Caledonian Tst. Regulatory News (CNN)

21 Dec 2005 07:01

Caledonian Trust PLC21 December 2005 For immediate release 21 December 2005 Caledonian Trust PLC Results for the year ended 30 June 2005 Caledonian Trust PLC, the Edinburgh based property investment holding anddevelopment company, announces its audited results for the year to 30 June 2005. CHAIRMAN'S STATEMENT YEAR ENDED 30 JUNE 2005 Introduction The Group made a profit of £412,150 in the year to 30 June 2005 compared to£434,662 last year. Earnings per share were 3.51p and NAV per share rose by31.9p from 173.9p last year to 205.8p. The dilapidations claim at St Margaret's House against the Scottish Ministerswas settled on a favourable basis for £2,100,000 on 8 February 2005, agreementhaving been reached a few days before the proof. The Ministers agreed to meetthe expenses of the action, which are being determined by the Auditor of Court.Income from rent and service charges was £707,009 a small rise from the £614,735recorded last year. There were no trading property sales this year whereas lastyear there were trading profits of £408,943. The profit from investment propertysales was £501,420 compared to £584,291 last year. The group gained £85,522from the sale of its holding in UA Group PLC. Administrative expenses fell by£278,515 to £850,743 due primarily to lower property costs and professional feesat St Margaret's. Net interest payable was £12,638 down from £56,273 last yearand our cash balance at 30 June 2005 was £4,761,664. The weighted average baserate was 4.72%, almost one percentage point higher than the 3.83% for the yearto June 2004. On 30 June 2005 the Group's portfolio comprised by value 39.2% office investmentproperty (of which 71.6% is open plan) 32.2% retail property, 37.6% industrialproperty, 21% development property. Review of Activities The Group's property activities reflect our current strategies of purchasingassets with medium-term development prospects and of making niche andopportunistic investments. Investment assets will probably be sold when they"mature". The only significant change to our Edinburgh New Town investment portfolio hasbeen the sale of two flats created out of unusable office space on the top threefloors of 61 North Castle Street for £295,000 and £330,000. The leases on twoproperties in Young Street determine in August 2006. One is currentlyunoccupied and a dilapidations claim is being negotiated. On determination weexpect to re-let the properties at or above current rentals. Our largest investment property in Edinburgh, St Margaret's House, was let tothe Scottish Ministers until November 2002. We served a writ in the CommercialCourt for damages in January 2003 and after protracted and complex proceduresthe Ministers made an acceptable offer a few days before the proof set down for18 January 2005. The settlement of the litigation has opened up wideropportunities. Discussions with the City of Edinburgh Council over the yearshave indicated that Council officials insist that any redevelopment of StMargaret's be part of a wider master plan. Such a plan would necessarilyinvolve Meadowbank House, the 125,000ft2 1970s' office block owned and occupiedby the Registers of Scotland, with which St Margaret's shares the island sitebetween the A1 and the main railway line and the existing access off "SmokeyBrae". Consequently, we are having continuing discussions with the Registers tooptimise our mutual interests. However, Registers, who like all ScottishAgencies and Departments are subject to a policy of dispersal away fromEdinburgh, are currently in "Phase II" of their discussions with the ScottishMinisters on the future location of the functions currently carried out atMeadowbank House. A decision was previously expected in late 2005 but it is notnow expected before 2006. A comprehensive redevelopment incorporating anyrequirement of the Registers for a new modern office in Edinburgh would beattractive. We are currently examining redevelopment schemes specific to StMargaret's and have commissioned a roads study which shows that an independentaccess directly off the A1 appears technically feasible. Such an access iscompatible with previous proposals to form a "piazza" and to complete the"streetscape". The carrying cost of St Margaret's has been minimized and we areseeking to offset this cost by letting the car park and by obtaining outdooradvertising. The lease on our investment property near Waterloo, London, at Baylis Road/Murphy Street has been extended for two years subject to mutual breaks. As boththe office and the residential markets continue to be weak, but appear likely toimprove considerably in the medium term, no further plans for refurbishment orredevelopment have been made. We receive unsolicited enquiries regularly for theproperty. Planning and redesign work continues for our proposed development of 192 flatsand 10,000ft2 commercial space at 100 West Street, Tradeston, Glasgow. Due tochanged planning requirements the virtually completed original plans had to berevised to bring the building into line with the newly completed adjacentdevelopment by Barratt of 370 flats, now nearing completion and virtually soldout. 100 West Street is currently let to Eastern/Western, a Saab franchise, andthe review in 2006 should increase the annual rent to at least £202,000. During the year the Group made five property sales. In addition to the twoconverted Castle Street flats referred to above the Group sold two flats atPowderhall Rigg, giving a 15% margin, and in July 2004 we sold St ClementsWells, a 200 acre East Lothian farm, purchased in January 2004, for almost£5,000 per acre, 47% above cost. The Old Pier public house in Portobello, eastEdinburgh, was sold for £300,000 or £100,000 above book value. Several purchases have been made and several more are being negotiated. InJanuary 2005 we bought a small parade of shops with one vacancy in ScotlandStreet, Tradeston, an area likely to benefit from the extension of the M74. Thevacancy has been filled and the parade now yields 8%. In July 2004 we purchaseda vacant warehouse for refurbishment and letting also near the line of theproposed M74 in Rutherglen, for £700,000. Work had just started on therefurbishment when an offer, substantially above the purchase price, was madefor the property in its present condition and a sale is currently beingnegotiated. In September 2004 we acquired a small industrial/retail investmentyielding about 9% in an improving residential area in Kirkcaldy, Fife. Several other properties have been acquired where we expect to obtain or toimprove existing planning permission. In central Perthshire, just off the A9 atBankfoot, we have bought a farm house, a farm steading and adjacent land onwhich we expect to gain planning consent for 10 to12 houses. In east Edinburgh,adjacent to the Brunstane Rail Station, we have bought a delightful developmentpackage of six cottages for refurbishment, a steading with planning permissionwhich we hope to augment, two further farm buildings and two-and-a-half acres ofland, adjacent to other residential property but at present in the Green Beltfringe. At Comrie in west Perthshire we have bought a smallholding containingtwo modern detached houses, a steading and an acre of land zoned industrialdevelopment within the settlement boundary and thirty acres of pasturelandadjacent to the settlement, bounded to the north by the A85 main road to Crieffand to the south by the charming River Earn. We expect to gain permission for upto twelve houses within the curtilage of the existing buildings. The industrialland may be rezoned for housing or rezoned subsequent to obtaining an industrialsite elsewhere in the holding. Eight other rural development properties are under offer. Most of theserepresent similar opportunities to those recently acquired and are in desirableand accessible areas. We expect these acquisitions to complete before Easter. The planning process is both tortuous and lengthy. For some of our projects wehave now travelled this long and convoluted course and, almost surprisingly,completed it. In Belford Road, Edinburgh, we have undertaken limited site workssufficient to implement the long-standing 22,500 ft2 office consent whichotherwise would have lapsed on 12 October 2005. On that day we obtained a newplanning consent for 20,000ft2 of residential development together with parkingfor 20 cars. Belford Road is less than 500m from Charlotte Square and the WestEnd of Princes Street and has recently become a quiet cul-de-sac. Residentialvalues should average above £350/ft2, the spectacular views from the upperfloors commanding much higher values. Planning permission has recently been received for 45 large detached houses nearDunbar, which has a station on the main east coast line. The dual carriagewaysection of the A1 from Edinburgh has recently been further extended and oursite, just off the A1, is now only four miles beyond the dual carriage way. Weexpect to receive planning permission for a further 28 houses, including four"affordable" on a second site nearby shortly. The report of an enquiry into aproposed superstore and a budget hotel on the A1 just south of Dunbar isawaited. We are also expecting planning permission soon for eight detached houses at oursite at Wallyford, which borders Musselburgh and is within 400 yards of the eastcoast mainline station with easy access to the A1 near the City Bypass. Buildinghas recently started on a contiguous area on which 250 houses are to be built,predominately for private sale. Lastly I report a quite different venture. We are participating in a developmentof 39 small detached and semi-detached houses at Herne Bay in Kent, a seasideVictorian town that is becoming increasingly accessible to the major employmentareas to the west. Our partners are an experienced local team and at present theproject is on time and on budget. Over the year we have assessed a very wide range of opportunities, viewed asmall proportion of those assessed and bid for some of them with a success rateapproaching 50%. Several similar properties are currently under consideration. Economic Prospects Over the last few years the world economy has usually been overshadowed by thethreat of various catastrophic or apocalyptic events. Fortunately the fourhorsemen of the Apocalypse appear quartered at a safer distance this year. In2002 the blood-red horse, ridden by a swordsman, foreshadowed the war in Iraq;in 2004 the black horse, whose rider's scales weigh famine and scarcity,threatened the world's oil supplies; in 2000 the white horse, with its crownedrider, brought the false testimony of world recession and deflation; and in2001, with later sightings, the pale horse, the colour of the sickly or recentdead, bearing a horseman wielding a scythe of terror and death materializedunexpectedly. The threats represented by the horseman are at worst now latent. There are challenges to the western world but at present they are of a differenttype and scale. The world economy grew by 5.1% in 2004, the strongest period ofgrowth in 20 years, and the EIU expects 4.3% growth this year and 4% in both2006 and 2007. The slowdown is due to continued high oil prices and furtherrises in US official interest rates. Growth at these levels is conditional on nooil shock and on no dramatic unfavourable changes in two critical US economicparameters: private savings and the current account deficit, at present over 6%of GDP. Brent oil futures indicate that the spot price will remain at about currentlevels over the next few years, double the 2004 price, but this averageindication conceals a very wide spread of forecasts. Estimates derived fromoptions show that there is now a one-in-four chance of the oil price being $10higher or $10 lower than the average six- month price. In contrast in February2004, prior to the marked rise in oil prices, the chance of so large a changewas less then one in fifty. High oil prices have had and are predicted to have only a limited effect oneconomic growth. Even at $60 crude oil is half the real price reached in the1978-80 oil shock which followed the Iranian revolution, when oil prices trebledafter quadrupling in the 1973/74 shock. Oil prices now have less influence onthe economy as the world economy uses about a third less oil per unit of outputnow than in the 1980s and the US uses less than half the oil per unit of outputthan in the late 1970s. Oxford Economic Forecasting estimates that a $10increase in oil prices reduces the rate of growth of the UK economy by 0.25percentage points lagged one year and Goldman Sachs estimates the effect on theworld economy as 0.3 percentage points. The Bank of England reports futureprices at around $60, a price Goldman Sachs expects to be maintained for therest of the decade but other forecasters expect prices below $50. The EIU basesits estimate of 4% growth in world output in 2006 and 2007 on oil prices ofaround $50. The twin US "imbalances" in savings and balance of payments are potentially agreater threat to the world economy than oil price rises. US consumers werealready net dissavers before the recent oil price rises which are likely to haveincreased such dissaving. The US federal budget was already in deficit beforethe costs of rectifying the hurricane damage increased federal expenditure andthe fall in corporate profits caused by higher oil costs reduced federal income.The US net national savings rate, which has been at a record low of 1.5% of GDPsince early 2002, could drop to nil or even become negative over the next year.Fortunately surplus savings, primarily from Japan, Germany and China, have beenused to buy US $ assets, but several factors might upset the symmetry of USdissaving being matched by non-US savings. Economic recoveries in Japan andGermany seem likely to reduce their savings and China - the third largest worldsaver - has indicated that it intends to stimulate domestic demand, reducing itssavings. If, as seems likely, the US deficit continues to increase but thesupply of overseas saving falls, then the US would be exposed to a run on the $almost certainly resulting in higher interest rates. Such a marked adjustmentcould result from one or more of several triggers: a marked exacerbation ofexisting trends outlined above; a further severe energy shock; a bursting of theUS housing boom; or a concatenation of political and economic events associatedwith political confidence, the Iraq war and a sudden change in economiccircumstances. Morgan Stanley comment "the history of economic crises is clear:the longer the delay any economy holds off in facing its imbalances, the greaterthe possibility of a hard landing ..." and conclude" there is now about a 40%probability of a hard landing in the next 12 months." Similar arguments have been advanced for at least two years. Last year AlanGreenspan said: "given the size of the US current account deficit, a diminishedappetite for adding to dollar balances (ie foreign holding of dollars) mustoccur at some point". At that time the exchange rate was about $1.86/£ and $1.30/• and several commentators expected further $ depreciation to $2.00/£ and amuch larger depreciation to $1.50/ against the Euro. Perversely the $ hasstrengthened to $1.721/£ and $1.179/•, almost at two year $ highs. Until recently the $'s strength resulted from foreign central banks buyingTreasury Bonds. However in the third quarter of 2005 foreign private investorsbought Bonds valued at $360bn compared with $42bn of net buying from centralbanks, possibly partly because both US short and long-term rates are now higherthan other reserve currencies. Thus $ devaluation is delayed, albeit nowincreasingly supported by shorter- term investors. However "over valuations" canpersist for a long time - several years in the dot.com equity boom, as in allother bubbles, and according to some commentators in the Sterling exchange ratefor the past ten years. However, as an FT leader says "a long-term requirementdoes not make a short-term bet. The current account dynamic may not bite forseveral years yet". Alan Greenspan suggests that the US housing boom will slow and "equityextraction will cease" giving rise to a significant rise in savings, reducingimports and improving the current account. Alternatively or additionally SamuelBrittan suggests that once "the rise in asset prices is well and truly over" USinterest rates will stabilise or fall and "nudge the dollar in the correctdirection without heroics or unlikely international concordats". There appears areasonable chance that a sudden dramatic realignment of the $ will not takeplace, or if it does, it could be long delayed. The UK economy has enjoyed a long period of sustained growth since the firstquarter of 1993, when the economy was emerging from the last recession. Howeverin Q2 of 2005 GDP expanded by only 1.5%, the slowest rate of expansion since1993, but private sector growth was only 1.3%. The slowdown in private sectoroutput growth since early 2004 has been more pronounced than that of the economyas a whole and the recent fall in GDP growth is due primarily to a reduction inhousehold consumption growth which, having grown markedly faster than GDP formuch of the last eight years, has dropped back to the same level of growth asGDP growth, only 0.4% in Q2 2005, the weakest growth in consumption since 1995.Thus the consumer boom which had provided the principal stimulus to growth forover ten years is waning as employment growth slows and rising oil and utilityprices and higher interest costs reduce disposable income. The spending slowdown has occurred without a rise in savings which remainsaround 4% even below the low levels in the late 1980s. The EIU expects savingsto rise accompanied by a rise in direct taxes restricting growth in privateconsumption and contributing to GDP growth of only 1.5% in 2006. Other privateforecasts are less pessimistic. The average forecast for 2006 of economistspolled by The Economist was 2.1% and Deloitte forecast 2.0% rising to 2.5% in2007. In contrast the MPC estimates that it is 50% likely that growth will bebetween 2% and 3.5% until 2009 and the Chancellor's pre-Budget Report forecasts2.25% in 2006 rising to 3% in 2007 and 2008. Changes in consumption growth related to changes in saving will influenceoverall growth. Deloitte has demonstrated that savings and house price inflationare inversely correlated. Savings dropped to around 4% in both the house pricebooms of the late 1980s and the early 2000s when house prices rose 20% perannum. Last year, when house price rises were still above 15% some commentators,notably Capital Economics and HSBC, argued that a house price bubble existedwhich, when pricked, would lead to sharp falls in house values, greatlyincreased saving and reduced consumption. Fortunately this extreme outcome hasnot been realised, at least so far, although the OECD calculates that Britishproperty is 35% overvalued. The FT House Price Index MA uses data from the Land Registry, the ODPM and theHalifax and Nationwide to compute a house price index for England and Wales,seasonally and mix adjusted. This index shows that annual house inflation was2.5% in October 2005, the lowest level after a steady decline from 12.4% inJanuary 2005. Monthly price inflation, which was "negative" in April 2005 andMay 2005, has been nil or slightly positive since then. The B of E reports"that there are signs of modest recovery in the housing market ...... and anaverage of lenders' monthly data suggests ..... that the pace of house priceinflation may have ticked up recently". Deloitte's figures for the inversecorrelation between house savings and house prices indicate that a 5% annualhouse price inflation is in line with a rise in the saving ratio from thecurrent 4% to a "more normal" 6% or 7%, an increase consistent with a recentsurvey showing that the balance of households expecting to save more in the yearahead had risen to 15% from the nil or "minus" figure in 1999-2003. A fortunateequilibrium seems to exist between slightly rising house prices, moderatelyincreased saving and marginal reductions in consumption growth. The EIU,factoring in weakening consumption, estimate growth of 1.5% in 2006. If houseprices fall and savings rise further, growth will be significantly lower.Fortunately current indications are that house prices will have a "softlanding". There are two separate but inter-related possible constraints to economic growth- tax and productivity. Tax brackets have not been adjusted in line with incomesand the number of taxpayers in higher tax brackets has increased, resulting in a10% rise in income taxes in the year to April 2005. This tax increase, "fiscaldrag", together with higher interest rates has reduced growth in real disposableincome to a six-year low. Unfortunately taxes seem likely to rise by stealth or otherwise, furtherrestraining consumption. The March Budget estimate of Public Sector NetBorrowing (PSNB) of £32bn was predicated on growth of 3% to 3.5% in 2005/6 andaccording to the Treasury each percentage point reduction in GDP growthincreases borrowing by about £7bn. The Pre Budget Report (PBR) estimates growthat only 1.75% and net debt is now forecast to be 36.5% of GDP compared to 35.5%at the Budget. The PBR forecasts growth to rise to 2.25% in 2006 to 3% in both2007 and 2008 but net debt is set to move closer to the 40% of GDP level set bythe Chancellor's second golden rule. The rise in growth to 3%, above the trend2.25%, is predicated on estimates of productivity showing an output gap, betweenactual and potential output, of 1.5% next year. Unfortunately most otherforecasters are less optimistic about productivity and the NIESR estimates thatthe output gap will be 0.2% and the OECD 0.7%. A lower output gap reduces thepossible level of non-inflationary growth. For example, Deloitte state that, iftheir estimates of GDP growth over the next few years are correct, PSNB will beabout £10bn higher in each year and conclude "taxes will have to rise sooner orlater". The Institute for Fiscal Studies, summed up the current positionsuccinctly: - "(The Chancellor's) overspent - an almost £20bn surplus is now a deficit of £30bn. He's got his economic forecasts wrong, so there is less money coming in to cover his spending ....... and he's (only) managed to keep his ownborrowing rules by ingenious accounting ......" "Imprudent" economic and political policies will not only result in higher taxesbut will also prejudice growth as a result of a misallocation of resources. Ahuge stimulus, resembling an old fashioned Keynesian boom, is being given to analready growing economy, but directed to the public services. In recent yearsthe UK public sector rose 4.5 percentage points of GDP faster than in any otherdeveloped country and UK Public Sector employment has risen 13.2%, over twice asfast as the private sector. Unsurprisingly this investment has yielded very lowreturns. In Healthcare public expenditure in real terms rose 60% between 1997and 2004 but output rose only 30%; and in Education real expenditure rose 42%but output rose only 10%. Thus Public Sector productivity has continued to fall.The Sunday Times concludes: "the outcome (of the investment boost) wasentirely predictable: we discovered long ago that large public sectororganisations are incapable of efficient delivery ...." The favourable economic circumstance inherited by Labour together with itsenlightened delegation of monetary policy has permitted a long period ofuninterrupted growth in the UK economy. Growth is now at a lower level and willcontinue below historic trends. Productivity growth which had reached a peak of3% in the five years to 1996 is now only 1.4% and forecast to fall. Asignificant factor in this deterioration has been the slow growth of output fromthe public services. Property Prospects In the year to September 2005 the CB Richard Ellis All Property Yield Index fell0.8 percentage points to 5.6% as all components of the index fell. Last year Ireported a similar fall, 0.8 percentage points in the All Property Yield Index,from 7.2% to 6.4%. The ten year Gilt yield was 4.3% giving a 1.3 percentagepoints yield gap, smaller than the 1.6 percentage points gap last year and the2.6 percentage points gap the previous year. The All Property Rental Index rose2.3%, although it slowed to 0.4% for Q3, due primarily to a fall in CentralLondon Shops and South East Industrials. Over the year Scottish Shops and RetailWarehouses were the second worst or worst performers in their sectors butScottish Offices' and Industrials' rental growth was average. Over the last five years the All Property Rental Index has grown by 1.1% perannum, significantly below the rate of inflation. Since the 1990 market peak theIndex has risen 19.1% but has fallen 20.2% in real terms. Offices have fallenfurthest, 30.7%, but less than last year's 37.8%, with most central Londonoffice locations only half their previous peak, inflation adjusted, except forDocklands where rents have grown 2.7% in real terms. Real retail warehouserentals have risen by a very remarkable 62.4%. The fall in yield of 0.8 percentage points to 5.6% together with a rise in therents of 2.3% has again produced excellent total returns. In the twelve monthsto October 2005 the IPD Index showed total property returns of 17.5% with allthe three constituent sectors, Retail, Office and Industrial, providing almostsimilar returns. Unsurprisingly, given the drop in yields, capital growth hasaccounted for about 10% of the total return. These returns compare with 19.8%for equities but only 7.3% for gilts. Over the last three, five and ten yearstotal returns from property have exceeded those in all other asset classes. Thereturn for equities over three years, 15.0%, is only a fraction below property,15.1%, but over five years the total equity return is only 0.2%. Over all thereview periods retail returns have been the highest and offices the lowest. The supply of investment property is relatively inelastic and even a smallincrease in demand results in large price rises. In 2004 net institutionalinvestment totalled £2.3bn, the highest level since the 1970s. Bank lending forproperty investment in the first half of 2005 was £30bn compared with £20bn inthe first half of 2004, the average LTV for retail property has risen to 82% andthe margin charged has fallen! National statistics appear contradictory, as theyshow lower investment levels in 2005, but these figures exclude therecently-created offshore and other indirect investment vehicles. Knight Frankpoint to a "weight of money in the market", an increased demand raisinginvestment prices. Unsurprisingly, listed property companies' shares have alsoperformed well showing a 27.4% rise over the last 12 months compared with 13.8%for the All Share Index. The immediate prospects for investment property appear good, although recentperformances are unlikely to be emulated. Recent good performance has created a"momentum" effect, buying on the back of recent good performance or buying with"the herd". This investment policy has recently been the subject of researchdemonstrating that price series show positive serial correlation in theshort-run i.e. if prices rose last period, they will probably rise in the nextperiod. However, in the long run they show negative serial correlation ie aperiod of time when they have risen by more than average is generally followedby a period of similar length in which prices rise by less than the average. Thequestion is: for property how long is the long run? Commentators including Cluttons, Colliers CRE and the Estates Gazette predict2006 and 2007 returns to be generally 7%-9%, based on moderate rental growth butno further fall in yield. Colliers (CRE) expects the highest All Propertyreturn, 9.5%, and all surveys expect offices to offer the highest returns - withhigh street shops usually providing the lowest return, 6.4% forecast by EstatesGazette. Only once in the last 29 years have All Property yields remainedconstant from year to year - at 8% from 1982 to 1984. This precedent was quotedin last year's report and yields changed: they fell, but will they fall further?The momentum effect, the weight of money and the normal uncertainties aboutasset allocation are likely to support current yields. The key elements for amarket turning point are reported to be first, an element of forced selling orirrational buying, second, a story or narrative that convinces investors theyare right and, third, signs of unusually high or low valuations. Presentvaluations may seem too high but property may prove the new "bubble". Ryden report Scottish Investment Property performed well in the year toSeptember 2005 with retail returns of 19.8%, offices 14.4% and industrials15.5%, appreciably better than last year. Retail returns were 1.5 percentagepoints above the UK average but office returns were about 1 percentage pointlower. The Scottish office market has provided improved returns over the last twelvemonths returning 14.4% compared with 10.7% last year, primarily due to areduction in prime yields to under 6%. Headline rents in Edinburgh are similarto last year - £27per sq ft in the City Centre and £19 in west Edinburgh. Theunchanged rental level reflects a relatively steady ratio between supply andtake-up. The moving average supply over four six-monthly periods has been2,400,000ft2 since March 2004, while the same moving average uptake figures havebeen about 450,000ft2. A discernible trend has been the reduction in supply ofperipheral space from 1,470,548ft2 to 879,310ft2 over the last two years. Rydenreport that take-up has been predominantly from indigenous organisations withlittle significant inward relocation. With the new schemes being built,traditional occupiers such as the Royal Bank of Scotland now occupying their newcampus site at Gogar, certain insurance companies releasing space and with thetransfer of professional firms from traditional space to modern open plan spacevirtually complete, it is unlikely that rents will increase significantly unlessnew occupiers are attracted to the City. Offices are being built or planned inareas peripheral to Edinburgh, such as Bathgate, Livingston, and Fife, and northMidlothian and East Lothian, these latter areas abutting the city boundary,which will compete for occupiers with City locations. Ryden report that Glasgow is enjoying a period of strong demand having attractedseveral large occupiers, presumably because of lower costs and a wider and moreavailable labour pool than Edinburgh. Take-up in the year to 30 September 2005was 1,020,000 ft2, almost double that of the previous twelve months and thehighest since 1999. Supply however is almost unaltered at about 2,600,000 ft2.The recent take-up has included landmark buildings such as 200 Broomielaw,Central Exchange, Optima and 6 Atlantic Quay, some of which have been empty forover two years. Rents remain unchanged at £21.50 - £23 but incentives have beencurtailed. The recent success of the Broomielaw will be a significant benefit toour development site for 192 flats at Tradeston, 600 yards away on the southbank of the Clyde. The smallest of the three main Scottish Office Markets, Aberdeen, has outshoneits larger rivals. Rents have risen to over £20/ft2 from £19/ft2 last year andtake up of 461,507ft2 in the year to September 2005 was similar to the period toSeptember 2004, then the highest for over 20 years, but supply remains close tothe five year average of about 1,000,000ft2. Ryden report the ever-escalatingprice of North Sea crude oil has "fuelled frantic activity" within the officemarkets. The number of development wells and exploration and appraisal wells hasrisen rapidly and production is scheduled to start on sixteen new fields in2005, up from eleven in 2004. Increased activity is likely to support theAberdeen market for a few years, but UK oil production is now projected to halveby 2020. The current conditions may represent a bull rally in a bear market. The residential property market continues to offer long-term attractions. Overthe year to October 2005 house price inflation in England and Wales slowed to2.5%, its lowest level since June 1996. In Scotland, house prices have risen17.7% but in the Edinburgh area, although some types or locations show smalldeclines, prices are generally 5% - 8% higher. The changes in the value of houses over the last year are primarily due tochanges in demand. Short-term considerations such as higher unemployment, risingor high interest rates, lower rents and lower future price expectations reduceshort term demand, leading to slower rises in prices or to falling prices. Theapartment /"flat" market represents an exception. Due to the release of largeareas of brownfield city land for residential development the supply of newflats has increased very significantly. This sudden increase in supply,accentuated by the less attractive location of many such current developments,has led to some significant price falls. The critical difference between most commercial property investments and mostresidential property lies in the parameters of supply. Supply constraints incommercial property, except for some retail property, have been considerablyreduced over the last few years. Planning consents for offices have been easedand in some cases traditional or locational prejudices and preferences have beenmodified increasing effective supply. The easing of the conditions for consentand the wider acceptability of the non- traditional areas has produced a muchflatter supply curve in which supply responds more quickly to demand, and wheredemand can be satisfied in less specialised areas, usually at reduced rents,thus limiting the rental value of previously established areas. The most notableexample of supply loosening is the development of out-of-town offices locationssuch as Docklands in London or Edinburgh Park in Edinburgh. Similarlyout-of-town shopping of all kinds has restricted rental growth in the highstreet and reduced city centre retail development. The supply constraints in most sectors of the residential market are different.Supply is usually limited by planning restrictions, by the slow administrationof the planning system, by the need for wider consultation, by the increasinglyvocal and better organised pressure groups supporting environmental and greenpolicies, by Nimbys and by other specific ad hoc opposition groups. In spite ofsome current initiatives the situation is unlikely to change in the foreseeablefuture and supply restrictions will continue to produce premium prices for mostconsented land. The uplift from obtaining consent can be realised through various separate oroverlapping routes. Change of use can be obtained by promoting existing land inthe local plan process, by buying land likely to be rezoned, by buying land thatlies within an area with a variety of uses, or by buying land where planningcriteria are about to change. The increase in value of the consent can begreatly enhanced if it is obtained in an area for which demand is growing as,for example, where new communications or transport systems are likely to beestablished, or where upgrading or improvements are likely to take place. TheGroup has been researching, bidding for and investing in all such avenues. Insome instances up to 80% of the price paid is covered by present value, with 20%invested in an opportunity with an estimated 50% probability of being worth tentimes that marginal investment. Even with a low success rate the returns oncapital are very attractive. A wide portfolio of such investments held over areasonable time and managed skillfully should yield very considerable profits. Future Progress The Group expects the current year's results to be satisfactory, but there is awide range of possible outcomes. Rental income is likely to rise marginally andvacancy costs and professional fees related to St Margaret's House are likely tobe lower than previously. The Group has a much larger development portfolio than previously, the fullvalue of which will be delivered over the coming years. We continue toconcentrate on the acquisition and creation of more development opportunitiesbut we will become increasingly involved in the realisation of suchopportunities when planning consents are obtained, provided market conditionsare favourable. The full outcome for the current financial year will bedependent upon any net change in valuation. The mid-market share price as at 19 December 2005 was 173p, a discount of 15.9%to the NAV of 205.8p. The Board recommends an increase in the final dividend of1.5p making a total dividend of 2.5p for the year, and we intend to increase thedividend at a rate consistent with profitability and with consideration forother opportunities. Tax of only £34,702 is provided in the current year. The Group has tax lossesand allowances accrued carried forward of £993,042 which we expect will beutilised over the next few years. Conclusion In spite of high oil prices and of other risks the UK economy should continue togrow next year but at below the trend rate of 2.5%. Investment property seemsfully priced as rental growth is likely to be limited and yields are unlikely tofall further. Short-term market conditions for residential property are notattractive in some limited areas but medium to long-term prospects for mosttypes of residential property are excellent. There are highly profitable nicheopportunities to create substantial value by effecting planning change. I D LoweChairman21 December 2005 Consolidated profit and loss accountfor the year ended 30 June 2005 2005 2004 £ £ Income - continuing operationsRents and service charges 707,009 614,735Trading property sales - 1,541,833Trading sales 278,406 375,866 _______ _______ 985,415 2,532,434Operating costsCost of trading property sales - (1,132,890)Cost of other sales (262,124) (363,642)Administrative expenses (850,743) (1,129,258) _______ _______ (1,112,867) (2,625,790) _______ _______ Operating loss (127,452) (93,356) Profit on disposal of investment property 501,420 584,291Profit on sale of investments 85,522 -Interest receivable 279,854 229,731Interest payable (292,492) (286,004) _______ _______ Profit on ordinary activities before taxation 446,852 434,662 Taxation (34,702) - _______ _______ Profit for the financial year 412,150 434,662 Dividends (297,073) (263,434) _______ _______ Retained profit for the financial year 115,077 171,228 _______ _______ Earnings per ordinary share 3.51p 3.78p _____ _____ Diluted earnings per ordinary share 3.51p 3.63p _____ _____ Profit for the financial year is retained as follows: In holding company 322,797 367,287 In subsidiaries (207,720) (196,059) _______ _______ 115,077 171,228 Consolidated balance sheetat 30 June 2005 2005 2004 £ £ £ £Fixed assetsTangible assets:Investment properties 23,142,302 19,301,974Other assets 4,056 4,190 __________ __________ 23,146,358 19,306,164Investments 20 90,898 __________ __________ 23,146,378 19,397,062Current assetsDebtors 1,018,560 122,031Cash at bank and in hand 4,761,664 6,312,760 _________ _________ 5,780,224 6,434,791Creditors: amounts fallingdue within one year (3,761,616) (3,726,095) _________ _________ Net current assets 2,018,608 2,708,696 __________ __________ 25,164,986 22,105,758 __________ __________ Creditors: amounts falling due after more than one year (710,319) (2,252,500) __________ __________ Net assets 24,454,667 19,853,258 __________ __________ Capital and reservesCalled up share capital 2,376,584 2,282,584Share premium account 2,745,003 2,530,753Capital redemption reserve 175,315 175,315Revaluation reserve 4,646,908 376,221Profit and loss account 14,510,857 14,488,385 _________ _________ Shareholders' funds - equity 24,454,667 19,853,258 _________ _________ These financial statements were approved by the Board of Directors on 21December 2005 and were signed on its behalf by: I D LoweDirector Consolidated cash flow statementfor the year ended 30 June 2005 2005 2004 note £ £ Net cash inflow from operating activities (a) (1,959,437) 71,312Returns on investments and servicing of finance (b) (35,889) (18,323)Corporation tax - -Capital expenditure and financial investment (b) 1,015,574 368,875Equity dividends paid (267,240) (241,636) __________ __________ Cash inflow/(outflow) before management ofliquid resources and financing (1,246,992) 180,228 Financing (b) (294,104) 909,321 __________ __________Increase /(decrease) in cash in period (1,541,096) 1,089,549 _________ _________ Reconciliation of net cash flow to movement innet funds (c) £ £Increase /(decrease) in cash in period (1,541,096) 1,089,549 Cash (outflow)/inflow from decrease in debt 602,354 (1,026,187) _________ _________ Movement in net funds in the period (938,742) 63,362Net funds at the start of the period 1,816,590 1,753,228 _________ _________ Net funds at the end of the period 877,848 1,816,590 _________ _________ Notes to the cash flow statement (a) Reconciliation of operating profit to net cash inflow from operating activities 2005 2004 £ £ Operating (loss) (127,452) (93,356) Profit on disposal of trading property - (408,943) Depreciation charges 134 4,385 (Increase)/Decrease in debtors (896,527) 184,617 (Decrease)/Increase in creditors (935,592) 384,609 _________ _________ Net cash inflow from operating activities (1,959,437) 71,312 _________ _________ Notes to the cash flow statement (ctd) (b) Analysis of cash flows 2005 2005 2004 2004 £ £ £ £ Returns on investment and servicing of finance Interest received 279,854 229,731 Interest paid (315,743) (248,054) _________ _________ (35,889) (18,323) _______ _______ Capital expenditure and financial investment Purchase of tangible fixed assets (3,446,816) (3,081,201) (3,446,816) Sale of investment property 2,236,414 3,540,954 Contribution to dilapidations received 2,049,576 Purchase of investments - (90,878) Sale of Investments 176,400 - _________ 1,015,574 368,875 __________ ________ Financing Purchase of ordinary share (116,866) capital - Issue of ordinary share capital 308,250 - Debt due within a year Increase/ (Decrease) in short-term borrowings 939,827 1,076,187 Debt due beyond a year (Decrease) in long-term borrowings (1,542,181) (50,000) _________ _________ (294,104) 909,321 __________ ________ (c) Analysis of net funds At beginning of Cash flow Other non-cash At end of year year changes £ £ £ £ Cash at bank and in hand 6,312,760 (1,551,096) - 4,761,664 Overdrafts (89,729) 10,000 - (79,729) __________ (1,541,096) Debt due after one year (2,252,500) 1,542,181 (710,319) Debt due within one year (2,153,941) (939,827) - (3,093,768) __________ __________ 602,354 - __________ __________ __________ __________ Total 1,816,590 (938,742) - 877,848 __________ __________ __________ __________ Notes to the Audtited Results for the year ended 30 June 2005 1. The above financial information represents an extract taken from theaudited accounts for the year to 30 June 2005 and does not constitute thestatutory accounts within the meaning of section 240 of the Companies Act 1985(as amended). The statutory accounts for the year ended 30 June 2005 werereported on by the auditors and received an unqualified report and did notcontain a statement under section 237 (2) or (3) of the Companies Act 1985 (asamended). The statutory accounts will be delivered to the Registrar ofCompanies. 2. All activities of the group are ongoing. The board recommends thepayment of a 1.5p per share final dividend (2004: 1.25p), which will be payable,subject to shareholder approval, on 24 January 2006 to all shareholders on theregister on 6 January 2006. 3. Earnings per ordinary share The calculation of earnings per ordinary share is based on thereported profit of £410,150 (2004: £434,662) and on the weighted average numberof ordinary shares in issue in the year, as detailed below. The weightedaverage number of shares has been adjusted for the deemed exercise of shareoptions outstanding. 2005 2004 Weighted average of ordinary shares in issue during year - 11,754,154 11,496,244undiluted Weighted average of ordinary shares in issue during year - 11,754,154 11,966,244fully diluted 4. The Annual Report and Accounts will be posted to shareholders on oraround 22 December 2005 and further copies will be available, free of charge,for a period of one month following posting to shareholders from the Company'shead office, 61 North Castle Street, Edinburgh, EH2 3LJ. 5. The Annual General Meeting of the Company will be held at 12.30 pm on20 January 2006 at 61 North Castle Street, Edinburgh, EH2 3LJ. 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