Annual Financial Report

RNS Number : 4949U

F&C UK Real Estate Investments Ltd

16 October 2014

 



To:                   RNS

Date:               16 October 2014

From:              F&C UK Real Estate Investments Limited

·     Share price total return of 23.2 per cent for the year

·     Portfolio ungeared total return of 14.9 per cent for the year

·     Net asset value per share total return of 23.9 per cent for the year

·     Net asset value per share total return since launch of 77.2 per cent

·     Dividend of 5.0 pence per share for the year

Chairman's Statement

With 15 months having passed since the Company completed the merger with ISIS Property Trust Limited, performance continues to be good and combined with the issue of a significant number of new Ordinary Shares during the year, has resulted in market capitalisation increasing from £151 million as at 30 June 2013 to £194 million as at 30 June 2014.

Share price performance has been strong during the year and the shares were trading at a premium to net asset value of 0.7 per cent at the year end, with the price at 84.0 pence per share. This represented a share price total return for the year of 23.2 per cent.

The net asset value ('NAV') total return for the year was 23.9 per cent with a NAV as at 30 June 2014 of 83.4 pence per share. The movement in the interest rate swap valuations had a positive impact on the NAV of £5.2 million during the year, which reduced the swap liability and increased the NAV per share by 2.4 pence. Future movements should reflect positively over time as the liability reduces to nil by the conclusion of the contract in January 2017.

Property Market and Portfolio

The UK commercial property market has seen positive returns across all sectors, resulting in an annual total return of 16.7 per cent for the year ended 30 June 2014, as measured by the Investment Property Databank ('IPD') Quarterly Funds Index. Although the economic backdrop has been supportive, with GDP consensus growth forecasts being revised higher, consumer sentiment improving and inflation remaining below 2 per cent; it may be that the improvement owes more to the weight of money coming into property. The UK property market remains attractive as a large, transparent, relatively liquid market.

At 30 June 2014 the portfolio was valued at £300.6 million, returning 14.9 per cent over the twelve months. The buoyancy of the property market assisted the Manager in continuing with the strategy of disposing smaller and non-performing assets which no longer fit the profile of the enlarged Group. The Manager was successful in selling five properties for a combined value of £16.05 million (excluding costs). The proceeds of these sales and the cash raised from share issues has created sufficient funds to facilitate the Company's purchase of two retail warehouses for a combined value of £18.05 million (excluding costs) and a further purchase of an office building completing post year end for £6.97 million.

The occupational market remains challenging, especially in the retail sector and this continues to have an effect on rental values and the number of vacancies in some locations. Despite new lettings during the year, the void rate on the portfolio has risen to 5.7 per cent although this has reduced since the year end following the sale of the property at Marlow. As a result of ongoing property management, the average unexpired lease length across the portfolio has been maintained at a creditable 7.8 years, compared with 7.9 years in June 2013.

Dividends

Three interim dividends of 1.25 pence per share were paid during the year and a fourth interim dividend of 1.25 pence per share was paid on 30 September 2014. This gives a total dividend for the year ended 30 June 2014 of 5.0 pence per share, a yield of 6.0 per cent on the year end share price. In the absence of unforeseen circumstances, it is the intention of the Group to continue to pay quarterly interim dividends at this rate.

The merged entity has benefited from a material reduction in the Total Expense Ratio with the ongoing charges as a percentage of average net assets at 2.1 per cent, well below the 2.6 per cent experienced in the previous year. This has helped the level of dividend cover which, even after property sales and an increased level of voids, was 89 per cent for the year ended 30 June 2014 compared to 74 per cent for the year ended 30 June 2013.

Borrowings

The net gearing level as at 30 June 2014 was 31.7 per cent, which compares with 39.7 per cent as at 30 June 2013 and 40.0 per cent at launch on 1 June 2004. The fall in the gearing percentage was due to a combination of the loan drawn down being reduced to £109.0 million from £112.0 million, an increase in the overall market value of the portfolio and proceeds from share issues and property sales being held in cash. The Group had £16.8 million of cash available at 30 June 2014 and an undrawn loan facility of £6 million. The Group retains a prudent attitude to gearing.

Alternative Investment Fund Managers' Directive ("AIFMD")

In July 2014, the Company entered into arrangements necessary to ensure compliance with the AIFMD. Following a review of the Company's arrangements, the Board approved the appointment of its existing investment manager, F&C Investment Business Limited ("FCIB"), as the Company's alternative investment fund manager (the "AIFM") on the terms of and subject to the conditions of a new investment management agreement between the Company and the AIFM.  The Company's existing management agreement with FCIB was replaced with a new agreement. The management fee, performance fee and notice period provisions remain unchanged.

The Board has appointed J.P. Morgan Europe Limited (the "Depositary") to act as the Company's Depositary (as required by the AIFMD) on the terms of and subject to the conditions of a depositary agreement between the Company, the AIFM and the Depositary.

 

Share Issues

The Company has experienced continued market demand for its Ordinary Shares and has issued 22.8 million Ordinary Shares during the year at a premium to the published net asset value at the time of each issuance, raising proceeds of £18.2 million. At the year end there were 230,855,539 Ordinary Shares in issue.

In order to take advantage of the prevailing market conditions and investment opportunities identified by the Investment Manager, the Board is proposing to raise additional share capital through a Placing Programme of up to 100 million new Ordinary Shares.  Initially the Board is proposing to issue new Ordinary Shares pursuant to the shareholder authority to allot up to 23,085,500 new Ordinary Shares (being approximately 10 per cent of the current issued share capital) being sought at the Annual General Meeting. Once the Annual General Meeting authority has been exhausted, the Company will convene further general meetings to seek shareholder approval for the additional disapplication of pre-emption rights in relation to the issue of further new Ordinary Shares under the Placing Programme.  

New Ordinary Shares will only be issued to new and existing shareholders under the Placing Programme at a premium to the prevailing NAV at the time of issue.

The Company intends to publish a prospectus containing full details of the Placing Programme in due course.

UK REIT Status

Since 1 January 2007 there has been legislation in place in the United Kingdom to enable qualifying companies (or groups) to apply for Real Estate Investment Trust (REIT) status. The main tax advantage of the UK-REIT regime is that net rental income derived from its rental property portfolio is exempt from UK income or corporation tax, as are capital gains on the disposal of the rental properties. Prior to 17 July 2012 groups entering the UK-REIT regime were required to pay a one off charge equal to 2 per cent of the value of their property assets. This conversion charge has now been abolished and becoming a UK REIT is more attractive.

The Company has been paying progressively more tax on its profits over recent years and looks set to pay even more moving forward as it has to renegotiate its inter-company loan arrangements. The Board therefore believes that it is in the best interests of the Group and shareholders taken as a whole that the Group keeps UK tax to a minimum and accordingly is proposing that the Company takes the necessary steps on behalf of the Group in order for the Group to achieve UK-REIT status.

A separate Circular, outlining this proposal in more detail and convening an extraordinary general meeting will be sent to shareholders shortly.

Outlook

The UK commercial property market appears to be set fair for the foreseeable future. There is likely to be continued investor demand for an asset class whose fundamentals are correlated to the wider economic position. Uncertainties may exist but the property market is predicted to deliver sustained positive total returns. Whereas it is well placed to take advantage of the current market conditions, the Board is conscious of the need to reflect quality throughout the portfolio, with an emphasis on longer term income and good quality covenants. We believe that the portfolio is more resilient following recent sales and asset management initiatives, and that there are further opportunities to improve the quality of stock in a strengthening market. The Manager will continue to use the current strong investor demand to dispose of further properties which do not fit the profile of the enlarged fund. At the same time the Company will purchase further investments using new equity raising and sales proceeds to strengthen the portfolio.

Manager's Review

The UK commercial property market delivered a total return of 16.7 per cent in the year to June 2014, as measured by the Investment Property Databank ("IPD") UK Quarterly Index for all-property, excluding transactions and developments. This represented a sharp turnaround from the 4.8 per cent return of the previous year. This is the best June to June annual performance since 2010.

Performance was supported by an income return of 5.5 per cent, but the year was marked by a return to capital growth, and this drove the improvement in total returns. Capital values rose by 10.6 per cent during the year, following two years of decline.

The year to June 2014 has seen the UK economy deliver sustained growth, with GDP rising by more than 3 per cent according to preliminary estimates and finally recovering the output losses seen during the recession. Both business and consumer confidence are on an improving trend. Inflation has remained subdued at 1.9 per cent over the period, slightly below the official target. Fiscal policy is still focused on reducing government account imbalances but monetary conditions are supportive, with low official interest rates remaining unchanged, ten year gilt yields modest by past standards, and signs of some easing in credit market conditions.

Although the economic backdrop has brightened, it may be that the improvement in total returns owes more to the weight of money coming into property. Investment activity totalled almost £55 billion in the year to June 2014, well ahead of the £30 billion seen in the previous 12 month period, according to Property Data. Overseas investors have remained a major source of net investment into property and have continued to boost the London market in particular. However, the year also saw greater net investment in property by institutions, often for long-lease, index-linked assets.

Investor interest in prime property and London assets remained intense but strong competition, keen pricing and a lack of stock led to investors broadening their search to the regions, to some secondary assets and to emerging property segments. IPD data shows initial yields at the all property level compressing by 60 basis points to 5.4 per cent in the year to June.

The upturn in the property market has been broadly based, with all the standard IPD segments delivering double digit total returns in the year to June 2014. The turnaround in the fortunes of the office markets outside London and industrials was especially marked. There are differences in absolute performance with West End/Midtown offices, Rest of South East offices and industrials recording annual total returns in excess of 20 per cent. In contrast, standard retails outside the South East delivered a total return of 9.9 per cent.

The retail sector as a whole continued to under-perform the all property average. Central London retail recorded another strong performance but elsewhere, the impact of structural changes to retailing, business rates and "the wrong space in the wrong place", coupled with the trend to shorter leases all had an effect on performance. In the office market, London and the South East generally out-performed, although the central City area moved broadly in line with the all property average and there were wide variations in performance between provincial cities. The industrial sector was generally firm with out-performance focused on the core locations of London, the South East and the Midlands.

The occupational market has been more muted than the investment market. Rental growth improved to 2 per cent in the year to June but positive rental advance was still largely confined to London and the South East and some rents are still under pressure especially in some regional office and town centre retail locations. Although there are signs of improved tenant interest, it will take time for economic recovery to produce reduced rental incentives and lead to enhanced rental growth. Net income growth improved to 1.2 per cent during the year but this is still modest and is negative in real terms in the three main property sectors.

Prime property generally out-performed secondary stock during the year in terms of total return, especially in retail. The year saw signs of a move towards near prime and higher yielding assets by investors with inward movements in initial yields at the secondary end becoming more pronounced. This would appear to be largely investment driven and in terms of the income stream, IPD data indicates that the disparity between prime and secondary assets has persisted in most parts of the market.

The property market has delivered a strong performance over the year to June 2014, but the current pace of yield compression may reflect an investment market that has moved somewhat ahead of the underlying fundamentals.

Property portfolio

The year saw capital growth return to the portfolio which was valued at £300.6 million as at 30 June, up from £276.6 million the previous year. The portfolio produced an ungeared total return of 14.9 per cent, which included a return from income of 6.9 per cent..

Properties in the industrial sector witnessed the highest returns at 19.2 per cent, enhanced by some sales and asset management initiatives, followed by offices which returned 16.8 per cent. The return from retail properties was 11.3 per cent overall, with shops in the Rest of the UK sub-sector in particular still witnessing falling rental values and a lack of investor and occupational demand, causing a drag on the portfolio total returns.  

Following on from the issue of new equity together with the proceeds of sales, the Company has purchased two new retail warehouses and agreed terms to buy a South East office investment.

The B&Q unit at Northfields Retail Park, Rotherham was purchased for £10.5 million reflecting a yield of 7.3 per cent. The unit extends to 52,120 square foot and is let to B&Q plc for a term of 20 years from August 2009, with a tenant's break in 2024. The rent is £810,346 per annum and is subject to five yearly reviews geared to the increase in RPI, capped at 3.0 per cent.

The Company also purchased Brook Retail Park in Bromsgrove, a newly completed out of town development comprising two units of 25,000 square foot and 9,000 square foot. Unit 1 is let to Homebase Limited for 20 years at £362,500 per annum, and Unit 2 is let to Pets at Home Ltd for 15 years at £132,750 per annum. The Company purchased the investment for £7.55 million which reflected a yield of 6.2 per cent.

In the last quarter, terms were agreed to buy Building A3, Glory Park, High Wycombe and the purchase was completed on 10 July, after the Company's year-end. The property comprises a 3 storey office building of 19,572 square foot. Two floors are let to Takeda UK Ltd for 15 years with a tenant's break in 2024. A further floor is let to Aptiv Ltd until 2020. The purchase price was £6.97 million reflecting a yield of 7.0 per cent.

The Company has continued with the strategy of selling the smaller lot size properties and those where future returns look compromised. This has been carried out in a market in which investors have become less risk adverse creating better opportunities to sell some of the more secondary assets.

Over the year to 30 June, the Company sold five properties with an aggregate value of £16.05 million (excluding costs). The Company disposed of three older industrial properties; Units A-C, Foundry Lane, Horsham were sold for £5.05 million reflecting a yield of 10.1 per cent and Swift House, Cosford Lane, Rugby was sold for £5.25 million, a yield of  9.4 per cent. Both these properties were subject to lease expiries in 2018 and 2019 with concerns of the risks of potential voids on older secondary units. A single industrial unit in King George Close, Romford, let to a local company, achieved £2.45 million, reflecting a yield of 7.1 per cent.

On the retail side, Units1/2 Above Bar Church, 89 Above Bar, Southampton was sold for £1.8 million reflecting a yield of 8.6 per cent, but was subject to lease expiries and breaks in 2016/17. 12/20 High Street, Wickford, a leasehold secondary parade of shops was sold for £1.5 million reflecting a yield of 10.6 per cent.

In addition to these sales, the Company also successfully agreed terms to regear the head leasehold interest of 2-3 Pavilion Buildings, Brighton and subsequently sold the investment for £2.5 million reflecting a yield of 6.0 per cent, delivering a return of 30.3 per cent. The Company also exchanged contracts to sell a vacant office building of 14,300 square foot at Globe Park, Marlow for £1.71 million, which compared with the June 2013 value of £1.15 million. These two sales completed in July 2014, after the Company's year-end.

A number of properties out-performed as a result of implementing asset management opportunities, lease renewals or new lettings. One of the largest tenants, HSBC plc agreed to renew the office lease on 1-2 Lochside Way, Edinburgh Park for 10 years from August 2014, with a break at the fifth year, at £699,616 per annum. This increased the value of the property from £6.6 million to £7.3 million and produced a total return for the asset of 24.7 per cent over the period.  Unit 2, Wide Lane, Eastleigh, an industrial property, was re-let during the final quarter to UTI Worldwide (UK) Ltd at a rent of £213,899 per annum, increasing the value from £4.9 million to £6.2 million creating a return of 30.9 per cent over the year.  The lease of the largest of the two units at Hemel Gateway, Hemel Hempstead, with an area of 62,000 square foot occupied by Majestic Wines, was extended from 2020 for a further 10 years thereby increasing the value from £7.5 million to £9.3 million, returning 29.8 per cent over the year. At 11 Church Street, Kingston upon Thames,  the Company took a surrender of the shop lease and relet to Calzedonia on a new lease for 10 years at £165,500 per annum (previously £134,500 per annum), producing a return on that asset of 34.9 per cent.

Against this background, the occupational market for some secondary property, especially retail remains challenging. The effect of lack of demand, coupled with oversupply in some towns continues to have an effect on rental values and the incidence of vacancies in some locations.

Despite new lettings during the year, the void rate on the portfolio has risen to 5.7 per cent although this figure includes Globe Park, Marlow which has since been sold.  As a result of the various lease renewals and lettings, the average unexpired lease length across the portfolio has been maintained and is now 7.8 years, compared with 7.9 years in June 2013.

Outlook

The Manager will continue to instigate asset management opportunities to add value within the existing property portfolio. Further sales of smaller and secondary properties which no longer fit the profile of the portfolio will be brought forward, in order to take advantage of the investor appetite for such assets. The proceeds of these sales together with monies raised from further equity raising will be deployed in purchasing new properties as part of the strategy to grow the Company's portfolio, improve the quality of the asset base and reduce levels of gearing.  This will be dependent on seeking out suitable investment properties which are priced at a level to generate sustainable returns going forward.

Investor sentiment has improved in the wake of a stronger UK economic performance and an easing of fears about debt markets in Europe. The major uncertainty would appear to be the timing and extent of an upturn in UK interest rates and its impact on the wider economy and property yields. While there are downside risks both in the UK and from abroad, if the economy performs in line with consensus expectations, the property market is predicted to deliver sustained positive total returns. The recent level of total returns may be exceptional, and we would expect some moderation to occur with the income component showing greater prominence over time.

All enquiries to:

Ian McBryde

Scott Macrae

F&C Investment Business Limited

Tel: [phone]

The Company Secretary

Northern Trust International Fund Administration Services (Guernsey) Limited

Trafalgar Court

Les Banques

St Peter Port

Guernsey GY1 3QL

Tel:      [phone]

F&C UK Real Estate Investments Limited

Consolidated Statement of Comprehensive Income

	Year ended 30 June 2014	Year ended 30 June 2013
	£'000	£'000
Revenue
Rental income	19,603	13,791
Total revenue	19,603	13,791
Gains/(losses) on investment properties	21,253	(4,313)
	40,856	9,478
Expenditure
Investment management fee	(1,707)	(1,242)
Expenses of merger	(32)	(746)
Other expenses	(1,697)	(1,204)
Total expenditure	(3,436)	(3,192)
Net operating profit before finance costs	37,420	6,286
Net finance costs
Interest receivable	49	15
Finance costs	(6,016)	(4,222)
	(5,967)	(4,207)
Net profit from ordinary activities before taxation	31,453	2,079
Taxation on profit on ordinary activities	(540)	(479)
Profit for the year	30,913	1,600
Other comprehensive income to be reclassified to profit or loss in subsequent periods
Net gain on cash flow hedges, net of tax	5,198	3,783
Total comprehensive income for the year, net of tax	36,111	5,383
Basic and diluted earnings per share	14.4p	1.2p

All items in the above statement derive from continuing operations.

All of the profit for the year is attributable to the owners of the Company.

F&C UK Real Estate Investments Limited

Consolidated Balance Sheet

	30 June 2014 £'000	30 June 2013 £'000
Non-current assets
Investment properties	295,387	271,063
Current assets
Trade and other receivables	6,061	6,362
Cash and cash equivalents	16,773	5,775
	22,834	12,137
Total assets	318,221	283,200
Non-current liabilities
Interest-bearing bank loan	(109,930)	(112,998)
Interest rate swap	(4,776)	(9,888)
	(114,706)	(122,886)
Current liabilities
Trade and other payables	(6,110)	(6,181)
Income tax payable	(377)	(472)
Interest rate swap	(4,459)	(4,546)
	(10,946)	(11,199)
Total liabilities	(125,652)	(134,085)
Net assets	192,569	149,115
Represented by:
Share capital	2,309	2,081
Special distributable reserve	170,704	153,929
Capital reserve	22,013	760
Other reserve	(2,457)	(7,655)
Equity shareholders' funds	192,569	149,115
Net asset value per share	83.4p	71.7p

F&C UK Real Estate Investments Limited

Consolidated Statement of Changes in Equity

For the year ended 30 June 2014

	Share Capital £'000	Special Distributable Reserve £'000	Capital Reserve £'000	Other Reserve £'000	Revenue Reserve £'000	Total £'000
At 1 July 2013	2,081	153,929	760	(7,655)	-	149,115
Profit for the year	-	-	-	-	30,913	30,913
Other comprehensive gains	-	-	-	5,198	-	5,198
Total comprehensive income for the year	-	-	-	5,198	30,913	36,111
Issue of ordinary shares	228	17,955	-	-	-	18,183
Dividends paid	-	-	-	-	(10,840)	(10,840)
Transfer in respect of gains on investment properties	-	-	21,253	-	(21,253)	-
Transfer to revenue reserve	-	(1,180)	-	-	1,180	-
At 30 June 2014	2,309	170,704	22,013	(2,457)	-	192,569

For the year ended 30 June 2013

	Share Capital £'000	Special Distributable Reserve £'000	Capital Reserve £'000	Other Reserve £'000	Revenue Reserve £'000	Total £'000
At 1 July 2012	1,105	89,445	5,073	(11,438)	-	84,185
Profit for the year	-	-	-	-	1,600	1,600
Other comprehensive gains	-	-	-	3,783	-	3,783
Total comprehensive income for the year	-	-	-	3,783	1,600	5,383
Issue of ordinary shares on merger	976	66,527	-	-	-	67,503
Dividends paid	-	-	-	-	(7,956)	(7,956)
Transfer in respect of losses on investment properties	-	-	(4,313)	-	4,313	-
Transfer to revenue reserve	-	(2,043)	-	-	2,043	-
At 30 June 2013	2,081	153,929	760	(7,655)	-	149,115

F&C UK Real Estate Investments Limited

Consolidated Cash Flow Statement

	Year ended 30 June 2014	Year ended 30 June 2013
	£'000	£'000
Cash flows from operating activities
Net profit for the year before taxation	31,453	2,079
Adjustments for:
(Gains)/losses on investment properties	(21,253)	4,313
Decrease in operating trade and other receivables	301	1,619
Decrease in operating trade and other payables	(71)	(1,646)
Interest received	(49)	(15)
Finance costs	6,016	4,222
	16,397	10,572
Taxation paid	(636)	(177)
Net cash inflow from operating activities	15,761	10,395
Cash flows from investing activities
Purchase of investment properties	(18,812)	-
Capital expenditure	(48)	(329)
Sale of investment properties	15,789	1,522
Cash transferred on merger	-	658
Interest received	49	15
Net cash (outflow)/inflow from investing activities	(3,022)	1,866
Cash flows from financing activities
Shares issued (net of costs)	18,183	-
Dividends paid	(10,840)	(7,956)
Bank loan interest paid	(1,467)	(698)
Payments under interest rate swap arrangement	(4,617)	(3,228)
Bank loan (repaid)/drawn down	(3,000)	4,000
Net cash outflow from financing activities	(1,741)	(7,882)
Net increase in cash and cash equivalents	10,998	4,379
Opening cash and cash equivalents	5,775	1,396
Closing cash and cash equivalents	16,773	5,775

F&C UK Real Estate Investments Limited

Principal Risks and Risk Uncertainties

The Group's assets consist of direct investments in UK commercial property.  Its principal risks are therefore related to the commercial property market in general, but also the particular circumstances of the properties in which it is invested and their tenants.  More detailed explanations of these risks and the way in which they are managed are contained under the headings of Credit Risk, Liquidity Risk, Interest Rate Exposure and Market Price Risk.  The Manager also seeks to mitigate these risks through active asset management initiatives and carrying out due diligence work on potential tenants before entering into any new lease agreements. All of the properties in the portfolio are insured.

Other risks faced by the Group include the following:

·     Market - the Company's assets comprise principally direct investments in UK commercial property and it is therefore exposed to movements and changes in that market.

·     Investment and strategic - poor investment processes and incorrect strategy, including sector and geographic allocations and use of gearing, could lead to poor returns for shareholders.

·     Regulatory - breach of regulatory rules could lead to suspension of the Group's Stock Exchange listing, financial penalties or a qualified audit report.

·     Tax efficiency - changes to the management and control of the Group or changes in legislation could result in the Group no longer being a tax efficient investment vehicle for shareholders.

·     Financial - inadequate controls by the Manager or third party service providers could lead to misappropriation of assets. Inappropriate accounting policies or failure to comply with accounting standards could lead to misreporting or breaches of regulations.

·     Reporting - valuations of the investment property portfolio require significant judgement by valuers which could lead to a material impact on the net asset value.  Incomplete or inaccurate income recognition could have an adverse effect on the Group's net asset value, earnings per share and dividend cover.

·     Operational - failure of the Manager's accounting systems or disruption to the Manager's business, or that of third party service providers, could lead to an inability to provide accurate reporting and monitoring, leading to a loss of shareholders' confidence.

The Board seeks to mitigate and manage these risks through continual review, policy-setting and enforcement of contractual obligations. It also regularly monitors the investment environment and the management of the Group's property portfolio, and applies the principles detailed in the internal control guidance issued by the Financial Reporting Council. 

The Board and the Manager recognise the importance of the share price relative to net asset value in maintaining shareholder value. The Manager meets with current and potential new shareholders, and with stockbroking analysts who cover the investment trust sector, on a regular basis. In addition, communication of quarterly portfolio information is provided through the Group's website.

Financial Instruments and Investment Property

The Group's investment objective is to provide ordinary shareholders with an attractive level of income together with the potential for income and capital growth from investing in a diversified UK commercial property portfolio.

Consistent with that objective, the Group holds UK commercial property investments.  In addition, the Group's financial instruments comprise cash, receivables, a bank loan, an interest rate swap and payables.

The Group is exposed to various types of risk that are associated with financial instruments.  The most important types are credit risk, liquidity risk and market risk (those relating to interest rate changes and pricing movements).

There was no foreign currency risk as at 30 June 2014 or 30 June 2013 as assets and liabilities are maintained in Sterling.

The nature and extent of the financial instruments outstanding at the balance sheet date and the risk management policies employed by the Group are detailed below.

Credit risk

Credit risk is the risk that an issuer or counterparty will be unable or unwilling to meet a commitment that it has entered into with the Group.

In the event of default by an occupational tenant, the Group will suffer a rental shortfall and incur additional costs, including legal expenses, in maintaining, insuring and re-letting the property until it is re-let. The Board receives regular reports on concentrations of risk and any tenants in arrears.  The Manager monitors such reports in order to anticipate, and minimise the impact of, defaults by occupational tenants.

The Group has a diversified tenant portfolio. The maximum credit risk from the rent receivables of the Group at 30 June 2014 is £520,000 (2013: £524,000). It is the practice of the Group to provide for rental debtors greater than three months overdue unless there is certainty of recovery. As at 30 June 2014 the provision was £78,000 (2013: £150,000). Of this amount £nil was subsequently written off and £6,156 has been recovered.

All of the cash is placed with financial institutions with a credit rating of A or above.  Bankruptcy or insolvency may cause the Group's ability to access cash placed on deposit to be delayed or limited.  Should the credit quality or the financial position of the banks currently employed significantly deteriorate, the Manager would move the cash holdings to another financial institution.

The Group can also spread counterparty risk by placing cash balances with more than one financial institution.  The Directors consider the residual risk to be minimal.

Liquidity risk

Liquidity risk is the risk that the Group will encounter in realising assets or otherwise raising funds to meet financial commitments.  The Group's investments comprise UK commercial property.

Property in which the Group invests is not traded in an organised public market and may be illiquid.  As a result, the Group may not be able to liquidate quickly its investments in these properties at an amount close to their fair value in order to meet its liquidity requirements.

The Group's liquidity risk is managed on an ongoing basis by the Manager and monitored on a quarterly basis by the Board.

In certain circumstances, the terms of the Group's bank loan entitles the lender to require early repayment, for example if covenants are breached, and in such circumstances the Group's ability to maintain dividend levels and the net asset value attributable to the Ordinary Shares could be adversely affected. 

Interest rate exposure

Some of the Group's financial instruments are interest-bearing.  These are a mix of both fixed and variable rate instruments with differing maturities.  As a consequence, the Group is exposed to interest rate risk due to fluctuations in the prevailing market rate.

Interest is receivable on cash at a variable rate.  At the year-end, rates receivable ranged from 0.0 per cent on current account balances to 0.18 per cent for deposit account balances.  Interest is payable on the bank loan at a variable rate of LIBOR plus a margin of 0.45 per cent.  The effect of the interest rate swap is to fix interest payable at 5.77 per cent per annum.  The effective rate of interest on the loan is 0.98 per cent.  Interest on financial instruments classified as floating rate is repriced at intervals of less than one year.

Exposure varies throughout the year as a consequence of changes in the composition of the net assets of the Group arising out of the investment and risk management policies.

In addition, tenant deposits are held in interest-bearing bank accounts.  These accounts earn interest at base rate less 0.75 per cent and receive no interest at this time as the base rate is too low.  Interest accrued on these accounts is paid to the tenant.

The Group's exposure to interest rate risk relates primarily to the Group's long-term debt obligations.  The Group's policy is to manage its interest rate risk using an interest rate swap, in which the Group has agreed to exchange the difference between fixed and variable interest amounts, calculated by reference to an agreed upon notional principal amount.  The swap is designed to fix the interest payable on the loan.  The interest rate swap covers £100 million of the loan and has the same duration.  Interest fixing periods are identical and on this basis the swap contract complies with IAS 39's criteria for hedge accounting.

Market price risk

The Group's strategy for the management of market price risk is driven by the investment policy. The management of market price risk is part of the investment management process and is typical of commercial property investment. The portfolio is managed with an awareness of the effects of adverse valuation movements through detailed and continuing analysis, with an objective of maximising overall returns to shareholders. Investments in property and property-related assets are inherently difficult to value due to the individual nature of each property. As a result, valuations are subject to substantial uncertainty. There is no assurance that the estimates resulting from the valuation process will reflect the actual sales price even where such sales occur shortly after the valuation date. Such risk is minimised through the appointment of external property valuers.

Fair values of financial assets and liabilities

In the opinion of the Directors there is no material difference between the carrying value and fair value of assets and liabilities that are included in the financial statements on a basis other than fair value.

The Directors and Manager regularly review the principles applied by the property valuers to ensure that they comply with the Group's accounting policies and with fair value principles.

Fair value hierarchy

The interest rate swap, valued at a liability of £9,235,000 (2013: £14,434,000) is considered to be Level 2 in the hierarchy.

Explanation of fair value hierarchy:

Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date.

Level 2 - The use of a model with inputs (other than quoted prices included in level 1) that are directly or indirectly observable market data.

Level 3 - The use of a model with inputs that are not based on observable market data.

 Directors' Responsibilities in Respect of the Annual Report & Consolidated Accounts

In accordance with International Financial Reporting Standards as adopted by the EU and applicable law, we confirm that to the best of our knowledge:

·      The financial statements contained within the Annual Report for the year ended 30 June 2014, of which this statement of results is an extract, have been prepared in accordance with applicable International Financial Reporting Standards as adopted by the EU, on a going concern basis, and give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group;

·      The Annual Report taken as a whole is fair, balanced and understandable and provides the information necessary to assess the Group's performance, business model and strategy; and

·      The Strategic Report and the Report of the Directors include a fair review of the development and performance of the business and position of the Group together with a description of the principal risks and uncertainties that they face. 

On behalf of the Board

Q Spicer

Director

16 October 2014

F&C UK Real Estate Investments Limited

Notes to the Consolidated Financial Statements

for the year ended 30 June 2014

1.         The audited results of the Group which were approved by the Board on 16 October 2014 have been prepared on the basis of International Financial Reporting Standards as adopted by the EU and the accounting policies set out in the statutory accounts of the Group for the year ended 30 June 2014.

2.         The fourth interim dividend of 1.25p was paid on 30 September 2014 to shareholders on the register on 12 September 2014. The ex-dividend date was 10 September 2014.

3.         There were 230,855,539 Ordinary Shares in issue at 30 June 2014. The earnings per Ordinary Share are based on the net profit for the year of £30,913,000 and on 214,347,657 Ordinary Shares, being the weighted average number of shares in issue during the year.

4.         Two properties were purchased during the year for £18.05 million and five properties were sold during the year for £16.05 million (excluding costs).

5.         The Group results consolidate those of F&C UK Real Estate Finance Limited, a wholly owned subsidiary which wholly owns IRP Holdings Limited and IPT Property Holdings Limited which hold and manage the investment properties.

6.         These are not full statutory accounts. The full audited accounts for the year ended 30 June 2014 will be sent to shareholders in October 2014, and will be available for inspection at Trafalgar Court, Les Banques, St. Peter Port, Guernsey, the registered office of the Company.  The full annual report and consolidated accounts will be available on the Company's websites: www.fcre.co.ukor www.fcre.gg

7.         The Annual General Meeting will be held on 19 November 2014.

 

END

 

 

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