Final Results
Caledonian Trust PLC
21 December 2005
For immediate release
21 December 2005
Caledonian Trust PLC
Results for the year ended 30 June 2005
Caledonian Trust PLC, the Edinburgh based property investment holding and
development company, announces its audited results for the year to 30 June 2005.
CHAIRMAN'S STATEMENT
YEAR ENDED 30 JUNE 2005
Introduction
The Group made a profit of £412,150 in the year to 30 June 2005 compared to
£434,662 last year. Earnings per share were 3.51p and NAV per share rose by
31.9p from 173.9p last year to 205.8p.
The dilapidations claim at St Margaret's House against the Scottish Ministers
was settled on a favourable basis for £2,100,000 on 8 February 2005, agreement
having been reached a few days before the proof. The Ministers agreed to meet
the expenses of the action, which are being determined by the Auditor of Court.
Income from rent and service charges was £707,009 a small rise from the £614,735
recorded last year. There were no trading property sales this year whereas last
year there were trading profits of £408,943. The profit from investment property
sales was £501,420 compared to £584,291 last year. The group gained £85,522
from the sale of its holding in UA Group PLC. Administrative expenses fell by
£278,515 to £850,743 due primarily to lower property costs and professional fees
at St Margaret's. Net interest payable was £12,638 down from £56,273 last year
and our cash balance at 30 June 2005 was £4,761,664. The weighted average base
rate was 4.72%, almost one percentage point higher than the 3.83% for the year
to June 2004.
On 30 June 2005 the Group's portfolio comprised by value 39.2% office investment
property (of which 71.6% is open plan) 32.2% retail property, 37.6% industrial
property, 21% development property.
Review of Activities
The Group's property activities reflect our current strategies of purchasing
assets with medium-term development prospects and of making niche and
opportunistic investments. Investment assets will probably be sold when they
'mature'.
The only significant change to our Edinburgh New Town investment portfolio has
been the sale of two flats created out of unusable office space on the top three
floors of 61 North Castle Street for £295,000 and £330,000. The leases on two
properties in Young Street determine in August 2006. One is currently
unoccupied and a dilapidations claim is being negotiated. On determination we
expect to re-let the properties at or above current rentals.
Our largest investment property in Edinburgh, St Margaret's House, was let to
the Scottish Ministers until November 2002. We served a writ in the Commercial
Court for damages in January 2003 and after protracted and complex procedures
the Ministers made an acceptable offer a few days before the proof set down for
18 January 2005. The settlement of the litigation has opened up wider
opportunities. Discussions with the City of Edinburgh Council over the years
have indicated that Council officials insist that any redevelopment of St
Margaret's be part of a wider master plan. Such a plan would necessarily
involve Meadowbank House, the 125,000ft2 1970s' office block owned and occupied
by the Registers of Scotland, with which St Margaret's shares the island site
between the A1 and the main railway line and the existing access off 'Smokey
Brae'. Consequently, we are having continuing discussions with the Registers to
optimise our mutual interests. However, Registers, who like all Scottish
Agencies and Departments are subject to a policy of dispersal away from
Edinburgh, are currently in 'Phase II' of their discussions with the Scottish
Ministers on the future location of the functions currently carried out at
Meadowbank House. A decision was previously expected in late 2005 but it is not
now expected before 2006. A comprehensive redevelopment incorporating any
requirement of the Registers for a new modern office in Edinburgh would be
attractive. We are currently examining redevelopment schemes specific to St
Margaret's and have commissioned a roads study which shows that an independent
access directly off the A1 appears technically feasible. Such an access is
compatible with previous proposals to form a 'piazza' and to complete the
'streetscape'. The carrying cost of St Margaret's has been minimized and we are
seeking to offset this cost by letting the car park and by obtaining outdoor
advertising.
The lease on our investment property near Waterloo, London, at Baylis Road/
Murphy Street has been extended for two years subject to mutual breaks. As both
the office and the residential markets continue to be weak, but appear likely to
improve considerably in the medium term, no further plans for refurbishment or
redevelopment have been made. We receive unsolicited enquiries regularly for the
property.
Planning and redesign work continues for our proposed development of 192 flats
and 10,000ft2 commercial space at 100 West Street, Tradeston, Glasgow. Due to
changed planning requirements the virtually completed original plans had to be
revised to bring the building into line with the newly completed adjacent
development by Barratt of 370 flats, now nearing completion and virtually sold
out. 100 West Street is currently let to Eastern/Western, a Saab franchise, and
the review in 2006 should increase the annual rent to at least £202,000.
During the year the Group made five property sales. In addition to the two
converted Castle Street flats referred to above the Group sold two flats at
Powderhall Rigg, giving a 15% margin, and in July 2004 we sold St Clements
Wells, a 200 acre East Lothian farm, purchased in January 2004, for almost
£5,000 per acre, 47% above cost. The Old Pier public house in Portobello, east
Edinburgh, was sold for £300,000 or £100,000 above book value.
Several purchases have been made and several more are being negotiated. In
January 2005 we bought a small parade of shops with one vacancy in Scotland
Street, Tradeston, an area likely to benefit from the extension of the M74. The
vacancy has been filled and the parade now yields 8%. In July 2004 we purchased
a vacant warehouse for refurbishment and letting also near the line of the
proposed M74 in Rutherglen, for £700,000. Work had just started on the
refurbishment when an offer, substantially above the purchase price, was made
for the property in its present condition and a sale is currently being
negotiated. In September 2004 we acquired a small industrial/retail investment
yielding about 9% in an improving residential area in Kirkcaldy, Fife.
Several other properties have been acquired where we expect to obtain or to
improve existing planning permission. In central Perthshire, just off the A9 at
Bankfoot, we have bought a farm house, a farm steading and adjacent land on
which we expect to gain planning consent for 10 to12 houses. In east Edinburgh,
adjacent to the Brunstane Rail Station, we have bought a delightful development
package of six cottages for refurbishment, a steading with planning permission
which we hope to augment, two further farm buildings and two-and-a-half acres of
land, adjacent to other residential property but at present in the Green Belt
fringe. At Comrie in west Perthshire we have bought a smallholding containing
two modern detached houses, a steading and an acre of land zoned industrial
development within the settlement boundary and thirty acres of pastureland
adjacent to the settlement, bounded to the north by the A85 main road to Crieff
and to the south by the charming River Earn. We expect to gain permission for up
to twelve houses within the curtilage of the existing buildings. The industrial
land may be rezoned for housing or rezoned subsequent to obtaining an industrial
site elsewhere in the holding.
Eight other rural development properties are under offer. Most of these
represent similar opportunities to those recently acquired and are in desirable
and accessible areas. We expect these acquisitions to complete before Easter.
The planning process is both tortuous and lengthy. For some of our projects we
have now travelled this long and convoluted course and, almost surprisingly,
completed it. In Belford Road, Edinburgh, we have undertaken limited site works
sufficient to implement the long-standing 22,500 ft2 office consent which
otherwise would have lapsed on 12 October 2005. On that day we obtained a new
planning consent for 20,000ft2 of residential development together with parking
for 20 cars. Belford Road is less than 500m from Charlotte Square and the West
End of Princes Street and has recently become a quiet cul-de-sac. Residential
values should average above £350/ft2, the spectacular views from the upper
floors commanding much higher values.
Planning permission has recently been received for 45 large detached houses near
Dunbar, which has a station on the main east coast line. The dual carriageway
section of the A1 from Edinburgh has recently been further extended and our
site, just off the A1, is now only four miles beyond the dual carriage way. We
expect to receive planning permission for a further 28 houses, including four
'affordable' on a second site nearby shortly. The report of an enquiry into a
proposed superstore and a budget hotel on the A1 just south of Dunbar is
awaited.
We are also expecting planning permission soon for eight detached houses at our
site at Wallyford, which borders Musselburgh and is within 400 yards of the east
coast mainline station with easy access to the A1 near the City Bypass. Building
has recently started on a contiguous area on which 250 houses are to be built,
predominately for private sale.
Lastly I report a quite different venture. We are participating in a development
of 39 small detached and semi-detached houses at Herne Bay in Kent, a seaside
Victorian town that is becoming increasingly accessible to the major employment
areas to the west. Our partners are an experienced local team and at present the
project is on time and on budget.
Over the year we have assessed a very wide range of opportunities, viewed a
small proportion of those assessed and bid for some of them with a success rate
approaching 50%. Several similar properties are currently under consideration.
Economic Prospects
Over the last few years the world economy has usually been overshadowed by the
threat of various catastrophic or apocalyptic events. Fortunately the four
horsemen of the Apocalypse appear quartered at a safer distance this year. In
2002 the blood-red horse, ridden by a swordsman, foreshadowed the war in Iraq;
in 2004 the black horse, whose rider's scales weigh famine and scarcity,
threatened the world's oil supplies; in 2000 the white horse, with its crowned
rider, brought the false testimony of world recession and deflation; and in
2001, with later sightings, the pale horse, the colour of the sickly or recent
dead, bearing a horseman wielding a scythe of terror and death materialized
unexpectedly. The threats represented by the horseman are at worst now latent.
There are challenges to the western world but at present they are of a different
type and scale. The world economy grew by 5.1% in 2004, the strongest period of
growth in 20 years, and the EIU expects 4.3% growth this year and 4% in both
2006 and 2007. The slowdown is due to continued high oil prices and further
rises in US official interest rates. Growth at these levels is conditional on no
oil shock and on no dramatic unfavourable changes in two critical US economic
parameters: private savings and the current account deficit, at present over 6%
of GDP.
Brent oil futures indicate that the spot price will remain at about current
levels over the next few years, double the 2004 price, but this average
indication conceals a very wide spread of forecasts. Estimates derived from
options show that there is now a one-in-four chance of the oil price being $10
higher or $10 lower than the average six- month price. In contrast in February
2004, prior to the marked rise in oil prices, the chance of so large a change
was less then one in fifty.
High oil prices have had and are predicted to have only a limited effect on
economic growth. Even at $60 crude oil is half the real price reached in the
1978-80 oil shock which followed the Iranian revolution, when oil prices trebled
after quadrupling in the 1973/74 shock. Oil prices now have less influence on
the economy as the world economy uses about a third less oil per unit of output
now than in the 1980s and the US uses less than half the oil per unit of output
than in the late 1970s. Oxford Economic Forecasting estimates that a $10
increase in oil prices reduces the rate of growth of the UK economy by 0.25
percentage points lagged one year and Goldman Sachs estimates the effect on the
world economy as 0.3 percentage points. The Bank of England reports future
prices at around $60, a price Goldman Sachs expects to be maintained for the
rest of the decade but other forecasters expect prices below $50. The EIU bases
its estimate of 4% growth in world output in 2006 and 2007 on oil prices of
around $50.
The twin US 'imbalances' in savings and balance of payments are potentially a
greater threat to the world economy than oil price rises. US consumers were
already net dissavers before the recent oil price rises which are likely to have
increased such dissaving. The US federal budget was already in deficit before
the costs of rectifying the hurricane damage increased federal expenditure and
the fall in corporate profits caused by higher oil costs reduced federal income.
The US net national savings rate, which has been at a record low of 1.5% of GDP
since early 2002, could drop to nil or even become negative over the next year.
Fortunately surplus savings, primarily from Japan, Germany and China, have been
used to buy US $ assets, but several factors might upset the symmetry of US
dissaving being matched by non-US savings. Economic recoveries in Japan and
Germany seem likely to reduce their savings and China - the third largest world
saver - has indicated that it intends to stimulate domestic demand, reducing its
savings. If, as seems likely, the US deficit continues to increase but the
supply of overseas saving falls, then the US would be exposed to a run on the $
almost certainly resulting in higher interest rates. Such a marked adjustment
could result from one or more of several triggers: a marked exacerbation of
existing trends outlined above; a further severe energy shock; a bursting of the
US housing boom; or a concatenation of political and economic events associated
with political confidence, the Iraq war and a sudden change in economic
circumstances. Morgan Stanley comment 'the history of economic crises is clear:
the longer the delay any economy holds off in facing its imbalances, the greater
the possibility of a hard landing ...' and conclude' there is now about a 40%
probability of a hard landing in the next 12 months.'
Similar arguments have been advanced for at least two years. Last year Alan
Greenspan said: 'given the size of the US current account deficit, a diminished
appetite for adding to dollar balances (ie foreign holding of dollars) must
occur at some point'. At that time the exchange rate was about $1.86/£ and $1.30
/€ and several commentators expected further $ depreciation to $2.00/£ and a
much larger depreciation to $1.50/ against the Euro. Perversely the $ has
strengthened to $1.721/£ and $1.179/€, almost at two year $ highs.
Until recently the $'s strength resulted from foreign central banks buying
Treasury Bonds. However in the third quarter of 2005 foreign private investors
bought Bonds valued at $360bn compared with $42bn of net buying from central
banks, possibly partly because both US short and long-term rates are now higher
than other reserve currencies. Thus $ devaluation is delayed, albeit now
increasingly supported by shorter- term investors. However 'over valuations' can
persist for a long time - several years in the dot.com equity boom, as in all
other bubbles, and according to some commentators in the Sterling exchange rate
for the past ten years. However, as an FT leader says 'a long-term requirement
does not make a short-term bet. The current account dynamic may not bite for
several years yet'.
Alan Greenspan suggests that the US housing boom will slow and 'equity
extraction will cease' giving rise to a significant rise in savings, reducing
imports and improving the current account. Alternatively or additionally Samuel
Brittan suggests that once 'the rise in asset prices is well and truly over' US
interest rates will stabilise or fall and 'nudge the dollar in the correct
direction without heroics or unlikely international concordats'. There appears a
reasonable chance that a sudden dramatic realignment of the $ will not take
place, or if it does, it could be long delayed.
The UK economy has enjoyed a long period of sustained growth since the first
quarter of 1993, when the economy was emerging from the last recession. However
in Q2 of 2005 GDP expanded by only 1.5%, the slowest rate of expansion since
1993, but private sector growth was only 1.3%. The slowdown in private sector
output growth since early 2004 has been more pronounced than that of the economy
as a whole and the recent fall in GDP growth is due primarily to a reduction in
household consumption growth which, having grown markedly faster than GDP for
much of the last eight years, has dropped back to the same level of growth as
GDP growth, only 0.4% in Q2 2005, the weakest growth in consumption since 1995.
Thus the consumer boom which had provided the principal stimulus to growth for
over ten years is waning as employment growth slows and rising oil and utility
prices and higher interest costs reduce disposable income.
The spending slowdown has occurred without a rise in savings which remains
around 4% even below the low levels in the late 1980s. The EIU expects savings
to rise accompanied by a rise in direct taxes restricting growth in private
consumption and contributing to GDP growth of only 1.5% in 2006. Other private
forecasts are less pessimistic. The average forecast for 2006 of economists
polled by The Economist was 2.1% and Deloitte forecast 2.0% rising to 2.5% in
2007. In contrast the MPC estimates that it is 50% likely that growth will be
between 2% and 3.5% until 2009 and the Chancellor's pre-Budget Report forecasts
2.25% in 2006 rising to 3% in 2007 and 2008.
Changes in consumption growth related to changes in saving will influence
overall growth. Deloitte has demonstrated that savings and house price inflation
are inversely correlated. Savings dropped to around 4% in both the house price
booms of the late 1980s and the early 2000s when house prices rose 20% per
annum. Last year, when house price rises were still above 15% some commentators,
notably Capital Economics and HSBC, argued that a house price bubble existed
which, when pricked, would lead to sharp falls in house values, greatly
increased saving and reduced consumption. Fortunately this extreme outcome has
not been realised, at least so far, although the OECD calculates that British
property is 35% overvalued.
The FT House Price Index MA uses data from the Land Registry, the ODPM and the
Halifax and Nationwide to compute a house price index for England and Wales,
seasonally and mix adjusted. This index shows that annual house inflation was
2.5% in October 2005, the lowest level after a steady decline from 12.4% in
January 2005. Monthly price inflation, which was 'negative' in April 2005 and
May 2005, has been nil or slightly positive since then. The B of E reports
'that there are signs of modest recovery in the housing market ...... and an
average of lenders' monthly data suggests ..... that the pace of house price
inflation may have ticked up recently'. Deloitte's figures for the inverse
correlation between house savings and house prices indicate that a 5% annual
house price inflation is in line with a rise in the saving ratio from the
current 4% to a 'more normal' 6% or 7%, an increase consistent with a recent
survey showing that the balance of households expecting to save more in the year
ahead had risen to 15% from the nil or 'minus' figure in 1999-2003. A fortunate
equilibrium seems to exist between slightly rising house prices, moderately
increased saving and marginal reductions in consumption growth. The EIU,
factoring in weakening consumption, estimate growth of 1.5% in 2006. If house
prices fall and savings rise further, growth will be significantly lower.
Fortunately current indications are that house prices will have a 'soft
landing'.
There are two separate but inter-related possible constraints to economic growth
- tax and productivity. Tax brackets have not been adjusted in line with incomes
and the number of taxpayers in higher tax brackets has increased, resulting in a
10% rise in income taxes in the year to April 2005. This tax increase, 'fiscal
drag', together with higher interest rates has reduced growth in real disposable
income to a six-year low.
Unfortunately taxes seem likely to rise by stealth or otherwise, further
restraining consumption. The March Budget estimate of Public Sector Net
Borrowing (PSNB) of £32bn was predicated on growth of 3% to 3.5% in 2005/6 and
according to the Treasury each percentage point reduction in GDP growth
increases borrowing by about £7bn. The Pre Budget Report (PBR) estimates growth
at only 1.75% and net debt is now forecast to be 36.5% of GDP compared to 35.5%
at the Budget. The PBR forecasts growth to rise to 2.25% in 2006 to 3% in both
2007 and 2008 but net debt is set to move closer to the 40% of GDP level set by
the Chancellor's second golden rule. The rise in growth to 3%, above the trend
2.25%, is predicated on estimates of productivity showing an output gap, between
actual and potential output, of 1.5% next year. Unfortunately most other
forecasters are less optimistic about productivity and the NIESR estimates that
the output gap will be 0.2% and the OECD 0.7%. A lower output gap reduces the
possible level of non-inflationary growth. For example, Deloitte state that, if
their estimates of GDP growth over the next few years are correct, PSNB will be
about £10bn higher in each year and conclude 'taxes will have to rise sooner or
later'. The Institute for Fiscal Studies, summed up the current position
succinctly: -
'(The Chancellor's) overspent - an almost £20bn surplus is now a deficit of
£30bn. He's got his economic forecasts wrong, so there is less money coming in
to cover his spending ....... and he's (only) managed to keep his own
borrowing rules by ingenious accounting ......'
'Imprudent' economic and political policies will not only result in higher taxes
but will also prejudice growth as a result of a misallocation of resources. A
huge stimulus, resembling an old fashioned Keynesian boom, is being given to an
already growing economy, but directed to the public services. In recent years
the UK public sector rose 4.5 percentage points of GDP faster than in any other
developed country and UK Public Sector employment has risen 13.2%, over twice as
fast as the private sector. Unsurprisingly this investment has yielded very low
returns. In Healthcare public expenditure in real terms rose 60% between 1997
and 2004 but output rose only 30%; and in Education real expenditure rose 42%
but output rose only 10%. Thus Public Sector productivity has continued to fall.
The Sunday Times concludes: 'the outcome (of the investment boost) was
entirely predictable: we discovered long ago that large public sector
organisations are incapable of efficient delivery ....'
The favourable economic circumstance inherited by Labour together with its
enlightened delegation of monetary policy has permitted a long period of
uninterrupted growth in the UK economy. Growth is now at a lower level and will
continue below historic trends. Productivity growth which had reached a peak of
3% in the five years to 1996 is now only 1.4% and forecast to fall. A
significant factor in this deterioration has been the slow growth of output from
the public services.
Property Prospects
In the year to September 2005 the CB Richard Ellis All Property Yield Index fell
0.8 percentage points to 5.6% as all components of the index fell. Last year I
reported a similar fall, 0.8 percentage points in the All Property Yield Index,
from 7.2% to 6.4%. The ten year Gilt yield was 4.3% giving a 1.3 percentage
points yield gap, smaller than the 1.6 percentage points gap last year and the
2.6 percentage points gap the previous year. The All Property Rental Index rose
2.3%, although it slowed to 0.4% for Q3, due primarily to a fall in Central
London Shops and South East Industrials. Over the year Scottish Shops and Retail
Warehouses were the second worst or worst performers in their sectors but
Scottish Offices' and Industrials' rental growth was average.
Over the last five years the All Property Rental Index has grown by 1.1% per
annum, significantly below the rate of inflation. Since the 1990 market peak the
Index has risen 19.1% but has fallen 20.2% in real terms. Offices have fallen
furthest, 30.7%, but less than last year's 37.8%, with most central London
office locations only half their previous peak, inflation adjusted, except for
Docklands where rents have grown 2.7% in real terms. Real retail warehouse
rentals have risen by a very remarkable 62.4%.
The fall in yield of 0.8 percentage points to 5.6% together with a rise in the
rents of 2.3% has again produced excellent total returns. In the twelve months
to October 2005 the IPD Index showed total property returns of 17.5% with all
the three constituent sectors, Retail, Office and Industrial, providing almost
similar returns. Unsurprisingly, given the drop in yields, capital growth has
accounted for about 10% of the total return. These returns compare with 19.8%
for equities but only 7.3% for gilts. Over the last three, five and ten years
total returns from property have exceeded those in all other asset classes. The
return for equities over three years, 15.0%, is only a fraction below property,
15.1%, but over five years the total equity return is only 0.2%. Over all the
review periods retail returns have been the highest and offices the lowest.
The supply of investment property is relatively inelastic and even a small
increase in demand results in large price rises. In 2004 net institutional
investment totalled £2.3bn, the highest level since the 1970s. Bank lending for
property investment in the first half of 2005 was £30bn compared with £20bn in
the first half of 2004, the average LTV for retail property has risen to 82% and
the margin charged has fallen! National statistics appear contradictory, as they
show lower investment levels in 2005, but these figures exclude the
recently-created offshore and other indirect investment vehicles. Knight Frank
point to a 'weight of money in the market', an increased demand raising
investment prices. Unsurprisingly, listed property companies' shares have also
performed well showing a 27.4% rise over the last 12 months compared with 13.8%
for the All Share Index.
The immediate prospects for investment property appear good, although recent
performances are unlikely to be emulated. Recent good performance has created a
'momentum' effect, buying on the back of recent good performance or buying with
'the herd'. This investment policy has recently been the subject of research
demonstrating that price series show positive serial correlation in the
short-run i.e. if prices rose last period, they will probably rise in the next
period. However, in the long run they show negative serial correlation ie a
period of time when they have risen by more than average is generally followed
by a period of similar length in which prices rise by less than the average. The
question is: for property how long is the long run?
Commentators including Cluttons, Colliers CRE and the Estates Gazette predict
2006 and 2007 returns to be generally 7%-9%, based on moderate rental growth but
no further fall in yield. Colliers (CRE) expects the highest All Property
return, 9.5%, and all surveys expect offices to offer the highest returns - with
high street shops usually providing the lowest return, 6.4% forecast by Estates
Gazette. Only once in the last 29 years have All Property yields remained
constant from year to year - at 8% from 1982 to 1984. This precedent was quoted
in last year's report and yields changed: they fell, but will they fall further?
The momentum effect, the weight of money and the normal uncertainties about
asset allocation are likely to support current yields. The key elements for a
market turning point are reported to be first, an element of forced selling or
irrational buying, second, a story or narrative that convinces investors they
are right and, third, signs of unusually high or low valuations. Present
valuations may seem too high but property may prove the new 'bubble'.
Ryden report Scottish Investment Property performed well in the year to
September 2005 with retail returns of 19.8%, offices 14.4% and industrials
15.5%, appreciably better than last year. Retail returns were 1.5 percentage
points above the UK average but office returns were about 1 percentage point
lower.
The Scottish office market has provided improved returns over the last twelve
months returning 14.4% compared with 10.7% last year, primarily due to a
reduction in prime yields to under 6%. Headline rents in Edinburgh are similar
to last year - £27per sq ft in the City Centre and £19 in west Edinburgh. The
unchanged rental level reflects a relatively steady ratio between supply and
take-up. The moving average supply over four six-monthly periods has been
2,400,000ft2 since March 2004, while the same moving average uptake figures have
been about 450,000ft2. A discernible trend has been the reduction in supply of
peripheral space from 1,470,548ft2 to 879,310ft2 over the last two years. Ryden
report that take-up has been predominantly from indigenous organisations with
little significant inward relocation. With the new schemes being built,
traditional occupiers such as the Royal Bank of Scotland now occupying their new
campus site at Gogar, certain insurance companies releasing space and with the
transfer of professional firms from traditional space to modern open plan space
virtually complete, it is unlikely that rents will increase significantly unless
new occupiers are attracted to the City. Offices are being built or planned in
areas peripheral to Edinburgh, such as Bathgate, Livingston, and Fife, and north
Midlothian and East Lothian, these latter areas abutting the city boundary,
which will compete for occupiers with City locations.
Ryden report that Glasgow is enjoying a period of strong demand having attracted
several large occupiers, presumably because of lower costs and a wider and more
available labour pool than Edinburgh. Take-up in the year to 30 September 2005
was 1,020,000 ft2, almost double that of the previous twelve months and the
highest since 1999. Supply however is almost unaltered at about 2,600,000 ft2.
The recent take-up has included landmark buildings such as 200 Broomielaw,
Central Exchange, Optima and 6 Atlantic Quay, some of which have been empty for
over two years. Rents remain unchanged at £21.50 - £23 but incentives have been
curtailed. The recent success of the Broomielaw will be a significant benefit to
our development site for 192 flats at Tradeston, 600 yards away on the south
bank of the Clyde.
The smallest of the three main Scottish Office Markets, Aberdeen, has outshone
its larger rivals. Rents have risen to over £20/ft2 from £19/ft2 last year and
take up of 461,507ft2 in the year to September 2005 was similar to the period to
September 2004, then the highest for over 20 years, but supply remains close to
the five year average of about 1,000,000ft2. Ryden report the ever-escalating
price of North Sea crude oil has 'fuelled frantic activity' within the office
markets. The number of development wells and exploration and appraisal wells has
risen rapidly and production is scheduled to start on sixteen new fields in
2005, up from eleven in 2004. Increased activity is likely to support the
Aberdeen market for a few years, but UK oil production is now projected to halve
by 2020. The current conditions may represent a bull rally in a bear market.
The residential property market continues to offer long-term attractions. Over
the year to October 2005 house price inflation in England and Wales slowed to
2.5%, its lowest level since June 1996. In Scotland, house prices have risen
17.7% but in the Edinburgh area, although some types or locations show small
declines, prices are generally 5% - 8% higher.
The changes in the value of houses over the last year are primarily due to
changes in demand. Short-term considerations such as higher unemployment, rising
or high interest rates, lower rents and lower future price expectations reduce
short term demand, leading to slower rises in prices or to falling prices. The
apartment /'flat' market represents an exception. Due to the release of large
areas of brownfield city land for residential development the supply of new
flats has increased very significantly. This sudden increase in supply,
accentuated by the less attractive location of many such current developments,
has led to some significant price falls.
The critical difference between most commercial property investments and most
residential property lies in the parameters of supply. Supply constraints in
commercial property, except for some retail property, have been considerably
reduced over the last few years. Planning consents for offices have been eased
and in some cases traditional or locational prejudices and preferences have been
modified increasing effective supply. The easing of the conditions for consent
and the wider acceptability of the non- traditional areas has produced a much
flatter supply curve in which supply responds more quickly to demand, and where
demand can be satisfied in less specialised areas, usually at reduced rents,
thus limiting the rental value of previously established areas. The most notable
example of supply loosening is the development of out-of-town offices locations
such as Docklands in London or Edinburgh Park in Edinburgh. Similarly
out-of-town shopping of all kinds has restricted rental growth in the high
street and reduced city centre retail development.
The supply constraints in most sectors of the residential market are different.
Supply is usually limited by planning restrictions, by the slow administration
of the planning system, by the need for wider consultation, by the increasingly
vocal and better organised pressure groups supporting environmental and green
policies, by Nimbys and by other specific ad hoc opposition groups. In spite of
some current initiatives the situation is unlikely to change in the foreseeable
future and supply restrictions will continue to produce premium prices for most
consented land.
The uplift from obtaining consent can be realised through various separate or
overlapping routes. Change of use can be obtained by promoting existing land in
the local plan process, by buying land likely to be rezoned, by buying land that
lies within an area with a variety of uses, or by buying land where planning
criteria are about to change. The increase in value of the consent can be
greatly enhanced if it is obtained in an area for which demand is growing as,
for example, where new communications or transport systems are likely to be
established, or where upgrading or improvements are likely to take place. The
Group has been researching, bidding for and investing in all such avenues. In
some instances up to 80% of the price paid is covered by present value, with 20%
invested in an opportunity with an estimated 50% probability of being worth ten
times that marginal investment. Even with a low success rate the returns on
capital are very attractive. A wide portfolio of such investments held over a
reasonable time and managed skillfully should yield very considerable profits.
Future Progress
The Group expects the current year's results to be satisfactory, but there is a
wide range of possible outcomes. Rental income is likely to rise marginally and
vacancy costs and professional fees related to St Margaret's House are likely to
be lower than previously.
The Group has a much larger development portfolio than previously, the full
value of which will be delivered over the coming years. We continue to
concentrate on the acquisition and creation of more development opportunities
but we will become increasingly involved in the realisation of such
opportunities when planning consents are obtained, provided market conditions
are favourable. The full outcome for the current financial year will be
dependent upon any net change in valuation.
The mid-market share price as at 19 December 2005 was 173p, a discount of 15.9%
to the NAV of 205.8p. The Board recommends an increase in the final dividend of
1.5p making a total dividend of 2.5p for the year, and we intend to increase the
dividend at a rate consistent with profitability and with consideration for
other opportunities.
Tax of only £34,702 is provided in the current year. The Group has tax losses
and allowances accrued carried forward of £993,042 which we expect will be
utilised over the next few years.
Conclusion
In spite of high oil prices and of other risks the UK economy should continue to
grow next year but at below the trend rate of 2.5%. Investment property seems
fully priced as rental growth is likely to be limited and yields are unlikely to
fall further. Short-term market conditions for residential property are not
attractive in some limited areas but medium to long-term prospects for most
types of residential property are excellent. There are highly profitable niche
opportunities to create substantial value by effecting planning change.
I D Lowe
Chairman
21 December 2005
Consolidated profit and loss account
for the year ended 30 June 2005
2005 2004
£ £
Income - continuing operations
Rents and service charges 707,009 614,735
Trading property sales - 1,541,833
Trading sales 278,406 375,866
_______ _______
985,415 2,532,434
Operating costs
Cost of trading property sales - (1,132,890)
Cost of other sales (262,124) (363,642)
Administrative expenses (850,743) (1,129,258)
_______ _______
(1,112,867) (2,625,790)
_______ _______
Operating loss (127,452) (93,356)
Profit on disposal of investment property 501,420 584,291
Profit on sale of investments 85,522 -
Interest receivable 279,854 229,731
Interest payable (292,492) (286,004)
_______ _______
Profit on ordinary activities before taxation 446,852 434,662
Taxation (34,702) -
_______ _______
Profit for the financial year 412,150 434,662
Dividends (297,073) (263,434)
_______ _______
Retained profit for the financial year 115,077 171,228
_______ _______
Earnings per ordinary share 3.51p 3.78p
_____ _____
Diluted earnings per ordinary share 3.51p 3.63p
_____ _____
Profit for the financial year is retained as follows:
In holding company 322,797 367,287
In subsidiaries (207,720) (196,059)
_______ _______
115,077 171,228
Consolidated balance sheet
at 30 June 2005
2005 2004
£ £ £ £
Fixed assets
Tangible assets:
Investment properties 23,142,302 19,301,974
Other assets 4,056 4,190
__________ __________
23,146,358 19,306,164
Investments 20 90,898
__________ __________
23,146,378 19,397,062
Current assets
Debtors 1,018,560 122,031
Cash at bank and in hand 4,761,664 6,312,760
_________ _________
5,780,224 6,434,791
Creditors: amounts falling
due within one year (3,761,616) (3,726,095)
_________ _________
Net current assets 2,018,608 2,708,696
__________ __________
25,164,986 22,105,758
__________ __________
Creditors: amounts falling
due after more than one year (710,319) (2,252,500)
__________ __________
Net assets 24,454,667 19,853,258
__________ __________
Capital and reserves
Called up share capital 2,376,584 2,282,584
Share premium account 2,745,003 2,530,753
Capital redemption reserve 175,315 175,315
Revaluation reserve 4,646,908 376,221
Profit and loss account 14,510,857 14,488,385
_________ _________
Shareholders' funds - equity 24,454,667 19,853,258
_________ _________
These financial statements were approved by the Board of Directors on 21
December 2005 and were signed on its behalf by:
I D Lowe
Director
Consolidated cash flow statement
for the year ended 30 June 2005
2005 2004
note £ £
Net cash inflow from operating activities (a) (1,959,437) 71,312
Returns on investments and servicing of finance (b)
(35,889) (18,323)
Corporation tax - -
Capital expenditure and financial investment (b) 1,015,574 368,875
Equity dividends paid (267,240) (241,636)
__________ __________
Cash inflow/(outflow) before management of
liquid resources and financing (1,246,992) 180,228
Financing (b) (294,104) 909,321
__________ __________
Increase /(decrease) in cash in period (1,541,096) 1,089,549
_________ _________
Reconciliation of net cash flow to movement in
net funds (c)
£ £
Increase /(decrease) in cash in period (1,541,096) 1,089,549
Cash (outflow)/inflow from decrease in debt 602,354 (1,026,187)
_________ _________
Movement in net funds in the period (938,742) 63,362
Net funds at the start of the period 1,816,590 1,753,228
_________ _________
Net funds at the end of the period 877,848 1,816,590
_________ _________
Notes to the cash flow statement
(a) Reconciliation of operating profit to net cash inflow from
operating activities
2005 2004
£ £
Operating (loss) (127,452) (93,356)
Profit on disposal of trading property - (408,943)
Depreciation charges 134 4,385
(Increase)/Decrease in debtors (896,527) 184,617
(Decrease)/Increase in creditors (935,592) 384,609
_________ _________
Net cash inflow from operating activities (1,959,437) 71,312
_________ _________
Notes to the cash flow statement (ctd)
(b) Analysis of cash flows
2005 2005 2004 2004
£ £ £ £
Returns on investment and
servicing of finance
Interest received 279,854 229,731
Interest paid (315,743) (248,054)
_________ _________
(35,889) (18,323)
_______ _______
Capital expenditure and
financial investment
Purchase of tangible fixed
assets (3,446,816) (3,081,201)
(3,446,816)
Sale of investment property 2,236,414 3,540,954
Contribution to dilapidations
received 2,049,576
Purchase of investments - (90,878)
Sale of Investments 176,400 -
_________
1,015,574 368,875
__________ ________
Financing
Purchase of ordinary share (116,866)
capital -
Issue of ordinary share
capital 308,250 -
Debt due within a year
Increase/ (Decrease) in
short-term borrowings 939,827 1,076,187
Debt due beyond a year
(Decrease) in long-term
borrowings (1,542,181) (50,000)
_________ _________
(294,104) 909,321
__________ ________
(c) Analysis of net funds
At beginning of Cash flow Other non-cash At end of year
year changes
£ £ £ £
Cash at bank and
in hand 6,312,760 (1,551,096) - 4,761,664
Overdrafts (89,729) 10,000 - (79,729)
__________
(1,541,096)
Debt due after
one year (2,252,500) 1,542,181 (710,319)
Debt due within
one year (2,153,941) (939,827) - (3,093,768)
__________ __________
602,354 -
__________ __________ __________ __________
Total 1,816,590 (938,742) - 877,848
__________ __________ __________ __________
Notes to the Audtited Results for the year ended 30 June 2005
1. The above financial information represents an extract taken from the
audited accounts for the year to 30 June 2005 and does not constitute the
statutory accounts within the meaning of section 240 of the Companies Act 1985
(as amended). The statutory accounts for the year ended 30 June 2005 were
reported on by the auditors and received an unqualified report and did not
contain a statement under section 237 (2) or (3) of the Companies Act 1985 (as
amended). The statutory accounts will be delivered to the Registrar of
Companies.
2. All activities of the group are ongoing. The board recommends the
payment of a 1.5p per share final dividend (2004: 1.25p), which will be payable,
subject to shareholder approval, on 24 January 2006 to all shareholders on the
register on 6 January 2006.
3. Earnings per ordinary share
The calculation of earnings per ordinary share is based on the
reported profit of £410,150 (2004: £434,662) and on the weighted average number
of ordinary shares in issue in the year, as detailed below. The weighted
average number of shares has been adjusted for the deemed exercise of share
options outstanding.
2005 2004
Weighted average of ordinary shares in issue during year - 11,754,154 11,496,244
undiluted
Weighted average of ordinary shares in issue during year - 11,754,154 11,966,244
fully diluted
4. The Annual Report and Accounts will be posted to shareholders on or
around 22 December 2005 and further copies will be available, free of charge,
for a period of one month following posting to shareholders from the Company's
head office, 61 North Castle Street, Edinburgh, EH2 3LJ.
5. The Annual General Meeting of the Company will be held at 12.30 pm on
20 January 2006 at 61 North Castle Street, Edinburgh, EH2 3LJ.
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