Final Results - Year Ended 31 March 2000, Part 2
Peel Hldgs PLC
1 June 2000
Part 2
Extract from the Chairman's Statement
The Peel Group enjoyed a period of further growth for the year ended 31st March
2000. The year was marked by a strong first full year's contribution from The
Trafford Centre and by the completion of a substantial refinancing exercise
which has given the Group additional financial security and flexibility.
Before an exceptional charge of £60.69m relating to prepayment penalties and
breakage costs on existing bank loans to enable the refinancing exercise to take
place, profit before tax improved by 22.9% to £22.77m. As a consequence of the
exceptional charge, the absorbed loss for the year totalled £50.66m. After
taking into account the absorbed loss and also the purchase by the Company of
its own shares for cancellation at a cost of £20.58m and a property valuation
uplift of £52.31m, there was a reduction in shareholders' funds of £18.43m from
£839.81m to £821.38m. Despite the reduction in shareholders' funds, the
Company's continuing purchases of its own shares during the period helped fully
diluted net assets per ordinary share at 31st March 2000 to increase to 988p
(1999: 965p). The fully diluted net asset value of each ordinary share reduces
to 909p when adjusted to reflect the post tax market value of the Group's fixed
rate debt at the year end. Basic earnings per ordinary share (before the
exceptional charge) were up 63.2% at 24.29p after an effective tax charge of
10.5%. The Board recommends a final dividend of 7.8p per ordinary share, an
increase of 14.7% over that for the previous year, making a total distribution
for the year of 11.5p (1999: 10.0p).
In January 2000, the quotation of the Company's shares moved from the Official
List to the Alternative Investment Market, partly to sustain a share buy-in
programme for both ordinary shares and convertible preference shares in the
Company. Following on from this, the Board has today announced Tender Offers
with Credit Lyonnais Securities under which shareholders will be given the
opportunity to sell ordinary and convertible preference shares. Details are set
out in a Circular of 1st June 2000 to shareholders.
Overall, the conditions in the UK economy remained favourable during the year
with steady growth and the Group's underlying operations performed respectably.
Details of the performance of each of the divisions is set out in the Operating
and Financial Review.
The increase in profit before tax (before the exceptional charge) was
attributable mainly to the substantial increase in rental income from The
Trafford Centre to £49.68m (1999: £20.49m) for the full financial year.
Elsewhere, the Group continued to improve the overall quality of its UK property
investment portfolio by active management and selective sales. However, the
recent increases in stamp duty on property transactions are harmful and are now
having a detrimental effect on values and discouraging activity. The Group's
total annual net rental income, including The Trafford Centre, was
£91.74m (1999: £62.51m). Conditions for development activity were positive
with firm tenant demand in most sectors. Six developments were completed
during the year producing profit, realised and unrealised, in excess of £5.0m.
The Group continued to manage its substantial landholdings effectively, winning
some new permissions in an increasingly hostile planning environment and
achieving a profit of £2.17m from land sales. However, the Group's contribution
to regional regeneration would be much faster with a planning system more
conducive to investment and development. The waste and minerals division found
conditions tougher with reduced income of £0.73m (1999: £0.88m), largely as a
result of the competitive conditions in the landfill and construction markets.
The port's operating profits at £2.84m were also well down on the previous
year's £3.92m, although liquid traffics held up well. In the airports' division,
significant progress in passenger throughput at Liverpool Airport, now over two
million on an annualised basis, was achieved but there is still a long way to go
to make this operation profitable, especially following the abolition of duty
free sales within the European Union which has cost over £1m per annum on the
bottom line. Good progress was also achieved on the planning process to convert
the former RAF base at Finningley near Doncaster, purchased in June 1999, into a
commercial airport.
In February this year, the Company completed a £610m securitised bond issue at
an interest rate of just under 7% per annum with an average life of 28 years
secured on the assets and income stream of The Trafford Centre. The size and
terms of the issue reflect the quality of The Trafford Centre and, as mentioned
earlier, this has provided the Group with considerable financial security and
certainty going forward. It also led to the repayment of existing bank loans of
£340m and the closing down of incidental financial instruments. The exit cost
from these arrangements produced the exceptional charge for the year of £60.69m,
but the replacement fixed rate securitisation issue is a substantial benefit to
the Group for the long term.
For the future, the Group's strategy will continue to be centred on
opportunities around property, land and transport where the Group can add value
or where there is a special angle to develop assets which are of strategic
importance sectorally or geographically. In addition, the Group will continue to
maximise returns from its investment property portfolio and extensive
development programme and also by building up and working effectively the
Group's range of other diverse assets, including its airports and port
interests.
The economic environment remains benign with investor sentiment and business
confidence solid and it would appear that interest rates will peak in this cycle
at levels not much higher than the present. The main drivers for progress are
therefore in place and I am confident that with an encouraging commercial and
economic environment the Group has the necessary physical and human resources to
deliver further asset and earnings growth.
John Whittaker
Chairman
Extract from the Operating and Financial Review
Earnings
Operating profit increased by £22.81m (35.6%) to £86.90m (1999: £64.09m). This
was largely attributable to an increase of £21.77m in property investment profit
to £76.91m (1999: £55.14m) which included for the first time a full year's
contribution from The Trafford Centre. Property trading profit increased by
£0.72m to £3.94m (1999: £3.22m). In addition, there was no repeat of the
impairment loss of £1.82m incurred in 1999.
These increases were offset by a reduction of £1.08m in port and canal operating
profit to £2.84m (1999: £3.92m) mainly due to an increase in abnormal
maintenance costs. There was also a negative contribution from Liverpool Airport
this year of £0.43m, compared with last year's profit of £0.63m, a decrease of
£1.06m which was largely as a result of the abolition of duty free sales within
the European Union from 1st July 1999. Additionally, there was a small decrease
of £0.15m in income from waste and minerals to £0.73m (1999: £0.88m).
Profit on disposal of fixed assets decreased from £3.64m in the previous
financial year to £1.65m largely due to a reduced profit of £1.67m on the
disposal of investment properties (1999: £3.54m) from total sale proceeds of
£30.88m compared with £12.75m for the previous financial year.
The net interest charge increased by £16.57m (33.7%) to £65.77m (1999: £49.20m),
reflecting a full year's charge for the borrowings relating to the development
of The Trafford Centre. Only £0.02m of interest (1999: £12.94m) was capitalised
during the year. The rental income from The Trafford Centre helped to increase
the cover of net rental income to total net interest to 139.5% (1999: 127.1%).
The Group incurred an exceptional charge of £60.69m following the repayment on
28th February 2000 of the £340m Trafford Centre loan facility. This exceptional
charge consisted of a prepayment premium of £27.34m and fixed rate loan breakage
costs of £33.35m. The reasons for incurring this charge are described within the
section headed 'Borrowings and Financial Resources'.
The above factors together contributed to an increase of £4.24m (22.9%) in pre-
tax profit (before the exceptional charge) to £22.77m (1999: £18.53m). After the
exceptional charge of £60.69m, there was a loss on ordinary activities before
taxation of £37.92m.
The tax charge of £2.40m (1999: £4.50m) represents an effective rate of 10.5% of
pre-tax profit before taking the exceptional charge into account (1999: 24.3%).
The tax charge consists of £2.14m of corporation tax (1999: £0.81m), £0.24m
of deferred tax (1999: £1.06m) and the write-off of advance corporation tax
of £3.76m (1999: £3.31m) incurred on the purchase by the Company of its own
shares which was offset by prior year adjustments of £3.74m (1999: £0.67m).
Basic earnings per share (before the exceptional charge) increased by 9.41p
(63.2%) to 24.29p (1999: 14.88p) as a result of the increased pre-tax profit and
the lower tax charge. After the exceptional charge, the basic loss per ordinary
share was 54.53p.
After minority interests and preference dividends, the loss attributable to
ordinary shareholders for the year amounted to £41.99m (1999: profit £11.47m).
The directors propose an increased final dividend of 7.8p per ordinary share
(1999: 6.8p) which, if approved at the Annual General Meeting, will be paid on
2nd October 2000 to ordinary shareholders on the register at the close of
business on 8th September 2000. This would make a total distribution for the
year of 11.5p per ordinary share (1999: 10.0p) which is covered by earnings
(before the exceptional charge) 2.2 times (1999: 1.5 times).
Balance Sheet
Consolidated shareholders' funds decreased by £18.43m (2.2%) to £821.38m (1999:
£839.81m) producing fully diluted net assets per ordinary share of 988p
(1999: 965p), an increase of 23p (2.4%).
The reduction in shareholders' funds was mainly due to the overall loss for the
year of £50.66m and the purchase by the Company of its own shares totalling
£20.58m. During the financial year, the Company bought for cancellation
2,330,000 of its own ordinary shares for a total cost of £10.74m, at an average
price of £4.61 per share. It also bought for cancellation 4,077,000 of its own
5.25% convertible cumulative non-voting preference shares for a total cost of
£6.60m at an average price of £1.62 per share. On 9th June 1999, the Company
also cancelled and repaid all of the class of the 2,700,000 10% non-redeemable
cumulative preference shares at a price of £1.20 per share for a total cost of
£3.24m. These reductions in shareholders' funds were partially offset by a
£52.31m uplift from the revaluation at the year end of certain investment
properties, of which £28.60m was attributable to the revaluation of The Trafford
Centre to £880.00m. The remainder of the revaluation was due to an uplift of
£22.81m on various UK commercial investment properties and £0.90m on certain
land assets. Other movements in shareholders' funds included a foreign exchange
gain of £0.46m and the issue of ordinary shares of £0.03m on the exercise of
share options.
Although consolidated shareholders' funds decreased, fully diluted net assets
per ordinary share actually increased due to the purchase by the Company for
cancellation during the year of its own shares at a substantial discount to net
asset value.
The investment property portfolio of the Group at 31st March 2000 totalled
£1,566.19m and is analysed over the various property sectors as follows:
Undevelop Capital Capital
ed Land Sq. Ft. Sq. Value Value
Acres '000 Metres £'000 %
'000
The Trafford Centre - 1,308 122 880,000 56.2
Out-of-town retail 16 1,729 161 299,260 19.1
Town centre retail - 469 44 53,435 3.4
Offices 5 1,030 96 93,967 6.0
Industrial 72 1,880 175 62,546 4.0
Sports and leisure 474 220 20 21,878 1.4
Land 9,815 65 6 111,744 7.1
Waste and minerals 1,882 - - 7,917 0.5
Overseas land and 32 212 20 35,442 2.3
property investment
12,296 6,913 644 1,566,189 100.0
The Group's portfolio of stock properties decreased to £9.88m compared with
£14.80m at 31st March 1999, as a result of the decrease in the amount of land
being held for development.
Cash Flow
The Group's net debt increased by £87.91m (13.4%) to £743.18m (1999: £655.27m)
at the financial year end. This resulted from capital expenditure, interest paid
and the purchase of own shares which was partially offset by a positive cash
flow from operating activities.
The amount generated from operating activities of £72.53m was £50.06m lower than
the previous year (1999: £122.59m). This was due to a VAT repayment of £29.98m
by Customs and Excise in April 1999 not repeated this financial year in addition
to expenditure of £31.21m on accrued costs to complete in respect of The
Trafford Centre. Returns on investments and servicing of finance
(pre-exceptional item) totalled £71.34m and were largely unchanged to last
year (1999: £71.64m). However, prepayment penalties and breakage costs of
£43.46m were paid in the year to enable the refinancing of The Trafford Centre.
The net capital expenditure and financial investment included £44.98m of
capital expenditure (1999: £160.72m) less proceeds from the sale of fixed
assets of £24.74m (1999: £10.06m).
As part of The Trafford Centre refinancing the £340m Trafford Centre loan was
paid on 28th February 2000 following the issue of the £610m securitised bonds.
Other associated costs of £18.11m were also incurred on raising the new finance.
Borrowings and Financial Resources
The Group's net borrowings at 31st March 2000 of £743.18m produced an increased
gearing ratio of net debt to shareholders' funds of 90.5% (1999: 78.0%),
resulting from both the increase in borrowings and the reduction in
shareholders' funds.
The amount of fixed long term debt in the Group at the financial year end was
£867.36m (1999: £616.46m) representing 85.1% of total gross borrowings (1999:
85.5%) and was held at a fixed annual borrowing cost of 7.9% (1999: 9.6%).
During the year, the Group continued to comply with all its borrowing covenants.
The principal covenants relate to net worth, gearing, asset cover and interest
cover, all of which were satisfied by a substantial margin at the financial year
end. At 31st March 2000, the Group had spare bank facilities of £207.03m
(1999:£77.64m).
On 28th February 2000, the Group took advantage of market conditions to issue a
610m multi- tranche securitised bond at an inclusive interest rate of just
under 7% per annum. The bonds are secured against the future rental income of
The Trafford Centre together with a legal charge over that asset. Part of the
net proceeds from the bond issue was used to repay the existing £340m Trafford
Centre loan facility which had a fixed interest rate plus an applicable margin
totalling 9.33%. The bond issue, with an average life of 28 years, has provided
the Group with long term financial stability and has also significantly reduced
the overall average interest rate of the Group. For these reasons, it was
considered to be in the best interests of the Group to incur the prepayment
premium of £27.34m and fixed rate loan breakage costs of £33.35m which resulted
in the exceptional charge of £60.69m.
The Group's objective continues to be to maintain sufficient facilities to meet
its financial requirements at the lowest achievable cost and at minimum risk.
The Treasury function within the Group is controlled centrally in accordance
with prudent procedures approved by the Board. During the year, the Group did
not enter into any interest rate swaps, currency swaps, forward contracts or any
other derivative financial instruments other than a £100m interest rate swap on
28th February 2000 at a strike rate of 6.66% in order to fix the interest rate
to the Group over the length of the bonds on the two tranches issued at a
variable rate, namely the £50m Class A1 and £50m Class D1 Secured Notes.
The present market value of the Group's fixed rate debt shows a post-tax
'marking to market value' of £65.79m in excess of book value (1999: £104.75m)
(or £93.99m pre-tax (1999: £151.81m)). If these adjustments were incorporated
into the balance sheet at the year end, it would deduct 79p and 113p
respectively from the fully diluted net asset value of each ordinary share
(1999: 121p and 175p).
Loan Market
Amount Value 31st 31st
31st Interest 31st March March
March March 2000 1999
Funding Source 2000 Rate Maturity 2000 Excess Excess
£'000 % £'000 £'000 £'000
£200m First 200,000 9.875 2011 229,000 29,000 56,847
Mortgage Debenture
£20m First Mortgage 20,000 10.000 2026 27,475 7,475 8,977
Debenture
£12m First Mortgage 12,000 11.625 2018 17,235 5,235 6,439
Debenture
£10m First Mortgage 10,000 12.500 2015/20 15,000 5,000 5,494
Debenture
Perpetual 698 3.500 Perpetu 1,597 899 910
Debentures al
£50m Class A1 50,000 6.660 2013 50,599 599 -
Secured Notes
£340m Class A2 340,000 6.500 2033 358,445 18,445 -
Secured Notes
£120m Class B 120,000 7.030 2029 125,215 5,215 -
Secured Notes
£50m Class D1 50,000 6.660 2017 50,401 401 -
Secured Notes
£50m Class D2 50,000 8.280 2022 52,255 2,255 -
Secured Notes
Amortising Bonds 30,608 8.590 2014 34,120 3,512 3,751
£340m Bank Loan - - - - - 69,394
FRS4 Adjustment (15,950) - - - 15,950 -
867,356 961,342 93,986 151,812
Tax relief (28,196)(47,062)
Net excess over 65,790 104,750
book value
The gross adjustment has reduced by £57.82m to £93.99m (1999: £151.81m) due to
the increase in interest rates during the year and the decision to repay the
£340m Trafford Centre loan facility and replace it with the £610m bond issue
which is fixed at close to current market rates.
Accounting Standards and Policies
Two new financial reporting standards were adopted for the first time during the
financial year, namely FRS 15 'Tangible Fixed Assets' and FRS 16 'Current Tax'.
Neither of the new accounting standards had a significant impact on the year's
financial statements.
The financial statements therefore comply with all accounting standards issued
by the Accounting Standards Board applicable to financial statements at 31st
March 2000. The Group's accounting policies are consistent with previous years.
Year 2000
The Group completed its Year 2000 programme and has experienced no significant
problems in this area to date. The costs associated with achieving Year 2000
Compliance were not material and were charged to the profit and loss account as
they were incurred.
The Trafford Centre
The Centre has enjoyed steady growth throughout the year as people change their
shopping habits and the Centre establishes itself as the premier retail and
leisure destination in the North West.
Visitor numbers at 23.5m for the financial year were in line with expectations
and in the first three months of this calendar year, visitor numbers were 11%
higher than for the equivalent period in 1999. The Centre enjoyed a successful
Christmas period. Like-for-like comparisons with the previous Christmas showed
an average 20% increase in trade, again indicating the all important steady
growth.
Income from base rents on an annualised basis currently stands at £49.1m. This
will increase by £1.3m upon the expiry of some rent free incentives and lettings
currently with solicitors. There is only one shop unit currently available to
let. This is in an important location next to Selfridges for which the right
occupier is awaited. Turnover rent produced an additional £1.8m in the financial
year.
Whilst many of the Centre's tenants are performing well, in recent months some
retail groups experienced difficulties. Knickerbox for example has gone into
administration and Arcadia have decided to close their Richards' stores
throughout the country. In some respects, these changes are seen as
opportunities to introduce fresh retailers into the Centre, but they need to be
handled in a controlled and steady manner.
The Centre's reputation was heightened by the BBC television programme 'Shopping
City' which featured the Centre every weekday for several months, reinforcing
the Centre's popularity particularly as a destination for coach trips.
The cinema within the Centre is reported to be the busiest in the UK and a
succession of entertaining events in the Orient have helped establish it as a
popular evening destination.
Improvements are continually sought at The Trafford Centre and one particular
area of focus is the Festival Village. Additional car parking has been provided
at that end of the site and a planning application has recently been submitted
to convert one corner of the Festival Village into a second food court.
Within the current retail sales environment, there has been much speculation
about the possible impact that might be created by the Internet. There may well
be consumer benefits from on-line, home deliveries of groceries, where the
supermarkets have the infrastructure in place to service and distribute, and
there may be other areas, particularly service orientated, where the Internet
brings other advantages. However, such purchases are merely transactions, whilst
shopping at The Trafford Centre is an experience and a day out. The majority of
the retailers in the Centre are fashion orientated and consumers will continue
to want to touch, feel and test the merchandise. The Group is however
investigating ways in which The Trafford Centre can work with and use the
Internet to the advantage of all concerned, but the Group believes that any
adverse impact will be confined to secondary locations which should only
reinforce the pre-eminence of schemes such as The Trafford Centre.
To further reinforce the Centre, the Group has submitted a planning application
for a major residential and office scheme on adjoining land next to the
Manchester Ship Canal. The scheme, which is known as Trafford Quays, will also
include a marina and a new 4/5 star hotel. In line with Government policy, the
objective is to create an area where people can live, work, shop and enjoy their
leisure time. The Trafford Quays application lies with the Government Office for
the North West, as does the application for a retail warehouse development on
the Giants Field site. Contrary to the recommendation of his own inspector, the
Secretary of State for the Environment, Transport and Regions refused permission
for the Giants Field development last year. That decision has now been quashed
and it is expected that the Public Inquiry into the proposal will be re-opened.
At the previous Inquiry, the Group put forward a funding proposal that would
have enabled a Metrolink line to be built through Trafford Park to the Centre.
Funding for other extensions of the Metrolink system has now been announced by
the Government and an agreement is in place with the Greater Manchester
Passenger Transport Executive that it will also tender the Trafford Park line. A
line to The Trafford Centre would enhance the commercial viability of the rest
of the network and it is hoped that a new funding package can be unveiled at the
re-opened Giants Field Inquiry which would at last lead to the long awaited
construction of this new line.
The Centre is committed to investing in all its employees and has demonstrated
this by achieving the Investor in People Award in its opening year, the North
West Tourist Board 'Training for Tourism' Award in June 1999, and as an equal
opportunities employer the Centre was awarded the EASE Award in 1999 which
underpins the commitment to staff and customers.
UK Commercial Property Investment Portfolio
The economy improved as the year progressed, eventually fuelling fears of
inflationary pressures and leading to precautionary increases in interest rates.
Overall, property yields tended to harden and there was evidence of
strengthening rental growth in all sectors with the London area being the main
focus for this growth. In previous years, the Group benefited from the strong
performance of retail warehouses but this year it was the turn of
industrial property to outperform other sectors, particularly in terms of
capital growth, followed by offices and then retail warehouses. Whilst showing
positive growth virtually across the board, the Group's UK commercial
property investment portfolio, being heavily weighted towards out-of-town
retail, performed less well than in recent years.
Despite a favourable economy, aggressive competition amongst retailers cut
margins and made life difficult for some operators, whilst others flourished.
This, coupled with the perceived future impact of e- commerce in siphoning off
demand from the high street and boosting demand for distribution space,
contributed to the relative underperformance of the retail sector.
The Group remains confident in its out-of-town retail portfolio and will
continue to adapt and develop to meet changing requirements of retailers.
However, the Group has reduced its exposure to traditional high street retail
investments (which are generally considered to be under the greatest threat from
the e-commerce revolution) and which now represents only 3.4% of the portfolio.
The Group's gradual but carefully considered disinvestment in this sector will
continue with poorer performing properties being targeted. As in recent years,
investment in new properties will come from the Group's development programme
together with added value acquisitions and refurbishments on and around existing
investments. It is also expected that the Group will continue to expand
its investment within the sports and leisure sector.
Opportunities to increase the rent roll were hampered by a number of factors.
Few high value rent reviews and lease renewals fell within the financial year
and although additional income of £0.71m per annum was generated from this
source, this compared unfavourably with the previous year's figure of £1.28m per
annum. A similar amount of property was let as the previous year with initial
rents totalling £2.91m per annum, but the receipt of much of this income was
deferred to the following financial year due to the grant of rent free periods.
Combined annualised rents of £1.38m per annum were deferred in this way
compared with £0.08m per annum the previous year. Rent lost from new vacancies
stood at £1.95m per annum, well down on the £3.00m per annum in the previous
year. There was also a net disinvestment in the portfolio as a result of a
combination of the ongoing sales programme and relatively few purchases
which caused an annualised rental loss of £1.51m.
Nevertheless, the overall annualised net rent roll only fell by £0.70m per annum
to £33.96m. Of the growth generated within the portfolio, roughly half came from
the development activity as newly completed units were absorbed into the
portfolio. The remaining growth was produced by the combined effects of rent
reviews, lease renewals, lettings and vacancies.
As mentioned, rents from new lettings exceeded that lost from units which were
vacated. However, the total figure for voids increased. This was partly due to
lettings being achieved at rents significantly higher than the previous passing
rent or previous forecast, and partly due to the purchase during the year of a
variety of properties for the purpose of future re-development which were either
wholly or partially empty. There also remained an overhang of vacant properties
from the previous year's refurbishment programme which had not been let as
quickly as originally anticipated. At the year end, vacant property accounted
for 3.0% of the total portfolio in terms of rental value and 6.2% in terms of
floor area.
The Group maintained its commitment to improving the quality of its portfolio by
disposing of certain poorly performing properties whilst at the same time
raising £27.58m in capital receipts for more profitable reinvestment which
included the purchase of eight properties for £7.33m, largely forre-development.
At 31st March 2000, 78.5% of the Group's UK commercial property portfolio,
excluding The Trafford Centre, was externally revalued by King Sturge. The total
valuation figure of £416.91m represents an initial yield, net of costs, of 6.4%,
compared with 7.1% in 1998 and 8.2% in 1997. The overall increase on the
valuation of the UK commercial properties in the financial statements is 5.8%
which is analysed by sector as follows:
Out-of-town retail +5.5%
Town centre retail +3.0%
Offices +8.4%
Industrial +21.8%
Sports and leisure -8.2%
Out-of-town retail parks and food superstores
Now representing 19.1% of the Group's property investment portfolio, this is the
Group's most important investment sector after The Trafford Centre. However, by
recent standards this was a poor year for retail warehouses in terms of
investment return reflecting a degree of caution amongst retailers who found
themselves operating in an increasingly price sensitive market. Tenant failure
featured for the first time in a number of years, with already one unit and
the likelihood of another, being vacated for this reason. At the year end,
there were only two units vacant, representing 1.8% of this sector of the
portfolio and the only impediment to re-occupation remains the seemingly
inevitable planning delays.
Increasingly, rents continue to widen between the best and the poorest sites and
it is at these better sites, particularly at Edinburgh and Stockport, that the
Group has sought to target further investment. There is also little doubt that
size matters in terms of ability to control tenant mix and create opportunities
for rental growth which was the justification for the purchase of three
additional retail warehouse units adjoining the Peel Centre at Corby. Schemes
involving further retail warehouse development are being pursued at Edinburgh,
Barnsley, Blackburn, Hyndburn and Wolverhampton. Opportunities also exist for
the expansion of food superstores at Bradford, Trafford and Rawtenstall.
Town centre retail
Despite reasonable consumer demand, high street retailers have experienced more
mixed fortunes than their out-of-town colleagues, with some types of retailers
doing better than others. This has limited rental growth outside the best
locations and investors have become suspicious of the e-commerce influences
putting a break on capital growth. For these reasons, it continues to be a
shrinking sector within the Group's portfolio. Voids were relatively high,
representing 13.6% of this sector of the portfolio largely as a result of an
extensive programme of refurbishment and re-development at locations such as
Amersham, Banstead and Walsall.
Offices
The office sector produced good results over the year as the service sector
outperformed the rest of the economy. Rental growth was good apart from the most
secondary accommodation and capital growth was also encouraging. It is now an
important area of investment within the UK commercial property investment
portfolio at 6.0% of the Group's property investment portfolio. The sector was
the subject of capital expenditure of £1.81m to complete a variety of
refurbishment schemes and to acquire a part-built office development at
Castlefield, Manchester. The departure of BNFL from over 73,000 sq. ft. of
office space at The Victoria, Salford Quays was a major disappointment, but
three of the five floors they occupied were quickly re-let at higher rents,
demonstrating the strength of the local market. Void property within this sector
of the portfolio stood at 18.1% although significant improvements are expected
over the coming year.
Industrial and warehouse properties
The manufacturing industry saw some improvement during the course of the year
which in turn fuelled the industrial property market. With the anticipated
additional demand for warehousing from operators of e-commerce, this sector
became very attractive to investors with capital growth boosting overall returns
above those of other sectors. This trend was evident in the industrial
properties which were re-valued, although the Group's holding in this area is
now fairly small at 4.0% of its property investment portfolio. Whilst 140,000
sq. ft. is currently vacant, representing 7.5% of the industrial portfolio,
127,000 sq. ft. is either the subject of re-development proposals or was on
the market for sale at the year end.
Sports and leisure
The proportion of the Group's investment in this sector is becoming increasingly
important and now represents 1.4% of its property investment portfolio. Added to
the portfolio from the development programme were two substantial health and
fitness centres, themed respectively on soccer and tennis.
Property Development
The general strategy for property development is to concentrate on land already
owned by the Group. Development opportunities will be undertaken in other
locations, but only where substantial pre-lets from occupiers or forward-sales
can be secured.
Completed property developments during the year included the construction and
sale of a 92,000 sq. ft. industrial factory in Altrincham. The occupier was
Rexam Printing Limited and the purchasers were the Crown Estate Commissioners.
Through its joint venture company with Manchester City Council, the Group
constructed and sold to the occupiers a 3,000 sq. ft. fast food restaurant, an
83 bedroom hotel and a 14,000 sq. ft. public house located at Junction 4 of
the M67, near to Stockport. In Dumfries, the Group obtained planning approval
for a 45,000 sq. ft. food supermarket on an eight acre site, which was sold to
Tesco and at Irlam, near Salford, the Group sold a three acre site with planning
approval for industrial use to MAN Trucks. The Group also constructed and sold
to the occupier a 120,000 sq. ft. cold storage facility at Heywood,
Lancashire.
Developments under construction at the year end included a 58,000 sq. ft.
non-food retail warehouse park at Yeovil, which has been pre-let to JJB
Sports, Matalan, Shoe City and Richleys.
Further projects with planning approval include two mixed town centre
developments at Blackburn and Altrincham where the Group is seeking to assemble
owner occupiers or to pre-let to end users before proceeding. Outline planning
approval was received for a 1.1m sq. ft. business park development on land
adjacent to Junction 39 of the M1, near Wakefield. In addition, outline planning
approval was also received for 1.06m sq. ft. of offices, 600 residential
units, 40,000 sq. ft. of leisure, 26,000 sq. ft. of retail and 300 hotel
beds at Salford Quays. Because of the relatively small take-up of space in these
locations and the Group's aversion to speculative development, these planning
approvals will take a substantial number of years to build out.
The restrictive nature of present legislation relating to environmental and
planning issues means that the development team is finding it more difficult to
obtain planning approvals, which inevitably prolongs the development cycle.
The Group's commitment to the North West region combined with its extensive
landholdings has given it the opportunity to contribute positively to the
regeneration of Manchester's waterfront. The Group's vision, shared with the
local authorities of Manchester, Salford and Trafford, has seen Castlefield
become a new residential and entertainment quarter for the city centre and
established Salford Quays as the region's most significant edge of town centre
office location served by the Metrolink tram system and now enhanced by The
Lowry arts complex. The Trafford Centre has brought a world class retailing and
leisure experience to the North West. Further opportunities near Manchester at
St Georges, Pomona and Carrington are now being promoted which will continue the
transformation providing new homes and employment, placing the Manchester Ship
Canal corridor and the Group at the economic heart of the region.
Overseas
The 138,000 sq. ft. Washington shopping mall and offices at Hamilton, Bermuda,
remain fully let and generate income of £2.40m per annum.
In Nassau, Bahamas, Frederick House, a 24,000 sq. ft. office building, remains
fully let and generates income of £0.28m per annum. Beaumont House, a 49,000
sq. ft. office building, is 66% let and generates income of £0.40m per annum.
Advertising
A department was created in December 1998 to generate income from advertising,
mainly in response to opportunities at The Trafford Centre. Its role is to
develop and maximise profit from sales of advertising space, promotions and
sponsorship throughout the Group's property portfolio. During the financial year
total advertising income amounted to £1.10m.
Land and Planning
The Land and Planning Department manages the Group's landholdings amounting to
12,296 acres. Land with potential is promoted through the planning system for
development by the Group or disposal to the market. The Department also handles
major planning applications for other parts of the Group including the expansion
of Liverpool Airport and the re-development of the former RAF base at Finningley
near Doncaster.
The housing market has displayed growing strength in the last year and a
particular focus has been placed upon bringing residential schemes forward. In
many cases, this has involved complex negotiations to assemble sites, obtain
planning approval and market in a manner which maximises values. With greenfield
development becoming increasingly difficult, the Group's portfolio of urban and
brownfield sites continues to present good opportunities.
Planning permission was granted for the development of 350 houses at Fairhills
Road, Irlam in Salford. Sale particulars have been issued in respect of the
Group's last remaining site in East Anglia at Bowthorpe, Norwich and a new
bridge over the River Yare has increased the attractiveness of this 38 plot
site. Planning permission was also obtained for 100 houses at Rush Green, Lymm,
Cheshire following a successful appeal against a refusal of planning permission.
A sale has been agreed and is due to contract shortly.
At a site in Stretford, an application has been submitted for houses and
apartments adjoining the Bridgewater Canal. The scheme includes a public house
and a marina for 32 boats which will greatly improve facilities on this part of
the Cheshire Canal Ring. The Group has been working with British Waterways to
promote the Cheshire Canal Ring in partnership with Local Authorities. However,
there have been some setbacks, including the loss of an appeal in respect of an
application for apartments at Granville Road, Sevenoaks on grounds of
incompatibility with the Conservation Area.
The sale of land with little development potential is ongoing with a further 130
acres sold at the Cadishead Estate. Since 1994, 395 acres have been sold,
leaving only 114 acres remaining for sale.
Significant progress was made during the year in the assembly and organisation
of the landholdings around Liverpool Airport. A total of 740 acres previously
held on option was purchased to allow for the long term future expansion of the
Airport in a phased manner. In addition, a Development Agreement was concluded
with Speke Garston Development Company in respect of the former Northern
Airfield. The Group will develop 240 acres as an extension to the successful
Estuary Business Park. A £5m contract to provide access, services and sewers is
currently underway.
The Group is progressing its proposals for the Salford Forest Park. Detailed
plans of the scheme, which will include a new racecourse for Manchester and a
high quality equestrian centre, are under preparation. A planning application
will be submitted later this year.
Active management of landholdings also delivers continuing opportunities to
extract additional value and a number of contracts in respect of radio masts,
fibre optic cables, other easements and the variation of covenants have been
concluded.
The Group contributes to the ongoing debate on planning policy at both national
and local level. Detailed comments have been made on the Regional Economic
Strategies prepared by the Regional Development Agencies in both the North West
and Yorkshire and Humber and similarly on the emerging Regional Planning
Guidance. This is important, as it will set the framework for the Unitary
Development Plans and Local Plans which will determine the future development
prospects for the Group's landholdings and businesses. Additional resources will
be directed to this process in the next few years and the Group will continue in
particular to promote the Manchester Ship Canal corridor in the North West. As a
contribution to the national debate, the Group is to fund a Research Fellowship
for the next three years in the newly established centre for Sustainable Urban
and Regional Futures (SURF) at Salford University.
At 31st March 2000, various licensed lands, ground rents, easements and other
minor interests of the Group were externally valued at £5.61m which resulted in
a valuation surplus of £0.90m, an increase of 19.1%.
Waste and Minerals
The economic and political climate for both waste management and quarrying
remained difficult during the financial year. Over the past three years, gate
prices at landfill sites in North West England have reduced from a high of
£10-£12 per tonne to levels as low as £7 per tonne at some sites.
In the same period, the landfill tax has dramatically reduced the volumes of
inert waste going to landfill sites. That trend is likely to continue for all
waste as a combination of political pressure and legislation from both the UK
Government and the European Union will continue to reduce the volumes of waste
being landfilled. There is now widespread acknowledgement that waste management
in North West England has become extremely competitive. In the light of these
circumstances, the decision in 1998 to convert the commercial arrangements at
the Arpley landfill site to a flat rate royalty per tonne now looks well judged.
The effect has been to preserve, to a large extent, the Group's income from
Arpley.
The planning application by Biffa Waste Services Limited for 4.4m cubic metres
of landfill capacity at Fletcher Bank Quarry, Ramsbottom near Bury has remained
undetermined. Biffa is still working hard to secure its planning permission.
Litigation was a feature of the year. A payment dispute with the Viridor Group,
the operator of the Whitehead Landfill Site, remains unresolved. A longer
running case involving overtipping at two older sites was finally settled after
the financial year end with a settlement in the Group's favour.
Quarrying also remained depressed. The Chancellor's announcement in his March
2000 budget of an aggregates tax of £1.60 per tonne, although long signalled,
has cast a shadow over the industry. Existing mineral operations have largely
met their targets, but increasingly complex planning legislation requires both
effort and guile simply to retain some existing planning permissions. Scout Moor
Quarry in Rossendale, which is set to become a major production unit, is now the
subject of five separate planning appeals.
Rationalisation in both waste management and quarrying continues with some of
the Group's business partners either having been taken over or likely to be sold
in the near future. The trend in both industries is strongly towards fewer and
bigger operating companies.
Opportunities to expand waste management and mineral extraction activities are
still available. However, the days of successfully promoting stand-alone
landfill sites are largely at an end. A more sophisticated and integrated
approach is now needed to reflect the need to reduce, re-use and recycle waste
and to reduce what are widely seen as unacceptable impacts from waste management
sites and quarries.
Income during the year reduced to £0.73m from £0.88m last year. However, income
projections for the current financial year are more promising and planning
decisions are also expected on a number of projects.
Port
The traffic handled through the port on the Manchester Ship Canal for the
financial year was 7.80m tonnes, a decrease of 0.15m tonnes on the previous
year. This generated income of £18.37m (1999: £18.21m) and an operating profit
of £2.84m (1999: £3.92m). There were no severance costs during the year.
Despite encouraging signs in the previous year, the anticipated growth in inward
bulk oil movements destined for the retail transport market failed to
materialise and tonnage in this sector of the business fell by 0.10m tonnes.
Further supply logistics rationalisation in this area accounted for the drop in
the movements and tonnage is not expected to recover in the current financial
year.
During the year, Shell UK closed the majority of the processing units at its
refinery at Shellhaven on the River Thames, leaving the refinery adjacent to the
Canal at Stanlow as its only major production unit in the UK. The closure of the
Shellhaven plant resulted in a drop in outward inter-refinery movements from
Stanlow and overall tonnage for Shell fell by 0.18m tonnes in the year. This
drop in tonnage handled for Shell follows a number of years of growth in traffic
for them but they still remain the port's largest single customer. During the
year, the upgrading by Shell of the oil docks at Stanlow was completed and a
long term lease on the dock area was granted to Shell.
The steady increase in other bulk liquids, mainly chemicals, imported and
exported via the port continued, albeit at a slower rate than in the previous
year. Export tonnage from a berth at Runcorn, for ICI and another exporter,
increased in the year. Further growth is expected in the current financial year
in this area of the business.
The total amount of dry cargo handled through the port increased by 0.14m tonnes
in the year. The dry cargo dock operation at Ellesmere Port saw increased
throughput as the bulk storage facility completed in 1999 was fully utilised and
tonnage was over 50% up on the previous year. Unfortunately, the dock operation
at Runcorn continued to operate below capacity and tonnage fell by 0.04m tonnes.
No customers were lost from Runcorn, but tonnage for a number of the major users
was down as difficulties in the glass manufacturing sector in particular
continued.
The section of the Canal between Runcorn and Manchester, the Upper Canal, had a
mixed year. Following the changes in the oil sector mentioned earlier, the bulk
liquid storage facility operated by British Tar Products and located adjacent to
the Canal at Partington closed mid way through the year. Although some traffic
transferred to another storage facility on the Canal, tonnage to the British Tar
Products' facility fell by 0.06m tonnes against the previous year. This decrease
in tonnage was offset by the revival of movements of grain by barge from
Liverpool to a production unit in Manchester and overall tonnage in the Upper
Canal ended marginally down on the previous year. Transhipment business via
Liverpool to the Canal is an area that the Group is keen to develop. Work is
progressing well on a rail-fed bulk cement storage facility adjacent to the
Canal at Weaste near Manchester and exports by ship are expected to start in the
second quarter of this current financial year.
With major work continuing on upgrading a swing bridge in the Warrington area,
increased dredging costs of £0.15m in the Upper Canal and the payment of a
one-off liability relating to a main line rail bridge over the Canal, the
operating deficit in the Upper Canal increased significantly in the year to
£1.59m, an increase of over 120%.
Maintenance and upgrading of the infrastructure of the Canal continued during
the year and the major refurbishment work and automation of a set of sluice
gates between the Canal and the River Mersey was finished. The completion of
this project was the final phase of the work that has been undertaken to
transfer the water drainage function of the Canal from a manually operated
system to a computer controlled one.
Dredging of the buoyed approach channel to the Canal was again required in the
year but to a lesser extent than in recent years. During the year, some of the
fine sand dredged during this exercise was put ashore with a view to selling the
product in an attempt to defray in part the overall cost of this dredging.
Airports
Liverpool
The emergence in recent years of low cost carriers offering very competitively
priced fares is changing the aviation industry and enabling smaller well
positioned regional airports to achieve 'critical mass' and to compete with
other well established airports. Liverpool Airport has benefited from this
development and in the financial year achieved a record level of passenger
throughput of 1,515,000, an increase of 62.6% over the previous year.
This was mainly due to the commitment by easyJet to develop an increasing range
of scheduled domestic and European destinations from Liverpool with appropriate
frequencies. The key advantage of scheduled services is their year round
activity and broad spread of aircraft movements throughout the day. During the
financial year, easyJet continued to attract thousands of new passengers to
Liverpool Airport by adding scheduled daily services to Belfast, Luton, Malaga,
Madrid and Majorca. Demand on the established Southern Ireland and Isle of Man
routes operated by Ryanair and Manx Airlines was also significantly ahead of the
previous year. As a consequence, the Airport produced income of £10.06m
(1999:£9.11m) and a net operating loss of £0.43m (1999: £0.63m profit). The
downturn of the previous year's net operating profit into an operating loss
was largely as a result of the loss of over £1.0m of income from the bottom
line following the abolition of duty free sales within the European Union with
effect from 1st July 1999.
As a 24 hour operation, Liverpool Airport also handles considerable quantities
of freight, much of which is handled during the night, including Royal Mail for
UK destinations, newspapers to the Isle of Man and Ireland and parcels for
world-wide destinations through TNT's hub at Liege. Tonnage in the financial
year at 45,000 tonnes was 9.8% ahead of the previous year (1999: 41,000 tonnes).
The UK aviation industry is expected to continue growing for the foreseeable
future at around 4.5% annually, driven by increasingly strong competition
between the airlines and the popularity of low cost carriers which has
stimulated passenger demand. To enable the airport to handle increased aircraft
movements and passenger numbers, a £12m capital programme, partly funded by a
grant from the European Regional Development Fund, was undertaken to provide
additional hardstanding, terminal capacity and car parking.
The Airport's immediate strategy is to provide the essential infrastructure to
attract both the airlines and passengers and widen the range of destinations on
offer for both scheduled and charter carriers. As passenger throughput
increases, the benefits of critical mass are clear with the potential to earn
increasing returns from retailing. However, the abolition of duty free sales by
the European Commission at the end of June has resulted in a significant
financial loss to the company, which cannot easily be recovered. The other key
objective for the Airport is to achieve increased aviation activity and revenue
contributions without adding to the overall cost base.
Charter flights to the Mediterranean operated by Airtours, Direct Holidays,
First Choice and Thomson were well supported and carried 215,000 passengers
during the year. Despite over-capacity in the industry, rationalisation and
other difficulties, Liverpool Airport is well placed in the coming seasons to
attract additional charter flights provided competitive terms are offered, the
right passenger facilities are in place and the airlines are handled
efficiently.
Although future prospects remain encouraging, the Airport now faces a difficult
year in an increasingly competitive airline market place. Efforts continue to be
made to add to the existing airline base. This is partly affected by the
dominance of easyJet and the limitation of the existing terminal building. On
a positive note, the Government's awareness of the importance of regional
airports as economic generators is helpful, particularly in view of Liverpool
Airport's geographic position and significant catchment area. The key
challenges for Liverpool Airport are to maintain high levels of growth, improve
profitability, maintain improving levels of customer service and achieve
additional commercial developments.
Finningley
The Group submitted a planning application to Doncaster Metropolitan Borough
Council in November 1999 for the re-development of the former RAF base at
Finningley into a commercial airport. This is currently undergoing a
consultation process by the Council. The application is subject to an Article 14
Direction and so it will be referred to the Secretary of State for the
Environment, Transport and Regions for him to decide whether to call a public
inquiry or allow the Council to determine the application.
National air traffic forecasts predict a steady growth in the number of
passengers using air services and Doncaster Finningley Airport is expected to be
handling 2.3m passengers and 62,000 tonnes of freight each year by 2014. With a
runway almost 3,000 metres long, it can serve popular destinations in the United
States, the Caribbean, and the Far East as well as Europe. There is already
significant interest from passenger and freight operators.
Making efficient use of existing infrastructure and buildings on a 840 acre
brownfield site, the development will also provide a catalyst for real and
sustainable economic regeneration. The creation of 7,300 jobs associated with
the development will provide a significant boost for South Yorkshire which
recently qualified for European Objective One funding to help revive economic
performance.
Convenient to the national motorway network and East Coast Main Line and with a
catchment of over 4m people within one hour's drive time the location of the
Airport is strategically excellent. A new station on the Doncaster to Lincoln
rail line adjoining the site is proposed and this will help ensure the Airport
meets the latest policies for integrated transport. An Environmental Management
Strategy has been prepared to ensure the Airport operates to high environmental
standards in all respects including noise and air quality.
With three out of four passengers in Yorkshire and Humberside currently flying
from airports outside the region each year (almost 5m passengers per annum (CAA
1998)) and an underdeveloped freight sector, the market potential is
substantial, as operators have been quick to recognise. It is also encouraging
that the scheme has received widespread support from local communities,
businesses and many individuals who recognise the critical role the Airport can
play in the renaissance of their area.
For further information on this document please contact
Mr P A Scott on 0161 629 8200.
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