portfolio was valued at almost £2.7bn at 31 March 2001. After allowing for sales and capital expenditure during the period the capital value decreased by 2.4%. On a similar like for like basis, rental values increased by 2.8%. A year ago there were considerable fears about the potential impact of e-commerce on retailing. Following the subsequent failure of a number of e-commerce ventures some of these fears receded. While internet sales will inevitably become a significant force in a limited number of sectors of the retail and consumer service markets, the proportion of sales via the internet is likely to fall well short of the proportion of total retail expenditure now taking place in out of town locations. A more serious feature over the last 12 months has been the deflationary pressures which have been experienced within certain categories of retailing. Against this background, we consider that the rental growth achieved over the last 12 months of 2.8% is a sound endorsement of the quality of our retail portfolio. In a number of shopping centres, we have accepted surrenders of leases and reconfigured units to meet current retailer requirements and thereby secured higher rental levels. At the Rivergate Centre in Irvine, we took a surrender of a Tesco supermarket within the mall and reconfigured it to provide seven large shop units which were let at rents some 23% above the previous rental values for the mall. Through active asset management we secured rental increases of 10% in Lord Street, Liverpool, and 14% in Hull. We also achieved rental growth at the Almondvale Centre in Livingston, where the opening of the Designer Outlet Centre, a 50:50 joint venture between BAA McArthurGlen and ourselves, boosted the ranking of the town within the retail hierarchy. Retailing in central London was generally more buoyant than in many other city centres. The average rental growth on our London retail holdings during the year was 5%. In Victoria Street, where we have significant retail holdings, we negotiated a lease surrender and relet the unit to show an uplift of 23% in rental value. Notwithstanding these successes, town centre retailing was the weakest sector of the market over the last 12 months with any positive rental growth being more than counterbalanced by the impact of an adverse yield shift. Looking forward, we plan to exploit further the footfall through our shopping centres. We estimate that there are in excess of 150 million visits each year to our various centres and we are currently pursuing a number of initiatives to generate additional income from companies keen to access the high level of customer visits. Retail warehouses and food superstores - Valuation at 31 March 2001 - £960.6m - Rental income for year to 31 March 2001 - £52.6m - 12.1% of Group valuation - 10.6% of Group rental income - 3.1% voids by rental income - 12.6% reversionary - Average unexpired lease term of 20.5 years Valuation Rental income % % Parks 76.9 69.2 Other 23.1 30.8 100.0 100.0 ==== ==== Valuation by location at 31 March 2001 Valuation by Valuation by location location at 31 March at 31 March 2001 2001 £m % Greater London & Home Counties 295.9 30.8 E. & W. Midlands & E. Anglia 134.7 14.0 Wales & South West 76.8 8.0 North, N.W., Yorkshire & Humberside 362.4 37.7 Scotland & N. Ireland 90.8 9.5 960.6 100.0 ==== ==== The portfolio was valued at £960.6m at 31 March 2001. After allowing for sales and capital expenditure during the year the capital value increased by 2.9%. On a similar like for like basis the rental value growth was 5.7%. During 2000 the retail warehouse market continued to respond to the Government's restrictive planning policies in relation to out of town retail development. As a result of these restrictions an increasing proportion of development activity across the country is now focused on existing retail parks which are being reconfigured or redeveloped either in whole or in part. In addition, a number of 'value' retailers requiring open A1 planning consents are now considering 'solus' stores as opposed to retail parks. We have benefited from both these trends during the year with an active asset management and development programme across our larger parks and material rental growth on some of our smaller holdings. These favourable trends were, however, partially offset by a modest weakening of investment yields. We have identified many development opportunities within our retail warehouse portfolio and these are expanded upon within the Development section. Our retail warehouse portfolio comprises just under 500,000 m2 including 25 retail parks. This makes us the largest owner of retail parks in the UK. One of the advantages of our dominant position in the market is the ability to forge close links with the major retailers and to respond to their changing requirements whether it be to take larger units or to reduce the space they trade from. At Aintree Retail Park in Liverpool we started redevelopment of the B&Q unit to double the size of their store to approximately 10,000 m2. At the same time we agreed the surrender and reletting of three units to Comet. This activity has resulted in rental values increasing from £148 per m2 at the beginning of the year to £200 per m2. We are also taking advantage of this activity to upgrade the car parking, landscaping and signage. At Gateshead we have negotiated surrenders on 6,400 m2 of space. This has been relet to Allied Carpets, PC World, Curry's and Holiday Hypermarket. We enlarged one unit to 1,400 m2 for Harveys and also developed a stand-alone unit for The Link's first out of town store. We continue to improve the appearance of the park through external refurbishment of the units. This has resulted in rental growth of 25% over the 12-month period. Similar activity is being carried out at our parks at Erdington, Stockton-on-Tees, West Thurrock and Manchester. In respect of reviews completed during the year, we achieved a 51% increase in rents, reflecting both the strength of the out of town market and our active management of the portfolio. Also, during the year we acquired the Livingston Retail Park for just under £ 19m. This is adjacent to our Almondvale Shopping Centre and gives us a dominant position in the town in terms of ownership of both town centre retailing and retail warehousing. In our portfolio our objective is to create an attractive shopping environment with a diversity of complementary tenants providing a retail offer with broad appeal. The flexibility of the lettable space differentiates this market from town centre retailing and has been instrumental in attracting a wider range of retailers to out of town locations. We believe that this trend, combined with increasingly restrictive planning policies, will continue to drive rental growth in the retail warehouse sector. Warehouses and industrial - Valuation at 31 March 2001 - £367.5m - Rental income for year to 31 March 2001 - £29.8m - 4.7% of Group valuation - 6.0% of Group rental income - 2.7% voids by rental income - 6.4% reversionary - Average unexpired lease term of 9.5 years Valuation by Valuation by location location at 31 March at 31 March 2001 2001 £m % Greater London & Home Counties 288.8 78.6 E. & W. Midlands & E. Anglia 29.4 8.0 North, N.W., Yorkshire & Humberside 35.7 9.7 Elsewhere in the U.K. 13.6 3.7 367.5 100.0 ==== ==== This portfolio was valued at £367.5m at 31 March 2001. After allowing for sales and capital expenditure during the year the capital value increased by 4.3%. On a similar like for like basis the rental value growth was 3.8%. After a period of three years when capital values in the industrial and warehouse sectors enjoyed a significant boost from a yield re-rating, performance last year was very much dependent upon rental growth. Satisfactory rental growth was achieved throughout the UK during the period but, as in recent years, rates of rental growth were stronger in the South East than in other regions of the country. Currently 78.6% of our portfolio is located in the South East. Sales planned for the forthcoming year will further increase the emphasis of the portfolio on the South East. At two of our larger industrial estates in the South East, West Thurrock and Heston, by reletting units we have increased the rental values applied across these estates by about 15% . At Chandlers Ford near Southampton, we constructed a 4,300 m2 extension to an existing unit of 10,760 m2 which both created a development profit and increased the rental value of the whole unit by around 8%. As investor demand for industrial and warehouse properties in the South East has driven investment yields to low levels, we have increasingly turned to development to generate higher levels of returns. During the year we secured four new development opportunities at Guildford, Hemel Hempstead and two sites at Basildon. More information is provided on the industrial development schemes in the Development section below. We plan to increase the size of the development programme further through new acquisitions and also through seeking planning permission on parcels of land which we have under option. These include two sites totalling over eight hectares close to Heathrow and 120 hectares adjacent to the M1 at Milton Keynes which is held in a joint venture with Gazeley Properties. MORE TO FOLLOW

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