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Caledonian Trust PLC (CNN)

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Wednesday 20 December, 2006

Caledonian Trust PLC

Final Results

Caledonian Trust PLC
20 December 2006


20 DECEMBER 2006

Caledonian Trust PLC

Results for the year ended 30 June 2006

Caledonian Trust PLC, the Edinburgh based property investment holding and
development company, announces its audited results for the year to 30 June 2006.



The Group made a profit of £129,509 in the year to 30 June 2006 compared with
£412,150 last year.  Earnings per share were 1.09p and NAV was 222.5p, compared
with 205.8p last year.   Income from rent and service charges was £870,745, an
increase of £163,736 over last year. Gains on the sale of properties were
£295,229 compared with £501,420 last year.    Administrative costs of £992,992
were £142,249 higher than last year due primarily to a rise of £98,420 in
property costs related principally to the vacancy at St Margaret's House and the
repair costs at Ashton Road, Rutherglen, prior to the successful sale.   Net
interest payable was £43,506, higher than last year's payment of £12,630, due to
increased borrowings.   The weighted average base rate for the year was 4.52%,
almost the same as the 4.72 % for the year to June 2005.

On 30 June 2006 the Group's portfolio comprised by value 37.7% office investment
property (of which 67.6% is open plan) 36.9% retail property, 3.6% industrial
property, and 21.8% development property.

Review of Activities

The Group's property activities reflect our continuing strategy of purchasing
assets with medium-term development prospects and of making niche and
opportunistic acquisitions.    Investment assets will probably be sold when they

Significant changes are taking place in our Edinburgh New Town investment
portfolio.  The twenty-five year leases on our two properties in Young Street,
adjacent to Charlotte Square, determined on 28 August 2006.   The smaller of the
two properties, 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
other property, 19 Young Street, also with two garages, has been unoccupied for
some years and we have agreed a satisfactory dilapidations settlement. Many New
Town offices have reverted to residential use where the values are usually over
£300/ft2 refurbished. In this instance residential conversion would cost around
£50/ft2 which produces a poorer return than office values at this location. The
unrefurbished offices as are being marketed at a price which reflects offers
over £260/ft2.  The two garages are being retained by the Group for letting.

We have made a similar analysis of the vacant space at 61 North Castle Street,
where office values are similar to Young Street, but have arrived at the
opposite conclusion. The Georgian Castle Street property is particularly elegant
and is built on a much more generous scale than Young Street and, on
refurbishment, is expected to have a residential value of over £450/ft2,
substantially in excess of office values. We propose to undertake this
refurbishment and to incorporate the Edwardian extension at the rear of 61 North
Castle Street into the contiguous office space in Hill Street.

In South Charlotte Street the first five year review due in December 2006 of the
4,500ft2 restaurant let to La Tasca for twenty five years is being negotiated.
Our agents have indicated that a substantial rental increase should be achieved.

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 City of Edinburgh Council officials over the years 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 of Scotland 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 Scottish 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 to one of six local
authority areas short-listed in Stage 1 with the 'status quo'- i.e. no move.
In their appraisal Registers concluded that for operational efficiency any
partial move should be of a whole sub-section and selected one currently
employing 222 full time employees, just over a fifth of their current full time
staff.  Due to a planned staff reduction to c800 by 2011/12 this subsection was
expected to have 162 full-time employees.   To counter the decline in the number
of employees being relocated, the proposed new feudal abolition unit of 24
full-time employees was to be added to the relocated site.

The marginal cost of such a move, given a range of variations, was the main
substance of the Stage 2 appraisal. Registers have a large existing office in
Glasgow.   Due primarily to economies of scale, adding the existing staff there
is the least expensive relocation.   The report states that on the premises
stated such a relocation would have a 'net present cost' of £8m, and involve
'significant and continuing loss of efficiency, the costs of which will have to
be met by the Registers of Scotland's client base'.  However, if such a partial
relocation is required, relocation to Glasgow 'delivers socio-economic benefits
in line with policy and also represents the least disadvantageous location in
terms of cost and impact on the Registers of Scotland's core business'.

Registers submitted their extensive Stage 2 Relocation Appraisal to the
Ministers on 8 July 2005. A decision was originally expected in late 2005, then
at a later date and latterly in the third week of July 2006.   On 21 September
2006, in response to a question in the Chamber, the Minister, George Lyon,
replied: 'The Executive will announce the outcome of Stage 2 of the location
review of the Registers of Scotland shortly'. Bizarrely on 24 November 2006 the
Minister announced that the Executive was 'deferring' a decision and had asked
Registers to report back in a year.  The referral complicates our analysis by
introducing several additional options and uncertainties and by lowering the
probability of any one particular outcome.

The deferral relates to 186 jobs only as the Stage 1 recommendation to maintain
the vast majority of jobs in Edinburgh was accepted. The cost of the job
transfer is high, although the Executive avers that the policy can be justified
on 'socio-political' grounds.  However, Audit Scotland has recently reported
that 'the policy had been operated inconsistently with no systematic evaluation
and an absence of explanations ...'.    In view of the criticism, the deferral
and the forthcoming election and, possibly, a change of policy and the carefully
argued appraisal by Registers, the move of the 186 jobs now seems less likely.
The retention of the majority of jobs,  c600, seems very likely.

Unfortunately these conclusions are necessarily uncertain. What is certain is
that Registers remain in the relocation review 'pending tray' and as such will
be unable to plan coherently beyond the ongoing relocation review, which now may
be subject to almost indefinite review.   Indeed the policy may be dead but the
death as yet unconfirmed. Next year, following the May 2007 election, there will
be a new parliament and a new administration.

While the Group's preferred option was to undertake a development in conjunction
with or for the benefit of Registers, outline contingency plans have been
prepared. We will now promote a phased development in which the St Margaret's
site provides the first phase.  Key elements will be a landmark tower on the
west boundary suitable for a hotel, office or residential use and a piazza
entering off a new street frontage on London Road.  In due course the
redevelopment of the Meadowbank House site would complement that at St

In our property at Baylis Road / Murphy Street neat Waterloo, in the borough of
Lambeth, London, the tenants, who had been in occupation on short-term leases
since the early 1990's, exercised the option to break the two year lease in May
2006.    A dilapidations schedule was served at that time and a substantial
amount of the reinstatement works undertaken by the tenant are nearing
completion and discussions are underway to agree a financial settlement in
respect of the outstanding items. There are many options for the properties on
which we are being advised by our London agents. Office rents have risen 17.7%
in the West End over the last three years and best rents in the South Bank are
now £38/ft2 equivalent to say £25/ft2 in Baylis Road. Residential values have
risen sharply, 25.4% in Lambeth in the year to September 2006, and are now
estimated to be over £600/ft2.    If fewer than fifteen flats are developed, no
affordable housing is required and a mixed commercial and residential
development of 14 flats may optimise value. Alternatively, once the
dilapidations works are completed, a moderate upgrade may result in a rental
value with an investment value higher than the residual value of any
development.   We continue to receive unsolicited offers to let or to buy the

The sale of Ashton Road, Rutherglen was our only investment disposal in the
period.   This industrial property was purchased for minor refurbishment and
letting in an area likely to benefit from the proposed extension of the M74 to
the Kingston Bridge.    Although planning permission had been granted for this
extension it became subject to a judicial review, the outcome of which was
uncertain.   Thus, when an unsolicited offer was made, even although
refurbishment had started, we accepted it and realised a surplus of £189,726
after all costs.

The Group gained several important planning consents during the year.  In
Tradeston, Glasgow, on the south side of the Clyde opposite the Broomielaw we
obtained permission for a development of 191 flats, predominantly two and three
bedrooms together with associated car parking and open space, and 10,000ft2 of
commercial space.  The property is let and currently the rent review due in May
2006 is being negotiated but is subject to a minimum uplift which should be

In August 2005 planning permission was received for forty-five large detached
houses near Dunbar, which has a station on the main east coast line.  The dual
carriageway section of the A1 from Edinburgh has recently been further extended
and our site, just off the A1, is now only four miles beyond the dual
carriageway. On 6 June 2006 we received planning permission for a further
twenty-eight houses including four 'affordable' on a second site nearby.  The
report of an enquiry into a proposed superstore and a budget hotel on the A1
just south east of Dunbar is still awaited.  Five years after our original
application planning permission was granted in August 2006 for eight detached
houses at our site at Wallyford, which borders Musselburgh and is within 400
yards of the east coast mainline station with easy access to the A1 near the
City Bypass.  Construction is proceeding rapidly on a contiguous site on which
two national house builders are developing around two hundred and fifty houses.

In Belford Road, Edinburgh, we have undertaken site works sufficient to
implement our long-standing 22,500ft2office consent which otherwise would have
lapsed on 12 October 2005,  the day we obtained another consent for 20,000ft2 of
residential development together with parking for 20 cars.  Belford Road, which
is less than 500m from Charlotte Square and the West End of Princes Street, has
recently become a quiet cul-de-sac.  Residential values should average over £365
/ft2, the spectacular views from the upper floors commanding much higher values.
  However the implementation of our office consent may yet prove to have been an
astute move. Since Q3 2005 office rents in Edinburgh have risen by about 5% and
yields fallen by 0.8 percentage points, sufficient to increase the office
investment value by 21.85% to say £500/ft2.

In East Edinburgh at Brunstane Farm, adjacent to the rail station, planning and
listed building consent was granted on 13 December 2006 to convert the listed
steading to provide ten houses of varying sizes totalling 14,000ft2. In addition
to the steading we own five stone-built two storey cottages for refurbishment
and possible extension, two further medium-sized brick farm buildings and
two-and-a-half acres of land adjacent to other residential property, but at
present in the Green Belt fringe.

Last year we bought a farmhouse, a farm steading and adjacent land in an
elevated location with commanding views over open country in central Perthshire
just off the A9 near Bankfoot.  We expect to submit an application for a
complete residential redevelopment shortly.

In the year to 30 June 2006 we have acquired eight development sites and since
the year end we have acquired a further four, including the second site near
Dunbar on which we gained consent for twenty-eight detached houses.  Currently
we are negotiating the purchase of a large rural property in Central Scotland
with long term potential.

Ardpatrick is the largest and the most extensive of the twelve properties
acquired but it is potentially the most rewarding. The Ardpatrick estate
occupies a peninsula in West Loch Tarbert and at present comprises a mansion
house based on a Georgian house built in 1769, ten estate houses or former
houses, a farm house (High Ardpatrick) 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 10 km 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.

The estate is in very poor condition but, as progress since our purchase on 4
April 2006 confirms, the medium-term development value of the Estate is
considerable. Immediately following a very long delayed completion we sold on
part of the property on which we realised a trading profit of £105,000. Three of
the outlying cottages have been repaired, redecorated and brought up to a
saleable standard and are currently under offer. We have recently obtained
planning consent to convert and extend a stone built bothy for residential use.
The small south Lodge cottage on the west drive has a wonderful coastal setting
and consent has recently been granted to extend it to just over 1,000ft2.

Like many West Highland estates houses Ardpatrick House enjoys a beautiful
setting looking SE over West Loch Tarbert to the Kintyre peninsula, but, unlike
most estate houses or shooting lodges, the house is built to a splendid classic
Georgian design originally comprising a central three-storey building with two
flanking pavilions.

Internally also it is set apart by many fine original Georgian features, many of
which are in their original condition.  Sadly the same is not true of the fabric
of the building where maintenance has been woeful.   At first, restoration of
this fine building seemed wholly uncommercial.  However, due to 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 1760ft2 to 3478ft2 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.

The Group's policy for the estate is to arrest the continuing decay in the
infrastructure and then to repair, renew or improve it sufficiently for its
function but also, wherever practicable, restore it as appropriate for the
amenity and style of the estate. Such a setting will make the properties
considerably more attractive to occupiers, purchasers and visitors. We also
intend to restore or provide limited central amenities available to a wide range
of occupiers or potential occupiers.

In a quite different part of Britain, Herne Bay, our joint venture development
of 39 houses is on budget. Fifteen houses have been sold and 14 are reserved,
slightly fewer than expected at this time.

Economic Prospects

The world economy grew by 5.0% in 2005 and is expected to grow by 5.3% in 2006,
the highest for over 20 years, before declining slightly in 2007 and 2008 to
4.7%, due to tighter monetary policy.   This favourable outlook is conditional
on the non-crystallisation of a number of political and economic risks, most of
which fortunately are remote.

A world recession and deflation posed a real but limited risk in 2000, but
growth was maintained, primarily by active monetary policies and world interest
rates are currently rising to moderate growth.  Japan, whose economy has
suffered a long, often deflationary, recession has now recovered and the economy
is estimated to grow by 2.8% this year.  The war in Iraq threatened a severe oil
shortage and subsequent economic dislocation, but oil supplies were largely
maintained.  Oil prices did rise subsequently, doubling in 2004-05, but this was
largely due to increased global demand and as the world economy expanded by
5.0%, less than in the previous year, possibly due to the estimated 0.3%
reduction in growth per $10 rise in oil. The disruption caused by international
terrorism is having a profound and widespread effect, particularly on individual
freedom and convenience but, like natural disasters, the consequences, however
awful locally, are confined and limited.

A widespread conflagration in the Middle East, centred on Iraq but including
Shiite Iran and possibly other states, is a major and increasing risk to world
stability.  Near anarchy prevails in Iraq with numerous separate factions
fighting the coalition forces and each other and murdering the civilian
population, the worst effects of which are being mitigated by the presence of
the Coalition Forces. There seems no military, political or economic
circumstance that will bring stability and a military withdrawal appears
inevitable after which the position is likely to deteriorate further, possibly
accompanied by a regrouping of the civilian population, until local supremacies
are established and any fighting is then concentrated between these warlords.

If the occupying forces effect a partition, then the worst aspects of a civil
war might be avoided.  In other contexts partitioning has reduced conflict but
Iraq appears inherently unstable.  In particular, the influence of the Iranian
Shiite theocracy in southern Iraq is already very strong and the risk of a war
with the previously dominant Sunni Iraq minority is high.  The long Iran-Iraq
war of 1980 - 1988 had little effect on the world economy in spite of the huge
loss of life and, if another conflict were to be confined to these combatants,
disruption to oil supplies, although significant, should not prove catastrophic.

Other states did not enter the 1980 - 1988 war, but the Iranian nuclear
programme is indicative of Iran's political ambition, a position likely to be
interpreted as inimical to the interests of the other nearby states who might
seek to limit the further spread of Iran's influence in Iraq, if necessary by
force, so threatening the stability of the whole region. Self-interest and the
still considerable influence of the West which has provided security for client
states, as in Kuwait, should ensure any military involvement is contained, but
the events unfolding in the Middle East represent the incipient undermining of
the present status quo, the regional balance of power, the status of the Nuclear
Non-Proliferation Treaty and the influence of the US in world politics. The
present engagement in and the manifest failure in Iraq and, to a lesser extent
in Afghanistan, has impaired the ability of the US to 'hold the peace'.

The twin US imbalances in savings and balance of payments are potentially the
greatest threat to the world economy.  At present one-seventh of the rest of the
world's gross savings (and more of the net) are being absorbed by the US current
account deficit, which is financing a huge boom in consumption fuelled by
unprecedented deficits - household debt at 7% GDP and large government deficits
- as the US has enjoyed a housing-led consumption boom.  However this has
apparently now come to an abrupt halt and the reduced growth of consumption will
slow the economy.  A remedial fiscal stimulus would increase the Federal deficit
when the economy and hence tax revenue was already declining, while a monetary
stimulus would reduce the attraction of $ holdings and might damage confidence
in the $.  In any down turn political pressure might mount for a weaker $ and
some protection against imports, principally China whose current account surplus
is 7% of GDP.  A large and sudden $ decline would stimulate domestic demand and
mitigate the effects of a downturn but it would seriously affect imports and
world trade. Such an economic shock could be avoided if non-US demand expanded
as US import demand declined: a 'Goldilocks' solution.  Last year Morgan Stanley
said 'The history of economic crises is clear: the longer any economy holds off
facing its imbalances, the greater the probability of a hard landing .......',
but the US has not faced its imbalances, as Alan Greenspan said in 2004 'given
the size of the US current account deficit a diminished appetite for adding to
dollar balances must occur at some point'.  However, overvaluations can persist
for a long time, as they did in the dot-com bubble described, as early as 1996,
by Alan Greenspan as 'irrational exuberance'.   But as the FT leader said last
year 'a long-term requirement does not make a short-term bet. The (US) current
account dynamics may not bite for several years yet' - one year has passed!

Recent political events may accelerate these necessary US economic adjustments.
  The US adventure in Iraq may represent a turning point similar to the abortive
UK adventure in Suez fifty years ago. That failure clearly demonstrated that the
UK's actual position was considerably different from its perceived position; the
UK was no longer a prominent independent world power, and, even in alliance with
France, both clinging to the relics of empire, they could not act independently.
The withdrawal took place subsequent to President Eisenhower's intervention,
notwithstanding that Nasser had unlawfully seized the Suez Canal, closed it to
warships and threatened other interests East of Suez, particularly those in the
Persian Gulf, all circumstances that compounded the UK's public humiliation. The
US-led invasion of Iraq bears a frightening similarity.   Saddam, like Nasser,
seemed to threaten the vital interests of the West; in both cases UN support was
sought but not gained; and both invasions were categorised as being in
self-defence. Moreover, the failures in Suez and in Iraq have had similar
outcomes:  the balance of power shifted against the invaders - Nasser was
greatly bolstered by his effective defiance and in Iraq fundamental Islamists,
Al Qaeda and other terrorists along with anti-American factions successfully
defy the world's greatest military and political power.  In both cases the
invaders grossly overestimated their own capabilities, miscalculated the
response of the population, had little preparation for post-invasion policy and
acted contrary to respected advice.  Suez highlighted the diminished real
influence of the UK and Iraq, at the very least, questions the unassailable
power of the US.

The supremacy of the US position arose on the fall of the 'Wall' in 1989 which
marked the defeat of the Soviet Union, not by the passage of arms but by the
implosion of Communism as a result of its prolonged economic failure.  The world
has seen few such unipolar powers, the most notable being the Roman Empire.
Gibbon, writing in 1776, the year the Declaration of Independence was signed,
makes two observations and an analysis of telling relevance - 'it was easy for
him (Emperor Augustus) to discover that Rome, in her present exalted situation,
had much less to hope than to fear from the chance of arms; and that, in the
prosecution of remote wars, the undertaking became, every day more difficult,
the event more doubtful, the possession more precarious and less beneficial
....' and 'the forests and morasses of Germany were filled with a hardy race of
barbarians;  and though, on the first attack, they seemed to yield to the weight
of Roman power, they soon, by a signal act of despair, regained their
independence'.  Gibbon analyses the decline and fall as a revolt against Roman
'universalism' driven by Christian values and an egalitarian protest against the
unequal distribution of property.

The unipolar US has a current account deficit of nearly 7% of GNP, but previous
empires were not so exposed.  The British Empire in its heyday, just before WW1,
had a current account surplus of about 7%, and, although both sixteenth century
Spain and Rome had current account deficits, these were covered by
theacquisition of long- term assets - colonies and silver and gold.

The potential fragility of the US undermines the existing unipolar position of
the U.S., or, as the Hudson Institute says 'Debt saps the world power of
America'. The hegemony of the US was amply demonstrated by the defiance of the
UN, by the recruitment of a coalition and by buying positions in Pakistan and
Central Asia to assist is the rout of the Taliban and of Iraq's forces.
However, hegemony is not omnipotence and, as in Indochina and Vietnam, big
nations lose small wars, where local combatants do not need to prevail, but only
to survive, to win.

The limits to US military power are cruelly exposed in the Middle East and the
financial exposure and dependence on China's $ deposits represent a changed
perspective. These factors will have contributed to the political failures in
Iran and North Korea which in turn undermines confidence in the strength of the
US and exposes the increasing risk inherent in the US twin imbalances.

UK economic growth is expected to be approximately 2.75% in 2006, and the
economy has expanded for the last fifty-seven consecutive quarters since the
economy emerged from the recession of the early 1990s, the longest unbroken
expansion period on record. The average annual growth rate in the nine years
since Labour came to power, benefiting from the reforms of the previous
administration and from granting operational independence to the Bank of
England, has been 2.8%.   In 1997 UK output per capita was the lowest of the G7
nations but by 2006 it was second only to the USA. Growth in 2005 was reduced to
1.9% as a result of a fall in the growth of consumer consumption from 3.5% in
2004 to 1.3%, the slowest rise since 1992, probably largely due to the
stabilisation of house prices. Over the next few quarters the Bank of England
expects consumption growth to be at its historical average following
stabilisation of tax rates and a fall in energy prices and its central forecast
for growth in 2007 is 3.0%

Deloittes suggest that in 2007 UK growth will be affected by a slowdown in
exports to the US where growth is expected to drop from 3.4% this year to only
1.5% in 2007. In the US existing house prices have fallen by 3% and new houses
by 9.7%.  The wealth effect on consumption - together with the related sharp
fall in MEW - is larger than in the collapse of the tech stocks in 2000, as
property, unlike the tech stocks, constitutes a significant part of household
wealth.   In the UK recent interest rate rises should result in interest
payments of 9.5% of household income, the highest proportion since 1992 and
savings are also expected to increase slightly. In view of these constraints
Deloittes forecast growth of 2.0% similar to the EIU's 2.2%, but lower than the
Economist's 2.4% forecasted growth and much less than the Bank of England's
central forecast.

Two years ago, when house price rises were still above 15% some commentators,
notably Capital Economics and HSBC, argued that a house price bubble existed
which, when pricked, would lead to a sharp fall in house values, greatly
increased savings and reduced consumption.   By October 2005 house price
inflation had dropped to 2.5%, after being negative in April and May 2005,
causing the contraction in consumption noted earlier.    The bubble contracted,
but there has been no pricking. Recently commentators have reported rises of up
to 12.3% which have brought new warnings from the relatively mild statement by
the Governor of the Bank of England: 'the level of house prices seems remarkably
high relative to average earnings or average incomes or anything else you could
look at' to an estimate by PwC that prices were 15% overvalued and a forecast of
'significant' falls in real house prices within one or two years by Morgan

Capital Economics is no longer predicting a collapse in house prices because
they had been 'proved wrong'. Morgan Stanley say that it is only possible to
explain the more than doubling of house prices in the past decade if demand for
houses has been heavily influenced by expectations of further rapid rises ie a
bubble had formed which by default occurs when the dominant motive for purchase
is the expectation of selling on soon at a profit - 'pass the parcel'.
Alternatively, house price rises can be explained in respect of reduced
inflation, asset price variation and supply. House prices have risen but so have
other assets, including the only safer asset class, gilts. Recently a fifty year
indexed gilt was issued which, if it had been issued ten years ago, would have
now doubled in value. Most asset class values vary around uncertain estimates of
fundamental value and changes in that fundamental value. These prices usually
slow positive serial correlation in the short term and negative serial
correlation in the long term: a series of above average increases are followed
by a series of below average increases: knowledge of the timing of the
switchover would make one very very rich!   Houses also derive value from prime
location and from perceived social status, benefits that are highly income
sensitive.   These properties attract the wealthy whose time is expensive, the
establishment and those aspiring to the establishment, an increasing demand, but
as the supply is fixed, prices rise. The current huge boom in City bonuses is
probably reflected in the 54.9% and 47.8% price rises in Kensington and Chelsea
and in the City of Westminster respectively. Where houses are outwith locational
and social value and supply is plentiful, house prices should reflect the
highest other use of the land on which they are built, normally farmland in the
UK, plus the commercial cost, including return on capital, of providing them, a
position approached in the American mid-west. In the UK supply is usually
constrained by rationing, the coupons being planning consents. House completions
(including flats) in the UK have now risen from 175,000 in 2001 to 206,000 in
2005, slightly above the 190,000 typically produced in the 1990s. Conversions
and demolitions reduce these figures by about 50,000 per year.  Over the next
twenty years Government estimates are that in England alone 209,000 new
households will be formed each year.

Kate Barker's report to the Treasury says UK real house prices have risen 2.4%
over the thirty years to 2004 (EU average 1.1%, Germany 0.0%!) or 2.7% over the
last twenty years. She estimates that for England to reduce real growth to 1.8%
would require an additional 70,000 private sector houses per annum and, to 1.1%,
a further 50,000. Given the constraints on supply in the UK it seems most
unlikely that supply increases will influence prices significantly.

CPI inflation is at its highest for ten years but largely due to recent oil and
energy prices which have now largely passed through the economy and current
estimates are for oil prices to be stable or to fall. Although interest rates
have recently risen and market projections are for a further small increase in
early 2007 the Bank of England's central projection is for inflation to fall
back to 2% in late 2007. Thus debt-servicing costs should not rise further,
inflation should be low and growth in the economy should continue at 2% to 3%
pa. These are conditions that will support demand for houses.

Property Prospects

In the year to September 2006 the CBRE All Property Yield Index fell 0.5
percentage points to 5.0%.  Falls of 0.8 percentage points were reported last
year which, together with the same fall the previous year, result in a 2.1
percentage point fall over 3 years.  If there had been no other changes in these
three years in the CBRE portfolio, its value would have increased by 42%.
Over these three years all sectors of the index rose in value by 30% or more,
and offices at 46.1% were the best sector.  In Scotland the value of Retail
Warehouses rose by 35% compared with 30% for UK Retail Warehouses, but all other
Scottish sectors rose less than the average. In September 2006 10-year Gilts
yielded 4.5% exactly the same as three years ago but then the yield gap between
gilts and property was 2.6 percentage points whereas now it is 0.5 percentage
points. Gilt yields were higher than All Property yields for the 25 years from
1972 to 1997 except for two quarters in 1993/1994. Since then property yields
have always been higher than gilts but the current small margin of 0.5
percentage points is the smallest positive yield gap since the negative yield
gap was eliminated in 1997.

In the year to September 2006 the yield on retail investment property fell only
0.2 percentage points but industrials fell 0.8 percentage points to 5.7% and
offices fell 0.9 percentage points to 5.2%.  The All Property rent index rose
3.9% compared with 2.3% last year and -1.1% the previous year. The largest rises
were shops, 3.1%, and offices, 6.6%, of which London's West End and City rose
12.0% and 13.4% respectively.  In spite of these rises office rents in London
and the South East are still lower than five years ago.

Over the last five years the All Property rent index has grown 13.6%, but, as
RPI has increased 17.1%, has fallen in real terms. Since the market peak in 1990
the All Property rent index has grown 33.6% but has fallen 14.9% in real terms.
In real terms offices have been the worst performing sector, falling 28.6% with
the notable exception of Docklands up 5.5%, industrials have fallen 2.2% but
shops have regained the previous rental value while retail warehouses show a
remarkable 64.1% rise.

The rumoured sale of Beaufort House in the heart of the City for £280m provides
an illustration of poor real performance.  Mountleigh of the 1980s boom (& then
bust) fame sold Beaufort House for £200m in 1987, the year the RPI was rebased
to 100.0 - it is now 200.4!

Capital Economics has provided an interesting historical analysis of property
yields compared with other asset classes. Since the 1920s there has been an
average 0.31% points reverse yield gap - ie property yielded less than gilts.
Property is an inherently riskier asset than gilts suggesting that investors
should require a premium to hold property in preference to gilts.   This premium
existed from the 1920s until the early 1970s and has again been present since
the mid 1990s. 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 been 1.5 percentage points higher than
gilts, a higher premium than is currently obtained. Capital Economics also argue
that property is expensive compared to Equities.  For the last eighty five years
the initial yield on property has been on average 2.6 percentage points more
than equities, or 3.7 percentage points since 1990, but the current premium is
only 1.7 percentage points.

The fall in the property premium has continued and current yields of 5.0%
together with a rise in rents have again provided excellent total returns. In
the twelve months to September 2006 the IPD index showed a total return of
20.7%, higher than the twelve-month figure of 17.5% I reported last year, with
all three constituent sectors having almost similar returns. Not surprisingly
capital growth provided almost 75% of the increased return.  These returns
compare with 14.7% for equities and just 2.5% for gilts. Over the last three,
five and ten years total returns from property have exceeded those in all other
asset classes, although the equity return over three years of 18.3%pa is only a
fraction below property, 18.4%pa. Over ten years the equity return is 7.7%pa
compared with property's 13.5%pa.

Property funds continue to be set up for investment in the UK which are
attracting large inflows of capital. The introduction of REITS next year is
likely to bring further additional capital to the investment market. However, as
the supply of UK investment property is relatively inelastic, even a small
increase in demand results in relatively large price rises.  These new sources
of demand will reinforce demand which has been buoyed up by recent excellent
performance.  Prices are positively serially correlated in the short-run - i.e.
if prices rose last period, they will probably rise in the next period - but, in
the long-run they show negative serial correlation.  The question for property
is: is it still the short-run?

Last year I reported that commentators including Cluttons, Colliers CRE and the
Estates Gazette IPF forecast predicted 2006 returns of 7% - 9%, based on
moderate rental growth but no further fall in yields.  All those commentators
understated the excellent returns for 2006, in particular the fall in yields
that has taken place in spite of a background of rising gilt yields.  Their
predictions for 2007 are similar to their predictions last year for 2006 - total
all property returns of 7% - 10%, based again on moderate rental growth and
little change in yields.  Offices are expected to be the best-performing sector
with those in London's City and West End areas forecast to return over 12%. Only
once in the last 31 years have All Property yields remained constant from year
to year - at 8% from 1982 - 1984. This precedent has been quoted in the last two
years' reports and yields changed: they fell, but any change in 2007 seems
finely balanced.

Rydens report Scottish investment property performed well in the year to June
2006 with the office sector returning 27.4%, above the UK figure of 23.8%,
industrial 20.3% and retail 20.5%. The excellent performance of the office
sector was due to yields falling to 4.5% in Glasgow, to under 5% in Edinburgh
and to 5.25% in Aberdeen.  Surprisingly such low yields are not unprecedented.
In April 1988 Rydens reported Charlotte Square, Edinburgh at 'sub 5%' and 5.25%
in Blythswood Square, Glasgow. In October 1989 they reported an investment sale
to a 'French Institution' at 5%.   Headline rents at £27/ft2 in Central
Edinburgh and about £19/ft2 in West Edinburgh have been unchanged for two years.
  The static rental level reflects an almost unchanged ratio between uptake and
supply.  For two years uptake has been 395,000ft2 per half year and the average
supply has been 2,337,000ft2. With new schemes such as the Quartermile
continuing to be built, certain insurance companies releasing space and the
transfer of large professional firms from traditional space to modern open plan
space virtually complete, it is unlikely that rents will increase significantly
unless new occupiers are attracted to the City. In all adjoining local authority
areas offices are being built or are planned near their boundary with Edinburgh
which will compete with Central Edinburgh locations.

Glasgow headline rents have risen from £19/ft2  two years ago to over £20/ft2
last year and to about £23/ft2 to £25/ft2 this year as uptake has averaged
571,000ft2 over the last four six- month periods as opposed to 279,000ft2 for
the four periods ended two years ago. Supply is now 1,708,000ft2, the lowest
since April 2001. Compared with Edinburgh, Glasgow offers lower occupation costs
and cheaper and more available labour together with better financial assistance.
  Glasgow is also the preferred location for most civil service jobs relocated
from Edinburgh. Glasgow's office sector seems likely to continue to improve.

In Aberdeen the takeup of office space in the year to end September 2006 was
555,381ft2 the highest ever reported and the total supply then was 832,407ft2
the lowest level since 2000; rents have risen to a record £22/ft2. Oil prices of
over $60 per barrel since 2004 have boosted North Sea investment which is
expected to rise to £4.8bn in 2006, a significant increase from an earlier
estimate of £3.2bn. Employment in the offshore sector is expected to be 380,000
this year compared to 365,000 last year and 349,000 in 2004.  Higher activity
has increased output which had been declining steadily from the peak of 4.5m boe
in 1999, but it is now expected to remain over 3m boe a day until 2011. At the
historic rate of decline economic production in existing fields will be under 1m
boe in ten years time and will cease by 2026.

Last year I reported that house prices had risen 2.5% in England and Wales but
at the much higher rate of 17.7% in Scotland although Edinburgh's average growth
was 'only' 5% - 8%.  This year, according to the FT House Price Index  prices in
England and Wales have risen 7.3%  ( to end November 2006). Rightmove who
monitor 'asking' prices report rises of 12% overall but of 18.2% in London and
of 50% in Kensington and Chelsea.  Lloyds TSB report Scottish prices 11.6%
higher and the ESPC report Edinburgh city centre prices to be 15.2% higher,
possibly reflecting similar market conditions to central London.

Commercial and residential property prices are at peaks, both supported by a
long period of stable growth, low inflation and interest rates and high
employment but the stability of these two peaks varies.  The commercial market
is supported by recent good performance, by a puncturing of the equity cult
following the dotcom boom, and by a professional move towards a reallocation of
asset classes that has spread to private investors and has a considerable
overseas following. These investments are made into a market with very low
short-term supply elasticity and so susceptible to rapid price increases.
However the long-term supply elasticity of most classes of commercial property
has been considerably increased in recent years as consents for offices, now
contained in the much looser 'business space', have been eased and users'
preferences and prejudices for some locations have changed. An increased supply
with wider choice reduces prices and the protection of 'location' has been

Property investment is at times regarded as a fixed bond yielding to maturity,
but this is not always a stable foundation.  Some commercial investments are
wasting assets as a portion of the investment value relates to the quality of
the covenant rather than to the site or to the building.  When the lease ends or
the tenant defaults the covenant value disappears and, in extreme circumstances,
the asset becomes a liability. A further disadvantage is that recent price rises
are arguably due to a short-term speculative serial correlation - a momentum
effect - which ultimately will be susceptible to a long-term reversal.

The support for the residential price peak is much broader. Short and long-term
supply continue to be constrained in most places by planning restrictions, by
the growing need to consult, by the slow and poor administration of the planning
system and by the increasingly vocal and better-organized pressure groups.  Most
housing is held for owner occupation with only a small proportion as an 'asset
class' available to switch class.  In contrast most investment property is
subject to realisation and reinvestment - an inherently less stable position.
The residential market is highly price sensitive and absorbs increased
short-term supply, but in commercial property demand is relatively price
insensitive. Demand for residential property in 'higher quality' areas appears
highly income sensitive but many investment property locations have lost
exclusiveness and their premium prices. Certainly recent rises have been
greatest in the better boroughs of London and the centre and more desirable
areas of Edinburgh which locations provide convenience and aspirational
satisfaction for their consumers, factors which are of increasingly less
importance for commercial ownership. The present residential property peak has a
much more stable base than the commercial peak and, should conditions become
adverse, will fall less far.

In the residential property market the highest return on capital is achieved by
obtaining consent for change of use.  Change of use can be obtained by promoting
existing land in the local plan process,  by buying land likely to be re-zoned
or by buying land where planning criteria are about to change. Additional
returns can be gained if the consent is obtained in an area where the
infrastructure is improved or the communications upgraded.

Future Progress

In addition to its investment portfolio the Group now owns twelve rural
development sites and has a further very large site under offer, four
significant city centre sites, two small sites in the Edinburgh area and eighty
five 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 two of these sites should be started next calendar year. Most of
these sites were purchased unconditionally, i.e. 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 undertaking
their development.  However, our policy is 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
by suitable financial structures to fund such development opportunities.

The Company expects the current year's results to be satisfactory given the
early stage of the development cycle.  The overall value of our investments and
developments should continue to improve, although such improvements will not
necessarily be reflected in these valuations where development properties are
held at cost.  The full outcome of the current financial year will depend on any
net change in valuation and the timing of the realisation of development

The mid-market share price at 15 December 2006 was 190p, a discount of 32.5p to
the NAV of 222.5p. The Board recommends an increased dividend of 1.75p making
total dividends of 2.75p for the year, and the Board intend to increase the
dividend at a rate consistent with profitability and with consideration for
other opportunities.

A tax credit of £5,070 is provided in the current year. Although not recognised
in the financial statements due to uncertainty over the availability of future
taxable profits to use its tax losses the Group has tax losses and allowances
carried forward of £966,908 which we hope to utilise over the next few years.
Many of the Group's investment properties benefit from indexation mitigating tax
on disposal.


The UK economy is expected to continue to grow next year at or above the trend
rate. There is a small risk that a re-alignment of the US $ associated with a
slow down in the American economy will adversely affect other economies
including the UK. Continuing strife in many areas of the Middle East will have
minimal effect on world economic growth.

In the UK investment property seems fully priced as rental growth is likely to
be limited, yields are unlikely to fall further and interest rates are above
recent low levels.  Residential property continues to increase in price and, if
economic conditions continue benign, price falls are unlikely.  However, general
increases at the current level will not persist in the medium term, but prices
will continue to rise in the long term, provided economic growth continues and
provided housing supplies continue to be allocated by rationing rather than by
price.  These conditions will continue to provide highly profitable niche
opportunities to create substantial value by effecting planning change.

I D Lowe


18 December 2006

Consolidated profit and loss account

for the year ended 30 June 2006

                                                                                  2006            2005
                                                                                     £               £

Income - continuing operations
Rents and service charges                                                      870,745         707,009
Trading property sales                                                         410,000               -
Trading sales                                                                  108,163         278,406
                                                                               _______         _______

                                                                             1,388,908         985,415
Operating costs
Cost of trading property sales                                               (304,500)               -
Cost of other sales                                                          (113,200)       (262,124)
Administrative expenses                                                      (992,992)       (850,743)
                                                                               _______         _______

                                                                           (1,410,692)     (1,112,867)
                                                                               _______         _______

Operating loss                                                                (21,784)       (127,452)

Profit on disposal of investment property                                      189,729         501,420
Profit on sale of investments                                                        -          85,522
Bank interest receivable                                                       275,644         279,854
Interest payable                                                             (319,150)       (292,492)
                                                                               _______         _______

Profit on ordinary activities before taxation                                  124,439         446,852

Taxation                                                                         5,070        (34,702)
                                                                               _______         _______

Profit for the financial year                                                  129,509         412,150

Earnings per ordinary share                                                      1.09p           3.51p

Diluted earnings per ordinary share                                              1.09p           3.51p

Statement of total recognised gains and losses
for the year ended 30 June 2006

                                                                                  2006              2005
                                                                                     £                 £

Profit for the financial year                                                  129,509           412,150

Unrealised surplus on revaluation of properties                              1,978,506         4,178,082
                                                                               _______           _______

Total recognised gains relating to the financial year                        2,108,015         4,590,232

Prior year adjustment (note 1)                                                 178,244

Total gains and losses recognised since last annual report                   2,286,259

Note of historical cost profits and losses
for the year ended 30 June 2006

                                                                                  2006              2005
                                                                                     £                 £

Reported profit on ordinary activities before taxation                         124,439           446,852
Realised (deficit) on previously revalued property                                   -          (92,605)
                                                                                ______            ______

Historical cost profit on ordinary activities before taxation                  124,439           354,247

Taxation on profit for year                                                      5,070          (34,702)
                                                                               _______           _______

Historical cost profit for the year after taxation                             129,509           319,545

Historical cost (loss)/profit for the year retained after taxation
and dividends                                                                (167,564)            52,305

Consolidated balance sheet
at 30 June 2006
                                                                    2006                            2005
                                                       £               £               £               £

Fixed assets
Tangible assets:
Investment properties                                         24,030,896                      23,142,302
Other assets                                                      21,117                           4,056
                                                              __________                      __________

                                                              24,052,013                      23,146,358
Investments                                                       43,013                              20
                                                              __________                      __________

                                                              24,095,026                      23,146,378
Current assets
Stock of development property                  7,034,258                               -
Debtors                                          968,314                       1,018,560
Cash at bank and in hand                       2,203,611                       4,761,664
                                               _________                       _________

                                              10,206,183                       5,780,224
Creditors: amounts falling
  due within one year                        (2,177,356)                     (3,583,372)
                                               _________                       _________
Net current assets                                             8,028,827                       2,196,852
                                                              __________                      __________

Total assets less current                                     32,123,853                      25,343,230

Creditors: amounts falling
  due after more than one year                               (5,680,000)                       (710,319)

                                                              __________                      __________

Net assets                                                    26,443,853                      24,632,911

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                                            6,625,414                       4,646,908
Profit and loss account                                       14,521,537                      14,689,101
                                                               _________                       _________

Shareholders' funds                                           26,443,853                      24,632,911

These financial statements were approved by the Board of Directors on 18
December 2006 and were signed on its behalf by:

I D Lowe

Consolidated cash flow statement
for the year ended 30 June 2006
                                                                          2006                            2005
Net cash outflow from operating activities                         (5,694,720)                     (1,959,437)
Returns on investments and servicing of finance                       (34,896)                        (35,889)
Tax paid                                                              (29,632)                              -
Capital expenditure and financial investment                            5,814                       1,015,574
Dividends paid on shares classified in
shareholders' funds                                                  (297,073)                       (267,240)
                                                                    __________                      __________

Cash outflow before management of liquid
resources and financing                                            (6,050,507)                     (1,246,992)

Financing                                                            3,572,183                       (294,104)
                                                                    __________                      __________
Decrease in cash in period                                          (2,478,324)                    (1,541,096)

Reconciliation of net cash flow to movement in
net funds

                                                                             £                               £
Decrease in cash in period                                         (2,478,324)                     (1,541,096)

Cash (outflow)/inflow from decrease in debt                        (3,572,183)                         602,354
                                                                     _________                       _________

Movement in net funds in the period                                (6,050,507)                       (938,742)
Net funds at the start of the period                                   877,848                       1,816,590
                                                                     _________                       _________
Net (debt)/funds at the end of the period                          (5,172,659)                         877,848

Notes to the cash flow statement

(a) Reconciliation of operating profit to net cash inflow from
operating activities

                                                          2006                                   2005
                                                             £                                      £

Operating (loss)                                      (21,784)                              (127,452)
Depreciation charges                                    4,682                                    134
Increase in stock                                  (5,825,167)                                     -
Decrease/(increase) in debtors                         50,246                               (896,527)
Increase/(decrease) in creditors                       97,303                               (935,592)

Net cash outflow from operating                    (5,694,720)                            (1,959,437)

Notes to the cash flow statement (ctd)

(b) Analysis of cash flows
                                                       2006         2006             2005          2005

                                                          £            £                £             £
Returns on investment and servicing of
Interest received                                   275,644                       279,854
Interest paid                                      (310,540)                     (315,743)

                                                                (34,896)                        (35,889)

Capital expenditure and financial investment
Purchase of tangible fixed assets                  (866,776)                   (3,446,816)
                                                 (3,446,816)                   (3,446,816)
Sale of investment property                         915,583                     2,236,414
Contribution to dilapidations received                    -                     2,049,576
Purchase of investments                             (42,993)                            -
Sale of investments                                       -                       176,400

                                                                  5,814                       1,015,574

Issue of ordinary share capital                           -                       308,250
Debt due within a year:
(Decrease)/increase in short-term borrowings     (3,969,681)                      939,827
Debt due beyond a year:
Increase/(decrease) in long-term borrowings

                                                    397,498                    (1,542,181)

                                                               3,572,183                      (294,104)

(c)  Analysis of net funds

                                At beginning of           Cash flow    Other non-cash     At end of year
                                           year                               changes
                                              £                   £                 £                  £

Cash at bank and in hand              4,761,664         (2,558,053)                 -          2,203,611
Overdrafts                             (79,729)              79,729                 -                  -


Debt due after one year               (710,319)         (3,969,681)       (1,000,000)        (5,680,000)
Debt due within one year            (3,093,768)             397,498         1,000,000        (1,696,270)

Total                                   877,848         (6,050,507)                 -        (5,172,659)

Notes to the audited results for the year ended 30 June 2006

1.  The above financial information represents an extract taken from
the audited accounts for the year to 30 June 2006 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 2006 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

2.  All activities of the group are ongoing. The board recommends
the payment of a 1.75p per share final dividend (2005: 1.5p), which will be
payable, subject to shareholder approval, on 22 January 2007 to all shareholders
on the register on 5 January 2007.

3.  Earnings per ordinary share

The calculation of earnings per ordinary share is based on the reported profit
of £129,509 (2005: £412,150) and on the weighted average number of ordinary
shares in issue in the year, as detailed below.

                                                      2006              2005

Weighted average of ordinary shares in issue
    during year - undiluted                     11,882,923        11,754,154

Weighted average of ordinary shares in issue 
   during year - fully diluted                  11,882,923        11,754,154

4.  The Annual Report and Accounts will be posted to shareholders on
or around 22 December 2006 and further copies will be available, free of charge,
for a period of one month following posting to shareholders from the Company's
head office, 61 North Castle Street, Edinburgh, EH2 3LJ.

5.  The Annual General Meeting of the Company will be held at 12.30
pm on 19 January 2007 at 61 North Castle Street, Edinburgh, EH2 3LJ

                      This information is provided by RNS
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