Final Results
Caledonian Trust PLC
20 December 2007
Caledonian Trust PLC
20 December 2007
For immediate release
20 December 2007
Caledonian Trust PLC
Results for the year ended 30 June 2007
Caledonian Trust PLC, the Edinburgh based property investment holding and
development company, announces its audited results for the year to 30 June 2007.
Chairman's Statement
Year ended 30 June 2007
Introduction
The Group made a loss of £244,153 in the year to 30 June 2007 compared with a
profit of £129,509 last year. The loss for the year comprised a loss of
£398,584 for the six months to 31 December 2006 and a profit of £154,431 for the
second half of the financial year. The loss per share was 2.05p and the NAV per
share was 223.1p compared with 222.5p last year.
Income from rent and service charges was £684,085 compared with £870,745 last
year, the reduction being principally due to the loss of the £125,000 annual
rent at Baylis Road, London when the lease determined in May 2006. Gains from
the sale of investment properties were £15,569 compared with £189,729 but gains
from trading property sales rose to £403,069 compared with £105,500. The income
earned from our successful participation in the development of 39 houses at
Herne Bay, Kent was £197,826. Other operating income of £130,615 included a
£108,665 recovery of costs from Enterprise Oil PLC in relation to the
refurbishment of St Magnus House, Aberdeen in 2000 together with miscellaneous
income from Ardpatrick Estate. Administration expenses of £1,148,378 were
£155,386 higher than last year, principally due to increased professional fees.
Net interest payable, £508,093, increased by £464,587 compared with last year
due to significantly higher average bank borrowings and slightly higher interest
rates. The weighted average base rate for the year was 4.90 %, 0.38% points
higher than last year.
Review of Activities
The Group's property activities continue to give effect to our primary strategy
of purchasing assets with medium-term development prospects and enhancing those
assets, principally, by gaining more valuable planning consents. Investment
assets will probably be sold when they mature.
The Group's Edinburgh New Town Investment portfolio is undergoing significant
change. In Young Street, adjacent to Charlotte Square, the lease on our two
properties determined on 28 August 2006. The smaller of the two, 17 Young
Street, together with two garages, has been let to the former sub-tenants for
ten years, with breaks, at a slightly enhanced rent. The larger property, 19
Young Street, also with two garages, had been unoccupied for some years. We
agreed a satisfactory dilapidations settlement and then separated off the
garages which we let for £3,000pa each. The vacant office was sold at a price
equivalent to nearly £300/ft2.
Residential values of New Town properties are generally higher than office
values. 61 North Castle Street is a particularly elegant Georgian property and
we propose to reconvert the vacant ground and first floors to residential use
and to incorporate the Edwardian extension at the rear of 61 North Castle Street
into the contiguous office space in Hill Street for which planning and listed
building consents have been granted.
In South Charlotte Street the first five-year rent review of the 4,500ft2
restaurant let to La Tasca for 25 years was due in December 2006 and was
determined by arbitration at £94,800, a 46% increase.
Our largest property in Edinburgh, St Margaret's House, was let to the Scottish
Ministers until November 2002 and was the subject of a long dilapidations
litigation in the Commercial Court until an acceptable offer was made in January
2005. Discussions with the City of Edinburgh Council planning officials have
indicated that any redevelopment proposals for St. Margaret's would require to
be considered in the context of a master plan for the island site which St.
Margaret's shares with, inter alia, Meadowbank House, the 125,000ft2 1970s
office block owned and occupied by the Registers of Scotland, between the A1 and
the main east-coast railway line and 'Smokey Brae'. In consequence we have had
discussions for several years with Registers to enhance our mutual interests.
Unfortunately Registers, like many Scottish Government Agencies and Departments,
are subject to a policy of dispersal away from Edinburgh and they have been
engaged in a relocation review process for five years. Stage 1 of the review was
delivered to the Ministers in December 2004 and, in line with the review's
recommendations, Ministers ruled out the relocation of the whole Meadowbank
operation and requested the Registers to undertake a Stage 2 appraisal comparing
a phased partial move from Edinburgh with the 'status quo'- ie no move.
Registers submitted their Appraisal to the Ministers on 8 July 2005 whose
decision was delayed several times until on 21 September 2006, in response to a
question in the Chamber, the Minister, George Lyon, replied: 'The Executive will
announce the outcome of the Stage 2 of the location review of the Registers of
Scotland shortly'. On 24 November 2006, bizarrely, the Executive 'deferred' a
decision.
While the Group's preferred option was to undertake a development in conjunction
with, or for the benefit of, Registers, we are now promoting a phased
development in which the St Margaret's site provides the first phase. In June
2007 our architects produced an Urban Analysis report and in July 2007 they
compiled Development Proposals which have formed the basis of discussions with
the City of Edinburgh Council. We have agreed with the Council to produce an
overall Development Brief which is expected to be published in the spring and,
if acceptable, approved this year.
In our London property at Baylis Road in the Borough of Lambeth, the tenants,
occupying the premises on short-term leases since the early 1990's, vacated them
in May 2006. Colliers CRE's London office is advising us on several options for
the property. A moderate upgrade before re-letting is the least attractive
option. A mixed redevelopment on our existing site of about 30,000ft2 is very
attractive. Residential values in Lambeth have risen by 18.9% in the year to
October 2007 and are reported to be now nearly £700/ft2, but this rise is offset
by a fall in office values of about 10% and a rise of 0.5% point in yield. A
significantly larger development, incorporating adjoining property for which we
have offered, is even more attractive.
In Belford Road, Edinburgh, a quiet cul-de-sac, less than 500m from Charlotte
Square and the West End of Princes Street, we have a long-standing office
consent for 22,500ft2 and 14 cars which has been implemented. We also have a
separate residential consent for 20,000ft2 and 20 cars. We are seeking to
improve the existing residential consent and to re-design the structure to
simplify construction and to increase the usable space. The prospective
improvement in the central Edinburgh office market is encouraging.
East of Edinburgh, near Dunbar which has a station on the east coast mainline,
we have two sites with planning permission, one for 45 large detached houses and
one for a further 28 houses, including four 'affordable'. The dual carriageway
from Edinburgh has recently been extended and these sites are now only four
miles further east, just off the A1. An ASDA superstore with a petrol station
recently opened near the east end of the dual carriageway. At present we are
redesigning the layouts to increase the number of houses and undertaking
engineering works to drain a portion of our site that could accommodate up to 22
additional houses.
At Tradeston, Glasgow, on the south side of the Clyde opposite the Broomielaw we
hold a planning consent for a development of 191 flats, predominantly two and
three bedroom, together with associated parking and open space and 10,000ft2 of
commercial space. Tradeston was for a long time a considerably 'run-down' area,
but has recently benefited from some major redevelopments. The pace of
redevelopment has recently increased considerably as the proposed extension to
the M74, for which enabling works are being undertaken, will pass through the
district before joining the existing M8 at the Kingston Bridge. To facilitate
the construction of the motorway a swathe of primarily derelict and
long-blighted industrial buildings has been demolished. The rent review due in
May 2006, which is subject to a minimum RPI uplift, is still being negotiated.
Planning consents have been obtained on two of our development sites in or near
Edinburgh, where construction should start next year. In August 2006, five years
after our original application, consent has been granted for eight detached
houses at Wallyford which borders Musselburgh and is within 400 yards of the
east- coast mainline station and has easy access to the A1 near its junction
with the City Bypass. On a contiguous site where two national house builders are
developing over 250 houses nearly all the houses are complete and sold. In East
Edinburgh at Brunstane Farm, adjacent to the rail station, planning and listed
building consents were granted on 13 December 2006 to convert the listed
steading to provide ten houses of varying sizes totalling 14,000ft2. The
necessary demolition work has been carried out and specialist contractors are
being appointed. Adjacent to the steading we own five stone-built, two-storey
cottages suitable for refurbishment and possible extension, two ruined farm
buildings, one built of stone and likely to gain consent for residential
conversion and two-and-a-half acres of scrub land in the Green Belt fringe
adjacent to established residential property. The inclusion of this isolated
uncultivated area within the Green Belt seems anomalous and we have entered an
objection in the current local plan review.
The Group now owns fifteen separate rural development opportunities, nine in
Perthshire, three in Fife, two in Argyll and Bute and one in East Dunbartonshire
of which a very varied six have been acquired since 30 June 2006. In Fife near
Anstruther, eight miles from St Andrews, we acquired an extensive steading with
stone buildings set in about four acres with a southern aspect to the sea.
Redevelopment of the stone buildings should provide at least fifteen houses with
more possible within the 'footprint'. On the Isle of Mull, near the village of
Lochdon, we bought a two-acre greenfield site with long-term prospects behind
some existing cottages overlooking the sea.
In Strathtay, Perthshire, we bought a 4.6 acre site in March 2006 partly within
the settlement boundary of the village with the balance adjoining the village.
In May 2007 an elegant house with a very large garden marching with our site was
offered for sale which we purchased and immediately sold on the house, retaining
1.7 acres of its garden within the settlement boundary and adjacent to our
existing 4.6 acre site.
Two large properties were acquired during the year. Near Kinross, adjacent to
the M90, we bought Chance Inn Farm, a 257 arable acre farm with a very extensive
steading of c27,500ft(2) standing in three acres and a modern farmhouse. Near
Kirkintilloch, only eight miles from the Kingston Bridge in central Glasgow, we
have bought the remnants of the Gartshore Estate, extending to over 203 acres,
including about 77 acres of formally-designed woodland garden with an unusually
large walled garden near the former mansionhouse site. There are several ruined
properties previously forming part of the walled garden, two occupied cottages
and a handsome Victorian stable block of about 15,000ft2 already partially
converted to residential use. After the year end we bought a farmhouse at
Carnbo, four miles east of the M90 at Kinross with an one-acre garden within the
settlement and a three-acre field just outside it. Many new houses are currently
being built in Carnbo.
In 2005 there was a slight relaxation in central planning policy for development
in rural areas which was outlined in Scottish Planning Policy 15: Planning for
Rural Development. In particular the first sentence of paragraph 23 states:
'opportunities to replace rundown housing and steadings with designs using new
materials should also be embraced'. The majority of our rural development
opportunities are steadings for conversion in accessible locations set in
attractive countryside. Most of these steading developments lie within Perth and
Kinross where the Council has issued 'planning guidance' taking into account
SPP15 to supplement the local plan. Three of the steading developments are in
Fife where no specific acknowledgement of SPP15 has yet taken place and the
preparation of Local Plans is delayed. Consequently detailed development
proposals for such steadings have not yet been prepared.
In Perth and Kinross plans are far advanced for four of the five steading
developments there. The fifth one, West Camghouran by Loch Rannoch, could
accommodate only up to three or four units, and detailed plans will be prepared
shortly. At Ardonachie steading, Bankfoot, near Perth, after extensive and
detailed discussions with the planning authority, we have submitted an
application for twelve houses over about 20,000ft2. At Tomperran, a
smallholding near Comrie, Perthshire, we have just applied for planning
permission to develop the steading and an adjoining area within the settlement
to provide twelve houses on 19,047ft(2). The smallholding includes two acres
zoned for industrial land and about 34 acres adjacent to the settlement which
will be promoted for a housing allocation in the now overdue Strathearn Local
Plan. At Chance Inn an application has been made for 23 houses including four
affordable units in replacement of the extensive buildings previously used for
pig fattening: a considerable possible improvement to the amenity of the area!
The farm lies within the Loch Leven catchment area and consent will be
conditional on meeting the strict control of phosphate emissions. At Myreside
farm in the Carse of Gowrie between Perth and Dundee we have applied for
planning consent for eight houses of 12,410ft2 on the site of the existing
steading adjacent to the existing attractive listed farmhouse. In addition to
the steading developments plans are far advanced for our development site at
Balnaguard, near Strathtay, where a planning application has been submitted for
nine houses. This application was modified from an original detailed proposal
for ten houses whose layout breached the recently established 1:200 year flood
rule for the Balnaguard burn running along one side of the site. Further
modifications to the layout will almost certainly be required.
The development of our estates at Ardpatrick and Gartshore presents both medium
and short-term opportunities. The Ardpatrick estate occupies a peninsula in West
Loch Tarbert and comprised a mansionhouse, based on a Georgian house built in
1769, ten estate houses or former houses, a farmhouse and a farm steading and
other buildings for potential residential development, and a number of possible
new housing sites in locations considered suitable in the Finalised Draft Local
Plan. The property extends over 1,000 acres, has over 10km of coastline,
commands striking views and includes a grassland farm, an oak forest, a private
beach, a named island and coastal salmon fishing and other sporting rights.
Three of the outlying cottages have been repaired, redecorated and brought to a
saleable standard. The smallest one was sold in February 2007, the largest one
in June 2007 and the remaining cottage, set back from the others, has just been
sold. A fourth property in this group, Keeper's Cottage, at present
uninhabitable, has gained planning approval for conversion and for a large
extension, subject to the provision of an additional and separate access. A
fifth cottage, at the northern extremity of the Estate, the former Ardpatrick
post office, has been undergoing extensive repairs but should be marketable in
the late spring. The South Lodge cottage on the shore drive gained planning
consent in June 2007 for an equal-sized extension and a large detached garage.
Ardpatrick House enjoys a beautiful setting looking SE over West Loch Tarbert to
the Kintyre peninsula and is built to a splendid classic Georgian design,
originally comprising a central three-storey building with two flanking
pavilions. The walled garden to the north west and the multi-faceted stone
elevations to the NW provide an excellent setting for the stone-built estate
houses around the walls of the garden. Fortunately, because of its
construction in three separate portions and the existence of three staircases, a
natural division is possible without disrupting the principal rooms. A further
partition can be easily achieved by introducing another staircase in the
Victorian servants' quarters towards the rear of the house, currently a maze of
storage and preparation rooms. Ardpatrick will then become four separate
houses ranging from 1760ft(2) to 3478ft(2), each with its own front door, one of
which will be a reinstated 1769 entrance. Planning and listed building
consents for the conversion have been granted and the necessary remedial works
have started.
Around Ardpatrick House we have obtained consents that enhance the existing
property and mirror existing buildings, creating a coherent whole. Permission
has been obtained to convert and extend the gardener's building into a three
bedroom house, to extend the existing coach house into two 3/4 bedroom flats and
to create two large new detached houses. The creation of this 'garden village'
is subject to the provision of appropriate roads, water and services, all of
which are well below standard. Considerable design work has been done but
further work remains. Needless to say progress is hindered by distance and
remoteness.
Gartshore Estate presents an unusual opportunity. The estate lies within a
designed landscape, containing a very large walled garden, a magnificent
stone-built Georgian pigeonnier and the site of the huge former Victorian
mansionhouse in a country setting, but with a mainline station nearby and only
seven miles from the centre of Glasgow. Detailed planning work has been
commissioned to reconcile restoration and maintenance of the landscape with an
appropriate use including possibly a 'care village'. Separately, designs for
the conversion of the 15,000 ft(2) stable block and restoration of the stone
buildings together with appropriate conversions are being undertaken.
In quite a different setting and in a very different part of Britain, Herne Bay,
Kent, our joint venture development of 39 modern 2/4 bedroom houses concluded
very successfully.
Economic Prospects
A large star burns, explodes into a supernova and collapses into a dense mass of
increasing gravitational attraction which becomes so great that not even light
travelling at 186,000 miles per second can escape: a black hole. The financial
market presently resembles a black hole into which increasing quantities and
categories of credit are disappearing.
The stellar phase, preceding the credit black hole, has been fuelled by several
sources and has burned for a long time. Paradoxically, a major fuel source has
been the success of the central banks in achieving their primary objective of
lower inflation and stable growth. However this new stability created a strong
incentive to seek higher returns, higher returns whose higher risk was not fully
assessed or was judged to be sterilised by the central banks' control of the
inflationary risk
A second potent fuel of the stellar growth of credit has been its artificially
low cost. The 1998 credit crisis, caused primarily by the collapse of Long-Term
Capital Management, created a precedent for future monetary policy. Although the
extent of that crisis turned out to be insignificant by the present standards,
some $3bn, mostly borne by the hedge fund investors, the monetary authorities
reacted strongly. The Fed, under Alan Greenspan, cut interest rates by 0.25%
points in three consecutive months, and the Bank of England cut base rates seven
times in the ten subsequent months by a total of 2.5%. Cheap money was also
used, and to great effect, in combating the US recession caused by the collapse
of the dot-com bubble in 2001 and reinforced by the terrorist attacks of 11
September 2001. Interest rates, which were 6.5% at the beginning of 2001, fell
to 1.75% by the year end and fell further to 1% in January 2003, this low rate
persisting until June 2004. Negative real interest rates from 2002 to 2005
assisted the US economy to recover to 2.5% growth in 2003. Even after the
recovery from the dot-com bubble cheap money continued to be made available. The
economies of Japan, China and the Middle East oil producers produced large
savings - in the case of oil, surplus 'petro-dollars' sucked by high prices out
of US consumers' hands. The fear that the resulting lower domestic demand might
in extreme circumstances lead to deflation caused the monetary authorities to
continue a policy of cheap money. The then fear of deflation and the investment
preferences of the foreign savers for long bonds over equities gave rise to what
Alan Greenspan termed a 'conundrum', the exceptional low returns on conventional
investments. In the UK this conundrum was manifested by nominal long term Gilt
returns falling below 4% per annum. Another change in investment thinking caused
by the Fed's supportive policy was the emergence of the markets' belief in the '
Greenspan put', the notion that the central bank would rescue tumbling markets:
the penalty for being wrong was reduced thus making higher risk returns more
attractive. Lower returns, coupled with a perception of lower risk, increased
the demand for higher risk assets. Thus spreads of emerging country bonds over
US Treasury Bonds fell, UK spreads for variable mortgages fell and the quality
of the covenants acceptable to lenders for any given margin deteriorated
significantly. Increased credit reduced the premium for risk.
Credit availability was also increased by the financial innovation undertaken by
commercial banks and finance houses. Traditionally banks 'intermediate' between
short-term deposits and longer-term lending. Using 'securitisation' banks
originate the loans and then distribute them, usually retaining fees but not
obligations or only residual obligations, allowing banks' capital to be recycled
and their balance sheets unencumbered or conditionally so. The assets
'securitised' include residential mortgages, credit cards, trade and loan
receivables, car loans and other financial bonds. The key to securitisation was
to provide 'structures' whose assets were securitised loans paying a significant
margin above LIBOR but financed by LIBOR-based bond funds at close to LIBOR.
Such structures can be further refined by stratifying the borrowing into
separate layers of senior debt, junior debt, mezzanine and equity or creating
Specialised Investment Vehicles 'SIVs'. Thus a package of low-covenant,
high-risk loans, such as personal credit can be converted into several slices of
which the senior slice is of the highest investment grade: effectively a
financial philosopher's stone that transmutes low grade credit into investment
grade loans. Between 1997 and 2004 the value of asset based US commercial paper
in these structures rose from $270bn to $650bn, or from 28% of all commercial
paper to 51%. Over the same period the Euro commercial paper market rose from
$10bn to $100bn, from 7 1/2% of the market to 20%.
Clever and elaborate financial systems allowed for a burgeoning increase in
credit. However, the resulting debt was not primarily in the hands of the
originating banks but sold down by them into a myriad of conduits, SIVs and
other such 'structures' sliced and packaged into different degrees of risk,
mostly as commercial paper or Collateralised Loan Obligations, 'CLOs',
refinanced on the inter bank markets. In consequence, as risk became attenuated
and dispersed away from the original lender, the standard of borrowers'
covenants could be relaxed with impunity and higher returns for the originating
banks could be obtained by increasing turnover, even at the expense of increased
risk. Such financial engineering has further fuelled the credit boom.
A principal source of fuel for the new exploding credit supernova was the US
mortgage market, particularly the sub-prime market. US house prices were already
rising at 10%, when the Fed started cutting rates in the dot-com crisis of 2001,
before rising to 15% in 2005/6. Rising house prices encouraged speculation that
prices would keep rising and recently it was reported that 31.5% of house
purchases were for 'investment', including 'flipping', buying ex-plan and
selling before completion, which had become common often using wholly borrowed
funds. Housing starts jumped from 1.5m/pa in August 2001 to a peak of 2.3m p.a.
in January 2006. Subsequently the Case-Schiller House Price Index has fallen by
over 10% and housing starts by 47%. This rapid reverse exposed short-term
investors many of whom had, at best, poor credit ratings and who formed an
increasing proportion of the market. The deterioration of the quality of credit
is simply illustrated: in 2003 only 38% of loans were for 90% or more of value,
but by 2006 56% were; in 2003 full documentation was provided by 63% of
borrowers but by 2006 only by 53%. Unsurprisingly, recent loans have had the
highest delinquency rates caused, according to an analysis presented to the IMF,
by 'excessive and inappropriate lending'. The Federal Division of Supervision
and Consumer Protection estimates that 14% of the $1.2tr sub-prime mortgages are
already in default and a million sub-prime borrowers this year and a further
0.8m next year face higher interest rates, following low 'starter' rates.
Patently the default rate is set to rise further, especially if economic
conditions, particularly interest rates or employment levels, deteriorate.
Thus the credit market has enjoyed a stellar expansion which culminated in an
exploding supernova before collapsing into the current 'black hole'. The
influence of the 'black hole' is pervasive, operating directly by reducing the
supply of credit and by increasing its price: the US asset backed commercial
paper market, worth $1,173bn in July 2007, dropped to $850bn in the three months
to November 2007; and the three month sterling LIBOR rate, which is normally
nearly equivalent to MLR, has been at a premium of about one percentage point
since September 2007.
The indirect effects of the black hole on the multiple products of financial
innovation, the 'structures, SIVs and conduits' are even more serious. They are
primarily designed to profit arbitrage between the normally low short-term LIBOR
rates and the higher margin long-term loans. Now, when credit is available, it
is at rates that reduce or reverse the expected arbitrage and the credit ratings
of some of these structures and of their components are being downgraded, and
asset realisations, usually at a loss, are being undertaken to meet liquidity
requirements, a vicious cycle with each downgrade potentially undermining other
positions. Many fund managers do not expect the fundamentally flawed SIV model
or that of other similar structures to survive.
Total loss estimates vary greatly, as in any one credit sector there are layers
of interdependent variables. In the US 'sub-prime' sector, where foreclosures on
2m or more homes are expected, estimates of mortgage losses vary from $100bn to
several hundred billion. The destination and the full effect of such mortgage
defaults is unclear as most of these loans have been sold by the originators,
usually packaged as Asset Backed Securities (ABS) to investors. The Bank
estimates there are $1,300bn of bonds worldwide backed by poorer quality
mortgage credit. However, some of these mortgage bonds have been included in
diversified packages of loans, CLOs and other structures tainting, them all. As
the FT puts it 'the multi-layered nature of these complex financial flows means
it is hard to assess how defaults by homeowners will affect the value of related
securities': surely a Delphic understatement! The CLOs affected by this
contagion are having their credit rating downgraded and, as there is now
virtually no market in CLOs, there is no external market value. Values based on
'models' are unreliable, as tiny changes have been shown by the Bank of England
to reduce the price of mortgage-linked debt by as much as 35%. Valuations can be
derived from traded derivative indices such as ABX. US mortgage backed
securities of mid-quality debt traded on the index in September at 40% of face
value, and BBB debt at 20%. Notwithstanding these external indicators certain US
banks are still valuing mid quality debt at 63% to 90% of face value.
Good news spreads quickly; bad news leaks out slowly: thus it is now. The
current crisis manifested itself on 9 August 2007 with a 'credit shock' in the
world banking system, in particular, a withdrawal of funding for collateralised
mortgage securities. Early estimates of $20- $30bn losses in September 2007
increased to $60 - $70bn by October, to at least $100bn by early November, and
by mid-November the Royal Bank of Scotland predicted losses rising to $250
-$500bn. The Hudson Institute now estimates write-offs in America will be $600bn
- $800bn. It seems incredible that in 1998 it was considered a crisis when LTCM
collapsed leaving total debts of ... just $3bn!
The present crisis is unprecedented both in scale and in type as credit risk
results in progressive economic paralysis. The American credit 'hit', say
$700bn, is patently a very large sum which, due to the securitisation, is spread
over many banks and institutions, some of which are under-capitalised. Some
institutions seem to be unaware of their financial exposure, as one after
another they make announcements of larger and larger 'write-offs'. Clearly, if
their knowledge of their own exposure is conjectural, their understanding of
their exposure to many of their trading partners is, at best, peripheral. The
risk of lending to or having counter parties to trade has suddenly become
dramatically higher - so great, that risk exceeds return and transactions seize
up. The credit crisis was transmuted into a liquidity crisis, which in turn
increased the risks of further defaults, as classically exemplified by Northern
Rock which, although possessing a large surplus of assets over liabilities, was
unable to refinance these liabilities. Thus credit risk and liquidity risk have
become mutually reinforcing.
Financial turmoil permeates the whole western economy. The investment banks at
the centre of the storm have been caught holding deals completed but not sold
down, including lower grade loans and assets awaiting repackaging into
asset-backed securities, which will have to remain on their books. Additionally,
they will be required to take back on to their own balance sheets at least some
of the 'conduits' set up to structure the SIVs. The Bank estimates that these
two requirements total over $1,000bn for which the UK banks would require new
funding of about £170bn. Securitisation has allowed the banks' lending to
balloon, or, as the FT puts it, 'real-world lending has been artificially
inflated for years'. The securitised vehicles were outside regulatory control
and any risk assessment was done by the ratings agencies, but then only in
respect of credit risk, not liquidity, a very real separate risk as Northern
Rock demonstrates. The Bank says 'financial markets and institutions appear to
be in transition' meaning, more bluntly, as one strategist says, 'what's at
stake is the future of securitisation' and the current unregulated practices.
The credit shortage has already increased its price. For example the cost of
'AA' corporate bonds is 1.58% points higher than US Treasuries, the highest
margin ever, compared with a 'normal' 0.83% spread and the previous 1.45% peak
following the dot-com bubble. In October 2007 25% of banks tightened their
standards on consumer loans, and 40% on prime mortgages, a more rapid adjustment
than occurred early in the dot-com bust: as the Economist says 'consumer pain
will be intensified by a sharp credit crunch, the scale of which is just
becoming clear'. US credit and house prices have an incestuous relationship:
credit facilitated price rises, price rises facilitated credit, doubling it in
real terms since 1997 to a record 130% of disposable income, 50% higher than in
1997. However, housing starts have been falling and are now 47% off the peak,
and house prices have fallen about 10% this year and further large falls are
expected. Goldman Sachs report that, if the US avoids a recession, prices will
fall by 7% in both 2008 and 2009 but by up to 30% in a recession. The effects on
the economy will be deleterious as the house construction sector accounts for 6%
GNP and US consumption varies with house prices at a rate of between 4% and 9%
of the change, a far closer relationship than in the UK. A quite separate and
additional threat to the economy is posed by the recent further increase in oil
prices to over $90 which alone is likely to reduce consumption by 1.5% points.
The Fed has reacted to the credit crisis and the threat to economic growth by
cutting interest rates three times, or by 1% point to 4.25%. Previously, in the
dot-com crash, nominal rates were as low as 1% but at present inflation is
rising, primarily due to the increased oil price and to the 6% increase in food
prices. Oil and food price increases reflect external markets rather than
internal US inflationary forces and they could be considered as 'one-off' or,
for food, partly seasonal, and thus not inhibit further monetary relaxation.
Indeed, as domestic conditions are likely to be deflationary due to the higher
price and the lower availability of credit, falling house prices and lower
economic activity, monetary policy could be eased further.
Lower interest rates would reduce the $ exchange rate which since its peak in
2002 has declined by 24% on a trade weighted basis, by 41% against the Euro and
by 33% against Sterling: and, since the start of the sub-prime crisis, by 9%
against the Euro. Devaluation has increased US net exports and a further modest
fall will assist in 'rebalancing' the US economy. A major fall in rates risks a
wholesale rapid diversification out of US dollars, a remote possibility, brought
nearer by the sudden collapse of the most sophisticated credit market in the
world, the expensive emergency funding for some of its largest banks and the
manifest inability of some household banking names to determine the location and
extent of their liabilities. The FT puts it succinctly 'the current account
deficit complicates the Fed's efforts to deal aggressively with risks to growth
because a deficit economy is always potentially vulnerable to a loss of global
investor confidence'. At present US employment continues to increase and trade
and growth are little affected. However credit is a 'lag' influence and Lehman
Brothers estimate that a US recession in 2008 is 30% likely, but, ominously,
Alan Greenspan's estimate is nearer 50%. Predictions should be viewed in a
historical content. Of the sixty world wide recessions in the 1990's only two
were predicted, according to the IMF, but, disturbingly, the Economist notes the
Harvard Economic Club's 1929 assertion: 'there will be no recession'.
The UK's economic prospects are currently aligned more closely with the US than
normal. The US produces 25% of world output and it has close trading
relationships with the UK which shares the credit default and consequent
liquidity problems with the US which are predominantly 'Anglo-sphere' phenomena,
spilling into Euroland but with lesser effects elsewhere. UK economic growth in
2007 is likely to be around 3.0%, above the UK's recent long-term average as the
economy expands for a record sixty-one consecutive quarters. The credit crisis
has downgraded estimates for UK growth in 2008 and made them subject to much
greater variation. The Bank of England's August central forecast, based on
unchanged interest rates, was for growth to slow gradually to a low of 2.5% in
two years, but in November the Bank expected growth to be below 2.0% by 2008,
almost 1% point lower, as a result of a drop from 1% in the third quarter of
2007 to about 0.3% in the first two quarters of 2008. Fortunately, the Bank's
central expectation, based on nominal interest rates of 5.75%, is for inflation
to be well below 2% in 2009, so facilitating interest rate cuts without
endangering the inflation target.
The UK has faced two similar sub-prime crises, the May 1972 - November 1974
secondary banking crisis and the August 1997 - August 1999 LTCM crisis. On both
occasions then, as now, base rates peaked as the crisis broke. In 1972 rates
were cut three times, but only by 1%, and only from 13% to 12% after a sharp
earlier rise from 8%, and GDP fell in both 1974 and 1975. In contrast from
August 1997 rates were cut seven times by a total of 2.5% points, more than
reversing previous rises and economic growth remained strong, before collapsing
shortly afterwards when the dot-com bubble burst. It is arguable that too little
intervention was undertaken in the banking crisis, although conditions were
overshadowed by the inflationary impact of the 1973 oil shock and by the 'three
day week', and that too much intervention was undertaken in the LTCM crisis
given the then expanding bubble of the dot-com boom. The optimal intervention
lies between two differing positions. It could be construed that assisting
institutions in difficulty by providing finance, by injecting money into
illiquid markets and by reducing rates creates 'moral hazard', as this action
rescues those who took high risk positions based on the premise that in extremis
the downside risk would be mitigated by policies for the general good. Such an
asymmetric risk pattern is comfortably shared by some traders, fund managers and
hedge fund dealers: higher risk can bring higher personal rewards but the
possible higher losses lie mostly with their institutions' investors. The
Governor, confronted with the collapse of Northern Rock PLC, wrote an elegant
essay on the evils of moral hazard and fortunately, but not until valuable time
had been lost, caved in and pumped money into the market for the general good,
albeit too late to repair all the damage his delay occasioned. The MPC is
constrained by its remit to target inflation at a low level on a specific narrow
definition. Wider, broader objectives favoured by some commentators and
considered more likely by them to provide enhanced economic stability and growth
are normally excluded from consideration. CPI inflation, like all 'single'
targets - money supply, the gold standard, the balance of payments, the £/$ rate
and the shadowing of the D-Mark - is proving necessary but not sufficient.
Perhaps the Bank will surprise us all with a 'Nelsonian' turn: 'You know,
Foley, I have only one eye - and I have a right to be blind sometimes....... I
really do not see the signal'.
The Fed's role is not similarly prescribed as it has no fixed inflation target.
There influential opinions, including Professor Summers of Harvard University,
are advocating strong and direct intervention on policy and at a direct level.
On policy he says 'maintaining economic demand must be the over-arching
macro-economic priority .... the Fed must recognise that levels of the Fed Funds
rate that were neutral when the financial system was working normally are quite
contradictory today .... the fiscal system needs to be on stand-by to provide
immediate ...........stimulus through spending or tax benefits ..........if the
situation worsens'. In the US there is a strongly based lobby for
intervention, a view which circumstances may impose on the UK.
Capital Economics analyse the six components of the sub-prime crisis affecting
the UK of which the most important one is the extent of any US economic
slowdown. However, given the present performance of the US economy and its
resilience and flexibility and the likely fiscal and monetary policy, I expect
growth to be curtailed but a recession narrowly avoided and damage to the UK
economy to be limited. The credit crisis will inhibit growth in the financial
sector, accounting for 9% of the UK's GDP, which will slow down due to a
reduction in M&A, leveraged buyouts and financial 'engineering' but there will
be partial offsets elsewhere. Many bonuses may be finessed but fewer jobs seem
likely to be lost permanently and in aggregate these should have little impact
on consumer spending. Consumer spending is likely to be curtailed by a fall in
confidence and by lower asset prices. The image of depositors queuing round the
block at Northern Rock, the first run on any UK bank since the Bank of Glasgow
collapsed in 1878, could be severe notwithstanding the Bank's subsequent 100%
guarantee, but a guarantee insufficient to stop depositors from continuing to
uplift their deposits. Equity wealth has fallen as the crisis unfolded but until
now has been partially compensated by rises in housing wealth, to which consumer
expenditure is more sensitive. However, as further falls in house prices are
likely and as consumption varies by about 3% of any house price change,
interestingly half that obtaining in the US, consumption will fall, by say 0.3%
point for every 10% fall in house prices. Higher inter-bank rates and tighter
credit conditions are the most immediate effects of the crisis. The three month
inter-bank rate is currently trading at about 1% above the repo rate, sufficient
if sustained to reduce growth in GDP by about 0.35% per year. Tighter credit
conditions will further increase the cost of credit and its availability, as is
already evident in the housing market, leading to a further fall in house prices
and the consequent effects on consumption.
UK economic growth in 2008 is forecast to be below average but with the decline
limited to about to about 1% below historic trends, provided that the US economy
does not slip into recession and that an inflationary straightjacket does not
inhibit cuts in the repo rate.
Property Prospects
The CBRE All Property Yield Index has continued to fall from 7.1% in late 2003
to 4.8% earlier this year before rising to 5.2% in the autumn. If there had been
no other changes in four years, then the underlying property values would have
increased by 36.5%. Over those years shops and retail warehouses rose by
approximately the average but industrials were below average at 32.2% and
offices above average at 46.1%. Earlier this year Gilts yielded 4.9% compared
with 4.5% in late 2003 but over the same period the All Property yield had
fallen to 4.8% from 7.1%, resulting in the All Property Index yielding 0.1%
points lower than Gilts this spring, compared to being 2.6% points higher than
Gilts in 2003. Such low property yields are often associated with high rental
growth, the increase in rent compensating for the relatively low yield. The All
Property Rent Index rose only 1.1% in the latest quarter, just above the 0.9%
rise in the Retail Price Index. Over the past five years the All Property Rent
Index has grown by 15.9%, but, as the Retail Price Index has increased by 17.1%,
it has fallen in real terms.
Since the market peak in 1990 the All Property Rent Index has grown 45% but has
fallen 11.7% in real terms. In real terms both offices and industrials have
fallen about 12% although Docklands' offices, by far the best performing office
sector, have risen by 19%, shops have fallen a mere 1%, but, in strong contrast,
retail warehouses have risen a handsome 68.5%. Interestingly, several peripheral
office locations including Yorkshire and Humberside, North East, Wales and
Scotland have almost maintained or increased real rents. Based on both historic
and recent rental evidence past rental rises have mostly been below inflation
and, unless an important change is imminent, of which there is no sign, the
recently recorded low in investment yields is unlikely to have been due to
prospective rental increases.
Last year I quoted an interesting historical analysis by Capital Economics of
property yields compared with other asset classes. Since the 1920s there has
been an average 0.31% points reverse yield gap - i.e. property yielded less than
gilts. Property is an inherently riskier asset than gilts suggesting that
property investors should require a premium return over gilts. A premium over
gilts existed from the 1920s until the early 1970s and has again been present
since the mid 1990s until a very short period earlier this year. The 1970s and
1980s were characterised by high inflation - the RPI was 25 in 1974, 50 in mid
1978 and 100 on 1 January 1987, a fourfold increase or a reduction in value of
75%! If this period of exceptional inflation is set aside, on the basis that the
existence of a negative, or reverse yield gap, is anomalous, property yields
have historically been 1.5 percentage points higher than gilts, a much higher
premium than is currently obtained and recent property yields have been
unusually low.
I reported last year that the fall in yields plus a rental income of about 5.0%
together with an inflationary rise in rents had produced total returns to
September 2006 of 20.7%, up from 17.5% the previous year, and that over the
previous three, five and ten years total returns from property had exceeded
those of all other asset classes. These excellent returns have led to
considerable additional investment, notably from overseas investors, while UK
property funds have tripled in size over the last two years as 'money has poured
in from both retail and institutional investors'. In 2006 Bank lending to
commercial property rose by 17.0% to £169.9bn, a large progressive increase from
£70.0bn in 2001. Institutional net investment was £4.6bn in 2006 and the
increased overseas investment, was an 'impressive' £2.1bn in the first quarter
of 2007. Patently there has been an increased demand for investment property
but, as its supply is relatively inelastic, increases in demand have resulted in
large price increases. Prices are positively serially correlated in the
short-term - i.e. if prices rose in last period they will probably rise in the
next period: good performance attracts further demand that produces further good
performance - but, in the long-term, prices are negatively serially correlated.
Last year I asked: ' the question for property is: is it still the short-term?'
The change from short-term positive correlation to long-term negative
correlation is patently large and insight into its timing would be invaluable.
That the switch will happen is probably known, at least subliminally, to many
players in the market place. One such player, Chuck Prince, the former chairman
and chief executive of Citibank, famously said 'When the music stops, in terms
of liquidity, things will be complicated. But as long as the music is playing,
you've got to get up and dance. We're still dancing'. The FT commented 'he
called the top of the market'....... before he waltzed out!
The study of structural system changes is part of physics. Professor Sornette,
author of 'Why Stock Markets Crash', has drawn attention to some interesting
analogies between physical and financial structures. When force is applied to a
pure homogeneous quartz crystal, it, unlike an impure crystal, does not exhibit
any change or 'foreshock' as the force is increased until, without warning, it
shatters. Similar homogeneity is evident in the structure of molecules in
physical systems about to make the phase change from, say, liquid to gas or the
switch from magnetism to non-magnetism, and it is such homogeneity that is
consistent with instability. Normally markets are endemically heterogeneous,
often appearing chaotic, and respond to 'force' by movement in one direction or
another: they do not effect sudden changes, but adjust up and down. The doctrine
of singularity posits that the less homogeneous systems are the more stable they
are, but when they narrow to a consensus, or singularity, instability threatens.
The behaviour of the commercial property market is consistent with the
hypothesis that homogeneity is a prelude to fracture. Returns have been very
high; a relatively specialised asset class has been opened up to retail
investors who have invested heavily; funds have promoted commercial property
investment aggressively ; bank investment has increased; more and more complex
and more geared investment vehicles have been created; reasonable expectation of
returns has diminished progressively and depended more and more on increasing
capital values rather than rental growth, while financing costs rise; and, to
resort to a parochial genre, latterly taxi-drivers and student bar staff first
asked advice on and then gave advice on such investments! Such behaviour appears
to be a classic example of the 'principle of singularity'.
The market has now fractured. In August 2007 the IPD All Property return was
nil, comprising +0.4%. Income return and - 0.4% Capital return, in September the
All Property return was -1.2%, a capital return of -1.6%, in October the return
was -1.5%, a capital return of -1.9%, and in November the capital return was
-3.5% giving a cumulative four month capital fall of 7.3%. In 2005 I reported
that commentators including Cluttons, Colliers and the Estates Gazette IPF
predicted 2006 All Property returns of 7% to 9%, based on moderate rental growth
but no further fall in yields. By December 2006 the total return was 18.1%,
marginally below the near record 18.8% in 2005. Last year the same commentators
predicted returns of 7% - 10% in 2007 based on moderate rental growth and even
lower yields. To end October 2007 IPD reported a return of 1.8% comprising 4.1%
income return but a negative capital return. The year out-turn to end December
2007 is at best likely to be nil as indeed these three commentators now
forecast. They were 10% points too low for 2006 and 10% points too high for
2007, as returns rose sharply to the peak from which they are now rapidly
retreating. More investment, a widening of the class of investors, a market
arguably based on 'momentum', values significantly higher than traditional
analysis - i.e. yields below short-term money rates with no prospective rental
growth - and a peak in value are strong characteristics of a 'bubble'. Like the
quartz crystal in Professor Sornette's analogy, the structure became less
complex, or more singular with no longer a balance between buyers and sellers.
Singular systems do not adjust, as normal markets do, they fracture.
Property 'crashes' occurred between 1972 and 1974 and between 1988 and 1991.
Yields peaked at 8.7% and 8.6% respectively, 2.7% points and 1.8% points higher
than the low yields immediately preceding them, giving a fall in capital values
of 31.0% and 25.6%. The CBRE All Property Yield Index recorded a low of 4.8% in
July 2007 and if drops in value of 31.0% or 25.6% occur, the corresponding
yields would be 6.9% and 6.5% respectively. During both these previous 'crashes'
interest rates were very high, RPI inflation averaged 121/2% and 61/2%
respectively, and there were severe recessions. Although prospective economic
conditions are likely to be less favourable than recently, the extreme
conditions obtaining in both the previous crashes are most unlikely and, given
the market propensity to exaggerate trends, I expect yields to rise to 6.5% +/-
0.5%.
The Governor of the Bank of England has recently said that the potential for a
fall in commercial property and housing markets posed the greatest threat to the
economy. The property crashes of early 1970s and the late 1980s were primarily
the result of, but not the cause of, the severe economic dislocations at the
time. The present position represents the antithesis, property posing the threat
to the economy. A fall in investment property values, even the predicted severe
fall, seems unlikely to have far-reaching economic effects. Bank losses would be
tiny in relation to the sub-prime fallout and the equity losses, extreme in some
instances, would directly affect relatively few private investors as most losses
would fall on institutional funds where specific effects would be greatly
diluted. The effect of a fall in house values is very different. House prices
in England and Wales have risen by 112% since 2000, including a rise of 9.1% in
the year to November 2007. There have been many incorrect predictions of an
imminent rapid fall in prices, but while these cries of 'Wolf' have proved
unfounded, there are signs of a distinctly 'unlamblike' creature in the fank
now. For November 2007 the Halifax showed a 1.1% fall, Nationwide a 0.8% fall
and the RICS survey a net balance of 22% report falling prices over the last
three months. The background to this fall is succinctly put by Acadametrics, the
compiler of the FT House Price Index: 'the expectation for a slowing market ...
...remains regardless of any decisions by the Bank of England. Indeed, the
Bank's previous increases have now collided with the tightening in mortgage
credit resulting from the sharp increase in mortgage arrears and repossessions
and loss of confidence in mortgage backed securities in the US market and, to a
lesser extent, in the UK'. Futures house prices have also fallen and the
November expectation of house price 'growth' over the next twelve months fell
from -2% to -7%. This time the wolf is in the fank and price falls, often
previously predicted, of up to or over 10% seem likely.
The extent of any price falls will vary among house types and among regions. New
properties seem to be at greater risk. House building is a quasi-production line
job with high operational and financial gearing. Thus there is a considerable
imperative, in the short-run at least, to keep selling even at lower prices. In
contrast for many house owners buying another house is discretionary. Large
falls are likely among the cities' new-build flats. Historically many new-build
flats were sold as buy-to-let. However rising interest rates have reduced the
equity return on many mortgaged properties to low positive or negative levels
and, as capital values have been falling, prospective returns are at best very
poor. Even where returns appear more attractive finance is often not available
or, if so, only at a low Loan to Value and or at a higher price. Thus as
buy-to-let markets have collapsed and prices have fallen with some developers
offering discounts of up to 25%, while recently newly built flats in some
locations are selling for up to 35% off the 'new' price.
The analysis of possible changes among the regions is more complex and
different. The flat market is an investment market similar to commercial
property, but, as the main housing market is not an asset class to be exchanged
for another on performance criteria, this feature dampens house price
volatility. The downturn in the 'commodity' flats market is presently most
marked in English provincial cities, but it seems likely to spread to all areas
where house building has included a very high percentage of flatted
developments, a widespread situation, as for the first time, due to Government
planning policy, more flats than houses have been built.
An important key to the prospective relative performance of house prices in
different regions can be ascertained from consideration of the early 1990s
crash. The late 1980s inflationary boom had a disproportionately high impact on
London and the South East where business, jobs and house prices boomed before
the subsequent recession. The effect on house prices in the South East was
amplified: they went up more and came down more with both effects 'rippling
out', as it was described. On this occasion any prospective reduction in house
prices will be due to the credit and liquidity constraints that will apply more
evenly throughout the UK, although areas with the most rapid rises will probably
have the largest falls, including the South East.
In Scotland, historically, house prices have been less volatile than in most
other UK regions. Local prejudice is that 'house prices have never dropped in
Edinburgh' but this does not bear examination. Certainly, in the 1990s
recession, some areas in the City very nearly maintained nominal values but they
all suffered real price falls. The Scottish house price-to-earnings ratio is the
lowest in the UK giving some inherent stability. The most recent HBOS report
states that prices are still rising in Scotland and predicts that prices in 2008
will rise in Scotland but not in the UK as a whole.
Future Progress
The slowdown in the investment property market and the current uncertainty in
the housing market will affect the Group to differing degrees. A possible fall
in investment values would have a significantly lower impact on the Group than
previously. Investment value changes, by definition, do not apply to our
development properties or to our trading stock. Most of our long-standing
investment properties currently have a development prospect or a development
'angle' and this insulates them from the full effects of any investment
downgrade. Recently acquired investment properties have been purchased
specifically to establish a development option except where they have
reversionary potential.
In addition to its investment portfolio the Group now owns fifteen rural
development sites, four significant city centre sites, two small sites in the
Edinburgh area and seventy-three plots near Dunbar. Most of these sites can be
developed over the next few years but some will be promoted through the
five-year local plan process. Development of the two Edinburgh sites should
start next year, a year later than expected due primarily to planning delays.
Most of these sites were purchased unconditionally, ie without planning
permission, and, when permission is obtained, should increase in value
significantly. For development or trading properties no change in value is made
to the company's balance sheet even when open market values have increased
considerably. Naturally, however, the balance sheet will reflect the value of
such properties on their sale or subsequent to their development.
The maximum value of our development properties will be realised by their
development. However, our policy continues to be to maximise investment in
development opportunities where at present investment returns are highest and,
if cash resources become limited, to realise development sites or to release our
capital through suitable financial structures to fund such development
opportunities.
The current year's results will continue to reflect the early stage of the
development cycle as the first development site will not be completed this year.
Our property values should continue to improve as planning changes should more
than outweigh any possible deleterious change in investment values or
residential plot values. The full outcome of the current financial year will
depend on any net change in valuation and the timing of any realisation of
development properties.
The mid-market share price at 17 December 2007 was 175p a discount of 48.2p to
the NAV of 223.2p. The Board does not recommend a final dividend, but intends to
restore the full dividend whenever profitability and consideration for other
opportunities permits.
Conclusion
The UK Economy is expected to experience a major deflationary shock resulting
from an unprecedented contraction of credit. Simultaneously, stronger
inflationary forces are becoming apparent primarily due to increased oil, food
and other commodity prices.
The sub-prime crisis in the US is leading to a major rebalancing of the US
economy with a lower $ exchange rate, a less unfavourable balance of trade and a
redistribution of economic activity. This is likely to be achieved without a
recession because of the expected accommodating stance of monetary and fiscal
policy.
Provided there is no US recession the UK economy should continue to grow, much
more slowly early in 2008 than later in the year, a growth and recovery rate
that could be assisted by an adjustment of the aims of monetary policy.
UK investment property appears over-priced as rental growth is likely to be
limited, yields are likely to rise further and effective interest rates will
continue to be high. Residential property seems likely to fall in price in the
short-term, but unless economic conditions deteriorate considerably, substantial
price falls are unlikely. In the long term, provided economic growth continues
and provided housing supplies continue to be allocated by rationing rather than
by price, prices will continue to rise. Neither current nor prospective economic
conditions will detract from the opportunity of uncovering specific situations
from which substantial value can be created by effecting planning change.
I D Lowe
Chairman
18 December 2007
For further information please contact:
Douglas Lowe, Chairman and Chief Executive Officer Tel: 0131 220 0416
Mike Baynham, Finance Director Tel: 0131 220 0416
David Ovens, Noble & Company Limited Tel: 0131 225 9677
Consolidated Profit and Loss Account
for the year ended 30 June 2007
2007 2006
£ £
Income - continuing operations
Rents and service charges 684,085 870,745
Trading property sales 1,477,186 410,000
Other sales 32,443 108,163
Other operating income 130,615 -
_______ _______
2,324,329 1,388,908
Operating costs
Cost of trading property sales (1,074,117) (304,500)
Cost of other sales (51,289) (113,200)
Administrative expenses (1,148,378) (992,992)
_______ _______
(2,273,784) (1,410,692)
_______ _______
Operating profit/(loss) 50,545 (21,784)
Profit on disposal of investment property 15,569 189,729
Bank interest receivable 59,050 151,329
Other Interest Receivable 197,826 124,315
Interest payable (567,143) (319,150)
_______ _______
(Loss)/profit on ordinary activities before taxation (244,153) 124,439
Taxation - 5,070
_______ _______
(Loss)/profit for the financial year (244,153) 129,509
(Loss)/earnings per ordinary share (2.05p) 1.09p
Diluted (loss)/earnings per ordinary share (2.05p) 1.09p
Statement of Total Recognised Gains and Losses
for the year ended 30 June 2007
2007 2006
£ £
(Loss)/profit for the financial year (244,153) 129,509
Unrealised surplus on revaluation of properties 642,250 1,978,506
________ ________
Total recognised gains and losses relating to the 398,097 2,108,015
financial year
Prior year adjustment in respect of recognition of - 178,244
dividends payable
________ ________
Total gains and losses recognised since last annual 398,097 2,286,259
report
Note of Historical Cost Profits and Losses
for the year ended 30 June 2007
2007 2006
£ £
Reported (loss)/profit on ordinary activities before taxation (244,153) 124,439
Realised gain on previously revalued property 319,250 -
______ ______
Historical cost profit on ordinary activities before taxation 75,097 124,439
Taxation on profit for year - 5,070
______ ______
Historical cost profit for the year after taxation 75,097 129,509
Historical cost loss for the year retained after taxation and (251,683) (167,564)
dividends
Consolidated Balance Sheet
at 30 June 2007
2007 2006
£ £ £ £
Fixed assets
Tangible assets:
Investment properties 24,075,896 24,030,896
Other assets 17,076 21,117
__________ __________
24,092,972 24,052,013
Investments 43,013 43,013
__________ __________
24,135,985 24,095,026
Current assets
Stock of development property 10,766,629 7,034,258
Debtors 538,947 968,314
Cash at bank and in hand 823,967 2,203,611
_________ _________
12,129,543 10,206,183
Creditors: amounts falling
due within one year (1,350,358) (2,177,356)
_________ _________
Net current assets 10,779,185 8,028,827
__________ __________
Total assets less current 34,915,170 32,123,853
liabilities
Creditors: amounts falling
due after more than one year (8,400,000) (5,680,000)
__________ __________
Net assets 26,515,170 26,443,853
Capital and reserves
Called up share capital 2,376,584 2,376,584
Share premium account 2,745,003 2,745,003
Capital redemption reserve 175,315 175,315
Revaluation reserve 6,948,414 6,625,414
Profit and loss account 14,269,854 14,521,537
_________ _________
Shareholders' funds 26,515,170 26,443,853
These financial statements were approved by the Board of Directors on 18
December 2007 and were signed on its behalf by:
I D Lowe
Director
Consolidated Cash Flow Statement
for the year ended 30 June 2007
2007 2006
£ £
Net cash outflow from operating activities (3,079,424) (5,694,720)
Returns on investments and servicing of finance (300,860) (34,896)
Tax paid - (29,632)
Capital expenditure and financial investment
607,268 5,814
Dividends paid on shares classified in
shareholders' funds (326,780) (297,073)
________ _________
Cash outflow before management of liquid
resources and financing
(3,099,796) (6,050,507)
Financing 1,720,152 3,572,183
__________ _________
Decrease in cash in period (1,379,644) (2,478,324)
Reconciliation of net cash flow to movement in net
debt
£ £
Decrease in cash in period (1,379,644) (2,478,324)
Cash outflow from increase in debt (3,572,183)
(1,720,152)
_________ _________
Movement in net debt in the period (3,099,796) (6,050,507)
Net (debt)/funds at the start of the period (5,172,659) 877,848
_________ _________
Net debt at the end of the period (8,272,455) (5,172,659)
Notes to the cash flow statement
(a) Reconciliation of operating profit/(loss) to net cash outflow from operating activities
2007 2006
£ £
Operating profit/(loss) 50,545 (21,784)
Depreciation charges 6,072 4,682
Loss on disposal of fixed assets 3,520 -
Increase in stock of development property (3,732,371) (5,825,167)
Decrease in debtors 429,367 50,246
Increase in creditors 163,443 97,303
_________ _________
Net cash outflow from operating (3,079,424) (5,694,720)
activities
_________ _________
(b) Analysis of cash flows
2007 2006
£ £
Returns on investment and servicing of finance
Interest received 256,876 275,644
Interest paid (557,736) (310,540)
_________ _______
(300,860) (34,896)
Capital expenditure and financial investment
Purchase of tangible fixed assets (5,551) (866,776)
Sale of investment property 612,819 915,583
Purchase of investments - (42,993)
_________ _______
607,268 5,814
Financing
Debt due within a year:
(Increase)decrease in short-term debt (152) 397,498
Debt due beyond a year:
Increase in long-term debt (1,720,000) (3,969,681)
__________ _________
(1,720,152) (3,572,183)
(c) Analysis of net funds
At beginning of Cash flow Other non-cash At end
year changes of year
£ £ £ £
Cash at bank and 2,203,611 (1,379,644) - 823,967
in hand
Debt due after (5,680,000) (1,720,000) (1,000,000) (8,400,000)
one year
Debt due within (1,696,270) (152) 1,000,000 (696,422)
one year
__________ __________ _________ __________
Total (5,172,659) (3,099,796) - (8,272,455)
Notes to the audited results for the year ended 30 June 2007
1. The above financial information represents an extract taken from the audited
accounts for the year to 30 June 2007, which have been prepared under the basis
of UK GAAP, and does not constitute statutory accounts within the meaning of
section 240 of the Companies Act 1985 (as amended). The statutory accounts for
the year ended 30 June 2007 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 does not recommend the
payment of a final dividend in 2007 (2006: 1.75p).
3. Earnings per ordinary share
The calculation of earnings per ordinary share is based on the reported loss of
£244,153 (2006: profit £129,509) and on the weighted average number of ordinary
shares in issue in the year, as detailed below.
2007 2006
Weighted average of ordinary shares
in issue during year - undiluted 11,882,923 11,882,923
Weighted average of ordinary shares
in issue during year - fully diluted 11,882,923 11,882,923
4. The Annual Report and Accounts will be posted to shareholders on or around
21 December 2007 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 61 North Castle
Street, Edinburgh, EH2 3LJ on Friday 18 January 2008 at 12.30 pm.
This information is provided by RNS
The company news service from the London Stock Exchange
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