Annual Financial Report
30 March 2011
UK Commercial Property Trust Limited
("UKCPT or the "Company")
Final Results
UK Commercial Property Trust Limited (LSE: UKCM), the largest UK focused commercial property trust, announces its final results for the year ended at 31 December 2010.
Financial highlights
§ NAV per share* as at 31 December 2010 was 77.0p, representing an increase of 4.6% compared to 73.6p as at 31 December 2009 and 0.5% compared to 76.6p at 30 September 2010.
§ The total adjusted NAV per share, after deducting the 1.3125p interim dividend paid in February 2011, is 75.7p, representing an increase of 4.1% from the equivalent NAV per share as at 31 December 2009.
§ Annual dividend yield of 6.4% based on the year end share price.
§ Property portfolio as at 31 December 2010 was valued at £898.8 million, up 7.9% from £710.5 million on a like for like basis.
§ Net Rental income increased 23.4% to £60.2 million (2009: £48.8 million).
§ Borrowings of £42.1 million and cash balances of £80.9 million as at 31 December 2010 (cash balance at 29 March 2011, £25 million). In addition, a balance of £37.9 million is still available to draw down from the Company's £80 million facility.
§ Total Return for the property portfolio was 13.2% (2009: 11.3%)
- Office holdings were the portfolio's strongest performer with an overall return of 13.8% driven by strong capital and rental growth in Central London. Regional offices also provided a strong return, delivering 11.7% over the year.
- Retail was the next best performer providing a total return of 13.7%, driven by a strong performance from both Central London and Regional high streets, which delivered returns of 17.8% and 17.4%, respectively.
Operational Highlights
§ Void rate in the portfolio (excluding pre-lets) as a percentage of income was 3.62% at 31 December 2010 (2009: 2.45%), significantly less than the industry average of 8.9%.
§ Fully subscribed 195,000,000 Ordinary Share issue in February 2010 raising in excess of £150 million.
§ Acquisition of Darwin, Pride Hill and Riverside Mall shopping centres in Shrewsbury. The three shopping centres were acquired at a total cost of £63.6 million, producing a total rental income of £5 million p.a., which represented an initial yield of 7%.
§ Purchase of Junction 27 Retail Park, Leeds at a cost of £59.6m, producing annualised income of £3.7 million, which represented a net initial yield of 6.15%.
§ 36 new lettings completed over the year producing additional annualised rent of £1.15 million, with an average lease length of eight years two months. Letting activity is primarily focused on shopping centres, where £822,220 per annum was secured. Key lettings include the 9,900 sq ft flagship store let to Top Shop in the newly developed 80,000 sq ft, seven unit retail development created from the former department store at The Parade, Swindon which will also see BHS and River Island open in Spring 2011.
§ Purchase of St. George's Retail Park, Leicester in February 2011 for £51 million will further enhance the Company's revenue stream.
*The net asset value per share is calculated under International Financial Reporting Standards ("IFRS") and is audited. It includes all current period income and is calculated after the deduction of all dividends paid prior to 31 December 2010. It does not include provision for the 2010 fourth interim dividend paid in February 2011.
The NAV per share at 31 December 2010 is based on 1,197,348,858 shares of 25p each, being the total number of shares in issue at that time (excluding 41,445,142 shares held in treasury).
Commenting on the results, Chris Hill, Chairman of UKCPT, said: "Having performed well throughout 2010 and taken advantage of market conditions to make a number of high quality acquisitions, UKCPT is well-placed for the future. The Company's strong cash position and unutilised debt facilities mean that we will be able to react to similar opportunities as they arise, while at the same time we can continue to create value through the asset management of our existing properties and the four retail properties we acquired during 2010 in particular."
Robert Boag, Senior Investment Director at Ignis Asset Mangement (UKCPT's Asset Manager) added: "Our focus remains on maintaining and improving the income stream from the Company's portfolio, given the potential occupational risks arising from the uncertainty which remains inherent in the UK economy.
"The Company may look to achieve opportunistic sales due to the growing desire for prime property and its regional office holdings could be a possible starting point in this respect, given the demand for good quality, well let income producing assets such as ours. In terms of acquisitions, stock selection remains vital and we will look for good quality properties where we can clearly identify opportunities to take advantage of our asset management capabilities."
For further information:
Ignis Investment Services Limited: 0141 222 8000
Robert Boag/Graeme McDonald,
Financial Dynamics: 020 7831 3113
Stephanie Highett/Richard Sunderland/Will Henderson
Chairman's Statement
I am pleased to present the Annual Report of the Company for the year to 31 December 2010.
Commercial Property Markets
The year started brightly for the commercial property market, continuing the positive sentiment experienced towards the latter stages of 2009 with the economy just emerging from recession and the expectation of a change in Government. May brought the surprise of dealing with a Coalition Government and the reality of how to deal with the scale of the inherited budget deficit. Despite surprisingly good GDP growth of 1.1% in the second quarter, market sentiment remained mixed with many fearful of a 'double dip' recession. While markets appeared to dissipate such fears in the following months, recovery remained lacklustre. The disappointing fall in UK GDP in the fourth quarter seems to indicate that the continuing global and domestic obstacles to growth took the wind out of the recovery's sails as it drifted slowly towards the end of the year.
Commercial property returns for the year were positive, with the CBRE UK Quarterly and Monthly Index recording a total return of 15.2%, of which 8.9% was capital driven. In the main, Central London Offices led the way with Industrials lagging as the regions struggled. Prime commercial properties were much in
demand over the period as the secondary property market struggled due to lack of finance, risk aversion and the scepticism about the strength of future recovery prospects, given the scale of Government cuts still to feed through to the economy.
NAV/Share Price Performance
The Net Asset Value per Ordinary Share (adjusted for the provision of dividend declarations) for the year to 31 December 2010 was as follows:
|
Date |
NAV (p) |
Share Price (p) |
Premium/ (Discount) % |
|
31 December 2009* |
72.69 |
78.50 |
7.99 |
|
31 March 2010 |
75.00 |
84.10 |
12.13 |
|
30 June 2010 |
75.50 |
79.35 |
5.10 |
|
30 September 2010 |
75.30 |
76.50 |
1.59 |
|
31 December 2010* |
75.69 |
82.25 |
8.67 |
|
* Audited |
|
|
|
It is pleasing to report an increase in NAV of 4.1% over the year and an increase of 4.8% in the share price over what has been a difficult trading environment. The total return on Net Asset Value for the period, inclusive of dividends paid, was 11.3%. While there was an increase in investment activity in 2010 compared to 2009, this was mainly focused on the prime property sector, where overseas investors looking for long term income opportunities and cash buyers have been active.
A full description of the portfolio performance and portfolio asset management activity is contained within the Investment Manager Review.
Corporate Activity
As previously highlighted in our Interim Report and through our announcements during July and August 2010, it was extremely disappointing to report that the proposed merger with F&C Commercial Property Trust Limited ("FCPT") was rejected by the narrowest of margins by the independent shareholders of FCPT. It was, however, pleasing to receive support for the proposals from the overwhelming majority of independent shareholders in UK Commercial Property Trust Limited ("UKCPT") and your Board remains committed to exploring future opportunities to enhance Shareholder value where possible and to work closely with our advisors to achieve this goal. As described in the prospectus it was agreed that the costs associated with the proposals would be shared between the two companies in proportion to their net assets and this resulted in costs to UKCPT of £1.3 million, which equates to approximately 0.14% of NAV (or 0.11 pence per share) as at 31 December 2010.
Share Capital
As at 31 December 2010 the Company had 1,197,348,858 Ordinary Shares of 25p each in issue, an increase of 207,250,000 in the year. This follows the successful completion of a Placing and Offer for 195 million new Ordinary Shares at 77.1p each, raising gross proceeds of £150 million on 11 February 2010 and the additional 12,250,000 Ordinary Shares issued following the delayed completion of a retail property in Buchanan Street, Glasgow.
Significant Property Transactions
Following the placing in February 2010, the Company was well positioned to acquire a number of prime investment properties at attractive yields in order to improve the income return to the Company. The transactions also provided the Investment Manager with asset management opportunities that would, in conjunction with the existing portfolio, enhance and protect returns to Shareholders. The acquisitions, detailed below, added £9.3 million per annum to rental income and did not have a material impact on the tenant void rates, which are still well below market average at 3.6%.
|
Transaction date |
Property |
Cost (£m) |
Equivalent Yield % |
Annualised Income (£m) |
|
24 March 2010 |
Charles Darwin Centre, Shrewsbury |
38.6 |
7.7 |
2.7 |
|
24 March 2010 |
Pride Hill Shopping Centre, Shrewsbury |
14.6 |
9.1 |
1.4 |
|
24 March 2010 |
Riverside Shopping Centre, Shrewsbury |
10.4 |
8.1 |
0.9 |
|
25 March 2010 |
Junction 27 Retail Park, Leeds |
59.6 |
6.2 |
3.7 |
|
9 July 2010 |
Buchanan Street, Glasgow |
8.6* |
6.0 |
0.6 |
|
|
|
|
|
|
|
Total |
|
131.8 |
|
9.3 |
*The Buchanan Street transaction was the final part of the corporate transaction announced in October 2009 and the cost quoted is the market value of the property at that date, inclusive of relevant stamp duty costs.
On 15 February 2011, the Company announced that it had completed the purchase of St George's Retail Park, Leicester, for £51 million at an equivalent yield of 6.2%, adding £3.1 million per annum to the Company's revenue stream.
Borrowing
As at 31 December 2010, the Company had borrowings of £42.1 million with Lloyds Banking Group. On 4 March 2010, the Company entered into an interest rate swap agreement with Lloyds which set the interest rate at 3.55%. As at 29 March 2011,the cash balance was £25 million, with total borrowings remaining at £42.1 million and a balance of £37.9 million still available to draw down from the Company's £80 million facility.
Dividends
The Company declared and paid the following dividends during 2010:
|
|
Ex Dividend Date |
Pay Date |
Dividend Rate (p)
|
|
4th interim for prior period* |
3 Feb 2010 |
26 Feb 2010 |
0.8988 |
|
1st Interim** |
3 Feb 2010 |
28 May 2010 |
0.5979 |
|
2nd Interim*** |
12 May 2010 |
28 May 2010 |
0.7146 |
|
3rd Interim |
28 Jul 2010 |
27 Aug 2010 |
1.3125 |
|
4th Interim |
10 Nov 2010 |
30 Nov 2010 |
1.3125 |
|
|
|
|
|
|
|
|
Total |
4.8363 |
* 2 month period.
** Paid in respect of the period 1 January 2010 to 10 February 2010.
*** Paid in respect of the period 11 February 2010 to 31 March 2010.
On 1 February 2011 the Company declared a 5th Interim dividend of 1.3125p per Ordinary Share with an ex-dividend date of 9 February 2011, which was paid on 28 February 2011. The yield on the Company's shares at 31 December 2010 based on the dividends declared in respect of the year to 31 December 2010, and the share price at that date, was 6.4%.
Outlook
While 2010 overall was a positive year for commercial property, a lot of the momentum was confined to the first 6 months of the year. The dreadful weather experienced in November and December 2010 has not helped retailers and, when combined with the increase in VAT introduced in January 2011 and fears over the anticipated effect of public sector cuts, many forecasters are struggling to see an upside in 2011. Inflation worries, possible interest rate increases, restrictive bank lending and consumer debt reduction together with the impact of Government deficit reduction plans will make growth prospects more difficult to achieve, particularly in light of the -0.6% GDP 2010 figure for the fourth quarter.
With the balance of cash and debt facility available to the Investment Manager, together with a strong tenant base and low void rate, your Company is well placed to take advantage of any opportunities that arise to enhance income further and deliver on the Company objectives. Much will depend on the impact of Government cuts on employment levels and how the reality impacts the consumer and their attitude to spending. Despite the inflation rate being well above the 2% target for the most of the last three years, interest rates have remained on hold for fear of hampering future growth prospects. This may encourage those investors sitting on cash balances to start reviewing their appetite for risk.
The Directors believe that the Company is well-placed both in terms of the prime quality of its portfolio composition and its financial structure, to have another satisfactory year in 2011, subject to any major economic dislocation, and the Board is confident about the long term prospects for your Company.
Investment Manager Review
Market review
Although perhaps not as eventful as the previous two years, 2010 was another interesting year for the UK commercial property market. With tentative signs of recovery in the economy and a new coalition government determined to cut the public sector deficit, total returns for the UK commercial property market were 15.2% according to the IPD Quarterly and Monthly Index, outperforming Equities (14.5%) and Gilts (9.1%).
That solid performance for 2010 contributed to the ongoing recovery of the commercial property sector since the market's nadir in June 2009 which has seen a 20.2% rise in capital values to December 2010. However capital values still remain significantly below the market peak in June 2007.
In this context it was notable that the rate of capital growth slowed as we progressed throughout 2010 with the first half recording 6.2% capital growth and the second half 2.0%. All Property rental values continued to fall throughout 2010, albeit at a declining rate. Overall rental values fell 0.5% in 2010 (8.1%
in 2009), a fall of 12.6% since the market's peak in March 2008.
The main driver for this relative improvement in rental performance has been the strong rental growth in Central London where rental values increased by 4.2% during 2010. This is a complete turnaround from the beginning of 2009 where rents were falling by approximately 20% per annum.
Overall property performance was characterised by divergence in geography and sector. This was clearly evident in the office sector which recorded an overall total return of 15.8% and accounted for the best and worst of all sub-sectors. Driven by a lack of supply, the best performer, with an overall return of
26.4%, was City offices; this was in marked contrast to the rest of UK offices, with an overall return of 7.2%. Values in that sub-sector continued to correct given the weaker occupier demand undermined by the prospects of public sector cuts. The 2010 performance for the South East offices was not much better, with total IPD return of 8.2%. Not surprisingly, overall returns for these sectors were derived mainly from income as both the Regions and South East experienced only modest capital growth.
With an overall return of 15%, relative performance within the retail sector has not been so varied as in the office sector with retail warehousing and shopping centres virtually matching each other with 16.1% and 16.0% total return respectively, both being buoyed by continued investor demand. High Street shops trailed with 13.1% overall with total return being hampered by large falls in rental levels, particularly for secondary locations, and the overall shortage of prime stock.
Industrials were the poorest performer of all sectors, with 10.1% total return, as the sector experienced continued rental falls against a difficult economic background and an absence of the improvement in yield witnessed in some of the other sub-sectors.
The year witnessed a strong resurgence in investment activity with investment transactions totalling £35bn, an increase of a third from the £24bn recorded in 2009 and consistent with the long term average since 2000 of £35bn.
Activity was particularly strong in the final quarter of the year, with £11.5bn of transactions, the highest since Quarter 3 2007. A number of significant shopping centre and retail warehouse transactions took place during the last three months of the year. Whilst overseas investors accounted for 60% of total
transactions in the market by value, there is still strong evidence of demand from UK institutions, with their overall investment for 2010 being the highest since 2006. In addition, towards the end of the year there was evidence of increased activity from the REITs, although this still remains low by historic standards.
The focus of investment activity has been in prime markets, especially so in London and the South East and particularly in office and retail sectors which have witnessed yields falling by 0.54% and 0.62% respectively.
Strong national and international investment demand in Central London has been the key driver for the fall in the IPD yield which has fallen 1.0% in the year to 5.0%. The only other sub-sector to record such significant adjustment in yield has been retail warehousing where the overall yield has decreased 1.5% to 5.9%.
The health of the banking sector continues to be crucial to the future prospects of the real estate market with 2010 being a year of deleveraging, as the level of outstanding real estate debt fell by approximately 6% to £228bn. In 2010, almost 70% of real estate lending was provided by 12 banks, with German
banks dominating this group.
Portfolio Performance
Both capital and income grew strongly during 2010 with 6.1% capital growth overall (7.0% on a like-for-like basis) and an income return of 6.8% (6.9% on a like-for-like basis). Total Return for the property portfolio was 13.2% compared to 11.3% in 2009.
As at 31 December 2010 the portfolio valuation was £898.8m, an increase of 26.5% from the December 2009 valuation of £710.5m, with three retail acquisitions totalling £132m and an overall valuation increase of 7.4%. Income increased from £48.8m in 2009 to £60.2m in 2010, an overall increase of 23.4%, attributable mainly to the acquisitions in March and also by letting and asset management activity throughout the year, details of which are described later in this Review.
The costs associated with the acquisitions early in the year meant that overall performance of the portfolio failed to match the IPD Quarterly and Monthly Benchmark, which recorded a Total Return of 14.3% for the year. However, the portfolio continues to generate a higher income return than the
benchmark, 6.8% compared to 6.1%. Enhancing income return remains a key objective for the Company, particularly as forecast returns are expected to be dominated by income in the short to medium term.
In common with the rest of the market, the Company's strongest performance for the year was from office holdings driven by the strong capital and rental growth in Central London. Offices produced an overall return of 13.8% (compared to the benchmark of 15.8%). The Company's underweight position in Central London relative to the benchmark was the main reason for that deficit but the holdings did in fact marginally outperform the market.
Elsewhere within the office sector, the Company's South East offices recorded a disappointing 6.9% total return, by far the worst sector in the portfolio. The primary reason for this was the continued falls in capital and rental values exacerbated by the shorter income streams that feature in these holdings.
There is, however, evidence of stabilising rents in these locations with tentative signs of improved occupational demand which may result in these same properties contributing to performance in the medium term. Significant capital expenditure may be required.
Regional office holdings provided a strong total return for the Company delivering 11.7% over the year, comfortably ahead of the benchmark in both income and capital terms. Although the Company continues to be overweight in that particular market where forecast returns are muted, the majority of the
Company's holdings are prime. They are secured on long leases to strong covenants and will continue to offer an attractive income yield for the Company.
The Company's retail portfolio was the next best performer, with a total return of 13.7%. Key contributors to that return were the Company's high street holdings, not just in the South East where strong investment demand and improved rental levels produced a total return of 17.8%, but also regionally. The acquisition of 2/8 Buchanan Street, (formerly 122/132 Argyle Street), Glasgow, and asset management activity particularly in High St, Exeter ensured a Total Return of 17.4%, comfortably outperforming the benchmark.
Disappointingly, the Company's retail warehouses and shopping centres, which represent approximately 41% of the overall portfolio, underperformed with 12.9% and 12.0% total return respectively. This is principally due to the acquisition cost of the Shrewsbury and Leeds purchases mentioned later but also the ongoing capital expenditure at The Parade, Swindon. The pre-lets to BHS, Top Shop and River Island in Swindon will improve the income position and, with the letting position at Shrewsbury beginning to show signs of an improvement following new initiatives and against a backdrop of improved investment demand for shopping centre assets, the prospects for the Company's shopping centre holdings are improving. For the retail warehousing holdings, there is a number of ongoing
income and potentially capital enhancing asset management initiatives which it is hoped will feature in the 2011 figures. The strong performance of the High Street was not sufficient to offset the underperformance of both retail warehouse and shopping centres. Hence, the Company's retail holdings
underperformed the benchmark.
The Company's industrial holdings were the poorest performers, recording a total return of 10.7% but still ahead of the benchmark by 0.6%. Within this sector, a disparity exists between the Company's South East holdings, which recorded 11.6% total return (aided by letting activity at Dolphin Industrial
Estate, Sunbury), and the Rest of UK, which produced 9.1%, hampered by evidence of capital falls in one of the Company's shorter income distribution warehouses.
Investment Activity
During 2010 the Company continued to invest in institutional grade, income producing properties to provide further dividend cover for the Company.
In what was a busy first quarter, the Company acquired the Darwin, Pride Hill and Riverside Mall shopping centres in Shrewsbury as well as Junction 27 Retail Park, Leeds for a total consideration of £123.2m. The three shopping centres in Shrewsbury were acquired at a total cost of £63.6m producing
a total rental income of £5m p.a. which represented an initial yield of 7%.
This purchase offered the Company the opportunity to acquire a dominant shopping centre within an affluent sub-regional location at a low point in the cycle where there are a number of asset management opportunities which are being actively pursued. With a number of key legacy issues now fully resolved
and our re-branded marketing campaign for vacant units now well underway, the income position has improved with additional £274,009 of income and a void position that has fallen from 14.93% to 13.32%.
The increase in supply of shopping centre investments has reactivated this investment market and there is now clear evidence of strong demand at all levels of the market. Provided the Company continues to maintain and improve the income position within the three centres, the prospects of capital value increases look favourable.
The Company's other major acquisition, at Junction 27 Retail Park, Leeds, was acquired off the market for £59.6m, producing a net initial yield of 6.15%. This purchase offered the Company the opportunity to increase exposure to a sector which continues to offer attractive returns. The bulky goods retail park forms part of a dominant (Top 5) regional retail location where tenants' trade is particularly strong. In line with the business plan for that property, further income enhancing initiatives are well underway and should improve the income and capital prospects for this acquisition.
The third and final acquisition during 2010 was that of 2/8 Buchanan Street (122-132 Argyle Street), Glasgow. As stated in the July 2010 announcement, the value of the property in October 2009 was £8.3m. The total cost of the acquisition was £8.6m. On the 7 July 2010, the share price was 79p resulting in a total book cost for the acquisition of this property of £9.9m, inclusive of acquisition costs. The tenant, HSBC Bank plc completed a major refurbishment of this flagship branch and opened in December 2010.
Property Portfolio
Key Attributes of Portfolio
• Net rental income £60.2m (£48.8m in 2009)
• Net income yield 6.84% (7.64% in 2009)
• Average lease length 9 yrs, 1 mth (9 yrs 7 mths in 2009 and compared to benchmark IPD 10 yrs)
• No of properties 39 (34 in 2009)
• No of tenants 296 (205 in 2009)
• Occupancy 96.38% (97.55% in 2009)
Asset Management Activity
Whilst 2010 was a period of further investment for the Company with the retail acquisitions referred to above, continued effort is being made with asset management as the Company seeks to improve and enhance the portfolio income stream.
Although occupational markets remain challenging, there were a total of 36 new lettings completed over the year which will produce an additional annual rent of £1.15 million after rent free periods. The average lease length of these lettings was 8 years 2 months.
This letting activity was primarily focused on the Company's retail assets and in particular the shopping centres where £822,220 per annum was secured. Principal amongst those lettings was the letting of 9,900 sq ft flagship store to Top Shop in the newly developed 80,000 sq ft, seven unit retail
development created from the former department store at The Parade, Swindon which will also see BHS and River Island open in Spring 2011. These lettings have helped improve the Parade's position within the retail hierarchy of the town and in doing so improve the letting and income prospects of the Company's largest holding.
Although the Company's void position increased over the year from 2.45% to 3.62% this was principally due to the acquisition of the three shopping centres in Shrewsbury, where the Company believes there is an opportunity to reduce voids and improve income. A number of key legacy issues within
the centres have been addressed and a much improved marketing campaign has resulted in 15 new lettings in the centres and another £274,009 per annum. During the year footfall has improved following new lettings that included H+M and Pandora. The continued effort and focus given by all those involved in the centre will ensure further lettings and improve the income profile for this important asset during 2011.
Significant progress has also been made in the letting of one of the Company's major industrial holdings in Dolphin Industrial Estate, Sunbury where a total of 55,000 sq ft was let in two separate lettings involving a total income of £301,450 per annum after rent free periods.
There were a number of other asset management initiatives which produced encouraging results with re-gears involving leases at High Street, Exeter, Kensington High Street, London, North Street, Brighton and Broadbridge Retail Park, Horsham, all completed during the year. In total these initiatives involved
£1.26 million per annum of income which was increased to £1.40 million per annum and extended the average lease length for the properties involved from 5 years 7 months to 6 years 9 months.
The number of leases due for renewal in 2010 represented a minor part of the Company's income and over the year there were twelve lease expiries totalling £243,057 per annum. A total of four renewals were successfully negotiated producing £126,698 per annum.
The rental falls experienced over the last two years has meant that it has been difficult to achieve any meaningful uplifts at review during 2010. Of the 25 reviews across all sectors involving a rent of £7.14 million, settled reviews produced an increase of 1% above rent passing.
The strength of the Company's covenant base continues to be reflected in a consistently high rent collection efficiency, exceeding 98% per annum after 28 days, over 2009 and 2010. A total of only £24,395 of bad debts was written off, representing 0.04% of the total rental income as at 31 December 2010.
Portfolio Strategy
Given the remaining risks to the occupational market, the strategy for the Company's existing portfolio still remains the retention and improvement of the income stream.
The continued effort to renew and regear leases, even if this does involve significant incentives, remains a key focus for the Company in order to sustain capital value.
The increasing appetite for prime property and the potential to realise sales in excess of valuation will provide the Company with the market to achieve opportunistic sales where either future return expectations are poor or for sound portfolio management reasons, particularly for the smaller assets by value in the portfolio. The Company's regional office holdings are one such source for potential sales given the relative overweight position and the total return prospects for the sector.
The 2010 purchases have increased the Company's exposure to retail in line with its strategy. The yield compression experienced in the prime end of the market earlier in 2010, particularly in
the High Street and Open A1 retail sectors, does mean that these assets can only be acquired at rates that would have an impact on dividend cover. Although we should continue to monitor that sector of the market for suitable propositions that will complement the portfolio's key attributes, there are perhaps greater possibilities in those sectors where yield compression has not been so prevalent and where income can be improved through effective asset management.
Although forecasts for the leisure sector total returns are in most cases less than for All Property, the lease length and level of yield prevalent in the sector, together with generally a strong covenant base, does suggest that this sector merits further consideration. As is the case in all sectors, stock selection is key.
The relatively low portfolio weighting in industrials and the strong income characteristics within that sector suggest that new investment should also be directed towards multi-let estates. The industrial sector consistently delivers strong income returns with a muted rental/capital growth cycle. This will form
a solid basis for investment performance in years when the rate of inflation is low.
Although the Company should consider reducing its regional office holdings, there are signs of a recovery in certain southeast markets where supply of Grade A accommodation is tight. Although occupational demand is still fragile, consideration should be given to the purchase of well let modern offices in certain south east locations. Certain South East office locations do offer attractive levels of income yield which would assist the dividend cover, whilst offering rental growth prospects in the medium term.
The target over the short term will be to maintain rental income levels in markets, particularly those most affected by public spending cuts. The lack of new quality supply being constructed in these markets, however, suggests an opportunity for refurbishing and remodelling existing assets.
As always it is stock selection which is important. We will continue to invest in income producing property with sound property fundamentals. This, in turn, will allow us to exploit our asset management skills which will support and enhance dividend cover.
Property Market Outlook
The strong net investment by UK funds into the market in 2010 was driven by the strong inflows received by property funds on a monthly basis, particularly around the turn of the year between Q4 2009 and Q1 2010.
The scale of net inflows has, however, slowed significantly to £133 million in Q4 2010. It remains to be seen whether this trend slows further in 2011 given that property no longer offers such a clear opportunity as was presented when pricing was on the floor. It does, however, remain attractive to other asset classes when gilt and equity yields remain low.
The actions of the banks and how they manage down exposure to the UK real estate market remains a crucial factor. To date, the banks have been content to roll performing loans over and not take action unless absolutely necessary. The establishment of real estate work out teams and the various partnerships already undertaken highlights their commitment to getting the best deal possible.
With the Basel III regulatory framework due to come in force over 2013-15, banks will be under great pressure to reduce property exposure. Given that an estimated £170 billion needs to be refinanced by 2015, some additional stock should be released to the market albeit in a controlled manner.
The prime versus secondary asset split remains a major feature of the property market across types and locations. Secondary markets have struggled during and through the end of the recession as rental incomes fell substantially, particularly in markets outside London. There is concern now that a weak
recovery will place further pressure on secondary pricing. One area for optimism is that the level of vacancy rates recorded by funds in the IPD Monthly Index had fallen significantly over the course of 2009-2010 suggesting that the worst period of tenant failures throughout the recession had passed and that rental income streams had bottomed out. This supports the view that property at the present time is fully, but fairly valued and that any further write-down in values is yet to be justified by falling or weaker rental income streams. There will be further shakeouts as companies that have survived consolidate
portfolios in an environment with less competition.
One beneficial variable supporting the market which is attributable directly to the credit crunch is the halting of speculative development. This has turned supply from a variable which tends to depress rents to a feature which has supported rents and contributed to some rental growth in selected markets including London. There is almost no additional stock coming onto the major office markets in 2011 and 2012 and this will put pressure on Grade A accommodation where vacancy rates are at lower levels than experienced after previous downturns. The limited pipeline trend extends to the retail and logistics sectors and will add to the growing divergence in performance between prime and secondary
assets. This leads to an opportunity for existing owners to refurbish and upgrade existing space to take advantage of the limited supply of the quality and location of building tenants will demand over the next 3-5 years.
Forecasts;
• Average UK retail rents weak in the short term reflecting poor consumer confidence driven by falling real incomes and the fear of unemployment;
• Strong rental growth in London reflecting limited supply and recovering FBS employment;
• Substantial relative performance differences to continue and even increase between London/Rest of UK markets and prime/secondary assets;
• Property offers a decent real income yield in an environment where either equity or gilt pricing is unsustainable;
• Average total Returns will mirror income return in the short term. Capital value growth limited outside London and Open A1 retail parks;
Our updated forecasts suggest that average rental value growth will remain relatively weak over 2011 and 2012 expanding by 1.6% and 2.4% respectively. Retail rental values will remain flat in 2011, dragged down by weaker consumer spending but reporting a modest improvement from the fall of 1.5% recorded by the IPD Quarterly Index in respect of 2010. Retail warehouses record the strongest recovery but shops record negative growth in 2011 and modest growth in 2012 and 2013. Industrial rents will remain flat over the forecasting horizon and are not expected to match inflation. The real rental story is in London, where offices and retail are expected to deliver further rental growth over the forecasting period.
With the recovery in rental incomes and improvement in vacancy rates, property appears fully, but fairly priced. It provides a store of value and compares favourably with cash, equity and gilt yields particularly at a time of elevated inflation. Property is in a good place to cope with the prospect of higher gilt yields. Our predictions for average yields therefore remain fairly flat and will only come in when there is more evidence of a stronger rental recovery. The averages, will, however, continue to mask substantial differences between London and other locations plus the continued gap between prime and secondary
assets. Limited rental growth plus flat yields makes for a mundane total return forecast. We expect headline total returns in 2011 to come in at approximately 7% representing effectively income return with limited change to capital values. Offices, boosted by the strong London weighting, will be the top performing sector in 2011 and 2012 although industrial comes close in 2012, benefitting from economic recovery plus starting from a higher yield.
Principal Risks and Risk Uncertainties
The Company's assets consist of direct investments in UK commercial property. Its principal risks are therefore related to the commercial property market in general, but also the particular circumstances of the properties in which it is invested and their tenants. More detailed explanations of these risks and
the way in which they are managed are contained under the headings of credit risk, liquidity risk and interest rate risk in note 16 to the accounts. The Investment Manager also seeks to mitigate these risks through continual review of the portfolio, active asset management initiatives, and carrying out due
diligence work on potential tenants before entering into new lease agreements. All of the properties in the portfolio are insured.
Other risks faced by the Company include the following:
• Economic - inflation or deflation, economic recessions and movements in interest rates could affect property valuations, and also its bank borrowings.
• Strategic - incorrect strategy, including sector and property allocation and use of gearing, could all lead to poor returns for shareholders.
• Regulatory - breach of regulatory rules could lead to suspension of the Company's Stock Exchange Listing, financial penalties or a qualified audit report.
• Management and control - changes that cause the management and control of the Company to be exercised in the United Kingdom could lead to the Company becoming liable to United Kingdom taxation on income and capital gains.
• Financial - inadequate controls by the Investment Manager or third party service providers could lead to misappropriation of assets. Inappropriate accounting policies or failure to comply with accounting standards could lead to misreporting or breaches of regulations.
• Operational - failure of the Investment Manager accounting systems or disruption to the Investment Manager business, or that of third party service providers, could lead to an inability to provide accurate reporting and monitoring, leading to a loss of shareholders' confidence.
The Board seeks to mitigate and manage these risks through continual review, policy setting and enforcement of contractual obligations. It also regularly monitors the investment environment and the management of the Company's property portfolio and levels of gearing, and applies the principles
detailed in the Turnbull Guidance Notes.
Consolidated Statement of Comprehensive Income
For the year ended 31 December 2010
|
|
|
Year ended 31 December 2010 |
|
Year ended 31 December 2009 |
|
|
Notes |
£'000 |
|
£'000 |
|
Revenue |
|
|
|
|
|
Rental income |
|
60,186 |
|
48,818 |
|
Gains on investment properties |
8 |
45,287 |
|
31,345 |
|
Interest revenue receivable |
|
598 |
|
225 |
|
Total income |
|
106,071 |
|
80,388 |
|
Expenditure |
|
|
|
|
|
Investment management fee |
2 |
(6,977) |
|
(4,503) |
|
Other expenses |
3 |
(4,901) |
|
(2,594) |
|
Aborted project costs |
3 |
(1,268) |
|
- |
|
Total Expenditure |
|
(13,146) |
|
(7,097) |
|
Net operating profit before finance costs |
|
92,925 |
|
73,291 |
|
Net finance costs |
|
|
|
|
|
Finance costs |
4 |
(1,369) |
|
(155) |
|
|
|
(1,369) |
|
(155) |
|
Net profit from ordinary activities before taxation |
|
91,556 |
|
73,136 |
|
Taxation on profit on ordinary activities |
5 |
- |
|
- |
|
Net profit for the year |
|
91,556 |
|
73,136 |
|
|
|
|
|
|
|
Other comprehensive income: |
|
|
|
|
|
Loss arising on cash flow hedge |
|
(1,353) |
|
- |
|
|
|
|
|
|
|
Net comprehensive income for the year |
|
90,203 |
|
73,136 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings per share |
7 |
7.83p |
|
8.40p |
All items in the above statement derive from continuing operations.
The accompanying notes are an integral part of this statement.
Consolidated Balance Sheet
As at 31 December 2010
|
|
|
2010 |
|
2009 |
|
|
Notes |
£'000 |
|
£'000 |
|
Non-current assets |
|
|
|
|
|
Investment properties |
8 |
898,750 |
|
710,485 |
|
|
|
898,750 |
|
710,485 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
Trade and other receivables |
10 |
5,146 |
|
5,181 |
|
Cash and cash equivalents |
|
80,937 |
|
70,163 |
|
|
|
86,083 |
|
75,344 |
|
Total assets |
|
984,833 |
|
785,829 |
|
Current Liabilities |
|
|
|
|
|
Trade and other payables |
11 |
(19,592) |
|
(15,273) |
|
|
|
|
|
|
|
Long Term Liabilities |
|
|
|
|
|
Bank loan |
12 |
(41,884) |
|
(41,919) |
|
Interest rate swap |
12 |
(1,353) |
|
- |
|
Total liabilities |
|
(62,829) |
|
(57,192) |
|
|
|
|
|
|
|
Net assets |
|
922,004 |
|
728,637 |
|
|
|
|
|
|
|
Represented by: |
|
|
|
|
|
Share capital |
13 |
482,703 |
|
322,680 |
|
Treasury shares |
13 |
(25,264) |
|
(25,264) |
|
Special distributable reserve |
|
635,717 |
|
646,307 |
|
Capital reserve |
|
(169,809) |
|
(215,096) |
|
Revenue reserve |
|
- |
|
- |
|
Interest rate swap reserve |
|
(1,353) |
|
- |
|
Equity Shareholders' funds |
|
921,994 |
|
728,627 |
|
Minority interest |
|
10 |
|
10 |
|
|
|
922,004 |
|
728,637 |
|
Net asset value per share |
14 |
77.0p |
|
73.6p |
The accompanying notes are an integral part of this statement.
Consolidated Statement of Changes in Equity
For the year ended 31 December 2010
|
|
|
|
£'000 |
£'000 |
Reserve £'000 |
Interest Rate Swap Reserve |
£'000 |
£'000 |
|
At 1 January 2010 |
322,680 |
(25,264) |
646,307 |
(215,096) |
- |
- |
10 |
728,637 |
|
Net profit for the year |
- |
- |
- |
- |
91,556 |
- |
- |
91,556 |
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
Issue of Ordinary Shares |
160,023 |
- |
- |
- |
- |
- |
- |
160,023 |
|
Issue costs |
- |
- |
(2,141) |
- |
- |
- |
- |
(2,141) |
|
Dividends paid |
- |
- |
- |
- |
(54,718) |
- |
- |
(54,718) |
|
Transfer in respect of gains on investment properties |
- |
- |
- |
45,287 |
|
|
- |
- |
|
Transfer from special distributable reserve |
- |
- |
|
- |
|
|
- |
- |
|
At 31 December 2010 |
482,703 |
(25,264) |
635,717 |
(169,809) |
- |
(1,353) |
10 |
922,004 |
For the year ended 31 December 2009
|
|
|
|
|
Special Distributable Reserve £'000 |
£'000 |
Reserve £'000 |
£'000 |
£'000 |
|
At 1 January 2009 |
220,000 |
267,952 |
(10,249) |
386,073 |
(246,441) |
- |
10 |
617,345 |
|
Net profit for the year |
- |
- |
- |
- |
- |
73,136 |
- |
73,136 |
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
Transfer* |
- |
(267,952) |
- |
267,952 |
- |
- |
- |
- |
|
Issue of Ordinary Shares |
102,680 |
- |
- |
- |
- |
- |
- |
102,680 |
|
Issue costs |
- |
- |
- |
(1,641) |
- |
- |
- |
(1,641) |
|
Shares bought back and held in Treasury |
- |
- |
(15,015) |
- |
- |
- |
- |
(15,015) |
|
Dividends paid |
- |
- |
- |
- |
- |
(47,868) |
- |
(47,868) |
|
Transfer in respect of gains on investment properties |
- |
- |
- |
- |
31,345 |
(31,345) |
- |
- |
|
Transfer from special distributable reserve |
- |
- |
- |
(6,077) |
- |
6,077 |
- |
- |
|
At 31 December 2009 |
322,680 |
- |
(25,264) |
646,307 |
(215,096) |
- |
10 |
728,637 |
* Under current regulations there is no longer a requirement to maintain a Share Premium Account. The 2009 opening Share Premium Account balance has been transferred to Special Reserves. The proceeds from the Companies 30 October 2009 share issue has been credited to the Share Capital Account.
The accompanying notes are an integral part of this statement
Consolidated Cash Flow Statement
For the year ended 31 December 2010
|
|
Year ended 31 December 2010 |
Year ended 31 December 2009 |
|
|
£'000 |
£'000 |
|
Cash flows from operating activities |
|
|
|
Net operating profit before tax for the year before taxation |
91,556 |
73,136 |
|
Adjustments for: |
|
|
|
Gains on investment properties |
(45,287) |
(31,345) |
|
Decrease/ (increase) in operating trade and other receivables |
35 |
(56) |
|
Increase in operating trade and other payables |
4,236 |
2,691 |
|
Net finance costs / (income) |
771 |
(70) |
|
Net cash inflow from operating activities |
51,311 |
44,356 |
|
|
|
|
|
Cash flows from investing |
|
|
|
Purchase of investment properties |
(123,502) |
(176,595) |
|
Sale of investment properties |
- |
60,265 |
|
Capital expenditure |
(9,798) |
(2,690) |
|
Interest received |
598 |
225 |
|
Net cash outflow from investing activities |
(132,702) |
(118,795) |
|
|
|
|
|
Cash flows from financing activities |
|
|
|
Proceeds from issue of Ordinary Shares |
150,345 |
102,680 |
|
Proceeds from utilisation of bank loan |
- |
41,919 |
|
Issue costs of ordinary share capital |
(2,141) |
(1,641) |
|
Share buyback |
- |
(15,015) |
|
Dividends paid |
(54,718) |
(47,868) |
|
Bank loan interest paid |
(514) |
(83) |
|
Payments under interest rate swap arrangement |
(807) |
- |
|
Net cash inflow from financing activities |
92,165 |
79,992 |
|
|
|
|
|
Opening balance |
70,163 |
64,610 |
|
|
|
|
|
Closing cash and cash equivalents |
80,937 |
70,163 |
|
Represented by; |
|
|
|
Cash at bank |
10,993 |
5,306 |
|
Short term deposits |
23,855 |
64,857 |
|
Money market funds |
46,089 |
- |
|
|
80,937 |
70,163 |
The accompanying notes are an integral part of this statement.
Notes to the Accounts
1. Accounting Policies
A summary of the principal accounting policies, all of which have been applied consistently throughout the year, is set out below.
(a) Basis of Accounting
The consolidated accounts have been prepared in accordance with International Financial Reporting Standard issued by, or adopted by, the International Accounting Standards Board (the IASB), interpretations issued by the IFRS Interpretations Committee that remain in effect, and to the extent that they have been adopted by the European Union, applicable legal and regulatory requirements of Guernsey law and the Listing rules of the UK Listing Authority.
Changes in accounting policies and disclosures
IFRS 3 (Revised) Business Combinations: The revised standard is effective for business combinations affected in financial periods beginning on or after 1 July 2009, IFRS 3 (Revised) introduces a number of changes in the accounting for business combinations that will impact the amount of goodwill recognised, the reported results in the period that an acquisition occurs, and future reported results. The adoption of this revision did not have any impact on the financial position or the performance of the Company.
IAS 27 (Amended) Consolidated and Separate Financial Statements: This amendment is effective for financial periods beginning on or after 1 July 2009. IAS 27 requires that a change in the ownership interest of a subsidiary (without loss of control) to be accounted for as an equity transaction. Therefore, such a transaction would no longer give rise to goodwill, nor give rise to a gain or loss. The adoption of this amendment did not have any impact on the financial position or the performance of the Company.
IAS 17 (Amended) leases: This amendment is effective for financial periods beginning on or after 1 January 2010.
This amendment deletes much of the existing wording in the standard to the effect all leases of land (where title does not pass) were operating leases. The amendment requires that in determining whether the lease of land (either separately or in combination with other property) is an operating or a finance lease, the same criteria are applied as for any other asset. The adoption of this amendment did not have any impact on the financial position or the performance of the Company.
No other standards or amendments which are effective from 1 January 2010 apply to the Group and have therefore not been disclosed.
(b) Significant accounting judgements, estimates and assumptions
The preparation of the Group's financial statements requires management to make judgements, estimates and assumptions that affect the amounts recognised in the financial statements. However, uncertainty about these assumptions and estimates could result in outcomes that could require a material adjustment to the carrying amount of the asset or liability affected in the future.
Going Concern: The Group's management has made an assessment of the Group's ability to continue as a going concern and is satisfied that the Group has the resources to continue in business for the foreseeable future. Furthermore, the management is not aware of any material uncertainties that may cast significant doubt upon the Group's ability to continue as a going concern. Therefore, the financial statements continue to be prepared on the going concern basis.
Fair value of investment properties: Investment property is stated at fair value as at the balance sheet date as set out in note 1 (h) and note 8 to these accounts.
The determination of the fair value of investment properties requires the use of estimates such as future cash flows from the assets. The estimate of the future cash flows includes consideration of the repair and condition of the property, lease terms, future lease events, as well as other relevant factors for the particular investment. These estimates are based on local market conditions existing at the balance sheet date.
Fair value of interest rate swap: The fair value of the interest rate swap is determined using mathematical models. The inputs to these models are taken from the observable markets where possible, but where this is not possible a degree of judgement is required in establishing fair value. Changes in assumptions used in the model could affect the reported fair value for this instrument.
(c) Basis of Consolidation
The consolidated accounts comprise the accounts of the Company and its subsidiaries drawn up to 31 December each year. Subsidiaries are consolidated from the date on which control is transferred to the Group and cease to be consolidated from the date on which control is transferred out of the Group.
(d) Functional and Presentation currency
Items included in the financial statements of the Group are measured using the currency of the primary economic environment in which the entity operates ("the functional currency"). The financial statements are presented in pounds sterling, which is the Group's presentational currency. All figures in the financial statements are rounded to the nearest thousand.
(e) Revenue Recognition
Rental income, excluding VAT, arising on investment properties is accounted for in the Statement of Comprehensive Income on a straight line basis over the lease term of ongoing leases. Surrender lease premiums paid are required to be recorded as a current asset and amortised over the period from the date of the lease commencement to the earliest termination date. Interest income is accounted on an accruals basis.
(f) Expenses
Expenses are accounted for on an accruals basis. The Group's investment management and administration fees, finance costs and all other expenses are charged through the Statement of Comprehensive Income.
(g) Taxation
The exempt status for Category D companies has been abolished and the standard rate of income tax for Guernsey companies reduced to zero per cent. However, the Company is still able to continue to apply for tax exemption under the Income Tax (Exempt Bodies) (Guernsey) Ordinance, 1989 as a category B collective investment vehicle, as will its subsidiaries. A fixed annual fee of £600 is payable to the States of Guernsey in respect of this exemption. Capital gains are not taxable in Guernsey.
The Directors intend to conduct the Group's affairs such that the management and control is not exercised in the United Kingdom and so neither the Company nor any of its subsidiaries carries on any trade in the United Kingdom. Accordingly, the Company and its subsidiaries will not be liable for United Kingdom taxation on their income or gains other than certain income deriving from a United Kingdom source.
The Company and its subsidiaries are subject to United Kingdom income tax on income arising on the property portfolio after deduction of its allowable debt financing costs and other allowable expenses.
(h) Investment Properties
Investment properties are initially recognised at cost, being the fair value of consideration given, including transaction costs associated with the investment property. Any subsequent capital expenditure incurred in improving investment properties is capitalised in the period during which the expenditure is incurred and included within the book cost of the property.
After initial recognition, investment properties are measured at fair value, with the movement in fair value recognised in the Statement of Comprehensive Income and transferred to the Capital Reserve. Fair value is based on the open market valuation provided by CB Richard Ellis Limited, chartered surveyors, at the Balance Sheet date.
On derecognition, gains and losses on disposals of investment properties are recognised in the Statement of Comprehensive Income and transferred to the Capital Reserve.
Recognition and derecognition occurs on the exchange of signed contracts between a willing buyer and a willing seller.
(i) Share Issue Expenses
Incremental external costs directly attributable to the issue of shares that would otherwise have been avoided are written off to reserves.
(j) Segmental Reporting
The Directors are of the opinion that the Group is engaged in a single segment of business being property investment in the United Kingdom.
(k) Cash and Cash Equivalents
Cash and cash equivalents are defined as cash in hand, demand deposits, and other short-term highly liquid investments readily convertible within three months or less to known amounts of cash and subject to insignificant risk of changes in value.
(l) Trade and Other Receivables
Trade receivables, which are generally due for settlement at the relevant quarter end are recognised and carried at the original invoice amount less an allowance for any uncollectible amounts. An estimate for doubtful debts is made when collection of the full amount is no longer probable. Bad debts are written off when identified.
(m) Reserves
Special Reserve
The special reserve is a distributable reserve to be used for all purposes permitted under Guernsey law, including the buyback of shares and the payment of dividends.
Capital Reserve
The following are accounted for in this reserve:
-gains and losses on the disposal of investment properties
-increases and decreases in the fair value of investment properties held at the year end
Revenue Reserve
Any surplus arising from the net profit on ordinary activities after taxation and payment of dividends is taken to this reserve, with any deficit charged to the special reserve.
Interest Rate Swap Reserve
Any surplus/deficit arising from the marked to market valuation of the swap instrument is credited/charged to this account.
Treasury Share Reserve
This represents the cost of shares bought back by the Company and held in Treasury.
(n) Interest-bearing borrowings
All bank loans and borrowings are initially recognised at cost, being their fair value of the considerations received net of arrangement costs associated with the borrowing. After initial recognition, all interest bearing loans and borrowings are subsequently measured at amortised cost. Amortised cost is calculated by taking into account any loan arrangement costs and any discount or premium on settlement.
On maturity, bank loans are recognised at par, which is equivalent to amortised cost. Bank loans redeemed before maturity are recognised at amortised cost with any charges associated with early redemptions being taken to the Statement of Comprehensive Income.
(o) Derivative financial instruments
The Group uses derivative financial instruments to hedge its risk associated with interest rate fluctuations.
Derivative instruments are initially recognised in the Balance Sheet at their fair value. Fair value is determined by reference to market values for similar instruments. Transaction costs are expensed immediately.
Gains or losses arising on the fair value of cash flow hedges in the form of derivative instruments are taken directly to the Statement of Comprehensive Income. Such gains and losses are taken to a reserve created specifically for that purpose, described as the Interest Rate Swap Reserve in the Balance Sheet.
On maturity or early redemption the unrealised gains or losses arising from cash flow hedges in the form of derivative instruments, initially recognised in the Statement of Comprehensive Income, are reclassified to the Statement of Changes in Equity.
The Group considers its interest rate swap qualifies for hedge accounting when the following criteria are satisfied:
· The instrument must be related to an asset or liability;
· It must change the character of the interest rate by converting a variable rate to a fixed rate or vice versa;
· It must match the principal amounts and maturity date of the hedged item; and
· As a cash flow hedge the forecast transaction (incurring interest payable on the bank loan) that is subject to the hedge must be highly probable and must present an exposure to variations in cash flows that could ultimately affect the profit or loss. The effectiveness of the hedge must be capable of reliable measurement and must be assessed as highly effective on an ongoing basis throughout the financial reporting periods for which the hedge was designated.
(p) New standards not applied
There are a number of new standards, amendments and interpretations that have been issued but are not yet effective for this accounting year and have not been adopted early.
In November 2009, the IASB issued IFRS9 'Financial Instruments' which becomes effective for accounting periods commencing on or after 1 January 2013. This represents the first of a three-part project to replace IAS 39 'Financial Instruments: Recognition and Measurement'. The objective of the standard is to enhance the ability of investors and other users of financial information to understand the accounting of financial assets and to reduce complexity.
A revised version of IAS 24 'related party disclosures' was introduced in November 2009 and is effective for accounting periods beginning on 1 January 2011. The revisions provide for a partial exemption from the disclosure requirements for government-related entities and clarify the definition of a related party. These revisions will have no effect on the Group.
The IASB issued improvements for 2010 in May 2010, effective from 1 January 2011. These cover eleven amendments to six standards, none of which are expected to materially affect the Group.
The Group does not consider that the future adoption of International Financial Reporting Standards, in the form currently available, will have any material impact on the financial statements presented.
2. Fees
|
|
Year ended 31 December 2010 |
Year ended 31 December 2009 |
|
|
£'000 |
£'000 |
|
Investment management fee |
6,977 |
4,503 |
Investment management fee
The Company's Investment Manager, Ignis Investment Services Limited, receive an aggregate annual fee from the Group at an annual rate of 0.75 per cent of the of the Total Assets, less the amount of the Group's borrowings, plus an amount calculated at the rate of 0.50 per cent, of the value of the assets of the Group represented by borrowings. The Investment Manager is also entitled to an administration fee of £110,000 per annum (which will increase annually in line with inflation) (see note 3). Both fees are payable quarterly in arrears. The fees of any managing agents appointed by the Investment Manager will be payable out of the Investment Management fee. The Investment Management agreement is terminable by any of the parties to it on 12 months' notice.
3. Other expenses
|
|
Year ended 31 December 2010 |
Year ended 31 December 2009 |
|
|
£'000 |
£ 000 |
|
|
|
|
|
Direct operating expenses of let property |
2,614 |
942 |
|
Valuation and other professional fees |
1,590 |
834 |
|
Bad debt provision |
(9) |
49 |
|
Directors' fees* |
212 |
125 |
|
Administration fee |
110 |
107 |
|
Facility Fees |
76 |
148 |
|
Administrator/ Co. Secretary fees |
83 |
55 |
|
Regulatory fees |
82 |
70 |
|
Auditors' remuneration for:** |
|
|
|
Statutory audit |
43 |
43 |
|
Tax services |
57 |
20 |
|
Other |
43 |
201 |
|
|
4,901 |
2,594 |
*Other than Mr Robertson, the Directors received an additional £5,000 each in relation to the 11 February 2010 Share Issue. This £20,000 was charged to reserves as part of launch costs for said share issue.
**Total non audit fees for 2010 were £265,000; £12,000 of which were charged to reserves as part of the February 2010 share issue, and £196,000 related to aborted project costs which were written off during the year.
At the Extraordinary General Meeting of F&C Commercial Property Trust Limited ("FCPT"), held on the 9 August 2010, the ordinary resolution to approve the participation of FCPT in the acquisition of its business and assets by the Company was not passed. As a result the Company incurred £1,268,000 of non recoverable project costs.
4. Finance costs
|
|
Year ended 31 December 2010 |
Year ended 31 December 2009 |
|
|
£'000 |
£ 000 |
|
|
|
|
|
Interest on principal loan amount |
514 |
83 |
|
Interest in respect of rate swap arrangement |
807 |
- |
|
Amortisation of loan set up fees |
48 |
72 |
|
|
1,369 |
155 |
5. Taxation
UK Commercial Property Trust Limited owns three Guernsey tax exempt subsidiaries, UK Commercial Property GP Limited (GP), UK Commercial Property Holdings Limited (UKCPH) and SCP Group Limited (SCP). GP and UKCPH are partners in a Guernsey Limited Partnership and own seven Jersey Property Unit Trusts. Both the Partnership and UKCPH own a portfolio of UK properties and derived rental income from those properties. As the Partnership, GP and UKCPH are considered tax transparent in the UK, their taxable results are liable to UK income tax at the rate of 20 per cent on their respective net rental income.
A reconciliation of the income tax charge applicable to the results from ordinary activities at the statutory income tax rate to the charge for the year is as follows:
|
|
Year ended 31 December 2010 |
Year ended 31 December 2009 |
|
|
£'000 |
£ 000 |
|
|
|
|
|
Net profit before tax |
91,556 |
73,136 |
|
UK income tax at a rate of 20 per cent |
18,311 |
14,627 |
|
Effect of: |
|
|
|
Capital (gains) on investment properties not taxable |
(9,057) |
(9,092) |
|
Capital losses realised not taxable |
- |
2,823 |
|
Income not taxable |
(120) |
(45) |
|
Inter company loan interest |
(10,666) |
(9,032) |
|
Expenditure not allowed for income tax |
1,960 |
538 |
|
Deferred tax asset not provided for |
(428) |
181 |
|
Total tax charge |
- |
- |
The Group has unused tax losses carried forward of £11,795,000 (2009: £12,223,000). These will only be utilised if the group has profits chargeable to income tax in the future.
6. Dividends
|
|
Year ended 31 December 2010 |
Year ended 31 December 2009 |
|
|
£'000 |
£ 000 |
|
Dividends on Ordinary Shares: |
|
|
|
2009 Fourth interim of 0.8988p per share paid 26 February 2010 (2008 Fourth interim: 1.3125p) |
|
|
|
2010 First Interim of 0.5979p per share paid 28 May 2010 |
|
|
|
2010 Second interim of 0.7146p per share paid 28 May 2010 |
8,469 |
- |
|
2010 Third interim of 1.3125p per share paid 27 August 2010 |
|
|
|
2010 Fourth interim of 1.3125p per share paid 30 November 2010 |
|
|
|
|
54,718 |
47,868 |
A fifth interim dividend of 1.3125p was paid on 28 February 2011 to shareholders on the register on 11 February 2011. Although this payment relates to the year ended 31 December 2010, under International Financial Reporting Standards it will be accounted for in the year ending 31 December 2011.
7. Basic and diluted Earnings per Share
The earnings per share are based on the net profit for the year of £91,556,000 (2009: £73,136,000) and on 1,168,600,913 (2009: 870,582,609) Ordinary Shares, being the weighted average number of shares in issue during the year. As there are no dilutive instruments outstanding, basic and diluted earnings per share are identical.
8. Investment Properties
|
|
Year ended 31 December 2010 |
Year ended 31 December 2009 |
|
|
£'000 |
£ 000 |
|
Freehold and Leasehold properties |
|
|
|
Opening valuation |
710,485 |
560,120 |
|
Purchases at cost |
133,180 |
176,595 |
|
Capital expenditure |
9,798 |
2,690 |
|
Movement in fair value |
45,287 |
28,110 |
|
Disposals at cost |
- |
(57,030) |
|
Closing valuation |
898,750 |
710,485 |
|
Gains on investment properties at fair value comprise |
|
|
|
|
|
|
|
Valuation gains |
45,287 |
28,110 |
|
Gains on disposals |
- |
3,235 |
|
|
45,287 |
31,345 |
Losses on investment property disposals
|
|
Year ended 31 December 2010 |
Year ended 31 December 2009 |
|
|
£'000 |
£ 000 |
|
|
|
|
|
Original cost of investment properties sold |
- |
(74,381) |
|
Sale proceeds |
- |
60,265 |
|
Losses on Investment Properties sold |
- |
(14,116) |
|
|
|
|
|
Recognised in previous periods |
- |
(17,351) |
|
Recognised in current period |
- |
3,235 |
|
|
- |
(14,116) |
CB Richard Ellis Limited completed a valuation of Group investment properties at 31 December 2010 on an open market basis in accordance with the requirements of the Appraisal and Valuation Manual published by the Royal Institution of Chartered Surveyors, which is deemed to equate to fair value. Fair value is determined by reference to market based evidence, which is the amounts for which the assets could be exchanged between a knowledgeable, willing buyer and a knowledgeable, willing seller in an arms length transaction as at the valuation date. The market value of these investment properties amounted to £898,750,000 (2009: £710,485,000) which is also the fair value.
The property valuer is external to the Group. The property valuer takes account of deleterious materials included in the construction of the investment properties in arriving at its estimate of open market valuation when the Investment Manager advises of the presence of such materials. The Group has entered into leases on its property portfolio as lessor (See note 18 for further information). No one property accounts for more than 15 per cent of the gross assets of the Group. All leasehold properties have more than 60 years remaining on the lease term. There are no restrictions on the realisability of the Group's investment properties or on the remittance of income or proceeds of disposal. However, the Group's investments comprise UK commercial property, which may be difficult to realise. Property and property related assets are inherently difficult to value due to the individual nature of such property. As a result, valuations are subject to substantial uncertainty. There is no assurance that the estimates resulting from the valuation process will reflect the actual sales price even where the actual sales occur shortly after the valuation date.
In addition to the above, the property portfolio market value as at 31 December 2010 is partly based on the following:
• The Estimated Net Annual Rent for each property, which is based on the current rental value of each of the properties, which reflects the terms of the leases where the property, or part of the property, are let at the date of valuation. If the property, or parts thereof, are vacant at the date of valuation, the rental value reflects the rent the valuer considers would be obtainable on an open market letting as at the date of valuation
• The valuer has assumed that all rent reviews are upward only and are to be assessed by reference to full current rents. Also there is the assumption that all tenants will meet their obligations under their leases, and are responsible for insurance, payment of business rates, and all repairs, whether directly or by means of a service charge.
• The valuer has not made any adjustments to reflect any liability to taxation that may arise on disposal, nor any costs associated with disposals incurred by the owner.
• The valuer assumes an initial yield in the region of 5 to 7% for the majority of the properties, with the reversionary yield being in the region of 7%.
The majority of the leases are on a full repairing basis and as such the Group is not liable for costs in respect of repairs, maintenance or enhancements to its investment properties.
Included within the total market value of the property portfolio, are;
Units in the Kensington High Street Jersey Property Unit Trust which holds the property at Kensington High Street, London. 99.5 per cent of the units in this Unit Trust are held by UKCPT Limited Partnership and 0.5 per cent is held by UK Commercial Property Holdings limited.
Units in the Kew Jersey Property Unit Trust which holds the property at Kew Retail Park, Richmond. 58 per cent of the units in this Trust are held by UKCPT Limited Partnership and 42 per cent is held by UK Commercial Property Holdings Limited.
Units in the W-S-M Jersey Property Unit Trust which holds the property at Weston-super-Mare. 99.5 per cent of the units in this Trust are held by UK Commercial Property Holdings Limited and 0.5 per cent is held by UKCPT Limited Partnership.
Units in the Junction 27 Jersey Property Unit Trust which holds the property at Junction 27 Retail Park, Leeds. 99.5 per cent of the units in this Trust are held by UK Commercial Property Holdings Limited and 0.5 per cent is held by UKCPT Limited Partnership.
Units in the Charles Darwin Jersey Property Unit Trust which holds the property at Charles Darwin Shopping Centre, Shrewsbury. 99 per cent of the units in this Trust are held by UK Commercial Property Holdings Limited and 1 per cent is held by UKCPT Limited Partnership.
Units in the Pride Hill Jersey Property Unit Trust which holds the property at Pride Hill Shopping Centre, Shrewsbury. 99 per cent of the units in this Trust are held by UK Commercial Property Holding limited and 1 per cent is held by UKCPT Limited Partnership.
Units in the Riverside Jersey Property Unit Trust which holds the property at Riverside Shopping Centre, Shrewsbury. 99 per cent of the units in this Trust are held by UK Commercial Property Holdings Limited and 1 per cent is held by UKCPT Limited Partnership.
9. Investment in Subsidiary Undertakings
The Company owns 100 per cent of the issued ordinary share capital of UK Commercial Property Holdings Limited (UKCPH), a company incorporated in Guernsey whose principal business is that of an investment and property company.
In addition to its investment in the shares of UKCPH, the Company had lent £277.8 million on 28 February 2007, £115.1 million on 30 October 2009 and £53.3 million on 1 April 2010 to UKCPH, all of which remains outstanding as at 31 December 2010. These loans are repayable in 2016 and are unsecured. Interest is payable quarterly in arrears at a fixed rate of 6.65 per cent per annum, 5.99 per cent per annum and 5.7 per cent per annum respectively, compounded on a quarterly basis. Total interest on these loans for the year amounted to £27.5 million (2009: £19.5 million), of which £8.3 million (2009: £3.7 million) remained payable as at 31 December 2010.
The Company owns 100 per cent of the issued share capital of UK Commercial Property GP Limited, (GP), a company incorporated in Guernsey whose principal business is that of an investment and property company.
UKCPT Limited Partnership, (GLP), is a Guernsey limited partnership, and it holds the properties comprised in the initial property portfolio. UKCPH and GP, have a partnership interest of 98.99 and 1 per cent respectively in the GLP. The remaining 0.01 per cent partnership interest is held by The Droit Purpose Trust, which is a Jersey purpose trust. The GP is the general partner and UKCPH is a limited partner of the GLP.
The Company had lent £406 million on 22 September, £0.2 million on 30 October 2009, and £3.0 million on 1 April 2010 to the GLP, £394.2 million (2009: £391.2 million) of which remains outstanding as at 31 December 2010. These loans are repayable in 2016 and are unsecured. Interest is payable quarterly in arrears at fixed rates of 6.5 per cent per annum, 5.99 per cent per annum, and 5.7 per cent respectively, compounded on a quarterly basis. Total interest on these loans for the year amounted to £25.8 million (2009: £25.4 million), of which £10.9 million (2009: £6.4 million) remained payable as at 31 December 2010. At 31 December 2010, the Company also had an intercompany balance with the GLP amounting to £16 million (2009: nil).
The Company owns 100 per cent of the issued share capital of SCP Group Limited (SCP), a company incorporated in Guernsey whose principal business is that of a holding company.
The Company owns 100 per cent of the issued share capital of UK Commercial Property Nominee Limited, a company incorporated in Guernsey whose principal business is that of a nominee company.
10. Trade and Other Receivables
|
|
2010 |
2009 |
|
|
£'000 |
£ 000 |
|
|
|
|
|
Rents receivable (net of provision for bad debts) |
806 |
1,644 |
|
Other debtors and prepayments |
4,340 |
3,537 |
|
|
5,146 |
5,181 |
Rents receivable, which are generally due for settlement at the relevant quarter end are recognised and carried at the original invoice amount less an allowance for any uncollectable amounts. An estimate for doubtful debts is made when collection of the full amount is no longer probable. Bad debts are written off when identified.
11. Trade and Other Payables
|
|
2010 |
2009 |
|
|
£'000 |
£ 000 |
|
|
|
|
|
Rental income received in advance |
15,764 |
12,478 |
|
Investment Manager fee payable |
1,813 |
1,334 |
|
VAT payable |
1,761 |
1,048 |
|
Other payables |
254 |
413 |
|
|
19,592 |
15,273 |
The Group's payment policy is to ensure settlement of supplier invoices in accordance with stated terms.
12. Bank loan
|
|
2010 |
2009 |
|
|
£'000 |
£'000
|
|
Facility |
80,000 |
80,000 |
|
Drawn down |
42,100 |
42,100 |
|
Set up costs |
(336) |
(336) |
|
Accumulated amortisation of set up costs |
120 |
72 |
|
Accrued variable rate interest on bank loan |
- |
83 |
|
Total due |
41,884 |
41,919 |
The Company has a 7 year £80 million facility with Lloyds Banking Group plc, of which £42.1 million is drawn down.
The bank loan is secured on the property portfolio of the Group. Under bank covenants related to the loan the Company is to ensure that at all times:
• The loan to value percentage does not exceed 50 per cent (this is defined as the ratio of the loan compared to the aggregate of the open market property valuations plus any cash deposits);
• The qualifying adjusted net rental income for any calculation period (any 3 month period) is not less than 175 per cent of the projected finance costs for that period;
• No single tenant accounts for more than 30 per cent of the total net rental income;
• The five largest tenants do not account for more than 50 per cent of total net rental income;
• No single property accounts for more than 25 per cent of the gross secured asset value (this is defined as the sum of the value of the properties as stated in the latest valuations plus any cash deposits);
The Company met the covenant tests during the year.
Interest rate exposure has been hedged by the purchase of an interest rate swap contract. The hedge has been achieved by matching the notional amount of the swap with the loan principal and matching the swap term to the loan term.
Interest on the swap is receivable at a variable rate calculated on the same LIBOR basis as for the bank loan (as detailed below but excluding margins) and payable at a fixed rate of 3.55 per cent per annum. The fair value of the liability in respect of the interest rate swap contract at 31 December 2010 is £1,353,000 which is based on the marked to market value.
Interest is payable by the Company at a rate equal to the aggregate of LIBOR, mandatory costs of the Bank and a margin. The applicable margin depends on the ratio of all loans made available to the Company (under the Bank Facility or otherwise) to the "Gross Assets Value", expressed as a percentage (the "LTV Percentage"). "Gross Assets Value" takes onto account the value of the properties and any other assets held by the Company and the Guarantors (currently UK Commercial Property Holdings Limited, UK Commercial Property GP Limited and UKCPT Limited Partnership) as well as unsecured cash, if the LTV Percentage is greater than 5 per cent. and does not exceed 10 per cent., the margin is 0.55 per cent. per annum. If the LTV Percentage is greater than 10 per cent. and does not exceed 40 per cent., the margin is 0.60 per cent. per annum. If the LTV Percentage is greater than 40 per cent. and does not exceed 50 per cent., the margin is 0.70 per cent. per annum.
13. Share capital accounts
|
|
2010 |
|
2009 |
|
|
£'000 |
|
£'000 |
|
Share capital Opening balance |
|
|
|
|
195,000,000 Ordinary Shares of 25 pence each issued on 11 February 2010 |
|
|
|
|
12,250,000 Ordinary Shares of 25 pence each issued on 7 July 2010 |
|
|
|
|
151,544,000 Ordinary Shares of 25 pence each issued on 30 October 2009 |
|
|
102,680 |
|
Share capital as at 31 December |
482,703 |
|
322,680 |
|
(number of shares in issue at the year end being 1,238,794,000)
|
|||
|
Treasury shares |
|
|
|
|
Opening balance |
(25,264) |
|
(10,249) |
|
17 March 2009 share buyback of 28,571,429 Ordinary Shares of 25 pence each |
- |
|
(15,015) |
|
Balance in Treasury account as at 31 December |
(25,264) |
|
(25,264) |
(number of shares held in treasury being 41,445,142 Ordinary Shares of 25 pence each at 31 December 2010)
Following the 2009 Annual General Meeting held on 4 June 2010, the Company does not have an authorised share capital limit, as permitted by Guernsey law.
Ordinary shareholders participate in all general meetings of the Company on the basis of one vote for each share held.
*As announced on the 6 July 2010 the conditions to the 6 October 2009 agreement to purchase the heritable property at 2/8 Buchanan Street, Glasgow were satisfied and the property was purchased by way of the issue of 12,250,000 ordinary shares. These shares were admitted to trading at 8.00am on the 7 July 2010. The market price at that time for these shares was 79p. Therefore, the value of this share issue is calculated as being 12,250,000 shares, at 79p per share which equates to £9,678,000.
Total issue costs for the above 2010 placings were £2,141,000. This has been charged in full against the Special Reserve.
14. Net Asset Value per Share
The net asset value per ordinary share is based on net assets of £922,004,000 (2009: £728,627,000) and 1,197,348,858 (2009: 990,098,858) Ordinary Shares, being the number of Ordinary Shares in issue at the year end, excluding Treasury Shares.
15. Related Party Transactions
No Director has an interest in any transactions which are or were unusual in their nature or significant to the nature of the Group.
Ignis Investment Services Limited received fees for its services as investment managers. Further details are provided in notes 2 and 3. The total management fee charged to the Statement of Comprehensive Income during the year was £6,977,000 (2009: £4,503,000) of which £1,813,000 (2009: £1,334,000) remained payable at the year end. The Investment Manager also receives an administration fee of £110,000 (2009: £107,000) per annum, of which £28,000 (2009: £27,000) remained payable at the year end. In addition to the above, the Investment Manager received a success fee of £250,000 in respect of the February 2010 new Ordinary Shares placing.
The Directors of the Company received fees for their services. Total fees for the year were £232,000 (2009: £145,250) none of which remained payable at the year end, (2009: nil). Mr Robertson's fees are paid directly to Ignis Investment Services Limited.
The Group invests in the Ignis Liquidity fund which is also managed by the Investment Manager. As at 31 December 2010 the Company had invested £46 million in the Ignis Liquidity Fund (2009: Nil).
As announced on 25 January 2010, Phoenix & London Assurance Limited ("PALAL"), which is a member of the Phoenix Group plc, as is the Company's Investment Manager, subscribed for 64,850,843 new Ordinary Shares, under the 195 million Ordinary Share placing held on 11 February 2010. The Company paid commission of 0.85 per cent. or £425,000 to PALAL on this subscription, as set out in the prospectus for this placement.
As announced on 6 July 2010, the Company acquired the heritable property at 122/132 Argyle Street Glasgow. The consideration for this purchase was the issue of 12,250,000 new Ordinary Shares on 7 July 2010 to Phoenix Life Limited. Phoenix Life Limited is a member of Phoenix Group plc as is the Company's Investment Manager.
The Company has various intercompany loans in place with fellow group entities, details of which are set out in note 9 of these accounts.
16. Financial Instruments
The Group's investment objective is to provide Ordinary Shareholders with an attractive level of income together with the potential for income and capital growth from investing in a diversified UK commercial property portfolio.
Consistent with that objective, the Group holds UK commercial property investments. In addition, the Group's financial instruments consist of cash, receivables and payables that arise directly from its operations.
The main risks arising from the Group's financial instruments are credit risk, liquidity risk and interest rate risk. The Board reviews and agrees policies for managing its risk exposure. These policies are summarised below and remained unchanged during the year.
Fair values
The fair value of financial assets and liabilities is not different from the carrying value in the financial statements.
Fair value hierarchy
The following table shows an analysis of the fair values of financial instruments recognised in the balance sheet by level of the fair value hierarchy: (2009: nil)
|
31 December 2010 |
Level 1 |
Level 2 |
Level 3 |
Total fair value |
|
Interest rate swap |
- |
(1,353) |
- |
(1,353) |
Explanation of the fair value hierarchy:
Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date.
Level 2 - Use of a model with inputs (other than quoted prices included in level 1) that are directly or indirectly observable market data.
Level 3 - Use of a model with inputs that are not based on observable market data.
The fair value of the derivative interest rate swap contract is estimated by discounting expected future cash flows using current market interest rates and yield curve over the remaining term of the instrument.
Market risk
A 10 per cent increase in the value of the investment properties held as at 31 December 2010 would have increase net assets available to shareholders and increased the net profit by £89.9 million (2009: £71.0 million). A 10 per cent decrease in value would have reduced net assets available to shareholders and reduced the net profit by £89.9 million (2009: £71.0 million).
The calculations above are based on investment property valuations at the respective balance sheet dates and are not representative of the year as a whole, nor reflective of future market conditions.
Credit risk
Credit risk is the risk that an issuer or counterparty will be unable or unwilling to meet a commitment that it has entered into with the Group.
At the reporting date, the maturity of the Group's financial assets was:
|
Financial Assets 2010 |
3 months or less |
More than 3 months but less than one year |
More than one year |
Total |
|
|
£'000 |
£'000 |
£'000 |
£'000 |
|
Cash |
80,937 |
- |
- |
80,937 |
|
Rent receivable |
806 |
- |
- |
806 |
|
Other debtors |
- |
- |
571 |
571 |
|
|
81,743 |
- |
571 |
82,314 |
|
Financial Assets 2009 |
3 months or less |
More than 3 months but less than one year |
More than one year |
Total |
|
|
£'000 |
£'000 |
£'000 |
£'000 |
|
Cash |
70,163 |
- |
- |
70,163 |
|
Rent receivable |
1,644 |
- |
- |
1,644 |
|
Other debtors |
23 |
- |
508 |
531 |
|
|
71,830 |
- |
508 |
72,338 |
In the event of default by an occupational tenant, the Group will suffer a rental shortfall and incur additional costs, including legal expenses, in maintaining, insuring and re-letting the property until it is re-let. The Board receives regular reports on concentrations of risk and any tenants in arrears. The Investment Manager monitor such reports in order to anticipate and minimise the impact of defaults by occupational tenants.
The Company has a diversified tenant portfolio. The maximum credit risk from the rent receivables of the Group at 31 December 2010 is £806,000 (2009: £1,644,000). The Group holds rental deposits of £571,000 (2009: £508,000) held as collateral against tenant arrears/defaults. There is no credit risk associated with the financial liabilities of the Group.
All of the cash is placed with financial institutions with a credit rating of A or above. £46m (2009: nil) of the year end cash balance is held in the Ignis Liquidity Fund; which is a money market fund. Bankruptcy or insolvency may cause the Group's ability to access cash placed on deposit to be delayed or limited. Should the credit quality or the financial position of the banks currently employed significantly deteriorate, the Investment Manager would move the cash holdings to another financial institution.
There are no significant concentrations of credit risk within the Group.
Liquidity Risk
Liquidity risk is the risk that the Group will encounter in realising assets or otherwise raising funds to meet financial commitments.
The Group's investments comprise UK commercial property. Property and property related assets are inherently difficult to value due to the individual nature of each property. As a result, valuations are subject to substantial uncertainty. There is no assurance that the estimates resulting from the valuation process will reflect the actual sales price even where such sales occur shortly after the valuation date.
The Group's liquidity risk is managed on an ongoing basis by the Investment Manager and monitored on a quarterly basis by the Board.
In certain circumstances, the terms of the Group's bank loan entitles the lender to require early repayment, and in such circumstances the Group's ability to maintain dividend levels and the net asset value attributable to the ordinary shares could be adversely affected. As at 31 December 2010 the cash balance was £80,937,000 (2009: £70,163,000).
At the reporting date, the maturity of the Group's liabilities was:
|
Financial Liabilities 2010 |
3 months or less |
More than 3 months but less than one year |
More than one year |
Total |
|
|
£'000 |
£'000 |
£'000 |
£'000 |
|
Bank loan and interest rate swap |
377 |
1,131 |
47,917 |
49,425 |
|
Other Creditors |
17,260 |
- |
571 |
17,831 |
|
|
17,637 |
1,131 |
48,488 |
67,256 |
|
Financial Liabilities 2009 |
3 months or less |
More than 3 months but less than one year |
More than one year |
Total |
|
|
£'000 |
£'000 |
£'000 |
£'000 |
|
Bank loan |
121 |
362 |
44,251 |
44,734 |
|
Other Creditors |
12,255 |
1,416 |
508 |
14,179 |
|
|
12,376 |
1,778 |
44,759 |
58,913 |
Interest rate risk
The cash balance as shown in the Balance Sheet, is its carrying amount and has a maturity of less than 1 year.
Interest is receivable on cash at a variable rate ranging between 0.2 per cent to 0.5 per cent at the year end and deposits are re-priced at intervals of less than one year.
An increase of 1 per cent in interest rates as at the reporting date would have increased the reported profit by £809,000 (2009: reduced the reported loss by £280,000). A decrease of 1 per cent would have reduced the reported profit by £809,000 (2009: increased the reported loss by £280,000). The effect on equity is nil (excluding the impact of a charge in retained earnings as a result of a change in net profit).
As the Company's bank loan has been hedged by its swap, this loan is not subject to interest rate risk.
The other financial assets and liabilities of Group are non-interest bearing and are therefore not subject to interest rate risk.
Foreign Currency Risk
There was no foreign currency risk as at 31 December 2010 or 31 December 2009 as assets and liabilities of the Group are maintained in pounds Sterling.
Capital Management Policies
The Group's capital is managed in accordance with investment policy which is to hold a diversified property portfolio of freehold and long leasehold UK commercial properties. The Group intends to invest in income producing properties. The Group will principally invest in three commercial property sectors: office, retail and industrial. The Group will be permitted to invest up to 15 per cent of its Total Assets in indirect property funds but will not invest in other listed investment companies. The Group will be permitted to invest cash, held by it for working capital purposes and awaiting investments, in cash deposits, gilts and money market funds.
The primary objective of the Group's capital management is to ensure that it remains within its quantitative banking covenants and maintain a strong credit rating. No changes were made in the objectives, policies or processes during the years ending 31 December 2010 and 31 December 2009.
The Group monitors capital primarily using a loan to value ratio, which is calculated as the amount of outstanding debt dividend by the valuation of the investment property portfolio. The Group's policy is to keep the average loan to value ratio of the Group lower than 10 per cent.
During the period. The group did not breach any of its loan covenants, nor did it default on any other of its obligations under its loan agreements.
|
|
2010 |
2009 |
|
|
£'000 |
£ 000 |
|
|
|
|
|
Carrying amount of interest-bearing loan and borrowings |
41,884 |
41,919 |
|
External valuation of completed investment property |
898,750 |
710,485 |
|
Loan to value ratio |
4.66% |
5.90% |
The Group's capital balances are set out in the Consolidated Statement of Changes in Equity and are regarded as the Group's equity and net funds.
17. Capital Commitments
The Company has committed to spend approximately £16 million on the redevelopment of the Swindon property as at 31 December 2010.
18. Lease Length
The Group leases out its investment properties under operating leases.
The future annual income under non-cancellable operating leases, based on the unexpired lessor lease length at the year end was as follows (based on total rentals):
|
|
31 December 2010 |
31 December 2009 |
|
|
£'000 |
£ 000 |
|
|
|
|
|
Less than one year |
62,525 |
54,008 |
|
Between one and five years |
201,276 |
186,131 |
|
Over five years |
338,529 |
296,754 |
|
Total |
602,330 |
536,893 |
The largest single tenant at the year end accounted for 6.47 per cent (2009: 7.68 per cent) of the current annual rental income.
The unoccupied property expressed as a percentage of estimated total rental value was 3.62 per cent (2009: 2.45 per cent) at the year end.
The Group has entered into commercial property leases on its investment property portfolio. These properties, held under operating leases, are measured under the fair value model as the properties are held to earn rentals. The majority of these non-cancellable leases have remaining non-cancellable lease terms of between 5 and 15 years.
19. Service charge
A summary of the service charge during the year is as follows:
|
|
2010 |
2009 |
|
|
£'000 |
£'000 |
|
|
|
|
|
Total service charge expenditure incurred |
6,129 |
4,437 |
|
Total service charge billed to tenants |
5,800 |
3,506 |
|
Service charge billed to the Group in respect of void units |
1,200 |
351 |
|
Service charge due from tenants as at 31 December |
377 |
185 |
The Companys' managing agents Jones Lang LaSalle manage service charge accounts for all the Companys' properties. The Company pays the service charge on any vacant units. Service charges on rental properties are recharged to tenants.
20. Post Balance Sheet Events
As announced on 15 February 2011 the Company completed the purchase of St. George's Retail Park, Leicester, for £51 million.
Announcement Ends
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