Caledonian Tst. Regulatory News (CNN)

20 Dec 2006 11:24

Caledonian Trust PLC20 December 2006 FOR IMMEDIATE RELEASE 20 DECEMBER 2006 Caledonian Trust PLC Results for the year ended 30 June 2006 Caledonian Trust PLC, the Edinburgh based property investment holding anddevelopment company, announces its audited results for the year to 30 June 2006. CHAIRMAN'S STATEMENTYEAR ENDED 30 JUNE 2006 Introduction The Group made a profit of £129,509 in the year to 30 June 2006 compared with£412,150 last year. Earnings per share were 1.09p and NAV was 222.5p, comparedwith 205.8p last year. Income from rent and service charges was £870,745, anincrease of £163,736 over last year. Gains on the sale of properties were£295,229 compared with £501,420 last year. Administrative costs of £992,992were £142,249 higher than last year due primarily to a rise of £98,420 inproperty costs related principally to the vacancy at St Margaret's House and therepair costs at Ashton Road, Rutherglen, prior to the successful sale. Netinterest payable was £43,506, higher than last year's payment of £12,630, due toincreased borrowings. The weighted average base rate for the year was 4.52%,almost the same as the 4.72 % for the year to June 2005. On 30 June 2006 the Group's portfolio comprised by value 37.7% office investmentproperty (of which 67.6% is open plan) 36.9% retail property, 3.6% industrialproperty, and 21.8% development property. Review of Activities The Group's property activities reflect our continuing strategy of purchasingassets with medium-term development prospects and of making niche andopportunistic acquisitions. Investment assets will probably be sold when they"mature". Significant changes are taking place in our Edinburgh New Town investmentportfolio. The twenty-five year leases on our two properties in Young Street,adjacent to Charlotte Square, determined on 28 August 2006. The smaller of thetwo properties, 17 Young Street, together with two garages, has been let to theformer sub-tenants for ten years with breaks at a slightly enhanced rent. Theother property, 19 Young Street, also with two garages, has been unoccupied forsome years and we have agreed a satisfactory dilapidations settlement. Many NewTown offices have reverted to residential use where the values are usually over£300/ft2 refurbished. In this instance residential conversion would cost around£50/ft2 which produces a poorer return than office values at this location. Theunrefurbished offices as are being marketed at a price which reflects offersover £260/ft2. The two garages are being retained by the Group for letting. We have made a similar analysis of the vacant space at 61 North Castle Street,where office values are similar to Young Street, but have arrived at theopposite conclusion. The Georgian Castle Street property is particularly elegantand is built on a much more generous scale than Young Street and, onrefurbishment, is expected to have a residential value of over £450/ft2,substantially in excess of office values. We propose to undertake thisrefurbishment and to incorporate the Edwardian extension at the rear of 61 NorthCastle Street into the contiguous office space in Hill Street. In South Charlotte Street the first five year review due in December 2006 of the4,500ft2 restaurant let to La Tasca for twenty five years is being negotiated.Our agents have indicated that a substantial rental increase should be achieved. Our largest property in Edinburgh, St Margaret's House, was let to the ScottishMinisters until November 2002 and was the subject of a long dilapidationslitigation in the Commercial Court until an acceptable offer was made in January2005. Discussions with City of Edinburgh Council officials over the years haveindicated that any redevelopment proposals for St Margaret's would require to beconsidered in the context of a master plan for the island site which StMargaret's shares with, inter alia, Meadowbank House, the 125,000ft2 1970soffice block owned and occupied by the Registers of Scotland, between the A1 andthe main east coast railway line and "Smokey Brae". In consequence we have haddiscussions for several years with Registers of Scotland to enhance our mutualinterests. Unfortunately Registers, like many Scottish Government Agencies andDepartments, are subject to a policy of dispersal away from Edinburgh and theyhave been engaged in a relocation review process for five years. Stage 1 of thereview was delivered to the Scottish Ministers in December 2004 and, in linewith the review's recommendations, Ministers ruled out the relocation of thewhole Meadowbank operation and requested the Registers to undertake a Stage 2appraisal comparing a phased partial move from Edinburgh to one of six localauthority areas short-listed in Stage 1 with the "status quo"- i.e. no move.In their appraisal Registers concluded that for operational efficiency anypartial move should be of a whole sub-section and selected one currentlyemploying 222 full time employees, just over a fifth of their current full timestaff. Due to a planned staff reduction to c800 by 2011/12 this subsection wasexpected to have 162 full-time employees. To counter the decline in the numberof employees being relocated, the proposed new feudal abolition unit of 24full-time employees was to be added to the relocated site. The marginal cost of such a move, given a range of variations, was the mainsubstance of the Stage 2 appraisal. Registers have a large existing office inGlasgow. Due primarily to economies of scale, adding the existing staff thereis the least expensive relocation. The report states that on the premisesstated such a relocation would have a "net present cost" of £8m, and involve"significant and continuing loss of efficiency, the costs of which will have tobe met by the Registers of Scotland's client base". However, if such a partialrelocation is required, relocation to Glasgow "delivers socio-economic benefitsin line with policy and also represents the least disadvantageous location interms of cost and impact on the Registers of Scotland's core business". Registers submitted their extensive Stage 2 Relocation Appraisal to theMinisters on 8 July 2005. A decision was originally expected in late 2005, thenat a later date and latterly in the third week of July 2006. On 21 September2006, in response to a question in the Chamber, the Minister, George Lyon,replied: "The Executive will announce the outcome of Stage 2 of the locationreview of the Registers of Scotland shortly". Bizarrely on 24 November 2006 theMinister announced that the Executive was "deferring" a decision and had askedRegisters to report back in a year. The referral complicates our analysis byintroducing several additional options and uncertainties and by lowering theprobability of any one particular outcome. The deferral relates to 186 jobs only as the Stage 1 recommendation to maintainthe vast majority of jobs in Edinburgh was accepted. The cost of the jobtransfer is high, although the Executive avers that the policy can be justifiedon "socio-political" grounds. However, Audit Scotland has recently reportedthat "the policy had been operated inconsistently with no systematic evaluationand an absence of explanations ...". In view of the criticism, the deferraland the forthcoming election and, possibly, a change of policy and the carefullyargued appraisal by Registers, the move of the 186 jobs now seems less likely.The retention of the majority of jobs, c600, seems very likely. Unfortunately these conclusions are necessarily uncertain. What is certain isthat Registers remain in the relocation review "pending tray" and as such willbe unable to plan coherently beyond the ongoing relocation review, which now maybe subject to almost indefinite review. Indeed the policy may be dead but thedeath as yet unconfirmed. Next year, following the May 2007 election, there willbe a new parliament and a new administration. While the Group's preferred option was to undertake a development in conjunctionwith or for the benefit of Registers, outline contingency plans have beenprepared. We will now promote a phased development in which the St Margaret'ssite provides the first phase. Key elements will be a landmark tower on thewest boundary suitable for a hotel, office or residential use and a piazzaentering off a new street frontage on London Road. In due course theredevelopment of the Meadowbank House site would complement that at StMargaret's. In our property at Baylis Road / Murphy Street neat Waterloo, in the borough ofLambeth, London, the tenants, who had been in occupation on short-term leasessince the early 1990's, exercised the option to break the two year lease in May2006. A dilapidations schedule was served at that time and a substantialamount of the reinstatement works undertaken by the tenant are nearingcompletion and discussions are underway to agree a financial settlement inrespect of the outstanding items. There are many options for the properties onwhich we are being advised by our London agents. Office rents have risen 17.7%in the West End over the last three years and best rents in the South Bank arenow £38/ft2 equivalent to say £25/ft2 in Baylis Road. Residential values haverisen sharply, 25.4% in Lambeth in the year to September 2006, and are nowestimated to be over £600/ft2. If fewer than fifteen flats are developed, noaffordable housing is required and a mixed commercial and residentialdevelopment of 14 flats may optimise value. Alternatively, once thedilapidations works are completed, a moderate upgrade may result in a rentalvalue with an investment value higher than the residual value of anydevelopment. We continue to receive unsolicited offers to let or to buy theproperty. The sale of Ashton Road, Rutherglen was our only investment disposal in theperiod. This industrial property was purchased for minor refurbishment andletting in an area likely to benefit from the proposed extension of the M74 tothe Kingston Bridge. Although planning permission had been granted for thisextension it became subject to a judicial review, the outcome of which wasuncertain. Thus, when an unsolicited offer was made, even althoughrefurbishment had started, we accepted it and realised a surplus of £189,726after all costs. The Group gained several important planning consents during the year. InTradeston, Glasgow, on the south side of the Clyde opposite the Broomielaw weobtained permission for a development of 191 flats, predominantly two and threebedrooms together with associated car parking and open space, and 10,000ft2 ofcommercial space. The property is let and currently the rent review due in May2006 is being negotiated but is subject to a minimum uplift which should beexceeded. In August 2005 planning permission was received for forty-five large detachedhouses near Dunbar, which has a station on the main east coast line. The dualcarriageway section of the A1 from Edinburgh has recently been further extendedand our site, just off the A1, is now only four miles beyond the dualcarriageway. On 6 June 2006 we received planning permission for a furthertwenty-eight houses including four "affordable" on a second site nearby. Thereport of an enquiry into a proposed superstore and a budget hotel on the A1just south east of Dunbar is still awaited. Five years after our originalapplication planning permission was granted in August 2006 for eight detachedhouses at our site at Wallyford, which borders Musselburgh and is within 400yards of the east coast mainline station with easy access to the A1 near theCity Bypass. Construction is proceeding rapidly on a contiguous site on whichtwo national house builders are developing around two hundred and fifty houses. In Belford Road, Edinburgh, we have undertaken site works sufficient toimplement our long-standing 22,500ft2office consent which otherwise would havelapsed on 12 October 2005, the day we obtained another consent for 20,000ft2 ofresidential development together with parking for 20 cars. Belford Road, whichis less than 500m from Charlotte Square and the West End of Princes Street, hasrecently become a quiet cul-de-sac. Residential values should average over £365/ft2, the spectacular views from the upper floors commanding much higher values. However the implementation of our office consent may yet prove to have been anastute move. Since Q3 2005 office rents in Edinburgh have risen by about 5% andyields fallen by 0.8 percentage points, sufficient to increase the officeinvestment value by 21.85% to say £500/ft2. In East Edinburgh at Brunstane Farm, adjacent to the rail station, planning andlisted building consent was granted on 13 December 2006 to convert the listedsteading to provide ten houses of varying sizes totalling 14,000ft2. In additionto the steading we own five stone-built two storey cottages for refurbishmentand possible extension, two further medium-sized brick farm buildings andtwo-and-a-half acres of land adjacent to other residential property, but atpresent in the Green Belt fringe. Last year we bought a farmhouse, a farm steading and adjacent land in anelevated location with commanding views over open country in central Perthshirejust off the A9 near Bankfoot. We expect to submit an application for acomplete residential redevelopment shortly. In the year to 30 June 2006 we have acquired eight development sites and sincethe year end we have acquired a further four, including the second site nearDunbar on which we gained consent for twenty-eight detached houses. Currentlywe are negotiating the purchase of a large rural property in Central Scotlandwith long term potential. Ardpatrick is the largest and the most extensive of the twelve propertiesacquired but it is potentially the most rewarding. The Ardpatrick estateoccupies a peninsula in West Loch Tarbert and at present comprises a mansionhouse based on a Georgian house built in 1769, ten estate houses or formerhouses, a farm house (High Ardpatrick) and a farm steading and other buildingsfor potential residential development and a number of possible new housing sitesin locations considered suitable in the Finalised Draft Local Plan. Theproperty extends over 1,000 acres, has over 10 km of coastline, commandsstriking views, and includes a grassland farm, an oak forest, a private beach, anamed island and coastal salmon fishing and other sporting rights. The estate is in very poor condition but, as progress since our purchase on 4April 2006 confirms, the medium-term development value of the Estate isconsiderable. Immediately following a very long delayed completion we sold onpart of the property on which we realised a trading profit of £105,000. Three ofthe outlying cottages have been repaired, redecorated and brought up to asaleable standard and are currently under offer. We have recently obtainedplanning consent to convert and extend a stone built bothy for residential use.The small south Lodge cottage on the west drive has a wonderful coastal settingand consent has recently been granted to extend it to just over 1,000ft2. Like many West Highland estates houses Ardpatrick House enjoys a beautifulsetting looking SE over West Loch Tarbert to the Kintyre peninsula, but, unlikemost estate houses or shooting lodges, the house is built to a splendid classicGeorgian design originally comprising a central three-storey building with twoflanking pavilions. Internally also it is set apart by many fine original Georgian features, many ofwhich are in their original condition. Sadly the same is not true of the fabricof the building where maintenance has been woeful. At first, restoration ofthis fine building seemed wholly uncommercial. However, due to its constructionin three separate portions and the existence of three staircases, a naturaldivision is possible without disrupting the principal rooms. A furtherpartition can be easily achieved by introducing another staircase in theVictorian servants' quarters towards the rear of the house, currently a maze ofstorage and preparation rooms. Ardpatrick will then become four separate housesranging from 1760ft2 to 3478ft2 each with its own front door, one of which willbe a reinstated 1769 entrance. Planning and listed building consents for theconversion have been granted and the necessary remedial works have started. The Group's policy for the estate is to arrest the continuing decay in theinfrastructure and then to repair, renew or improve it sufficiently for itsfunction but also, wherever practicable, restore it as appropriate for theamenity and style of the estate. Such a setting will make the propertiesconsiderably more attractive to occupiers, purchasers and visitors. We alsointend to restore or provide limited central amenities available to a wide rangeof occupiers or potential occupiers. In a quite different part of Britain, Herne Bay, our joint venture developmentof 39 houses is on budget. Fifteen houses have been sold and 14 are reserved,slightly fewer than expected at this time. Economic Prospects The world economy grew by 5.0% in 2005 and is expected to grow by 5.3% in 2006,the highest for over 20 years, before declining slightly in 2007 and 2008 to4.7%, due to tighter monetary policy. This favourable outlook is conditionalon the non-crystallisation of a number of political and economic risks, most ofwhich fortunately are remote. A world recession and deflation posed a real but limited risk in 2000, butgrowth was maintained, primarily by active monetary policies and world interestrates are currently rising to moderate growth. Japan, whose economy hassuffered a long, often deflationary, recession has now recovered and the economyis estimated to grow by 2.8% this year. The war in Iraq threatened a severe oilshortage and subsequent economic dislocation, but oil supplies were largelymaintained. Oil prices did rise subsequently, doubling in 2004-05, but this waslargely due to increased global demand and as the world economy expanded by5.0%, less than in the previous year, possibly due to the estimated 0.3%reduction in growth per $10 rise in oil. The disruption caused by internationalterrorism is having a profound and widespread effect, particularly on individualfreedom and convenience but, like natural disasters, the consequences, howeverawful locally, are confined and limited. A widespread conflagration in the Middle East, centred on Iraq but includingShiite Iran and possibly other states, is a major and increasing risk to worldstability. Near anarchy prevails in Iraq with numerous separate factionsfighting the coalition forces and each other and murdering the civilianpopulation, the worst effects of which are being mitigated by the presence ofthe Coalition Forces. There seems no military, political or economiccircumstance that will bring stability and a military withdrawal appearsinevitable after which the position is likely to deteriorate further, possiblyaccompanied by a regrouping of the civilian population, until local supremaciesare established and any fighting is then concentrated between these warlords. If the occupying forces effect a partition, then the worst aspects of a civilwar might be avoided. In other contexts partitioning has reduced conflict butIraq appears inherently unstable. In particular, the influence of the IranianShiite theocracy in southern Iraq is already very strong and the risk of a warwith the previously dominant Sunni Iraq minority is high. The long Iran-Iraqwar of 1980 - 1988 had little effect on the world economy in spite of the hugeloss of life and, if another conflict were to be confined to these combatants,disruption to oil supplies, although significant, should not prove catastrophic. Other states did not enter the 1980 - 1988 war, but the Iranian nuclearprogramme is indicative of Iran's political ambition, a position likely to beinterpreted as inimical to the interests of the other nearby states who mightseek to limit the further spread of Iran's influence in Iraq, if necessary byforce, so threatening the stability of the whole region. Self-interest and thestill considerable influence of the West which has provided security for clientstates, as in Kuwait, should ensure any military involvement is contained, butthe events unfolding in the Middle East represent the incipient undermining ofthe present status quo, the regional balance of power, the status of the NuclearNon-Proliferation Treaty and the influence of the US in world politics. Thepresent engagement in and the manifest failure in Iraq and, to a lesser extentin Afghanistan, has impaired the ability of the US to "hold the peace". The twin US imbalances in savings and balance of payments are potentially thegreatest threat to the world economy. At present one-seventh of the rest of theworld's gross savings (and more of the net) are being absorbed by the US currentaccount deficit, which is financing a huge boom in consumption fuelled byunprecedented deficits - household debt at 7% GDP and large government deficits- as the US has enjoyed a housing-led consumption boom. However this hasapparently now come to an abrupt halt and the reduced growth of consumption willslow the economy. A remedial fiscal stimulus would increase the Federal deficitwhen the economy and hence tax revenue was already declining, while a monetarystimulus would reduce the attraction of $ holdings and might damage confidencein the $. In any down turn political pressure might mount for a weaker $ andsome protection against imports, principally China whose current account surplusis 7% of GDP. A large and sudden $ decline would stimulate domestic demand andmitigate the effects of a downturn but it would seriously affect imports andworld trade. Such an economic shock could be avoided if non-US demand expandedas US import demand declined: a "Goldilocks" solution. Last year Morgan Stanleysaid "The history of economic crises is clear: the longer any economy holds offfacing its imbalances, the greater the probability of a hard landing .......",but the US has not faced its imbalances, as Alan Greenspan said in 2004 "giventhe size of the US current account deficit a diminished appetite for adding todollar balances must occur at some point". However, overvaluations can persistfor a long time, as they did in the dot-com bubble described, as early as 1996,by Alan Greenspan as "irrational exuberance". But as the FT leader said lastyear "a long-term requirement does not make a short-term bet. The (US) currentaccount dynamics may not bite for several years yet" - one year has passed! Recent political events may accelerate these necessary US economic adjustments. The US adventure in Iraq may represent a turning point similar to the abortiveUK adventure in Suez fifty years ago. That failure clearly demonstrated that theUK's actual position was considerably different from its perceived position; theUK was no longer a prominent independent world power, and, even in alliance withFrance, both clinging to the relics of empire, they could not act independently.The withdrawal took place subsequent to President Eisenhower's intervention,notwithstanding that Nasser had unlawfully seized the Suez Canal, closed it towarships and threatened other interests East of Suez, particularly those in thePersian Gulf, all circumstances that compounded the UK's public humiliation. TheUS-led invasion of Iraq bears a frightening similarity. Saddam, like Nasser,seemed to threaten the vital interests of the West; in both cases UN support wassought but not gained; and both invasions were categorised as being inself-defence. Moreover, the failures in Suez and in Iraq have had similaroutcomes: the balance of power shifted against the invaders - Nasser wasgreatly bolstered by his effective defiance and in Iraq fundamental Islamists,Al Qaeda and other terrorists along with anti-American factions successfullydefy the world's greatest military and political power. In both cases theinvaders grossly overestimated their own capabilities, miscalculated theresponse of the population, had little preparation for post-invasion policy andacted contrary to respected advice. Suez highlighted the diminished realinfluence of the UK and Iraq, at the very least, questions the unassailablepower of the US. The supremacy of the US position arose on the fall of the "Wall" in 1989 whichmarked the defeat of the Soviet Union, not by the passage of arms but by theimplosion of Communism as a result of its prolonged economic failure. The worldhas seen few such unipolar powers, the most notable being the Roman Empire.Gibbon, writing in 1776, the year the Declaration of Independence was signed,makes two observations and an analysis of telling relevance - "it was easy forhim (Emperor Augustus) to discover that Rome, in her present exalted situation,had much less to hope than to fear from the chance of arms; and that, in theprosecution of remote wars, the undertaking became, every day more difficult,the event more doubtful, the possession more precarious and less beneficial...." and "the forests and morasses of Germany were filled with a hardy race ofbarbarians; and though, on the first attack, they seemed to yield to the weightof Roman power, they soon, by a signal act of despair, regained theirindependence". Gibbon analyses the decline and fall as a revolt against Roman"universalism" driven by Christian values and an egalitarian protest against theunequal distribution of property. The unipolar US has a current account deficit of nearly 7% of GNP, but previousempires were not so exposed. The British Empire in its heyday, just before WW1,had a current account surplus of about 7%, and, although both sixteenth centurySpain and Rome had current account deficits, these were covered bytheacquisition of long- term assets - colonies and silver and gold. The potential fragility of the US undermines the existing unipolar position ofthe U.S., or, as the Hudson Institute says "Debt saps the world power ofAmerica". The hegemony of the US was amply demonstrated by the defiance of theUN, by the recruitment of a coalition and by buying positions in Pakistan andCentral Asia to assist is the rout of the Taliban and of Iraq's forces.However, hegemony is not omnipotence and, as in Indochina and Vietnam, bignations lose small wars, where local combatants do not need to prevail, but onlyto survive, to win. The limits to US military power are cruelly exposed in the Middle East and thefinancial exposure and dependence on China's $ deposits represent a changedperspective. These factors will have contributed to the political failures inIran and North Korea which in turn undermines confidence in the strength of theUS and exposes the increasing risk inherent in the US twin imbalances. UK economic growth is expected to be approximately 2.75% in 2006, and theeconomy has expanded for the last fifty-seven consecutive quarters since theeconomy emerged from the recession of the early 1990s, the longest unbrokenexpansion period on record. The average annual growth rate in the nine yearssince Labour came to power, benefiting from the reforms of the previousadministration and from granting operational independence to the Bank ofEngland, has been 2.8%. In 1997 UK output per capita was the lowest of the G7nations but by 2006 it was second only to the USA. Growth in 2005 was reduced to1.9% as a result of a fall in the growth of consumer consumption from 3.5% in2004 to 1.3%, the slowest rise since 1992, probably largely due to thestabilisation of house prices. Over the next few quarters the Bank of Englandexpects consumption growth to be at its historical average followingstabilisation of tax rates and a fall in energy prices and its central forecastfor growth in 2007 is 3.0% Deloittes suggest that in 2007 UK growth will be affected by a slowdown inexports to the US where growth is expected to drop from 3.4% this year to only1.5% in 2007. In the US existing house prices have fallen by 3% and new housesby 9.7%. The wealth effect on consumption - together with the related sharpfall in MEW - is larger than in the collapse of the tech stocks in 2000, asproperty, unlike the tech stocks, constitutes a significant part of householdwealth. In the UK recent interest rate rises should result in interestpayments of 9.5% of household income, the highest proportion since 1992 andsavings are also expected to increase slightly. In view of these constraintsDeloittes forecast growth of 2.0% similar to the EIU's 2.2%, but lower than theEconomist's 2.4% forecasted growth and much less than the Bank of England'scentral forecast. Two years ago, when house price rises were still above 15% some commentators,notably Capital Economics and HSBC, argued that a house price bubble existedwhich, when pricked, would lead to a sharp fall in house values, greatlyincreased savings and reduced consumption. By October 2005 house priceinflation had dropped to 2.5%, after being negative in April and May 2005,causing the contraction in consumption noted earlier. The bubble contracted,but there has been no pricking. Recently commentators have reported rises of upto 12.3% which have brought new warnings from the relatively mild statement bythe Governor of the Bank of England: "the level of house prices seems remarkablyhigh relative to average earnings or average incomes or anything else you couldlook at" to an estimate by PwC that prices were 15% overvalued and a forecast of"significant" falls in real house prices within one or two years by MorganStanley. Capital Economics is no longer predicting a collapse in house prices becausethey had been "proved wrong". Morgan Stanley say that it is only possible toexplain the more than doubling of house prices in the past decade if demand forhouses has been heavily influenced by expectations of further rapid rises ie abubble had formed which by default occurs when the dominant motive for purchaseis the expectation of selling on soon at a profit - "pass the parcel".Alternatively, house price rises can be explained in respect of reducedinflation, asset price variation and supply. House prices have risen but so haveother assets, including the only safer asset class, gilts. Recently a fifty yearindexed gilt was issued which, if it had been issued ten years ago, would havenow doubled in value. Most asset class values vary around uncertain estimates offundamental value and changes in that fundamental value. These prices usuallyslow positive serial correlation in the short term and negative serialcorrelation in the long term: a series of above average increases are followedby a series of below average increases: knowledge of the timing of theswitchover would make one very very rich! Houses also derive value from primelocation and from perceived social status, benefits that are highly incomesensitive. These properties attract the wealthy whose time is expensive, theestablishment and those aspiring to the establishment, an increasing demand, butas the supply is fixed, prices rise. The current huge boom in City bonuses isprobably reflected in the 54.9% and 47.8% price rises in Kensington and Chelseaand in the City of Westminster respectively. Where houses are outwith locationaland social value and supply is plentiful, house prices should reflect thehighest other use of the land on which they are built, normally farmland in theUK, plus the commercial cost, including return on capital, of providing them, aposition approached in the American mid-west. In the UK supply is usuallyconstrained by rationing, the coupons being planning consents. House completions(including flats) in the UK have now risen from 175,000 in 2001 to 206,000 in2005, slightly above the 190,000 typically produced in the 1990s. Conversionsand demolitions reduce these figures by about 50,000 per year. Over the nexttwenty years Government estimates are that in England alone 209,000 newhouseholds will be formed each year. Kate Barker's report to the Treasury says UK real house prices have risen 2.4%over the thirty years to 2004 (EU average 1.1%, Germany 0.0%!) or 2.7% over thelast twenty years. She estimates that for England to reduce real growth to 1.8%would require an additional 70,000 private sector houses per annum and, to 1.1%,a further 50,000. Given the constraints on supply in the UK it seems mostunlikely that supply increases will influence prices significantly. CPI inflation is at its highest for ten years but largely due to recent oil andenergy prices which have now largely passed through the economy and currentestimates are for oil prices to be stable or to fall. Although interest rateshave recently risen and market projections are for a further small increase inearly 2007 the Bank of England's central projection is for inflation to fallback to 2% in late 2007. Thus debt-servicing costs should not rise further,inflation should be low and growth in the economy should continue at 2% to 3%pa. These are conditions that will support demand for houses. Property Prospects In the year to September 2006 the CBRE All Property Yield Index fell 0.5percentage points to 5.0%. Falls of 0.8 percentage points were reported lastyear which, together with the same fall the previous year, result in a 2.1percentage point fall over 3 years. If there had been no other changes in thesethree years in the CBRE portfolio, its value would have increased by 42%.Over these three years all sectors of the index rose in value by 30% or more,and offices at 46.1% were the best sector. In Scotland the value of RetailWarehouses rose by 35% compared with 30% for UK Retail Warehouses, but all otherScottish sectors rose less than the average. In September 2006 10-year Giltsyielded 4.5% exactly the same as three years ago but then the yield gap betweengilts and property was 2.6 percentage points whereas now it is 0.5 percentagepoints. Gilt yields were higher than All Property yields for the 25 years from1972 to 1997 except for two quarters in 1993/1994. Since then property yieldshave always been higher than gilts but the current small margin of 0.5percentage points is the smallest positive yield gap since the negative yieldgap was eliminated in 1997. In the year to September 2006 the yield on retail investment property fell only0.2 percentage points but industrials fell 0.8 percentage points to 5.7% andoffices fell 0.9 percentage points to 5.2%. The All Property rent index rose3.9% compared with 2.3% last year and -1.1% the previous year. The largest riseswere shops, 3.1%, and offices, 6.6%, of which London's West End and City rose12.0% and 13.4% respectively. In spite of these rises office rents in Londonand the South East are still lower than five years ago. Over the last five years the All Property rent index has grown 13.6%, but, asRPI has increased 17.1%, has fallen in real terms. Since the market peak in 1990the All Property rent index has grown 33.6% but has fallen 14.9% in real terms.In real terms offices have been the worst performing sector, falling 28.6% withthe notable exception of Docklands up 5.5%, industrials have fallen 2.2% butshops have regained the previous rental value while retail warehouses show aremarkable 64.1% rise. The rumoured sale of Beaufort House in the heart of the City for £280m providesan illustration of poor real performance. Mountleigh of the 1980s boom (& thenbust) fame sold Beaufort House for £200m in 1987, the year the RPI was rebasedto 100.0 - it is now 200.4! Capital Economics has provided an interesting historical analysis of propertyyields compared with other asset classes. Since the 1920s there has been anaverage 0.31% points reverse yield gap - ie property yielded less than gilts.Property is an inherently riskier asset than gilts suggesting that investorsshould require a premium to hold property in preference to gilts. This premiumexisted from the 1920s until the early 1970s and has again been present sincethe mid 1990s. The 1970s and 1980s were characterised by high inflation - theRPI was 25 in 1974, 50 in mid 1978 and 100 on 1 January 1987, a fourfoldincrease or a reduction in value of 75%! If this period of exceptional inflationis set aside, on the basis that the existence of a negative, or reverse yieldgap, is anomalous, property yields have been 1.5 percentage points higher thangilts, a higher premium than is currently obtained. Capital Economics also arguethat property is expensive compared to Equities. For the last eighty five yearsthe initial yield on property has been on average 2.6 percentage points morethan equities, or 3.7 percentage points since 1990, but the current premium isonly 1.7 percentage points. The fall in the property premium has continued and current yields of 5.0%together with a rise in rents have again provided excellent total returns. Inthe twelve months to September 2006 the IPD index showed a total return of20.7%, higher than the twelve-month figure of 17.5% I reported last year, withall three constituent sectors having almost similar returns. Not surprisinglycapital growth provided almost 75% of the increased return. These returnscompare with 14.7% for equities and just 2.5% for gilts. Over the last three,five and ten years total returns from property have exceeded those in all otherasset classes, although the equity return over three years of 18.3%pa is only afraction below property, 18.4%pa. Over ten years the equity return is 7.7%pacompared with property's 13.5%pa. Property funds continue to be set up for investment in the UK which areattracting large inflows of capital. The introduction of REITS next year islikely to bring further additional capital to the investment market. However, asthe supply of UK investment property is relatively inelastic, even a smallincrease in demand results in relatively large price rises. These new sourcesof demand will reinforce demand which has been buoyed up by recent excellentperformance. Prices are positively serially correlated in the short-run - i.e.if prices rose last period, they will probably rise in the next period - but, inthe long-run they show negative serial correlation. The question for propertyis: is it still the short-run? Last year I reported that commentators including Cluttons, Colliers CRE and theEstates Gazette IPF forecast predicted 2006 returns of 7% - 9%, based onmoderate rental growth but no further fall in yields. All those commentatorsunderstated the excellent returns for 2006, in particular the fall in yieldsthat has taken place in spite of a background of rising gilt yields. Theirpredictions for 2007 are similar to their predictions last year for 2006 - totalall property returns of 7% - 10%, based again on moderate rental growth andlittle change in yields. Offices are expected to be the best-performing sectorwith those in London's City and West End areas forecast to return over 12%. Onlyonce in the last 31 years have All Property yields remained constant from yearto year - at 8% from 1982 - 1984. This precedent has been quoted in the last twoyears' reports and yields changed: they fell, but any change in 2007 seemsfinely balanced. Rydens report Scottish investment property performed well in the year to June2006 with the office sector returning 27.4%, above the UK figure of 23.8%,industrial 20.3% and retail 20.5%. The excellent performance of the officesector was due to yields falling to 4.5% in Glasgow, to under 5% in Edinburghand to 5.25% in Aberdeen. Surprisingly such low yields are not unprecedented.In April 1988 Rydens reported Charlotte Square, Edinburgh at "sub 5%" and 5.25%in Blythswood Square, Glasgow. In October 1989 they reported an investment saleto a "French Institution" at 5%. Headline rents at £27/ft2 in CentralEdinburgh and about £19/ft2 in West Edinburgh have been unchanged for two years. The static rental level reflects an almost unchanged ratio between uptake andsupply. For two years uptake has been 395,000ft2 per half year and the averagesupply has been 2,337,000ft2. With new schemes such as the Quartermilecontinuing to be built, certain insurance companies releasing space and thetransfer of large professional firms from traditional space to modern open planspace virtually complete, it is unlikely that rents will increase significantlyunless new occupiers are attracted to the City. In all adjoining local authorityareas offices are being built or are planned near their boundary with Edinburghwhich will compete with Central Edinburgh locations. Glasgow headline rents have risen from £19/ft2 two years ago to over £20/ft2last year and to about £23/ft2 to £25/ft2 this year as uptake has averaged571,000ft2 over the last four six- month periods as opposed to 279,000ft2 forthe four periods ended two years ago. Supply is now 1,708,000ft2, the lowestsince April 2001. Compared with Edinburgh, Glasgow offers lower occupation costsand cheaper and more available labour together with better financial assistance. Glasgow is also the preferred location for most civil service jobs relocatedfrom Edinburgh. Glasgow's office sector seems likely to continue to improve. In Aberdeen the takeup of office space in the year to end September 2006 was555,381ft2 the highest ever reported and the total supply then was 832,407ft2the lowest level since 2000; rents have risen to a record £22/ft2. Oil prices ofover $60 per barrel since 2004 have boosted North Sea investment which isexpected to rise to £4.8bn in 2006, a significant increase from an earlierestimate of £3.2bn. Employment in the offshore sector is expected to be 380,000this year compared to 365,000 last year and 349,000 in 2004. Higher activityhas increased output which had been declining steadily from the peak of 4.5m boein 1999, but it is now expected to remain over 3m boe a day until 2011. At thehistoric rate of decline economic production in existing fields will be under 1mboe in ten years time and will cease by 2026. Last year I reported that house prices had risen 2.5% in England and Wales butat the much higher rate of 17.7% in Scotland although Edinburgh's average growthwas "only" 5% - 8%. This year, according to the FT House Price Index prices inEngland and Wales have risen 7.3% ( to end November 2006). Rightmove whomonitor "asking" prices report rises of 12% overall but of 18.2% in London andof 50% in Kensington and Chelsea. Lloyds TSB report Scottish prices 11.6%higher and the ESPC report Edinburgh city centre prices to be 15.2% higher,possibly reflecting similar market conditions to central London. Commercial and residential property prices are at peaks, both supported by along period of stable growth, low inflation and interest rates and highemployment but the stability of these two peaks varies. The commercial marketis supported by recent good performance, by a puncturing of the equity cultfollowing the dotcom boom, and by a professional move towards a reallocation ofasset classes that has spread to private investors and has a considerableoverseas following. These investments are made into a market with very lowshort-term supply elasticity and so susceptible to rapid price increases.However the long-term supply elasticity of most classes of commercial propertyhas been considerably increased in recent years as consents for offices, nowcontained in the much looser "business space", have been eased and users'preferences and prejudices for some locations have changed. An increased supplywith wider choice reduces prices and the protection of "location" has beendiluted. Property investment is at times regarded as a fixed bond yielding to maturity,but this is not always a stable foundation. Some commercial investments arewasting assets as a portion of the investment value relates to the quality ofthe covenant rather than to the site or to the building. When the lease ends orthe tenant defaults the covenant value disappears and, in extreme circumstances,the asset becomes a liability. A further disadvantage is that recent price risesare arguably due to a short-term speculative serial correlation - a momentumeffect - which ultimately will be susceptible to a long-term reversal. The support for the residential price peak is much broader. Short and long-termsupply continue to be constrained in most places by planning restrictions, bythe growing need to consult, by the slow and poor administration of the planningsystem and by the increasingly vocal and better-organized pressure groups. Mosthousing is held for owner occupation with only a small proportion as an "assetclass" available to switch class. In contrast most investment property issubject to realisation and reinvestment - an inherently less stable position.The residential market is highly price sensitive and absorbs increasedshort-term supply, but in commercial property demand is relatively priceinsensitive. Demand for residential property in "higher quality" areas appearshighly income sensitive but many investment property locations have lostexclusiveness and their premium prices. Certainly recent rises have beengreatest in the better boroughs of London and the centre and more desirableareas of Edinburgh which locations provide convenience and aspirationalsatisfaction for their consumers, factors which are of increasingly lessimportance for commercial ownership. The present residential property peak has amuch more stable base than the commercial peak and, should conditions becomeadverse, will fall less far. In the residential property market the highest return on capital is achieved byobtaining consent for change of use. Change of use can be obtained by promotingexisting land in the local plan process, by buying land likely to be re-zonedor by buying land where planning criteria are about to change. Additionalreturns can be gained if the consent is obtained in an area where theinfrastructure is improved or the communications upgraded. Future Progress In addition to its investment portfolio the Group now owns twelve ruraldevelopment sites and has a further very large site under offer, foursignificant city centre sites, two small sites in the Edinburgh area and eightyfive plots near Dunbar. Most of these sites can be developed over the next fewyears but some will be promoted through the five year local plan process.Development of two of these sites should be started next calendar year. Most ofthese sites were purchased unconditionally, i.e. without planning permission,and when permission is obtained should increase in value significantly. Fordevelopment or trading properties no change in value is made to the company'sbalance sheet even when open market values have increased considerably.Naturally, however, the balance sheet will reflect the value of such propertieson their sale or subsequent to their development. The maximum value of our development properties will be realised by undertakingtheir development. However, our policy is to maximise investment in developmentopportunities where at present investment returns are highest and, if cashresources become limited, to realise development sites or to release our capitalby suitable financial structures to fund such development opportunities. The Company expects the current year's results to be satisfactory given theearly stage of the development cycle. The overall value of our investments anddevelopments should continue to improve, although such improvements will notnecessarily be reflected in these valuations where development properties areheld at cost. The full outcome of the current financial year will depend on anynet change in valuation and the timing of the realisation of developmentproperties. The mid-market share price at 15 December 2006 was 190p, a discount of 32.5p tothe NAV of 222.5p. The Board recommends an increased dividend of 1.75p makingtotal dividends of 2.75p for the year, and the Board intend to increase thedividend at a rate consistent with profitability and with consideration forother opportunities. A tax credit of £5,070 is provided in the current year. Although not recognisedin the financial statements due to uncertainty over the availability of futuretaxable profits to use its tax losses the Group has tax losses and allowancescarried forward of £966,908 which we hope to utilise over the next few years.Many of the Group's investment properties benefit from indexation mitigating taxon disposal. Conclusion The UK economy is expected to continue to grow next year at or above the trendrate. There is a small risk that a re-alignment of the US $ associated with aslow down in the American economy will adversely affect other economiesincluding the UK. Continuing strife in many areas of the Middle East will haveminimal effect on world economic growth. In the UK investment property seems fully priced as rental growth is likely tobe limited, yields are unlikely to fall further and interest rates are aboverecent low levels. Residential property continues to increase in price and, ifeconomic conditions continue benign, price falls are unlikely. However, generalincreases at the current level will not persist in the medium term, but priceswill continue to rise in the long term, provided economic growth continues andprovided housing supplies continue to be allocated by rationing rather than byprice. These conditions will continue to provide highly profitable nicheopportunities to create substantial value by effecting planning change. I D Lowe Chairman 18 December 2006 Consolidated profit and loss account for the year ended 30 June 2006 2006 2005 £ £ Income - continuing operationsRents and service charges 870,745 707,009Trading property sales 410,000 -Trading sales 108,163 278,406 _______ _______ 1,388,908 985,415Operating costsCost of trading property sales (304,500) -Cost of other sales (113,200) (262,124)Administrative expenses (992,992) (850,743) _______ _______ (1,410,692) (1,112,867) _______ _______ Operating loss (21,784) (127,452) Profit on disposal of investment property 189,729 501,420Profit on sale of investments - 85,522Bank interest receivable 275,644 279,854Interest payable (319,150) (292,492) _______ _______ Profit on ordinary activities before taxation 124,439 446,852 Taxation 5,070 (34,702) _______ _______ Profit for the financial year 129,509 412,150 Earnings per ordinary share 1.09p 3.51p Diluted earnings per ordinary share 1.09p 3.51p Statement of total recognised gains and lossesfor the year ended 30 June 2006 2006 2005 £ £ Profit for the financial year 129,509 412,150 Unrealised surplus on revaluation of properties 1,978,506 4,178,082 _______ _______ Total recognised gains relating to the financial year 2,108,015 4,590,232 Prior year adjustment (note 1) 178,244 ________ Total gains and losses recognised since last annual report 2,286,259 Note of historical cost profits and lossesfor the year ended 30 June 2006 2006 2005 £ £ Restated Reported profit on ordinary activities before taxation 124,439 446,852Realised (deficit) on previously revalued property - (92,605) ______ ______ Historical cost profit on ordinary activities before taxation 124,439 354,247 Taxation on profit for year 5,070 (34,702) _______ _______ Historical cost profit for the year after taxation 129,509 319,545 Historical cost (loss)/profit for the year retained after taxationand dividends (167,564) 52,305 Consolidated balance sheetat 30 June 2006 2006 2005 £ £ £ £ RestatedFixed assetsTangible assets:Investment properties 24,030,896 23,142,302Other assets 21,117 4,056 __________ __________ 24,052,013 23,146,358Investments 43,013 20 __________ __________ 24,095,026 23,146,378Current assetsStock of development property 7,034,258 -Debtors 968,314 1,018,560Cash at bank and in hand 2,203,611 4,761,664 _________ _________ 10,206,183 5,780,224Creditors: amounts falling due within one year (2,177,356) (3,583,372) _________ _________Net current assets 8,028,827 2,196,852 __________ __________ Total assets less current 32,123,853 25,343,230liabilities Creditors: amounts falling due after more than one year (5,680,000) (710,319) __________ __________ Net assets 26,443,853 24,632,911 Capital and reservesCalled up share capital 2,376,584 2,376,584Share premium account 2,745,003 2,745,003Capital redemption reserve 175,315 175,315Revaluation reserve 6,625,414 4,646,908Profit and loss account 14,521,537 14,689,101 _________ _________ Shareholders' funds 26,443,853 24,632,911 These financial statements were approved by the Board of Directors on 18December 2006 and were signed on its behalf by: I D LoweDirector Consolidated cash flow statementfor the year ended 30 June 2006 2006 2005 £ £Net cash outflow from operating activities (5,694,720) (1,959,437)Returns on investments and servicing of finance (34,896) (35,889)Tax paid (29,632) - Capital expenditure and financial investment 5,814 1,015,574 Dividends paid on shares classified inshareholders' funds (297,073) (267,240) __________ __________ Cash outflow before management of liquidresources and financing (6,050,507) (1,246,992) Financing 3,572,183 (294,104) __________ __________Decrease in cash in period (2,478,324) (1,541,096) Reconciliation of net cash flow to movement innet funds £ £Decrease in cash in period (2,478,324) (1,541,096) Cash (outflow)/inflow from decrease in debt (3,572,183) 602,354 _________ _________ Movement in net funds in the period (6,050,507) (938,742)Net funds at the start of the period 877,848 1,816,590 _________ _________Net (debt)/funds at the end of the period (5,172,659) 877,848 Notes to the cash flow statement (a) Reconciliation of operating profit to net cash inflow fromoperating activities 2006 2005 £ £ Operating (loss) (21,784) (127,452)Depreciation charges 4,682 134Increase in stock (5,825,167) -Decrease/(increase) in debtors 50,246 (896,527)Increase/(decrease) in creditors 97,303 (935,592) Net cash outflow from operating (5,694,720) (1,959,437)activities Notes to the cash flow statement (ctd) (b) Analysis of cash flows 2006 2006 2005 2005 £ £ £ £Returns on investment and servicing offinanceInterest received 275,644 279,854Interest paid (310,540) (315,743) (34,896) (35,889) Capital expenditure and financial investmentPurchase of tangible fixed assets (866,776) (3,446,816) (3,446,816) (3,446,816)Sale of investment property 915,583 2,236,414Contribution to dilapidations received - 2,049,576Purchase of investments (42,993) -Sale of investments - 176,400 5,814 1,015,574 FinancingIssue of ordinary share capital - 308,250Debt due within a year:(Decrease)/increase in short-term borrowings (3,969,681) 939,827Debt due beyond a year:Increase/(decrease) in long-term borrowings 397,498 (1,542,181) 3,572,183 (294,104) (c) Analysis of net funds At beginning of Cash flow Other non-cash At end of year year changes £ £ £ £ Cash at bank and in hand 4,761,664 (2,558,053) - 2,203,611Overdrafts (79,729) 79,729 - - (2,478,324) Debt due after one year (710,319) (3,969,681) (1,000,000) (5,680,000)Debt due within one year (3,093,768) 397,498 1,000,000 (1,696,270) Total 877,848 (6,050,507) - (5,172,659) Notes to the audited results for the year ended 30 June 2006 1. The above financial information represents an extract taken fromthe audited accounts for the year to 30 June 2006 and does not constitutestatutory accounts within the meaning of section 240 of the Companies Act 1985(as amended). The statutory accounts for the year ended 30 June 2006 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 recommendsthe payment of a 1.75p per share final dividend (2005: 1.5p), which will bepayable, subject to shareholder approval, on 22 January 2007 to all shareholderson the register on 5 January 2007. 3. Earnings per ordinary share The calculation of earnings per ordinary share is based on the reported profitof £129,509 (2005: £412,150) and on the weighted average number of ordinaryshares in issue in the year, as detailed below. 2006 2005 Weighted average of ordinary shares in issue during year - undiluted 11,882,923 11,754,154 Weighted average of ordinary shares in issue during year - fully diluted 11,882,923 11,754,154 4. The Annual Report and Accounts will be posted to shareholders onor around 22 December 2006 and further copies will be available, free of charge,for a period of one month following posting to shareholders from the Company'shead office, 61 North Castle Street, Edinburgh, EH2 3LJ. 5. The Annual General Meeting of the Company will be held at 12.30pm on 19 January 2007 at 61 North Castle Street, Edinburgh, EH2 3LJ This information is provided by RNS The company news service from the London Stock Exchange