Caledonian Tst. Regulatory News (CNN)

28 March 2019

Caledonian Trust plc

("Caledonian Trust" or the "Company")

Unaudited interim results for the six months ended 31 December 2018

Caledonian Trust plc, the Edinburgh-based property investment holding and development company, announces its unaudited interim results for the six months 31 December 2018.

Enquiries:

Introduction

The Group made a pre-tax loss of £43,000 in the six months to 31 December 2018 compared with a pre-tax profit of £2,824,000 for the same period last year. The loss per share for the six months to 31 December 2018 was 0.36p and the NAV per share as at 31 December 2018 was 185.8p compared with a profit per share of 24p and NAV per share of 185.7p last year.

Review of Activities

The Group's emphasis continues to be on development, including works to secure existing planning consents, the provision of infrastructure for development plots, and the marketing of house plots and houses. In consultation with Drum Property Group with whom we have entered into an agreement as announced on 5 February 2018 for the conditional sale of St Margaret's House for £15m, the utility of different variants of the design are being evaluated. Necessarily this is a very expensive and complex task and the planning process is taking longer to complete than we had originally hoped and the sale is now expected to complete in 2020 after vacant possession is achieved. An earlier completion, in accordance with the previously announced timeline, is possible if the conditions are purified or a later completion date may be agreed if there is an unavoidable planning delay. The site survey has been completed with no untoward findings and the site conditions are satisfactory. Work continues on mitigating the site difficulties associated with demolition, proximity to the main line railway and an improved access. We will continue to update shareholders as appropriate.

Circumstances continue to work in our favour. The large Commonwealth Stadium on the adjacent Meadowbank site is virtually completely demolished and demolition of the remainder of the complex continues. Plans for the new complex have been approved and a large proportion of the site has been transferred to the City's housing department. The balance of the site is expected to be marketed shortly and its sale to make a major contribution to the expected £46m cost of the new Sports Centre. An adjacent plot, formerly a car wash, has consent for 30 flats over five storeys. Immediately to the west an application has been made for a mixed-use development including student accommodation.

Edinburgh Palette, our tenant in St Margaret's House, suffered a loss of tenants subsequent to the announcement of the sale last year, but this has proved short lived and the long planning process, together with six months' notice period available under the lease, have provided an expectation of a more than sufficiently long period for most occupiers. Consequently, the premises again have few vacancies and high levels of enquiries.

In the interim Edinburgh Palette has been very successful in establishing the first of its two new premises at 525 Ferry Road EH5 2FF in north central Edinburgh, just west of the Fettes College's playing fields, and near the Wester General Hospital where a modern 125,000ft2 Grade A office building has been secured on favourable terms. This central site is served by eight bus routes and has 125 car parking spaces, 83 single offices and numerous large open plan spaces. I understand all the 83 single "studios" are let and much of the large open plan space, not sub-divisible into studios, has been taken by large "sister" charities.

The second, and quite different new premises, is the Stanley Street Container Village occupying an area of ground just north of Portobello golf course and about half a mile from the A1 and Brunstane Rail Station. Edinburgh Palette expect to provide "community services" and 50 - 60 single unit studios, primarily for local residents, some currently leasing space at St Margaret's House and for other creative groups and individuals. Extensive work is being undertaken on the Village which is expected to open in the late summer. The Village development will be phased as the capital requirements are significant, especially given the quality of the development, but the property is held on a long-term lease from the City of Edinburgh Council, offering security of tenure not usually available on high quality offices or on potential development sites. I am pleased to note that these two most imaginative and successful ventures secure the long-term future of Edinburgh Palette, allowing it to continue its charitable works, providing modestly priced facilities for artists and artisans and enriching the cultural life of the community.

Development at the company's site at Brunstane in East Edinburgh continues satisfactorily, but slowly. Our original purchase was of five Georgian terraced houses with open ground to the south, a large listed Georgian steading and two adjacent acres of land, all in the green Belt and part of Brunstane Home Farm. The site is adjacent to the A1 and to Brunstane railway station with services on the Borders Railway between Tweedbank and Edinburgh, eight minutes from Brunstane and on to the South Gyle and Fife. We refurbished and sold four of these terraced houses for over £280/ft2 with a mid-terraced house being re-sold for over £350/ft2 in 2017, while the end terrace house adjacent to the steading currently under development re-sold for £360/ft2 in July 2018.

On the open ground south of these houses we secured consent in 2014 to construct two new semi-detached houses of modern construction but faced with stone which, together with the woodland to the west, completed a traditional farm courtyard. In 2016 we gained consent to extend the easterly gable and add a sun room to the west elevation, increasing the total area to nearly 3,000ft2 and development started in August 2016 for completion the following Spring, but the builder went into liquidation. A replacement was engaged quickly, but the utilities had to be rescheduled so delaying the completion by several months. The houses were marketed in November 2017, inviting offers over £435,000 and £445,000 respectively and attracted immediate interest, and, following the first four viewings, we received four notes of interest, and three offers in December 2017. We put the houses under offer at above the asking prices for completion in the spring of 2018. The westerly house sale completed in April 2018 at £345/ft2 but the offerer for the easterly house was forced to delay completion until August 2018.

We have consent to convert the listed stone-built Georgian steading, to refurbish and extend a house attached to it to form ten individually designed houses, comprising 15,000ft2 with an expected development value of over £5.0 million. Work on the stonework for five of these ten houses, the "Horse Mill" courtyard, which comprises the five stone-arched cart sheds, the single storey cottage, the main barn and a hexagonal Horse Mill, a notable feature, was completed late last year, and a contractor, appointed in the late summer, started on site in early November 2018.

Prior to that contract, further improvements to the design were made to provide contemporary style large dining/living spaces, underfloor heating, additional en-suite bathrooms and improved fenestration. The development has an expected Gross Development Value of £2.4 million and has very recently been funded by a construction loan peaking at £1.415 million. The loan with complex covenants and security took several months to negotiate, and, while it is competitive in current market terms, compared to loans before the current financial restrictions, is very expensive costing over 10% per annum "all in", including fees. Prior to accepting this loan we had assessed the outline terms offered by more than 10 prospective lenders. The construction programme is on target, and we expect to start marketing early in the summer.

The next phase of five houses comprising the "Steading" courtyard abuts the Horse Mill courtyard, with the two courtyards having a mutual central barn. Although the barn is part of the Steading it is being built now to complete the Horse Mill courtyard. To meet planning requirements it is being rebuilt in stone, but the other four houses in the Steading phase will be "new build", giving a similar high-quality product to the Horse Mill phase, but at a much lower construction cost. The Steading phase costs will also be reduced as some services already provided can be extended at marginal cost. The Steading phase is 7,750ft2 and the Board expect it to have a Gross Development Value of £2.75 million.

East of the "Steading" lies a derelict farmhouse and piggeries and beyond them an open area, all of which properties were abstracted from the Green Belt in the Edinburgh Local Development Plan in November 2016 and now form the "Stackyard" phase. The appearance, approach and access to this much larger phase has been greatly improved by the ongoing rebuilding of the barn bounding the Horse Mill phase. Proposals for the development of the Stackyard phase have been accepted in principle, comprising a development of 19 new-build houses over 26,500ft2. The Board believe the Gross Development Value should be about £8.0 million. East of our Stackyard phase the "New Brunstane" Master Plan has been approved for an extensive residential development for which ground investigations have been completed, and part of the site is now under offer.

The third of our Edinburgh sites lies between Belford Road, a quiet cul-de-sac less than 500m from Charlotte Square and the west end of Princes Street, and Bell's Brae, a partly cobbled street leading down to the historic bridge over the Water of Leith. The quaint but rather ramshackle buildings and offices in Bell's Brae adjacent to our site have recently been developed into a terrace of town houses fronted by the public footpath along the Water of Leith and set back into the steep slope. Of the ten houses developed there only three are still available with the smallest over two floors priced at £1.2 million. This development opposite our Bell's Brae car park entrance has both considerably improved the area and established its inherently high value. Our site has long been considered "difficult" but the transformation of the immediate vicinity and the extensive preparation work done on the site, together with the creation of the Bell's Brae vehicle access makes the site ready for development for which we have endured both a residential consent for twenty flats over 20,000ft2 and twenty car parking spaces and an office consent for 22,500ft2 and fourteen car parking spaces. The residential consent is capable of immediate development, but in view of changes to living patterns, and to external finishes, slight variations would improve the amenity of the development and of its appearance. We are currently discussing such changes with architects with these particular skills.

The remaining site in the Edinburgh area is at Wallyford, Musselburgh, where we have implemented a consent for six detached houses and four semi-detached houses over 12,469ft2. The site lies within 400m of the East Coast mainline station and is near the A1/A720 City Bypass junction. Persimmon and Taylor Wimpey have nearby sites of about 50 plots and 400 plots respectively which are complete or just completing at prices of between £210/ft2 and £250/ft2. South of Wallyford groundworks for a 1,050-unit housing development have been completed and proposals for a 500-house plot extension are in progress and a new primary school has already opened on the main site. Two major house builders are on site and, of Persimmon's first phase of 131 plots, 51 are sold, 9 reserved and 13 currently available. Prices for smaller houses are generally over £250 per ft2 and for larger houses over £225 per ft2. The site cost for the 10 houses and the foundation work already undertaken for two houses was less than £270,000, which will be used as the base cost within the 60% Loan to Cost covenant, which will restrict the credit available compared to the full value of the site.

The Group has three large development sites in the Edinburgh and Glasgow catchment areas. Two sites are at Cockburnspath on the A1 just east of Dunbar and the East Lothian border where we have implemented the planning consents for four semi-detached family houses and 72 detached houses. Extensive development continues in Dunbar with several sites opening or proposed east of the town towards Cockburnspath together as the large extension to the supermarket on the eastern edge of the town. Improved train services to Edinburgh are being considered. Notwithstanding such favourable changes, we have delayed development as market conditions have been less favourable than elsewhere, with prices in the Scottish Borders falling steeply in 2018 after a fall of 4.0% in the three previous years.

Gartshore, the third of these development sites, is seven miles from central Glasgow, near Kirkintilloch, on the forth and Clyde Canal and comprises the nucleus of the large estate, formerly owned by the Whitelaw family. We are promoting the creation of a new village community, together with local amenities within the existing designed landscape to complement the proposed rural high-amenity business park, hotel and leisure centre. This long-term project meets existing needs and development criteria and we hope to gain sufficient local support for its inclusion in the emerging Local Plan due to be published in 2022.

The Group owns fourteen separate rural development opportunities, nine in Perthshire, three in Fife and two in Argyll and Bute, all set in areas of high amenity. Work on these sites has been restricted to securing consents and enduring existing consents as the rural market, in spite of some recent isolated local improvements, continues to be less attractive than the urban market. Comrie, the conservation village on the river Earn seven miles west of Crieff, provides evidence of such isolated improvements where a small semi-detached two-bedroom cottage sold earlier this year for £310,000 or £250 per square foot. We hold consent for 24 houses over 33,400ft2 in a site bordering the river. At Chance Inn, part of the Loch Leven catchment, we have recently completed the phosphate reduction necessary at a cost of over £100,000 which is a prerequisite of our development of ten houses over 21,831ft2.

The opening of the Queensferry Crossing and the completion of the associated road works has improved access to all our development sites north of the Forth estuary. North of the existing dual carriageway, beyond Perth, the A9 is being dualled over about seven miles from Luncarty to Birnam ("wood to Dunsinane hill" of Macbeth fame!) and is due to be complete next year, giving an uninterrupted dual carriageway to our site at Ardonachie. Further sections of the A9 dualling "in preparation" extend it to Ballinluig. The Luncarty to Birnam extension of the dual carriageway will result in our sites at Balnaguard (15,994ft2) and Strathtay (6,060ft2 and 10,811ft2) being within ten miles of the dual carriageway to Perth.

Work on our three sites near St Andrews, Fife has been suspended pending a market improvement. The expansion of the University of St Andrews, east to Guardbridge, marks a significant move away from the narrow confines of St Andrews which may extend the current restricted residential catchment area. Persimmon have lodged a master plan for 357 houses at Seggie Farm south west of Guardbridge.

Our largest rural development site is at Ardpatrick, a peninsula of great natural beauty on West Loch Tarbert within two hours' drive of Glasgow and central Scotland. Due to poor market conditions no active marketing of plots has taken place, although boards are in place. In the summer we will remarket the following development sites: Bay Cottage, a stone-built farm building for conversion with consent for an extension to form a three-bedroom house set in a paddock with views to Achadh-Chaorann Bay; and two plots set in a small field just off the B8024 Kilberry Road where the road access has just been formed and the consent endured. A fourth development site, Oak Lodge, is under offer for just below the asking price. We have applied for a felling licence to extract the timber from the commercial forest this summer. When the decision was made timber prices were rising quickly and then we expected a net payment of over £125,000. However, timber is a volatile commodity and the outcome could vary greatly.

The market in Argyll remains depressed and, in these circumstances, we will continue to improve the amenity of the property and the production capacity of the farm and forestry lands. In order to meet current regulations, we intend to upgrade the water supply. The upgrading will facilitate letting vacant properties and we intend to undertake limited refurbishment of those vacant properties to develop a leisure business based on existing or previous leisure facilities on the Estate. Again, for such improvements we will refrain from further capital investment until market prospects improve.

Economic Prospects

It looks like a duck, it quacks like a duck and it walks like a duck, but it's not a duck it's a decoy, or "de kooi" (Old Dutch), a lure or a pond netted to entrap escaping ducks. I believe that these meanings have resemblances to the circumstances in which the UK joined the EU and now attempts to leave it. The lure of economic arguments, while of very great merit in joining the economic community, but of much lesser merit in leaving, featured strongly in the decisions to join the EEC in 1973, the referendum in 1975 and the referendum in 2016 and continue to do so in the subsequent disagreement on whether to implement the "Leave" decision and, if so, how.

Of the 1975 referendum result, Tony Benn, writing to constituents, said:-

"In short, the power of the electors of Britain …. (to make laws, levy taxes, change laws which the courts must uphold, and control the conduct of public affairs) has been substantially ceded to the European Community whose Council of Ministers and Commission are neither collectively elected, nor collectively dismissed by the British people nor even by the peoples in all the Community countries put together …" and later … "the arguments presented to the British public that year led them to believe that the Common Market was a matter of trade only".

It is incontrovertible that the political design of the EEC and the aspiration for a centralised European state were publicly available in 1975. Indeed, the political nature of the "Europe" movement had long been public as clearly evidenced in 1955 by the following extract from the European Coal and Steel Community, brochure which states:-

"The Community is the first truly European government with federal institutions. It exercises sovereign powers over the coal and steel resources of six nations. In the Community the coal and steel resources of the member nations are pooled in a common market and are subject to common rules administered by common institutions, acting in the interest of the community as a whole. Its purpose is to create a single market for the basic commodities of coal and steel throughout the area of the member states; to raise the standard of living by encouraging an expanding economy through competition; to ensure the continuing expansion of production by smoothing out maladjustments, notably social ones; and to take the first step towards a United States of Europe."

The key statements are "truly European government with federal institutions. It exercises sovereign powers; … to take the first steps towards a United States of Europe". The intention goes beyond "indicative planning" as an economic policy, reminiscent of the "dirigisme" of medieval France.

The political implications of the 1975 referendum were not publicised and the arguments almost exclusively focused "on a matter of trade only", as Tony Benn wrote. The trade argument, while true and of great significance, given the very high tariffs in 1975, was an effective decoy, and the well publicised and more obvious attractions of greater economic prosperity proved more attractive than the intangible and obscure disadvantages of a little appreciated and distant political ambition.

The use of a decoy is again evident in the emphasis on and interpretation of economic arguments in the discussion of the effects of a decision to leave the EU. The short-term forecasts for the economy before the 2016 referendum were often extreme, particularly those emanating from Government sources. The Treasury's summary was that the economy would fall into recession with four quarters of negative growth and after two years, GDP would be around 3.6% lower. They said - "the fall in the value of the pound would be around 12%, and unemployment would increase by around 500,000, with all regions experiencing a rise in the number of people out of work. The exchange-rate-driven increase in the price of imports would lead to a material increase in prices, with the CPI inflation rate higher by 2.3 percentage points." The Bank of England and the IMF agreed that recession was "possible". The Treasury also forecast real wages dropping 2.8% - 4.0% and house prices dropping 10% - 18%. Of these forecasts only one has been clearly realised, the 12% fall in the value of sterling and a consequential but much more modest rise in inflation. The Bank was less pessimistic but, as the Institute for Government comments, "The Bank would have been more accurate, if it had stuck to its pre-referendum forecasts". The FT's unashamedly pro EU economics editor Chris Giles wrote: "when the Treasury last published short-term forecasts predicting a recession after a Leave vote, the analysis appeared "made-up" to several neutral advisers."

Many explanations are possible for errors in forecasting, even errors as large as these, but fewer for errors due to being "made-up". An explanation, the most likely given all the circumstances, is that there is a bias in the models or their interpretation in favour of emphasis of the negative aspects of a Leave vote. The probable explanation for such a bias is political preference: the cause for Remain is best made by emphasis on negative economic forecasts. The adverse economic effects forecast are a decoy to attract attention to the economy and away from political effects perceived to be undesirable.

It is self-evident that economic arguments have dominated the debate, a dominance facilitated by the wide range of possible economic relationships with the EU27, all with different economic consequences. The evidence for emphasis on the deleterious economic consequence of leaving the EU is provided by the results of studies of the long-term impact of leaving the EU as analysed by the Institute for Government who fairly say:-

"Before the referendum, the Treasury forecast that a vote for Brexit would lead to an immediate recession. This prediction proved wrong, as did some other pessimistic forecasts produced before the referendum. But this does not automatically mean that the longer-term projections made by the same organisations should be rejected out of hand. The techniques and evidence used to inform the short-term forecasts are very different from those used to project the long-term impact of Brexit."

The Institute for Government analysis surveyed 15 such long-term forecasts, including those of the Treasury's and Her Majesty's Government, under five different trading arrangements post leaving the EU and, with one exception, all showed an economic disadvantage in leaving the EU, the extent being least severe if the UK joined the European Economic Area, and most severe if the UK relied on World Trade Organisation rules. A Free Trade Agreement with the EU was judged the second least disadvantageous. Excluding the forecasts at either extremity, there were ten forecasts of the long-term impact on GDP, relative to remaining in the EU. The average of these forecasts showed a long-term reduction of 2.86%, equivalent, if the long-term is 12 years, to a reduction of 0.23% per year or, if over 20 years, 0.125% per year. The worst assumption, leaving on WTO terms, would reduce GDP on average by 4.50% over 12 years or by 0.37% per year or by 0.22% per year over 20 years.

Separately, the Institute for Government analysis calculated that, if the UK leaves the EU, immigration will be significantly less, which, while reducing gross GDP, increases GDP per capita. Thus, the effect of reduced immigration as a result of leaving the EU will be to mitigate any potential loss in GDP per capita. PwC estimate that in years 2000 - 2019 GDP grew 1.82% per annum and the components of that growth were: a higher percentage of population working 0.29%; output per worker (productivity) 0.90%; and population growth 0.63%. Thus GDP grows more rapidly than GDP per head, but over the next four years the Office for Budget Responsibility (OBR) estimates that the current gap between growth in gross GDP and GDP per capita of 0.6 percentage points will narrow to 0.5 percentage points, presumably due to the current lower immigration rates.

The average of the forecasts for the reduction in GDP per head per year over the "long-term" from leaving the EU is small. But the "short-term" is likely to be different. Unfortunately, it is self-evident that the adjustment in the economy from the present EU membership to any new trading relationship, even a close one, cannot be made without upset and destruction in some areas, in some industries and to some people. The longer the notice period and the longer the transition period the less destructive any change will be.

However, the potential long-term loss of GDP from leaving the EU is small compared to other sources of 'losses' of GDP. In the Great Recession of 2008 real GDP dropped by 5.0% over two years, in contrast to a lesser potential relative loss of 2.8% over twelve years. A much greater thief of actual GDP growth, compared to potential GDP, has been the significant reduction in productivity. In the eight years before the 2008 recession productivity rose 19% or about 2.35% per annum, similar to the previous eight years, but since 2008 productivity has risen less than 0.2% per annum. Last year the OBR estimated that output per hour was 21% below an extrapolation of the pre-crisis trend. By the beginning of 2023 the OBR, assuming an improvement in productivity to about 1% per annum, estimate that output per hour will be 27%, below its pre-crisis trend. The OBR forecasts an improvement in productivity to 2% by 2030 - a long way off - and even if it averages 1.35% until 2030, the UK economy will be losing 1.0% per year in output, very considerably more than the above annual projection of output loss from leaving the EU.

In spite of a probably relatively small reduction in GDP growth per person from leaving the EU this aspect of leaving the EU attracts the most widespread emphasis in some sectors of the business and financial press, notably the FT and the Economist. These journals do not campaign actively for other measures that would raise GDP more than the loss from leaving the EU, such as increased productivity. Similarly, criticism is not made of misallocated capital investment in a variety of projects, ill-judged transport investment such as HS2; of EU restrictive trade policies; of widespread subsidy as in agriculture; in green policies and in nuclear power generation; of investment in tertiary education producing graduates with unwanted skills; and of restrictive or oligopolistic practices in services, medicine, banking and finance.

These are many possible reasons to emphasise the financial disadvantages of leaving the EU. Emphasis on financial disadvantage is very potent: recession, for falling house prices, unemployment are strong messages, directly understandable, but such emphasis may also be used as a decoy to shift the emphasis of the debate, consciously or unconsciously, elsewhere. Such emphasis may be influenced by a laudable idealistic view, as summarised in a measured admission of its political views by the FT:-

 "As never before in its 70-year history, the European ideal of peace, prosperity and unity is under siege from an array of malign internal and external forces. Right-wing nationalists and anti-establishment populists seek to undermine the EU from within.… The times cry out for elected political leaders who are unafraid not merely to defend EU values, but to set out attractive proposals for the future … it is a clarion call to European citizens to overcome fatalists, naysayers and enemies of the EU in the European Parliament elections scheduled for May 23 - 26. In these contests, spread across 27 member states, Mr Macron will be the champion of liberal, pro-EU internationalism lined up against Eurosceptic, nativist reaction ….. he is urging European voters to save the EU from its illiberal adversaries. In this he is absolutely right and Europeans would do well to follow his advice."

Emphasis on the financial disadvantages of leaving the EU may also arise from self-interest amongst certain groups of industrialists, financiers and others, including the "media" and the "establishment". Such parties may have many strong incentives to maintain the status quo: market share, protectionism, personal relationships and understandings and past investment in time and money to gain privileged access. The institutions of the EU are as opaque as they are powerful and access to them is limited, giving existing users a protective barrier to entry, a cosy special oligopolistic relationship: existing users can lobby well; work the system well. Unbalanced arguments have supported and been effective decoys for an array of opposition to the Government and a "justification" for the majority of MPs in Parliament, especially those who personally support Remain but represent Leave constituencies. Importantly, and quite separately, change is always inconvenient and always resisted.

Most forecasters restrict their analysis of UK economic prospects to consideration of an orderly, Leave, presumably in line with the present, but so far rejected, Bill. The OBR say:-

 "With no meaningful basis on which to predict the nature of the future relationship between the UK and the EU, we have retained the broad-brush assumptions on productivity, trade and migration in our previous post-referendum forecasts. Reflecting the Withdrawal Agreement, we incorporate a transition period until December 2020, during which the terms on which the UK and EU trade with each other will remain unchanged. This means that we continue to assume that the UK makes an orderly transition to a new - though as yet undefined - long-term relationship. But there remains considerable uncertainty about the economic and fiscal implications of different potential outcomes, including the impact of any policy response that might accompany them."

The OBR forecast for 2019 is for 1.2% growth, a reduction of 0.4 percentage points from their October 2018 forecast, but for 1.4% growth in 2020 and for 1.6% in the following three years, 0.1% increase over the October 2018 forecast. External forecasters, including the Bank of England, the National Institute of Economic and Social Research, the EC and the IMF are remarkably similar, but the OECD forecast is slightly lower, forecasting 0.85% growth in 2019 and 2020. PwC, whose November 2018 UK forecast of 1.6% is similar to the OBR's at that time, forecast Scottish growth of 1.5% in 2019, in the lowest quartile of the UK regions.

In the Euro area forecast growth is of 1.3%, similar to the UK and down from 1.9% in late 2018, with Germany falling to 1.1% and France 1.3% and Italy 0.2% from 1.2%. Thus, the OBR's downgrade of UK growth is matched by similar reductions in the EU. An "orderly transition" to a new - as yet undefined - long-time relationship is forecast to result in growth continuing in the UK in line with average forecasts for the EU.

Official forecasters do not appear to hazard any political forecast for other than "orderly transition", however and whenever that is achieved. The "bookies" provide a reflection of the "punters'" views. Unsurprisingly, the odds against leaving the EU by 30 March 2019 had lengthened from a low of 2½:1 in early February to 7:1 on 18 March. The odds on another referendum before end 2019 were 2½:1 whereas in early 2019 they were about 1½:1. If there is a 2019 referendum the odds were 4:1 against "Remain" having risen from 2½:1 to December 2018. The odds for the Brexit date being in 2019 are 11:10 - almost an even chance. No betting was shown for a "revocation", now increasingly likely.

As I said in my last statement the key determinant of economic prospects is the passage or otherwise of the existing Bill before Parliament, which if it is not passed in its present form, or with minor revision, will certainly result in a significant reduction in short-term economic activity, always provided failure does not result in a revocation of Article 50. On the outcome of the Bill, I have no basis on which to make a forecast, certainly not an informed one. I join the punters and bet that a resolution or a revocation will be achieved presently. I consider the prospect of the UK economy, both short term and long-term, to be fair.

Property Prospects

The Investment Property Databank Index commercial property return was 7.3% in 2018, of which mostly, about 5.5%, was "Income" as investment values changed little, so falling from 11% in 2017. The property return of 7.3% exceeded the 2.0% return from Gilts but was much higher than equities as the FTSE 100 fell by 12% to 6,734, a level last reached in 1999, and the FTSE 250 fell by 15%. Income yields of about 4% and 3% respectively reduced these losses to 8% and 12% respectively.

The CBRE All Property Yield in December 2018 is estimated to have been 5.3%, a 0.1 percentage point increase in the year, as retail yields rose 12bp for Prime Shops, 25bp for Retail Warehouses and 34bp for "Shops". Offices yields were unchanged and Industrials fell 29bp. The 10 Year Gilt Yield of 1.20% was virtually unchanged in the year to December 2018, 4.1 percentage points lower than the All Property Yield. At the market peak in May 2007 the All Property Yield was 4.8% compared with the current 5.3%, or equivalent to a fall in property values of 4.6% assuming unchanged rents. The 2007 Rent Index adjusted for RPI is 292 and the current estimated Rent Index of 200 represents a fall in real value of 32%.

In May last year the Investment Property Forum forecast for the All Property return for 2018 was 5.2%, very close to the actual outturn of 5.0%, but much less than the 2017 return of over 10.0%. Industrials were expected to have the highest return at 10.2% but returned an exceptional 15.5% due to strong rental growth and falling yields. Office returns were forecast at 3.3% but returned 5.3% as capital values were steady. Retail returns in 2018 were expected to be depressed by falling capital values with returns of only 2.0% for Shopping Centres and 4.5% for Shops and Retail Warehouses. The average total return for all retail sectors was -1.9% as average income of 5.1% was offset by falls in capital value of 6.7%.

Three years ago I said:-

"segments of the investment market will continue to suffer a secular erosion caused by technical obsolescence, loss of locational primacy and competition from new formats. Such trends are likely to continue, especially as the delivery systems of online retailers have become exceptionally refined and the systems for handling customers' requirements become very sophisticated, more consumer orientated and now widespread. From being unusual this distribution channel is now routinely used for a larger proportion of the consumer goods market. Such trends make it increasingly unlikely that many segments of the investment market will ever recover the 2007 peak".

Such effects are now very obvious in the retail sector although benefitting the industrial and distribution sector. Anecdotally it appears that the pace and scale of retail closures has increased and the readjustment will not be completed shortly. The 2018/19 IPF forecast for 2019 is of an All Property Return of 2.4%, as, except for Industrials, falls in capital values of all sectors, particularly shopping centres of 8.2% and retail warehouses of 6.5% erode the income return of approximately 5.0%. The IPF forecast show these trends continuing until 2022 as rents continue to fall in all retail sectors together with capital values, while office values are virtually unchanged and industrial rents and capital both grow about 2.0% each year. All Property Returns are forecast to improve slightly from the 2.4% achieved in 2019 and to average 4.1% per year.

The residential market in Scotland has continued to improve and in 2018 house prices rose 5.0%, or by £8,790 to £185,747, and represents the highest annual rate of growth in Great Britain. The current 5.0% rise follows rises of 4.5% in 2017, and rises of between 2.2% and 4.2% in the previous four years.

In England house prices were unchanged over the year while prices in Wales rose 3.9%. English price changes show very large variations between areas. In London in Kensington and in Westminster prices have dropped 21% and 25% respectively over the year. "Middle" England seems to have fared best with rises of about 3.5% in East Midlands, West Midlands and the South West, but only of 1.0% in the Yorkshire and Humberside, the North East and the South West, and with the East of England, South East, and Greater London barely changed.

Edinburgh's dominance of the housing market in Scotland has an uncanny resemblance to that which London enjoyed until recently in the English market. House prices in Edinburgh rose an outstanding 12.9% in 2018 and on its borders Midlothian prices rose 9.0%, West Lothian 9.1% and East Lothian 6.5%. The ESPC categorises the distribution of price changes in 2018 within Edinburgh. The ESPC show that within Edinburgh the largest increase of 20.5% was recorded for two-bedroom New Town/West End flats with rises of over 10% for flats on the periphery of the city centre such as Leith Walk, Tollcross, Broughton and Stockbridge and of 12% for "up and coming" peripheral areas such as Portobello.

HM Treasury published independent forecasts made up to three months ago, which show rises of 1.9% in 2019 and of 2.4% in 2020 increasing to about 3.4% in each of the following three years. The OBR has recently reduced its forecast for house price growth for 2019 to 0.8%, 2.3 percentage points below its Autumn forecast and to 1.3% in 2020, 1.8 percentage points below its Autumn forecast, but rises of about 4.0% per year are expected in the following three years. The OBR reduced its Spring 2019 forecast as "market activity and price expectations have deteriorated significantly … and are consistent with a further fall in house price inflation".

Savills distinguish between "Mainstream" and "Prime housing" markets. In a publication late in 2018, approximately the time of the OBR Autumn forecast, Savills' Mainstream forecast was for a 2.0% rise in 2019, 4.0% in 2020, and almost 3.0% in each of the three following years, or a compound total rise of 14.8% over five years. House price inflation is forecast as above an assumed CPI inflation rate of 2.0% or 10.4% over five years, but below the 14.8% five-year forecast increase in earnings. Within the UK, Savills expect the regional divergence in house price growth to be greater than previously expected, as London prices are only forecast to increase by 4.5% over five years with modest rises of about 10% in the South East and the South West, but rises of 18% - 22% in the rest of Great Britain. In Scotland house prices are forecast to rise by 18.2%, including a 5.0% rise in 2020.

Savills have reviewed the performance of prime property worth £1 million in 2007. They find that in 2018 "Other" London and Prime Central London prices were about £1.3 million, Suburban London and Commuting London were about £1.125 million, Wider South England and Wales about £1.0 million, but North and Midlands England and Scotland had fallen to £0.9 million. The RPI Index rose 35.4% between 2007 and 2018, giving an equivalent present value of £1.354 million to the £1 million houses: all such £1 million houses are lower in real terms than in 2007. Not so "safe as houses"!

Savills forecast the prime market in Prime Central London and the Wider South of England and Wales and the North/Midlands and Scotland will have price rises of about 14% over the next five years, above expected inflation. However, London commuting and suburban areas are forecast to rise less than 10%. Savills comment: "the price gap will drive demand into the Commuter Zone and beyond as confidence returns …". In Scotland the forecast for prime property, one of the better performers in the prime sector, are expected to rise by 14.2%, but significantly less than the 18.2% forecast for the mainstream market!

All these house price forecasts are based on economic conditions consistent with what the OBR terms on "orderly transition for a new relationship". Given the political stability consistent with such an "orderly transition to a new relationship" forecast for the UK economy, together with adequate credit, at least within the limits of the Bank's criteria, and, crucially for first-time buyers, the Government Help to Buy schemes, post Brexit conditions will continue to sustain demand. House supply entails a long production cycle, including particularly the planning process, and continues to be restricted by the elimination of almost all small house builders who previously built almost half the houses, but now only a tenth, and by the cost and availability of finance for those remaining. In these circumstances, prices will continue to increase slowly, especially for family houses, for which supply seems most constrained and for which the potential demand seems greatest.

Conclusion

The UK economy recovered quickly form the unexpected 'shock' of the Leave vote in June 2016 and current growth rates are, like many other EU countries, below long-term trend rates for many reasons, particularly the slow down in world trade. However, the uncertainty of the outcome of the forthcoming negotiations to leave the EU and any settlement with the EU are now adversely affecting UK growth. The consequences of leaving the EU have gained very considerable publicity in both the popular and the financial press, but the analysis of the possible effects is very varied and often unsound. Considered analysis shows that while the cumulative effect on GDP over the 12 years to 2030 may be considered high, the effect per year of say 0.2% on average is low and within the range of statistical error.

There is a reasonable disquiet in accepting any of the many forecasts, given the very long timescale, the uncertainty of the many variables and the questionable, if not poor, record both of the specific forecasters and of forecasters in general. Additionally, many such analyses have served as decoys for other arguments, prejudicing their value. I perceive the cost to the UK economy of leaving the EU as generally overstated, and, if not overstated, not differing from other non-economically optimal policy choices such as "green" power, banning fracking, external tariffs, production subsidies, restrictive planning policy and the tolerance of concentrated market power in some economic areas. There are varied opportunities for improving economic output particularly in fostering a return to the previous levels of increase in productivity which would benefit the economy by a factor several times some forecasters estimate of economic loss from leaving the EU. The UK, like a duck, is stuck in a pond netted by perceived economic arguments.

If the assumption of an "orderly transition" proves false, this analysis is void. A "no deal" Brexit would not seriously alter the long-term economic prospects but the immediate disruption would be considerable, albeit not as extensive as widely publicised. A delayed determination of the implementation of the Leave vote for longer than a few months would result in considerable damage to the UK economy during that interim period. In the EU negotiations several possible outcomes have very adverse immediate economic consequences. The potential downside risk inherent on any of these consequences far outweighs the extra benefit which might be derived from any extensive investment before this risk has passed. We will await events.

In our existing portfolio, most development properties are valued at cost, usually based on existing use, and when these sites are developed or sold, I expect that their considerable upside will be realised. Some investment properties may also have considerable development value, as we expect to realise at St Margaret's.

I D Lowe

Chairman

28 March 2019

Caledonian Trust PLC

Registered Number 01040126

Consolidated income statement for the six months ended 31 December 2018

__________________________________________________________________________________

Caledonian Trust PLC

Registered Number 01040126

Consolidated statement of changes in equity as at 31 December 2018

__________________________________________________________________________________

Caledonian Trust PLC

Registered Number 01040126

Consolidated balance sheet as at 31 December 2018

__________________________________________________________________________________

Caledonian Trust PLC

Registered Number 01040126

Consolidated cash flow statement for the six months ended 31 December 2018

__________________________________________________________________________________

Caledonian Trust PLC

Registered Number 01040126

1 This interim statement for the six-month period to 31 December 2018 is unaudited and was approved by the directors on 28 March 2019. Caledonian Trust PLC (the "Company") is a company domiciled in the United Kingdom. The information set out does not constitute statutory accounts within the meaning of Section 434 of the Companies Act 2006.

2 Going concern basis

After making enquiries, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing this interim statement.

3 Basis of preparation

The consolidated interim financial statements of the Company for the six months ended 31 December 2018 comprise the Company and its subsidiaries, together referred to as the "Group". The financial information set out in this announcement for the year ended 30 June 2018 does not constitute the Group's statutory accounts for that period within the meaning of Section 434 of the Companies Act 2006. Statutory accounts for the year ended 30 June 2018 are available on the Company's website at www.caledoniantrust.com and have been delivered to the Registrar of Companies. These accounts have been prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union. The auditors have reported on those financial statements; their reports were (i) unqualified, (ii) did not include references to any matters to which the auditors drew attention by way of emphasis without qualifying their reports, and (iii) did not contain statements under Section 498 (2) or (3) of the Companies Act 2006.

The financial information set out in this announcement has been prepared in accordance with International Accounting Standard IAS34 "Interim Financial Reporting". The financial information is presented in sterling and rounded to the nearest thousand.

The interim financial statements have been prepared based on IFRS that are expected to exist at the date on which the Group prepares its financial statements for the year ending 30 June 2019. To the extent that IFRS at 30 June 2019 do not reflect the assumptions made in preparing the interim statements, those financial statements may be subject to change.

In the process of applying the Group's accounting policies, management necessarily makes judgements and estimates that have a significant effect on the amounts recognised in the interim statement. Changes in the assumptions underlying the estimates could result in a significant impact to the financial information. The most critical of these accounting judgement and estimation areas are included in the Group's 2018 consolidated financial statements and the main areas of judgement and estimation are similar to those disclosed in the financial statements for the year ended 30 June 2018.

4 Accounting policies

The accounting policies used in preparing these financial statements are the same as those set out and used in preparing the Group's audited financial statements for the year ended 30 June 2018, except for the adoption of new Standards adopted by the Group.

New Standards adopted

IFRS 15, 'Revenue from contracts with customer' is a converged standard of IAS 18 'Revenue', IAS 11 'Construction Contracts' and a number of revenue-related interpretations from the IASB and FASB on revenue recognition. The standard introduces a new model for revenue recognition based upon the transfer of control rather than the transfer of risks and rewards. It is effective for the year ending 30 June 2019. As the Group has and will account for sales of both investment property and developments on legal completion, there is no impact on Group results in adopting IFRS 15.

The Group's activities comprise property investment and development carried on solely in the United Kingdom. Income generated from renting investment property and sales of developments are reported separately in the profit and loss account. In accordance with IFRS 15, profits or losses on the sale of investment property are also separately identified in the profit and loss account when relevant.

IFRS 9 'Financial Instruments' replaces the guidance in IAS 39 and is effective for the year ending 30 June 2019. It affects the classification, measurement, impairment and de-recognition of financial instruments. The Group has reviewed its existing classification and confirmed that most financial assets will continue to be recognised at amortised cost, with other financial assets being classified at fair value through the profit or loss. The Group reviews the future recoverability of debtors, most of which are for rent receivable, in assessing exposure to expected credit loss. Given the nature of the receivables, the spread of tenants and the lack of significant exposure to expected credit loss, there is no impact on Group results of adopting IFRS 9.

There were no other key judgements or estimates in assessing the impact of IFRS 15 and 9 on the Group.

Standards and interpretations in issue but not yet effective

IFRS 16 'Leases' replaces the current guidance in IAS 17. IFRS 16 requires lessees to recognise a lease liability reflecting future lease payments for virtually all lease payments. The Group is not a lessee under any contract and so expects no impact from this change. Under IFRS 16, there are also changes for lessors but the accounting remains almost the same. These changes may affect negotiations between lessors and lessees but the Group expects such an impact to be small due to the number and type of tenants in its rented investment properties.

IFRS 16 is effective for annual periods beginning on or after 1 January 2019 and the Group does not expect the net impact on profit to be significant.

4 Valuation gains/(losses) on investment properties

As set out in note 7, the valuation gain in the period ended 31 December 2017 relates to progress on St Margaret's House, Edinburgh, which is the subject of a conditional agreement for sale for £15 million entered into on 2 February 2018.

5 Income tax

Taxation for the 6 months ended 31 December 2018 is based on the effective rate of taxation which is estimated to apply to the year ending 30 June 2019. Due to the tax losses incurred there is no tax charge for the period.

In the case of deferred tax in relation to investment property revaluation surpluses, the base cost used is historical book cost and includes allowances or deductions which may be available to reduce the actual tax liability which would crystallise in the event of a disposal of the asset. At 31 December 2018 there is a deferred tax asset which is not recognised in these accounts.

6 Profit or loss per share

Basic profit or loss per share is calculated by dividing the profit or loss attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period as follows:

7 Investment Properties

The carrying value of investment property is the fair value at the balance sheet date at directors' valuation and based on valuations as at 30 June 2016 by Montagu Evans, Chartered Surveyors, and for one property, by Rettie & Co. The external valuers are not connected with the Company. The directors' valuation at 31 December 2018 reflects progress on the potential for redevelopment of St Margaret's House, Edinburgh. As disclosed previously, a conditional agreement for sale of St Margaret's House was entered into on 2 February 2018.

8 Financial instruments

Fair values

Fair values versus carrying amounts

The fair values of financial assets and liabilities, together with the carrying amounts shown in the balance sheet, are as follows:

Estimation of fair values

The following methods and assumptions were used to estimate the fair values shown above:

Available for sale financial assets - as such assets are listed, the fair value is determined at the market price.

Trade and other receivables/payables - the fair value of receivables and payables with a remaining life of less than one year is deemed to be the same as the book value.

Cash and cash equivalents - the fair value is deemed to be the same as the carrying amount due to the short maturity of these instruments.

Other loans - the fair value is calculated by discounting the expected future cashflows at prevailing interest rates.

9 Issued share capital

10 Seasonality

Property sales in the Group are largely unaffected by seasonal variations and tend to be driven more by opportunity on investment and by progress on development sites.

11 Subsequent events

During the period, the Group agreed a loan facility from Bank of Scotland of £1,415,000 to finance the next stage of its Brunstane Development. The loan is expected to be drawn down in 2019 as expenditure is incurred and interest is payable at a margin of 5.1% over Bank of Scotland base rate. The loan is secured by a floating charge over the assets of a subsidiary and by a standard security over Phases 2 and 3 of the development site.