Ground Rents Regulatory News (GRIO)

3 March 2021

Ground Rents Income Fund plc

("GRIO"/ the "Company" / the "Group")

Full year results for the year ended 30 september 2020

Resilient income collection UNDERPINNED DIVIDENDS WITH strong focus on delivering best-in-class residential asset management

Ground Rents Income Fund plc (the 'Company'), the REIT investing in long-term, income generating real estate assets across the United Kingdom, announces its audited full year results for the year ended 30 September 2020.

Key financial highlights

• Net Asset Value ('NAV') as at 30 September 2020 of £102.6 million or 105.7 pence per share ("pps"), a decline of 5.6 pps, or 5.1%, compared with 30 September 2019 (£108.0 million or 111.3 pps). NAV reflects a one-off accounting adjustment relating to the Beetham Tower litigation which is expected to be reversed during the current financial year.

• Stable independent portfolio valuation of £124.2 million as at 30 September 2020 (30 September 2019: £122.9 million).

• 91% of rents due collected over the financial year, which compares favourably with 90% over the equivalent financial year to 30 September 2019.

• Dividend paid in line with the full year target and unchanged from pre-Covid level.

• Significant headroom to debt and interest cover ratio covenants with a consolidated, portfolio level loan to value of 15.7%.

• Enhanced operational flexibility with a new five-year, £25 million facility with Santander UK plc comprising a £12.5 million term loan and a £12.5 million revolving credit facility ("RCF"), extending the loan term to January 2025.

Key operational highlights

• Acquisition in September 2020 of Brentford Lock, a 157 unit development in West London, producing £65,700 per annum of RPI linked ground rent income, for £1.64 million (excluding costs), reflecting a net initial yield of 3.7%.

• Increased operational efficiency by restructuring six purpose-built student accommodation headleases, delivering £300,000 in additional revenues within the financial year (£1 million over three years).

• Renegotiation of key supplier agreements generating additional net income of approximately £115,000 per annum.

• Appointment of Barry Gilbertson since the financial year end as a new independent non-executive director and Chairman-elect.

Sector reform

• Leaseholders continue to be offered the opportunity to convert 'doubling' ground rents to the lower of doubling or RPI, in line with the Government's June 2019 Public Pledge for leaseholders.

• The Company remains actively engaged with Government to ensure all stakeholders interests are carefully considered in any legislation following the January 2021 announcement of leasehold reform proposals.

• The Hackitt Review and ongoing Grenfell Tower enquiry have provided a basis for the implementation of a revised health and safety policy to enhance risk and governance processes and deliver best-in-class residential asset management.

• The Manager continues to work closely with managing agents and delivery partners to mitigate the impacts of the Covid-19 pandemic, to ensure the safety and wellbeing of our residents, suppliers and other stakeholders, while protecting shareholders' long-term interests.

Malcolm Naish, Chairman of the Board, commented:

"There continues to be strong demand in other parts of the real estate market for investments offering similar annuity-style cash flows, which has continued during the pandemic and which we expect to endure. However, the Company is operating in a challenging environment and the outlook will principally be influenced by resolution of the litigation at Beetham Tower and the outcome of leasehold reform.

"The Board and Manager continue to support leasehold reform which achieves a better balance between the interests of ground rent investors and leaseholders, and we are both advocates for a fair and transparent leasehold system which takes account of all stakeholders and supports the appropriate value of the Group's portfolio."

James Agar, Fund Manager, added:

"The portfolio performance has been encouraging, with strong rent collection figures and a stable portfolio valuation over the financial year.

Our strong focus is therefore on bringing final resolution to the litigation at Beetham Tower, which will have a positive impact on NAV, and working with Government and other stakeholders to deliver fair leasehold reform. We will also continue to focus on delivering sustainable net income growth and developing our risk and governance processes to demonstrate 'Best-in-Class' residential asset management."

The Company's annual report and financial statements for the year ended 30 September 2020 are also being published in hard copy format and an electronic copy will shortly be available to download from the Company's webpages www.groundrentsincomefund.com. Please click on the following link to view the document:

http://www.rns-pdf.londonstockexchange.com/rns/9333Q_1-2021-3-2.pdf

Contacts

Schroder Real Estate Investment Management Limited

James Agar / Matthew Riley

020 7658 6000

N+1 Singer (Broker)

James Maxwell / Ben Farrow

020 7496 3000

FTI Consulting

Dido Laurimore / Richard Gotla / Methuselah Tanyanyiwa

020 3727 1000

Appleby Securities (Channel Islands) Limited (Sponsor)

Andrew Weaver

01534 888 777

Chairman's Statement

Overview

Since the onset of the Covid-19 pandemic, our focus has been on the safety and wellbeing of our leaseholders and managing agents, maintaining the Company's income and delivering our strategic objectives. The Company's response to the pandemic is consistent with the Board's and the Manager's commitment to 'Best-in-Class' residential asset management, underpinned by strong and effective Health & Safety procedures.

Significant work has been carried out over the year to address the headwinds and regulatory change impacting the Company and the residential ground rents sector more generally. Our priority has been to ensure our leaseholders are safe in their homes and that they are receiving a professional, transparent and fair service. The scale and complexity of the ongoing building safety crisis, compounded by challenges relating to the cost of building insurance, clearly illustrates the need for well-resourced, professional risk and governance oversight of large-scale residential buildings.

In the face of these challenges, and whilst supporting fair reform of the leasehold system, the Government's package of reforms announced in January 2021 could have severe consequences for both leaseholders and investors. The proposed legislative changes could facilitate a one-time transfer of wealth from one consumer group to another, alongside a mandated system of building management which is potentially unable to manage the complex challenges facing the sector. The Board and Manager will be urging Government to engage with industry to ensure these concerns are heard.

During the financial year ending 30 September 2020, the defensive qualities of the portfolio's underlying cash flows resulted in a small decline of 0.1% in the like-for-like value of the underlying portfolio. Despite this resilient performance, the long running litigation at Beetham Tower and the uncovered element of the dividend contributed to a £5.5 million or -5.1% decline in Net Asset Value ("NAV") to £102.6 million or 105.7 pence per share ("pps"), which compares with £108.0 million or 111.3 pps at the start of the financial year. £2.9 million of the NAV decline is an accounting adjustment relating to Beetham Tower that we expect to be reversed on a sale or liquidation of the asset owning subsidiary, although approximately £0.3 million of further sale or liquidation costs are expected to be incurred.

Dividend cover over the year was negatively impacted by the costs associated with the litigation at Beetham Tower. Dividend cover, excluding Beetham Tower, was 81% which was supported by robust ground rent collection.

Investment objective

The Company's investment objective is to provide secure, long-term, inflation protected returns through investment in long-dated UK ground rents, which historically have had lower correlation to returns in mainstream real estate sectors.

Approximately 71% of the underlying ground rent income is index-linked, with a weighted average unexpired lease term of 343 years. There continues to be strong demand in other parts of the real estate market for investments offering similar annuity-style cash flows, which has continued during the pandemic and which we expect to endure. We continue to believe that the catalyst for increased demand for our shares will be resolution of the Beetham Tower litigation and greater visibility on the outcome of leasehold reform.

Given the uncertainty surrounding the residential ground rents sector the Board and Manager continue to investigate other complementary real estate assets which provide similar defensive, secure, counter-cyclical, index-linked income characteristics.

Strategy

Following Schroders' appointment as Manager in May 2019, the Board and Manager carried out a strategic review to maximise sustainable shareholder total returns, including a review of the dividend policy.

Good initial progress was made delivering on the objectives, including demonstrating Best-in-Class asset management, implementing a formal Health & Safety policy which takes into account the Hackitt Review and Grenfell Tower Inquiry findings, and early adoption of the forthcoming Building Safety Bill. The Company also completed the headlease restructuring of six purpose-built student accommodation ground rent assets generating staged payments totalling £1 million over a three year period and an important refinancing which extended the debt maturity profile and provides operational flexibility via the revolving credit facility ("RCF") at a reduced interest cost.

However, as noted above, recent progress has been impacted by the significant work required to address the headwinds affecting the sector and the litigation at Beetham Tower. The Board and Manager are focussed on managing and reducing these risks, which are key to delivering a re-rating of the Company's share price.

Beetham Tower, Manchester

In 2014, routine maintenance to Beetham Tower in Manchester identified that the structural bond used to fix certain glass cladding panels to the frame was failing. Following proceedings brought by the hotel long leaseholder in March 2018, North West Ground Rents Limited (''NWGR"), the Company's wholly owned subsidiary which owns Beetham Tower, commenced proceedings in July 2018 against parties including the original main contractor Carillion Construction Limited ("Carillion"), which had entered liquidation on 15 January 2018, its insurers, façade sub-contractors Bug-Alutechnik GmbH and architects SimpsonHaugh.

In January 2019, the High Court ordered NWGR to carry out specific repairs to the building, Following a tender process NWGR has been advised that the total cost of these works is approximately £8.9 million, prior to any potential recovery from the parties listed above and from residential leaseholders.

Following extensive engagement with Manchester City Council and with the support of the Beetham Tower Residents Association ("BTRA"), in May 2020 planning permission was secured for an alternative repair scheme, which NWGR believes is more deliverable, at a cost of approximately £4.1 million. In October 2020, the High Court found against NWGR's application to vary the remedial work to the alternative repair scheme, but extended the time to complete the scheme until 31 July 2022.

In conjunction with its advisers, the Board has formed the view that, in the current circumstances, it is in the best interests of the Company to pursue a sale of NWGR for a nominal amount as soon as practicably possible, or to withdraw support for NWGR which is likely to lead to the director of NWGR placing it into liquidation.

Leasehold Reform

In January 2020, the Law Commission ("LC") published its report on enfranchisement, setting out three primary options which aim to reduce enfranchisement costs payable by leaseholders, whilst ensuring sufficient compensation is paid to landlords. The options principally focused on the component parts of the premium calculation, including the abolition of Marriage Value for short-dated or reversionary ground rents (sub 80 years unexpired term) which the Company does not invest in. The LC's recommendations were therefore generally positive for the Company and were designed to promote a simplified system for leaseholders, whilst considering the legitimate property interests of wider stakeholder investors.

In January 2021 the Government set out high level proposals based on the LC's recommendations. Although much is in line with previous guidance, important areas of detail remain unclear, specifically the methodology for an online premium calculator and the proposed 0.1% of market value cap on the quantum of ground rent that can be capitalised in the premium calculation.

Steps to remove genuinely onerous ground rents and efforts to simplify the enfranchisement process are welcome. However, as drafted, the proposals will create a one-time transfer of wealth from one group of stakeholders to another, creating significant economic consequences for both private and pension fund investors with legitimate interests in this sector.

The Manager continues to engage actively with Government in order to ensure that all stakeholders are carefully considered in any proposed legislation, whilst emphasising the peaceful enjoyment requirements of Article 1 of Protocol No. 1 of the European Convention on Human Rights to give appropriate compensation to asset owners.

Competition and Markets Authority

In June 2019, the Competition and Markets Authority ("CMA") launched an investigation into potential breaches of consumer law in the leasehold housing market. The Company has engaged with the CMA during its investigation and responded in detail to a formal information request in December 2019.

On 4 September 2020, the CMA announced its intention to bring enforcement action against four leading housing developers as part of its investigation into possible instances of mis-selling and potential breaches of consumer protection law. The CMA has also confirmed that, at this time and in line with their prioritisation principles, it was not taking action against the Company.

In line with the findings of the investigation, the Company has reviewed its leases and procedures to ensure that they are compliant with consumer law. The Company will also be implementing changes including providing clearer and more readily available information for leaseholders on rent review calculations and the updating of processes surrounding forfeiture under the Housing Act 1988.

Building Safety Reform

In July 2020, the Government published the draft Building Safety Bill, which aims to improve safety in high rise buildings. The Bill applies to all multi-occupied residential buildings higher than 18 metres and implements the recommendations of the Grenfell Tower Inquiry Phase 1 report. It also introduces the concept of an 'Accountable Person' responsible for building safety, and a requirement to maintain a 'Golden Thread' of building information.

Against the backdrop of a rapidly developing regulatory environment, the Board and Manager believe that institutional ground rent investors have the necessary financial incentive, expertise and resource to perform these complex duty-holder obligations in order to protect leaseholders and assist Government in implementing its proposed building safety reforms.

Dividend policy

Despite the onset of Covid-19 and the material impact the pandemic has had on rent collection within the wider commercial real estate market, the Company's strong income collection performance enabled total dividends of £3.9 million to be paid during the year, in line with its stated target. Quarterly dividends of 0.99 pence per share have continued to be paid since the financial year end.

Future dividends will be reviewed in light of leasehold reform, increasing non-recurring property management and related costs and any pandemic related impact.

Board composition

In February 2021, Barry Gilbertson joined the Board as an independent non-executive director and will replace me as Chairman when I retire at the Annual General Meeting in March 2021.

Barry has more than 45 years of experience within real estate, strategy and risk, including as an adviser to the Bank of England, the UK Government, and as a Past President of the Royal Institution of Chartered Surveyors. Barry's extensive investment trust and wider real estate experience will be a valuable addition to the Board.

Outlook

The Company is operating in a challenging environment and the outlook will principally be influenced by resolution of the litigation at Beetham Tower and the outcome of leasehold reform.

The Board and Manager continue to support leasehold reform which achieves a better balance between the interests of ground rent investors and leaseholders, and we are advocates for a fair and transparent leasehold system which takes account of all stakeholders and supports the appropriate value of the Group's portfolio.

Malcolm Naish

Chairman

2 March 2021

Investment Manager's Review

Resilient income collection and strong focus on delivering Best-in-Class residential asset management

Managing challenges associated with leasehold reform and building safety.

Performance

The Group's Net Asset Value ("NAV") was £102.6 million or 105.7 pence per share ("pps") as at 30 September 2020, which compares with £108.0 million or 111.3 pps at the start of the financial year. This reflected a decline in NAV of 5.6 pps or 5.1%, and a NAV total return, including total dividends paid over the financial year of £3.9 million, of -1.6%. The movement in NAV is set out in the table below:

Although the portfolio value was stable over the financial year at £124.2 million, the NAV was adversely impacted by litigation expenses and an accounting adjustment relating to Beetham Tower in Manchester, that is owned by the Company's wholly owned subsidiary, North West Ground Rents Limited ('NWGR'). As outlined in more detail below, the Company is seeking resolution to the long-running litigation which will result in a sale for nominal consideration or the withdrawal of support for NWGR.

The £2.9 million provision is an accounting adjustment under International Accounting Standard ("IAS") 37 which reflects an estimate of the cost NWGR would incur, were it to proceed with the remedial works required to Beetham Tower, after recovery. This provision is expected to be reversed in the event of either a sale or liquidation of NWGR.

Income Collection

Since the onset of Covid-19, we have implemented more accommodative revenue collection practices by extending the arrears process, temporarily suspending late payment fees, accepting extended payment terms where appropriate and encouraging leaseholders experiencing genuine financial hardship to engage with our external advisors.

Despite these amended collection processes, and the restrictions of the Coronavirus Act 2020, rental collection rates show a slight improvement compared with the previous financial year. Our active oversight of credit control has seen a strong start to 2021, with over 70% of the £2.4 million total ground rent income due on 1 January collected, which compares positively against the same point last year. These strong income collection results enabled the pre-Covid dividend level to be maintained during the financial year.

Market overview

Ground Rents Investment Market

The Covid-19 pandemic has impacted global financial markets, including many sectors of the real estate market. During the financial year the ground rent investment market saw a steady, if reduced, number of transactions taking place at broadly stable pricing which was reflected in the portfolio valuation.

Investor sentiment towards the ground rents sector and market liquidity is, not unsurprisingly, being affected by the ongoing leasehold reform process. The generally well received announcement from the Law Commission ("LC") in January 2020 triggered a number of transactions, on assets comparable to those owned by the Company, that provided evidence to support valuations at the end of the year.

More recently, the Government's announcement of reform proposals in January 2021 has increased uncertainty which, together with ongoing building safety reform, has led to greater caution amongst institutional investors. This is expected to persist until there is clarity on the Government's reform proposals and specifically the detail related to the 0.1% market value cap as part of the enfranchisement premium calculation.

Whilst our focus remains on the current strategy, we continue to explore diversifying the Company into commercial ground rents and expanding the current investment mandate to include other assets offering complementary defensive, predictable, index-linked income such as shared ownership and social housing. Comparable asset classes with index-linked, annuity-style income characteristics have seen strong appetite from investors, and we expect this to continue.

Inflation & Retail Price Index ("RPI") Reform

Annual Consumer Prices Index ("CPI") inflation for December 2020 surprised consensus by rising from 0.3% to 0.6% against expectations of 0.5%. The Retail Price Index ('RPI'), a more relevant measure for the Company due to approximately 71% of cash flows being linked to this measure of inflation, rose to 1.2% year on year.

There is increasing debate as to whether the expansion in the money supply arising from the Bank of England's £150 billion quantitative easing programme, will lead to higher inflation. We would expect higher expected and actual inflation to lead to greater demand for long dated cash flows such as those offered by the ground rents sector.

In 2019, the then Chancellor pledged to bring RPI in line with the Consumer Prices Index including occupiers housing costs, a measure called CPIH. HM Treasury have subsequently announced that in 2030 RPI will be brought in line with CPIH. Whilst this could lead to reduced income in the future, this could be off-set by increased demand for defensive assets offering inflation-proofed cash flows.

Portfolio activity

Following Schroders' appointment in May 2019, the Board and Manager undertook a strategy review to determine the best course of action to maximise sustainable shareholder total returns. The key strategic objectives were to sustainably grow recurring income to accelerate dividend coverage, whilst enhancing risk management and operational efficiency as we implement Best-in-Class residential asset management. Progress has been made delivering on these strategic objectives whilst also dealing with the increased headwinds and work streams relating to leasehold and building safety reform. Examples of this activity are set out below:

Growing Recurring Income

Restructure of six purpose-built student accommodation head-leases

- Six new long headleases completed, removing day-to-day management responsibilities, and consolidating 812 rental demands into eight.

- The restructuring delivered £300,000 within the financial year (£1 million over three years) and, following a rent review, increased rent received from £305,000 to £320,000 per annum.

Loan refinancing

- A new five-year, £25 million facility with Santander UK plc comprising a £12.5 million term loan and a £12.5 million revolving credit facility ("RCF"), extending the loan term to January 2025.

- The term loan is at a fixed cost of 2.68% and the RCF is at a margin of 1.85% per annum above 3-month LIBOR (the London Interbank Offered Rate), a reduction of 45 basis points compared to the previous margin of 2.30%.

- The margin reduction generates an approximate interest rate saving of £150,000 per annum (based on the total drawn amount of £19.5 million and 3-month LIBOR rate as at 30 September 2020).

Review of key supplier agreements and auxiliary income

- Renegotiated the agreement between the Company and its principal property manager to generate additional net income of approximately £115,000 per annum.

- Reducing the dividend's reliance on non-core, ancillary income.

Operational Efficiency & Risk Management

During the year and since the year end, further steps have been taken to enhance risk and governance processes and deliver Best-in-Class residential asset management. This includes the implementation of a formal Health & Safety policy taking into account the Hackitt Review and Grenfell Tower Inquiry Phase 1 Report, together with the following more detailed actions;

- Compartmentalisation audit of fire doors, riser cupboards and automatic opening vents.

- Digitisation of documentation as early adopters of the anticipated Building Safety Bill.

- External Wall Surveys ("EWS1") instructed for all buildings over 18 metres.

- Regular engagement with residents' management company directors and agents in the non-managed estate.

- Type 4 Fire risk assessments instructed across the managed estate.

- Acceleration of 2021 and 2022 Fire Reinstatement Valuations.

- Registration of all the Company's qualifying managed assets for the Government's Building Safety Fund.

- 2021 Insurance renewal completed under challenging market conditions with focus on external walls.

- Updated Property Management Agreements to enhance governance and risk management and expand environmental, social and governance ("ESG") obligations.

- Membership of the British Property Federation ("BPF") Residential Safety Committee to improve best practice.

Leasehold & Building Safety Reform

Leasehold Reform

Progress on reform slowed during Covid-19, with Government resources reallocated to the pandemic. However, in January 2021 the Government re-confirmed their commitment to meaningful sector reform and announced:

- The abolition of "Marriage Value".

- Setting all future ground rents to £zero.

- 990 years lease extensions at £zero rent in return for a premium payment to the freeholder.

- The establishment of an online calculator to make it easier for leaseholders to ascertain the level of premium payable to the freeholder.

- 0.1% market value cap on the quantum of ground rent that can be capitalised in the term valuation.

Marriage Value does not form part of the valuation of long-dated ground rents and therefore the potential impact on the Company's portfolio is likely to be minimal. Conversely, if enacted, the 0.1% cap on the level of ground rent that can be capitalised in the term valuation would be dilutive to investors and would represent radical Government intervention in a functioning real estate market.

We therefore welcome the creation of a RICS working group, which has been established with Government to consider important outstanding detail relating to the January 2021 announcement, together with the implications of the enfranchisement premium calculation methodology and proposed 0.1% of market value cap.

We are actively engaged with Government via the RICS and BPF in order to ensure that all stakeholders are carefully considered in any proposed legislation. This includes emphasising the requirements of Article 1 of Protocol No. 1 of the European Convention on Human Rights to provide appropriate compensation to investors in this sector.

Legislation setting future ground rents to zero is expected during 2021, with legislation relating to new lease extension and enfranchisement premiums expected by the end of the current parliament in 2024.

Building Safety Reform

In January 2020, Government announced new measures to improve building safety standards. The proposed legislation will strengthen the regulatory system for building safety, ensuring greater accountability and responsibility throughout the lifecycle of a building, and will implement many of the recommendations from the Grenfell Tower Inquiry Phase 1 report.

Under the proposals, Landlord and Tenant legislation will be updated to include a new Building Safety Charge, which applies to all buildings and sits outside of the confines of a development's leases. This new charge will be separate to the service charge but will create a mechanism to recover the costs of fire safety related works such as cladding replacement, fire related façade works or installing enhanced fire detection measures.

We believe these proposals are an important milestone in delivering the enhanced safety standards the industry needs to ensure leaseholders are safe in their homes. As we have articulated throughout our engagement with policy makers, we strongly believe professional investors with an economic interest in fair, transparent ground rents have a clear incentive to participate in the underlying management of their portfolios.

In March 2020, the Government announced a further £1 billion Building Safety Fund ("BSF"') to remove defective cladding from private sector sites above 18 metres. This was followed by a further announcement in February 2021 which included:

- £3.5 billion of additional funding (£5 billion in total) for the BSF for buildings over 18 metres high.

- For buildings under 18 metres high a long-term loan scheme will be created with a cap of £50 a month for repayments by any leaseholder.

- A developer levy will be applied to new-build high-rise buildings and reflects the application fee described in the proposed Building Safety Bill.

- A new residential development tax, which is expected to raise £2 billion over 10 years.

The Government is also addressing the issue of professional indemnity insurance for External Wall Survey Review ("EWS1") and BSF works. The Government has stated that they will work towards a state-backed indemnity scheme for qualified professionals, which should accelerate the remediation of buildings at risk.

Whilst we again support the Government's steps to address the industry wide cladding issues and limit the financial impact on leaseholders, the BSF still does not cover works to replace fire breaks, flammable insulation, or other types of combustible cladding. We welcome the appointment of Lord Stephen Greenhalgh as Building Safety and Fire Minister and continue to engage with Government to develop policy makers' implementation strategy.

Competition and Market Authority

In June 2019, the Competition and Market Authority ("CMA") launched a sector-wide investigation into potential mis-selling and other possible breaches of consumer protection law in the leasehold housing sector. In February 2020, the CMA published an Update Report, setting out the main areas of concern in relation to its investigation. These areas were:

- The mis-selling of leasehold houses by housing developers.

- Lease terms under which ground rents, which may initially be high already, increase over time.

- High or escalating ground rents that either mean that a tenancy is, or raise the prospect of a lease becoming, an 'assured short hold tenancy' under the Housing Act 1988.

- The use of RPI to adjust the levels of ground rent under rent review.

- Landlords or their managing agents charging high and unjustified permission fees and service charges.

- The effectiveness of the current system of checks and balances intended to protect homeowners from potentially harmful terms and practices.

On 4 September 2020, the CMA announced its intention to bring enforcement action against four leading housing developers. The CMA also confirmed that, at this time and in line with their prioritisation principles, it was not taking enforcement action against the Company. In line with the findings of the sector-wide investigation, the Company continues to review the terms of its leases and its procedures to ensure that they are compliant with consumer law.

We will be closely monitoring the enforcement cases being brought by the CMA and will review the Company's position in the light of any further developments.

Real estate portfolio

As at 30 September 2020 the portfolio comprised approximately 19,000 units across 400 assets valued at £124.2 million. The portfolio produces a ground rent income of £4.92 million per annum, reflecting an average Years Purchase ("YP") of 25.2 or a gross income yield of 3.97%.

The median annual ground rent charge is £110 for houses and £250 for apartments (excluding student assets). During the year, the Group acquired Brentford Lock for £1.64 million (excluding costs), which represented a net initial yield of 3.7%. This acquisition generates free cash of approximately £45,000 (taking into account the net costs of financing), which improves dividend cover and adds to the portfolio of RPI-linked assets.

The portfolio's weighted-average lease term as at 30 September 2020 was 343 years, with 93% of the ground rent income subject to indexed or fixed increase review mechanisms. This is set out in the table below.

The rent review profile is shown in the table below, with 41.3% of the ground rent income due for review over the next five years:

The chart on page 7 of the 2020 Annual Report and Financial Statements demonstrates the forecast income performance based on various levels of RPI. RPI inflation over the five years to and including September 2020 was 2.5% per annum.

Assuming future RPI inflation (for which the calculation is expected to be adjusted to CPIH with effect from 2030) of 2.5% per annum, ground rent income should increase c.16% over the next five years or an annualised figure of 2.6%; slightly ahead of the RPI inflation assumption.

The top 10 assets by value represent 28.6% of the total portfolio valuation as at 30 September 2020.

The geographic spread of the portfolio as at 30 September 2020 is shown in the chart below:

North West Ground Rents Limited - Beetham Tower, Manchester

The Company purchased North West Ground Rents Ltd ("NWGR") as part of its IPO in 2012. NWGR is a wholly owned subsidiary of the Company and its only asset is the freehold title of Beetham Tower, a mixed use, 47 story building in Manchester with 219 apartments and a Hilton branded hotel. The asset generates total ground rent income of £64,152 per annum comprising £33,250 from the 219 residential leases and £30,902 from the hotel lease.

In 2014 routine maintenance identified that the structural bond used to fix certain glass cladding panels to the frame was failing. NWGR notified the main contractor, Carillion Construction Limited ("Carillion"), who subsequently installed fixings to secure the glazing. This was intended to be a temporary solution whilst Carillion and their specialist cladding subcontractors, BUG Alutechnik GmbH ("BUG"), developed a permanent solution. Despite repeated reassurances that Carillion and BUG were working on a solution, progress was limited, and Carillion fell into liquidation in 2018.

Following proceedings brought by the hotel long leaseholder in March 2018, NWGR commenced proceedings in July 2018 against parties including Carillion (now in liquidation), its insurers, and façade sub-contractors BUG Alutechnik GmbH and architects SimpsonHaugh, who it believes have a responsibility to remedy the defects in the cladding. In September 2018 due to litigation and uncertainty the value of NWGR's total investment in Beetham Tower was written down to £nil.

In January 2019, the hotel long leaseholder, Blue Manchester Limited ("BML"), obtained a Court ruling which required NWGR to implement a specific permanent solution ("Option B") and complete the works by July 2020. The works directed by the Court include removing affected glazing units from the frames, removing the defective structural bond and then re-fixing them to the building. NWGR is advised that this solution is technically challenging to deliver, with significant risk from working at height and potential weather-related delays. The total cost of these works have been tendered resulting in potential total costs of approximately £8.9 million, before any recovery from the abovementioned third parties and from residential leaseholders.

Given this significant cost of Option B for NWGR and the residential leaseholders, NWGR explored alternative options to achieve a satisfactory repair solution. Following extensive engagement with Manchester City Council and with the support of the Beetham Tower Residents Association ("BTRA"), in May 2020 planning permission was secured for an alternative repair scheme that the board of NWGR and its professional advisors believe is more deliverable and at a total cost of approximately £4.1 million prior to any recovery under the terms of the residential leases.

In June 2020, an application was made to the Court to approve the alternative scheme which was challenged by BML. On 20 October 2020, the Court found against NWGR's application to vary the remedial work to the alternative repair scheme but extended the time to complete the original ordered scheme until 31 July 2022.

Since the 2019 High Court judgement, following requests from NWGR, the Company has provided loans to NWGR totalling approximately £2.7 million to facilitate its working capital requirements, including its exploration of the alternative repair solution. NWGR has no external loans, other than the shareholder loans advanced by the Company. The Company has not provided any guarantees in respect of NWGR's obligations.

In conjunction with its advisers, the Company has formed the view that, in the current circumstances, it is in the Company's best interests to pursue a sale of NWGR for nominal value, whilst also contingency planning for the scenario where this is not achievable and NWGR enters into a formal insolvency process.

Under either a sale of NWGR for a nominal value or a formal insolvency process, the £2.9 million remedial works provision included at the financial year end in line with requirements under IAS 37 will be reversed.

The Company stated in October 2020 that, based on expenses incurred since the 31 March 2020 and a provision for costs, the further negative financial impact for the Company, were NWGR to enter liquidation or be sold for a nominal sum, was expected to be in the region of £1.3 million. £1 million of this is reflected in the Company's 30 September 2020 NAV and the remaining approximate £0.3 million is expected to be incurred after the year end to conclude either the sale or liquidation process.

Responsible investing with impact

Responsible investment is integral to how Schroder Real Estate manages its investments. Together with the Board, we believe that by understanding and managing the impact of Environmental, Social and Governance ("ESG") considerations we can generate better long-term returns for our clients, contribute to our tenants' business performance and create tangible benefits to the communities in which they are located.

SREIM's sustainability programme is continually evolving, reflecting progression with industry sustainability targets, available technologies and the regulatory environment. Our approach looks to consistently improve the sustainability credentials of the Company's portfolio.

There will be an unrelenting focus on sustainability in the next financial year with our investment and asset management teams incorporating sustainability and impact credentials into all activities. This is evident in our consumer focussed response to the Covid-19 pandemic, where our focus has been on the safety and wellbeing of our leaseholders and managing agents, maintaining the Company's income and delivering our strategic objectives.

In relation to the environment, positive action is needed as the built environment is generally accepted to be responsible for 40% of global carbon emissions. In recognition of the role and responsibilities of the real estate industry and property owners, in December 2020 Schroder Real Estate published its pathway to achieving net zero carbon across all assets by 2050. The publication of this pathway follows Schroders becoming a founding signatory to the Net Zero Asset Managers Initiative in December 2020, as well as the Net Zero Commitment Schroder Real Estate made in September 2019 as part of the UK Better Buildings Partnership Climate Commitment. This commitment is an extension of SREIM's sustainability programme which includes targets to reduce energy consumption and greenhouse gas emissions.

Finance

In January 2020, the Company refinanced its previous £19.5 million loan with Santander UK plc with a new five-year, £25 million facility comprising a £12.5 million term loan and a £12.5 million revolving credit facility ("RCF"). This removed refinancing risk in 2021 and provides important operational flexibility.

The interest payable on the term facility is fixed at 2.68% per annum, while the RCF attracts a rate of 1.85% above 3-month LIBOR per annum subject to a cap of 1.0% on £5.5 million of the total £12.5 million. The total 'all-in' interest rate has therefore reduced from 3.37% to approximately 2.62% per annum, generating an interest rate saving of approximately £150,000 per annum (based on the total drawn amount of £19.5 million and 3-month LIBOR rate as at 30 September 2020 and including the non-utilisation fee on the undrawn RCF).

The table below sets out the loan terms:

1 Total 'all in' interest rate based on the LIBOR rate applicable to the RCF as at 30 September 2020, inclusive of non-utilisation fee.

2 Loan balance divided by Santander secured portfolio bank valuation as at 31 March 2020.

3 For the quarter preceding the Interest Payment Date ('IPD'), ((rental income received - void rates, void service charge and void insurance)/interest paid).

4 For the four quarters following the IPD, ((rental income to be received - void rates, void service charge and void insurance)/interest payable).

At 30 September 2020, £19.5 million was drawn on the Company's revolving credit facility and term loan combined. The Loan to Value ("LTV") on the charged pool of assets is 30.6% versus a covenant of 50%, and £5.5 million of the facility remains undrawn.

The Company has £68.5 million of uncharged assets as per the independent portfolio valuation and the Group level LTV based on gross assets is 15.7% against a restriction of 25%.

Summary

Investor sentiment towards the Company and performance continues to be affected by uncertainty related leasehold reform and the litigation surrounding Beetham Tower.

Our strong focus is therefore on addressing these risks by bringing final resolution to Beetham Tower and working with Government and other stakeholders to deliver fair leasehold reform. We will also continue to focus on delivering sustainable net income growth and developing our risk and governance processes to demonstrate 'Best-in-Class' residential asset management.

James Agar

Fund Manager

Schroder Real Estate Investment Management Limited

2 March 2021

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Principal risks and uncertainties

The Board is responsible for the Group's system of risk management and internal control and for reviewing its effectiveness. The Board has adopted a detailed matrix of principal risks affecting the Group's business as a REIT and has established associated policies and processes designed to manage and, where possible, mitigate those risks, which are monitored by the Audit Committee on an ongoing basis. This system assists the Board in determining the nature and extent of the risks it is willing to take in achieving the Group's strategic objectives. The principal risks, emerging risks and the monitoring system are also subject to robust assessment at least annually. The last assessment took place in December 2020.

Although the Board believes that it has a robust framework of internal control in place this can provide only reasonable, and not absolute, assurance against material financial misstatement or loss and is designed to manage, not eliminate, risk. Actions taken by the Board and, where appropriate, its committees, to manage and mitigate the Group's principal risks and uncertainties are set out in the table below.

Emerging risks and uncertainties

During the year, the Board also discussed and monitored risks that could potentially impact the Group's ability to meet its strategic objectives. The main emerging risk monitored was political risk, specifically leasehold reform, which could adversely impact the value of the Group's portfolio. Political risk also includes Brexit and the Board continues to monitor developments from the UK's departure from the European Union and to assess the potential consequences for the Group's future activities, but believes that the Group's business model's lack of exposure to foreign exchange currency rates, positions the Group to be suitably insulated from Brexit related risks.

Climate change risk includes how climate change could affect the Company's investments, and potentially shareholder returns or the safety of residents. The Board notes the Manager has integrated ESG considerations, including climate change, into the investment process. The Board will continue to monitor the status of climate change as an emerging risk.

The Board also reviewed the risks arising from the Covid-19 pandemic and how it impacted the Company's principal risks and uncertainties. The Board considers that the pandemic has not affected the Company's cash flows to date, although it continues to monitor this. The Board notes the Manager's investment process is unaffected by the pandemic. Covid-19 also affected the Company's service providers, who implemented business continuity plans in line with government guidelines. All service providers continue to operate on a business as usual basis. The "change" column below highlights at a glance the Board's assessment of any increases or decreases in risk during the year after mitigation and management. The arrows show the risks as increased or decreased, and dashes show risks as stable.

Risk assessment and internal controls

Risk assessment includes consideration of the scope and quality of the systems of internal control operating within key service providers, and ensures regular communication of the results of monitoring by such providers to the Audit Committee, including the incidence of significant control failings or weaknesses that have been identified at any time and the extent to which they have resulted in unforeseen outcomes or contingencies that may have a material impact on the Group's performance or condition. No significant control failings or weaknesses were identified from the Audit Committee's ongoing risk assessment which has been in place throughout the financial year and up to the date of this report.

Viability statement

The Directors have assessed the viability of the Company over a five year period, taking into account the Company's position at 30 September 2020 and the potential impact of the principal risks and uncertainties it faces for the review period. A period of five years has been chosen as the Board believes that this reflects a suitable time horizon for strategic planning, taking into account the investment policy, liquidity of investments, potential impact of economic cycles, nature of operating costs and dividends.

In their assessment the Directors have considered each of the Group's principal risks and uncertainties detailed on pages 12 to 14 of the 2020 Annual Report and Financial Statements and in particular the impact of a significant fall in the value of the Group's investment portfolio. The Directors have also considered the Group's income and expenditure projections and the £12.5 million term loan repayable on 10 January 2025, and the £12.5 million revolving credit facility which expires on the same date. The Directors know of no reason that an equivalent facility will not be in place by the expiry of this credit facility.

Based on the Group's processes for monitoring operating costs, the share price discount, the Investment Manager's compliance with the investment objective, asset allocation, the portfolio risk profile, gearing, counterparty exposure, liquidity risk and financial controls, the Directors have concluded that there is a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the five year period to 30 September 2025. In reaching this decision, the Board has taken into account the Company's next continuation vote, to be put forward at the AGM in 2023. The Directors have no reason to believe that such a resolution will not result in the continuation of the Company.

Going concern

The Directors have examined significant areas of possible financial risk and have reviewed cash flow forecasts and compliance with the debt covenants, in particular the LTV covenant and interest cover ratio. They have not identified any material uncertainties which would cast significant doubt on the Group's ability to continue as a going concern for a period of not less than 12 months from the date of the approval of the financial statements. The Directors have satisfied themselves that the Group has adequate resources to continue in operational existence for the foreseeable future.

After due consideration, the Board believes it is appropriate to adopt the going concern basis in preparing the financial statements.

By order of the Board

Schroder Investment Management Limited

Company Secretary

2 March 2021

Statement of Directors' Responsibilities

The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulation.

Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have prepared the Group financial statements in accordance with International Accounting Standards in conformity with the requirements of the Companies Act 2006 and Company financial statements in accordance with International Accounting Standards in conformity with the requirements of the Companies Act 2006. Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and Company and of the profit or loss of the Group for that period. In preparing the financial statements, the Directors are required to:

- select suitable accounting policies and then apply them consistently;

- state whether applicable International Accounting Standards in conformity with the requirements of the Companies Act 2006 have been followed for the Group financial statements and International Accounting Standards in conformity with the requirements of the Companies Act 2006 have been followed for the Company financial statements, subject to any material departures disclosed and explained in the financial statements;

- make judgements and accounting estimates that are reasonable and prudent; and

- prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and Company will continue in business.

The Directors are also responsible for safeguarding the assets of the Group and Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group and Company's transactions and disclose with reasonable accuracy at any time the financial position of the Group and Company and enable them to ensure that the financial statements and the Directors' Remuneration Report comply with the Companies Act 2006 and, as regards the group financial statements, Article 4 of the IAS Regulation.

The Directors are responsible for the maintenance and integrity of the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Directors' confirmations

The Directors consider that the annual report and financial statements, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group and Company's position and performance, business model and strategy.

Each of the Directors, whose names and functions are listed on pages 15 and 16 of the Directors' Report in the 2020 Annual Report and Financial Statements confirm that, to the best of their knowledge:

- the Group financial statements, which have been prepared in accordance with International Accounting Standards in conformity with the requirements of the Companies Act 2006, give a true and fair view of the assets, liabilities, financial position and loss of the Group;

- the Company financial statements, which have been prepared in accordance with International Accounting Standards in conformity with the requirements of the Companies Act 2006, give a true and fair view of the assets, liabilities, financial position and loss of the Company; and

- the Directors' Report includes a fair review of the development and performance of the business and the position of the Group and Company, together with a description of the principal risks and uncertainties that it faces.

In the case of each Director in office at the date the Directors' Report is approved:

- So far as each Director is aware, there is no relevant audit information of which the Company's auditor is unaware. Relevant information is defined as "information needed by the Company's auditor in connection with preparing their report".

- Each Director has taken all the steps that they ought to have taken in their duty as a Director in order to make themselves aware of any relevant audit information and to establish that the Company's auditor is aware of that information.

- Steps that a Director ought to have taken would include making inquiries of other Directors and the auditor and any other steps required by the Director's duty to exercise due care, skill and diligence.

By order of the Board

Malcolm Naish

Chair

2 March 2021

Consolidated Statement of Comprehensive Income

For the year ended 30 September 2020

* See note 1 Exceptional items

Consolidated Statement of Financial Position

As at 30 September 2020

Consolidated Statement of Cash Flows

For the year ended 30 September 2020

Consolidated Statement of Changes in Equity

For the year ended 30 September 2020

Notes to the Consolidated Financial Statements

For the year ended 30 September 2020

1 Accounting policies

Ground Rents Income Fund plc (the "Company") is a closed-ended investment company registered in England and Wales as a public company limited by shares. The Company's registered address is 1 London Wall Place, London, EC2Y 5AU. The consolidated financial statements of the Company comprise the Company and its subsidiaries (together referred to as the "Group").

Statement of compliance

The consolidated financial statements of the Group have been prepared in accordance with International Accounting Standards in conformity with the requirements of the Companies Act 2006 ("IFRS") and applicable legal requirements of the Companies Act 2006.

Basis of preparation

The consolidated financial statements have been prepared under the historical cost convention, as modified by the revaluation of investment properties and derivative financial instruments, which have been measured at fair value. The functional and presentational currency is sterling.

The accounting policies applied to the results, assets, liabilities and cash flows of the entities included in the consolidated financial statements are consistent with those of the previous year other than as set out below.

Going concern

In March 2020 the World Health Organisation declared the outbreak of the Novel Coronavirus ("Covid-19") a global pandemic. Subsequently, the Directors have examined significant areas of possible financial risk including: the non-collection of rent as a result of the Covid-19 pandemic and potential resulting falls in property valuations; and the future implications of potential leasehold reform. The Manager has prepared detailed forward-looking cash flow forecasts and third party debt covenant calculations, in particular the Loan to Value covenant and interest cover ratios.

The Board and Manager are closely monitoring the potential ongoing impact the Covid-19 pandemic may have on the Company's rental collection, which has remained strong during the year and to the date of this report, and the requirement to distribute dividends in accordance with REIT regulations. The Company's dividend policy will be kept under constant review to ensure the Company's liquid resources will be sufficient to cover any working capital requirements. Further details can be found within the Chairman's statement on page 3 and the Directors' Report on page 17 of the 2020 Annual Report and Financial Statements.

In January 2020 the Group completed a refinancing of the facility held with Santander. Half of the facility is a £12.5 million fixed rate loan attracting a total interest rate of 2.68% per annum, compared to a previous rate of 3.37%. The Group also arranged a £12.5 million revolving credit facility ("RCF") with Santander. As at the year end, the undrawn capacity was £5.5 million. The RCF is an efficient and flexible source of funding at an interest rate of 1.85% per annum plus three month LIBOR which can be repaid and redrawn as often as required.

The Directors have not identified any material uncertainties which would cast significant doubt on the Group's ability to continue as a going concern for a period of not less than twelve months from the date of the approval of the consolidated financial statements.

In addition to the matters described above, in arriving at their conclusion the Directors have also considered:

• The current cash balance at 26 February 2021 of approximately £2.2 million;

• The nature and timing of the Group's income and expenses;

• Obligations for remedial works within the Group; and

• That the Manager continues to implement its business continuity plans to help ensure the safety and well-being of its staff thereby retaining the ability to maintain the Group's business operations.

The Directors have satisfied themselves that the Group has adequate resources to continue in operational existence for the foreseeable future.

After due consideration, the Board considers it is appropriate to adopt the going concern basis in preparing the Group consolidated financial statements.

Adoption of new and revised standards

During the year, the Group adopted the following standards:

IFRS 16 - Leases

The new standard requires recognition on the balance sheet for the head rent payable by a lessee over the lease term. For lessees, it will result in almost all leases being recognised on the balance sheet, as the distinction between operating and finance leases will be removed. The accounting for lessors has not significantly changed.

The Group adopted IFRS 16 Leases on 1 October 2019. This standard does not impact the Group's financial position since it is a lessor of investment properties and has no other operating leases.

New standards and interpretations not yet adopted by the Group

IFRS 3 - Business Combinations

Amendments to IFRS 3 Business Combinations, effective for financial years commencing on or after 1 January 2020 provides a revised framework for evaluating a business and introduces an optional 'concentration test'. The amendment will impact the assessment and judgements used in determining whether future property transactions represent an asset acquisition or business combination. As a result of the amendment it is expected that future transactions are more likely to be treated as an asset acquisition.

There are no other standards or interpretations yet to be effective that would be expected to have a material impact on the financial statements of the Group.

Use of estimates and judgements

The preparation of financial statements in accordance with International Accounting Standards in conformity with the requirements of the Companies Act 2006, requires management to make judgements, estimates and assumptions that affect the application of policies and the reported amounts of assets and liabilities, income and expenses. These estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making judgements about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected.

The most significant estimates made in preparing the consolidated financial statements relate to the carrying value of investment properties, as disclosed in note 8, which are stated at fair value. Fair value is inherently subjective because the valuer makes assumptions which may not prove to be accurate. The Group uses external professional valuers to determine the relevant amounts.

A further significant estimate is the provision for the liability for the works required to repair investment properties, which represents a shortfall between future payments and future receipts. The evaluation included analysis of inputs and outputs such as: estimates for repair works, and the probability and sum of expenditure recovery under leasehold agreements and from other third parties. Further details can be found in note 22 Provisions for liabilities.

Another significant estimate is the IFRS 9 expected credit loss. IFRS 9 requires an impairment review to be made for certain financial assets held on a Group's balance sheet using a forward-looking expected credit loss model. Where any impairment is required to be made, appropriate recognition is required in the Consolidated Statement of Comprehensive Income together with appropriate disclosure in the notes to the consolidated financial statements. Within the Company financial statements, all intercompany loans are considered to be such financial assets and must therefore be assessed at each reporting period for potential impairment, with appropriate disclosures.

Basis of consolidation

The Group's financial statements comprise a consolidation of the financial statements of the parent company (Ground Rents Income Fund plc) and its subsidiaries. The financial statements of the subsidiaries are prepared using consistent accounting policies. Subsidiaries are entities controlled by the Group and control exists when the Group has the power to govern the financial and operating policies of an entity so as to obtain benefit from its activities. The financial statements of the subsidiaries are included from the date on which control is transferred to the Group. Financial statements of subsidiaries are deconsolidated from the date on which control ceases.

All intra-group transactions and balances are eliminated on consolidation.

Revenue

Revenue represents the value of ground rent income due in the year together with any supplementary income earned in the year, including insurance income, tenant fees, lease restructure premiums and other income. The policy is in line with IFRS 15 - Revenue from contracts with customers.

Rental income, including fixed rental uplifts, from investment property leased out under operating leases is recognised as revenue on a straight-line basis over the lease term, apart from:

- Any rent adjustments based on open market estimated rental values or indexed-linked rent reviews which are recognised, based on management estimates, from the rent review date in relation to unsettled rent reviews; and

- Contingent rents, being those lease payments that are not fixed at the inception of the lease, which are recognised in the period they are earned and as defined by the lease.

Finance income and expenses

Finance income comprises interest receivable on bank deposits. Finance expenses comprise interest payable and transaction costs incurred in connection with the borrowing of funds of the facilities. Finance income and expenses are recognised in the Consolidated Statement of Comprehensive Income on an accruals basis in the period to which they relate.

Taxation

Tax on the profit for the year comprises current tax. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the year end date.

Deferred tax

Generally, the Group is not exposed to deferred tax because it is a REIT. REITs do not pay tax on property income and gains.

Exceptional items

The Group's Consolidated Statement of Comprehensive Income separately identifies exceptional items. Such items are those that in the Directors' judgement are one-off in nature and need to be disclosed separately by virtue of their size or incidence. In determining whether an item should be disclosed as an exceptional item, the Directors consider quantitative as well as qualitative factors such as frequency, predictability of occurrence and significance. This is consistent with the way the financial performance is managed by the Manager and reported to the Directors. Disclosing exceptional items separately provides additional understanding of the performance of the Group.

The Directors have retrospectively applied the policy to the year ended 30 September 2019 (as presented within the restated Consolidated Statement of Comprehensive Income and note 3 Operating expenses) and reclassified the £1.3 million of prior year costs from operating expenses to exceptional items. This enables the reader to identify the costs incurred in both financial years in connection with the litigation at Beetham Tower, Manchester, a mixed use residential and hotel asset owned by the Group subsidiary, NWGR. This follows the High Court finding in October 2020 against NWGR in its application to vary the remedial work to the building and subsequent requirement to recognise the future liability for the remedial solution. Apart from this reclassification of exceptional costs within the Consolidated Statement of Comprehensive Income, there is no other impact on the comparative consolidated financial statements of the Group. Further details can be found in note 3 Operating expenses and note 22 Provisions for liabilities.

Investment properties

Investment properties are carried in the Consolidated Statement of Financial Position at their open market value. The Directors have applied the fair-value model in IAS 40 - Investment Property. Investment properties are revalued at the Consolidated Statement of Financial Position date by an independent valuer. The fair value also reflects estimated future cash flows. Expenses that are directly attributable to the acquisition of an investment property are capitalised into the cost of investment. Gains and losses on changes in fair value of investment properties are recognised in the Consolidated Statement of Comprehensive Income. The Directors instruct the independent valuers biannually and, in addition, on acquisition of investment properties as the need arises. Gains and losses on changes in fair value are recognised at the time of each valuation.

Cash and cash equivalents

Cash comprises call deposits held with banks.

Capital management

The capital managed by the Group consists of cash held across different bank accounts in several banking institutions. The Group's objectives when managing capital are to safeguard the Group's ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maximise the interest return on funds which have yet to be invested while ensuring there is enough free cash to meet day-to-day liabilities. In order to maintain or adjust the capital structure the Directors have the option to adjust the dividends paid to shareholders, return cash to shareholders, sell assets or delay purchase of individual assets. The Group monitors capital through cash and dividend forecasts which are prepared and reviewed on a quarterly basis. Following the Santander loan refinancing in January 2020, the Group has a fully drawn down £12.5 million fixed rate debt facility and a £12.5 million RCF facility, of which £7 million is drawn down, which both expire in January 2025. See note 12 - Financial Instruments for further information on the loan. Associated costs are capitalised and amortised over the duration of the loan.

Derivative financial assets and liabilities

Derivative financial assets and liabilities comprise an interest rate cap for hedging purposes, as an economic hedge. This has been initially recognised at cost and subsequently revalued to fair value, with the revaluation gains or losses recognised in the Consolidated Statement of Comprehensive Income.

Financial assets and liabilities

Non-derivative financial assets and liabilities comprise trade and other receivables, cash and cash equivalents, loans and borrowings, and trade and other payables. These are initially recognised at fair value and subsequently measured at amortised cost and discounted as appropriate. On initial recognition and at each period end the Group calculates the expected credit loss for non-derivative assets based on lifetime expected credit losses under the IFRS 9 simplified approach.

Deferred income

Deferred income arises because ground rents are usually billed annually in advance. Deferred income is held in the deferred income account within payables and released to the Consolidated Statement of Comprehensive Income over the period to which it relates.

Amortisation of loan arrangement fees

Loan arrangement fees are capitalised and deducted from the amount outstanding on the loan. They are expensed to the Consolidated Statement of Comprehensive Income over the period of the loan facility. This loan amortisation is included within finance expenses in the consolidated financial statements.

Provisions

A provision is recognised in the Consolidated Statement of Financial Position when the Group has a legal or constructive obligation as a result of a past event and it is probable that an outflow of economic benefits will be required to settle the obligation.

Ordinary share capital

Ordinary share capital is classed as equity. Incremental costs directly attributable to the issue of new ordinary shares are shown in equity as a deduction from the share premium account.

Warrants

Warrants were issued on a one for five basis with the issue of the ordinary share capital in August 2012. Each warrant gives the holder the right to subscribe for an ordinary share for £1 on the anniversary of their issue for a period of ten years.

Dividend distribution

Dividend distribution to the Company's shareholders is recognised as a liability in the Group's financial statements in the period in which the dividends are approved by the Company's Directors.

2 Segmental reporting

The Directors are of the opinion that the Group is engaged in a single segment of business, being the collection of ground rent from its investment properties. The Group receives some ancillary income to which it is entitled as a result of its position as property freeholder or head leaseholder. Schroders acts as adviser to the Board of Directors, who then make management decisions following its recommendations. As such, the Board is considered to be the chief operating decision maker. A set of consolidated IFRS information is provided to the Board on a quarterly basis.

All income of the Group is derived from activities carried out within the United Kingdom. The Group is not reliant on any one property or group of connected properties for the generation of its revenues.

3 Operating expenses

*See note 1 Exceptional items. Litigation costs have been incurred in connection with the ongoing litigation within a wholly owned subsidiary NWGR. The provision for remedial works is a provision under IAS 37 "Provisions, Contingent Liabilities and Contingent Assets" (see note 22), again in connection with NWGR.

No direct operating expenses were incurred in relation to investment property in the year (2019: £nil).

Services provided by the Company's auditors:

4 Directors' emoluments

The Directors are the only officers of the Company and there are no other key personnel. The average number of Directors during the year was 3 (2019: 3). The Directors' annual remuneration for services is set out in the Directors' Remuneration Report on pages 24 and 25 of the 2020 Annual Report and Financial Statements. The total charge for Directors' fees is shown in note 3 and is inclusive of employer's National Insurance Contributions. There were no post-employment benefits, other long-term benefits, termination benefits or share-based payments accrued or paid out in the year (2019: none).

5 Finance income

6 Finance expenses

Following the modification to the loan facility during the year, additional loan arrangement and associated professional fees of £0.25 million have been capitalised and deducted from the total loan amount outstanding. Total capitalised fees of £0.5 million at the year end date are to be amortised over the period to January 2025. See note 11 for further details.

7 Taxation

The Company applied to HMRC to join the REIT taxation regime on 14 August 2012. The REIT regime affords the Company a number of potential efficiencies in its tax affairs including exemption from UK corporation tax on profits and gains from its UK property rental business. The Company is compliant with the rules of the REIT regime in order to achieve these potential benefits. No tax charge arose in the year (2019: £nil). For the current year ended 30 September 2020, the Group did not have any non-qualifying profits and accordingly there is no tax charge in the year. If there were any non-qualifying profits and gains, these would be subject to corporation tax.

Deferred tax

No deferred tax arises on revaluation of investment properties due to the REIT status of the Company. UK REITs are exempt from Capital Gains Tax on property sales.

Factors affecting current and future tax charges

The Government has announced that the corporation tax standard rate will also be set at 19% for the financial year beginning 1 April 2021.

8 Investment properties

Fair value hierarchy

Non-financial assets carried at fair value, as is the case for investment property held by the Group, are required to be analysed by level depending on the valuation method adopted under IFRS 13 'Fair Value Measurement'.

The fair value hierarchy has the following levels:

Level 1: Quoted prices (unadjusted) in active markets for identical assets and liabilities.

Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability either directly (that is, as prices) or indirectly (that is, derived from prices).

Level 3: Inputs for the asset or liability that are not based on observable market data (that is unobservable inputs).

All investment property held by the Group is classified as Level 3.

There have been no transfers between levels of the fair value hierarchy during the year.

Key assumptions within the basis of fair value are:

The value of each of the properties has been assessed in accordance with the relevant parts of the Royal Institution of Chartered Surveyors Valuation - Global Standards 2020, incorporating the IVSC International Valuations Standards (the "Red Book Global Standards"), which is consistent with IFRS 13 measurement requirements. The RICS Red Book provides two definitions of fair value. The one appropriate for the IFRS basis of accounting is as follows:

"The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date".

The commentary under VPS 4 (1.5.3) of the Red Book states that, for most practical purposes, fair value is consistent with the concept of market value and there is no difference between the two.

The Group's investment property was revalued at 30 September 2020 by Savills. The valuer has confirmed to the Directors that the fair value as set out in the valuation report has been primarily derived using comparable recent market transactions on an arm's length basis.

The valuer within Savills is a RICS Registered Valuer. The valuation of ground rent investment properties takes into account external factors such as interest rates and the availability of other fixed rate investments in the market.

The valuation of a ground rent investment property is principally dependent on the aggregate income generated, and the potential for this to increase in future through rent reviews. The most valuable ground rent investment property assets are those which are RPI linked with reviews every 10 years or less. Other types of ground rents are 'doubling' where the rent doubles at a fixed time interval and 'fixed increases' where the uplifts are fixed and detailed in the lease. The least attractive ground rents are those which are flat with no future rental increases which attract the lowest Years Purchase (YP) multiple and the highest yield.

Information about fair value measurement using significant unobservable inputs (Level 3):

Valuation Category - type of rent review

All categories of ground rent investment properties have been valued by independent valuers using available market comparisons. During the year, some assets held with doubling rent reviews transitioned to a flat review profile.

The table below shows the principal sensitivity to the key valuation metrics and the resultant change to the valuation.

The average YP across the portfolio is 25.2 (2019: 25.5).

Included within the Group portfolio valuation is a £nil (2019: £nil) value for the investment property Beetham Tower, Manchester, held within the NWGR subsidiary undertaking. The Directors have introduced a provision under IAS37 "Provisions, Contingent Liabilities and Contingent Assets" to reflect the costs for remedial works (see note 22) in connection with the remediation of the asset.

9 Trade and other receivables

The fair value of trade and other receivables is equal to the book value.

The ageing analysis of trade receivables is as follows:

Management consider the trade receivables to be fully collectable due to the secure nature of the receipts. The Directors believe all financial assets that are neither past due nor impaired to be fully recoverable as the amounts are represented by either cash held at a secure client account at the Company's solicitors or other trading amounts which are considered fully recoverable and of good quality. Therefore no expected credit loss by ageing is presented above. Accordingly, the provision for doubtful debts at 30 September 2020 was nil (2019: £nil).

10 Trade and other payables

Trade payables and Other taxes and social security amounts fall due within the next three months.

11 Financial liabilities measured at amortised cost

On 10 January 2020, the existing loan facility with Santander UK plc was amended and split into two facilities totalling £25 million. Of the total amount drawn, £12.5 million is held as a term loan and matures on 10 January 2025 and carries a fixed interest rate of approximately 2.68% per annum, payable quarterly. The remaining £7 million is held within a coterminous £12.5 million Revolving Credit Facility ("RCF"), which carries an interest rate per annum of 1.85% plus three month LIBOR, payable quarterly.

An additional fixed fee of 0.74% per annum is payable on amounts undrawn under the RCF. The facility was subject to a £0.25 million arrangement fee which is being amortised over the period of the loan.

The lender has charges over investment property owned by the Group with a value of £63.6 million. A pledge of all shares in the borrowing Group company and loan obligor companies is in place.

As at the year end date, the loan facility was secured over assets held in the following Group companies: Admiral Ground Rents Limited, Clapham One Ground Rents Limited, GRIF040 Limited, GRIF041 Limited, GRIF044 Limited, GRIF048 Limited, Masshouse Block HI Limited, Masshouse Residential Block HI Limited, OPW Ground Rents Limited, The Manchester Ground Rent Company Limited and Wiltshire Ground Rents Limited.

No security or guarantee exists in relation to the facility over any other Group assets or assets within the parent company.

The combined amended facility has a loan-to-value ("LTV") covenant of 50% and interest cover covenant of 270%. The Group was in full compliance with the covenants throughout the year. As at the year end the actual LTV over secured assets was 30.6% with headroom of £24.6 million and interest cover was 403.1% with headroom of £0.6 million.

Group borrowings

At 30 September 2020, Group borrowings were 15.7% (30 September 2019: 15.9%) of non-current assets.

Leverage ratio

For the purposes of the AIFMD, leverage is any method which increases the Company's exposure, including the borrowing of cash and the use of derivatives.

It is expressed as a ratio between the Group's gross assets and its NAV and is calculated under the gross and commitment methods, in accordance with the AIFMD. This differs to the Group's borrowing restriction which is expressed as an absolute measure as quoted above.

The Group is required to state its maximum and actual leverage levels, calculated as prescribed by the AIFMD as at 30 September 2020, and are as follows:

The gross method represents the sum of the Group's positions (total assets) after deducting cash balances. The commitment method represents the sum of the Group's positions without deducting cash balances.

12 Financial instruments

The Group's financial instruments comprise cash and various items such as trade and other receivables and trade and other payables which arise from its operations.

Financial assets carried at amortised cost

The book value and fair value profile of the Group's financial assets, were as follows:

As of 30 September 2020 no trade receivables (2019: £nil) were impaired or provided for as detailed in note 9.

Financial liabilities carried at amortised cost

The book value and fair value profile of the Group's financial liabilities, were as follows:

Financial risk management

The Group has identified the risks arising from its activities and has established policies and procedures as part of a formal structure of managing risk.

Capital risk management

The Group's objectives when managing capital are to safeguard the Group's ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maximise the interest return on funds which have yet to be invested while ensuring there is enough free cash to meet day to day liabilities. In order to maintain or adjust the capital structure the Directors have the option to adjust the dividends paid to shareholders, return cash to shareholders, sell assets or delay purchase of additional assets. The Group monitors capital through cash and dividend forecasts which are prepared and reviewed on a quarterly basis.

A gearing ratio measures the proportion of a Group's borrowed funds to its equity. The Group's gearing ratio at the year end date was as follows:

Credit risk

Cash deposits are placed with a number of financial institutions whose financial strength and credit quality have been considered by the Directors based on advice received from the AIFM. The panel of suitable counterparties is subject to regular review by the Board.

Interest rate risk

The Company places excess cash of the Group on deposit in interest-bearing accounts to maximise returns.

Liquidity risk

Liquidity risk is the risk that the Group is unable to meet its payment obligations associated with its financial liabilities when they fall due. The Directors, based on advice received from the AIFM, manage and monitor short-term liquidity requirements to ensure that the Group maintains a surplus of immediately realisable assets over its liabilities, such that all known and potential cash obligations can be met.

13 Loss per share

Basic loss per share

Losses used to calculate loss per share in the financial statements were:

Diluted loss per share

Diluted loss per share is the basic loss per share, adjusted for the effect of contingently issuable warrants in issue during the year, weighted for the relevant periods. There was no potential dilutive impact of warrants at the beginning nor the end of the year.

14 Net asset value per ordinary share

The NAV calculates the net asset value per share in the financial statements. The diluted NAV per ordinary share is calculated after assuming the exercise of all outstanding warrants at £1, which would increase the aggregated NAV by £4,423,876.

15 Share capital

Warrants were issued for £nil consideration on the basis of one warrant for every five subscription shares in August 2012. Warrant-holders have the right to subscribe £1 per share for the number of ordinary shares to which they are entitled on 31 August in each year following admission up to and including 31 August 2022. 100 warrants were exercised and ordinary shares issued in September 2019. No warrants were exercised and thus no ordinary shares issued in the year to September 2020. At 30 September 2020 there were 4,423,876 warrants in issue.

16 Share premium account

General meetings of the ordinary shareholders and warrantholders were held in November 2019 to approve the conversion of the Company's share premium account into distributable reserves. Both resolutions passed and the related court process to permit the reduction of the share premium account was completed during the year.

17 Retained earnings

18 Dividends

It is the policy of the Group to pay quarterly interim dividends to ordinary shareholders. The interim dividend relating to the fourth quarter of the year was paid in November 2020.

19 Cash generated from operations

Reconciliation of operating loss to net cash inflow from operating activities

Proceeds of share issue

The proceeds from issue of shares is as follows:

20 Analysis of changes in net debt

21 Related party transactions

The Company's balances with fellow group companies at 30 September 2020 are set out in note 14 to the Company's financial statements.

Brooks Macdonald Funds Limited ("BMF") provided investment management and administration services to the Company up until 12 May 2019, the fees for which were 0.55% per annum of the market capitalisation of the Company. In addition, BMF was entitled to an agency fee of 2% of the purchase price of any property acquired by the Company, where no other agency fee was payable. Where a third party agency fee was less than 2% of the purchase price, BMF was entitled to an agency fee of 50% of the difference between 2% of the purchase price and the third party agency fee. BMF also received a share of event fees from an unrelated party Braemar Estates Limited.

Schroder Real Estate Investment Management Limited ("Schroders") acted as the Manager from 13 May 2019 and is also deemed to be a related party. Schroders is paid a simplified, tiered annual fee comprising 1% of NAV up to £200 million; 0.9% of NAV between £200 million and £400 million; and 0.8% of NAV above £400 million.

Transactions between Schroders, BMF and Ground Rents Income Fund plc were as follows:

No amounts were due from the Company to Schroders at the year end date (2019: £nil).

No amounts were due from the Company to BMF at the year end date (2019: £nil).

22 Provisions for liabilities

In October 2020, NWGR lost its application to vary an order handed down by the High Court, for restoring its investment property to its original condition (see note 24). Subsequently, the Directors have increased the estimate of the cost of remedial works to be met by NWGR by £2.9 million at the year end date.

The provision of £2.9 million reflects tendered costs for the remedial works ordered by the Court of approximately £8.9 million, reduced by amounts that will be payable by leaseholders and recoveries from third parties.

The provision of costs at the year end date reflects the best estimate of the net cost to NWGR of fulfilling the contract, reflecting all estimated costs and recoveries. The Directors have estimated the future recovery of costs from leaseholders and third parties based on legal advice received and obligations under leasehold contracts.

23 Other financial commitments and contingencies

Damages associated with the judgement against NWGR are still to be determined by the High Court at a future date. In line with IAS37 - Provisions, Contingent Liabilities and Contingent Assets, no provision has been made in the Group for the possible obligations of these damages as these are, as yet, not reliably measurable.

24 Events after the year end date

In October 2020 the High Court found against NWGR's application to vary the remedial work to the alternative repair scheme at Beetham Tower, Manchester. An adjusting Post Balance Sheet Event ("PBSE") has been made to provide for the costs associated with the remedial solution (see note 22).

Company Statement of Financial Position

As at 30 September 2020

Company Statement of Cash Flows

For the year ended 30 September 2020

Company Statement of Changes in Equity

For the year ended 30 September 2020

Notes to the Company Financial Statements

For the year ended 30 September 2020

1 General information

The Company is a public company limited by shares, incorporated, registered and domiciled in England in the United Kingdom. The address of its registered office is 1 London Wall Place, London, EC2Y 5AU.

The Company's principal activity during the year was to operate as a holding company for a group operating a property rental and investment business.

2 Accounting policies

The financial statements of the Company are separate to those of the Group.

The accounting policies of the Company are consistent with those of the Group, which can be found in note 1 to the Group financial statements. As with the Group, during the year the Company adopted IFRS 16 - Leases.

The adoption of IFRS 16 has not had a quantitative impact upon the Company's financial statements.

Accounting policies specific to the Company are set out below.

Statement of compliance

The financial statements of the Company have been prepared in accordance with International Accounting Standards in conformity with the requirements of the Companies Act 2006 ("IFRS") and the applicable legal requirements of the Companies Act 2006.

Basis of preparation

These financial statements are prepared on the going concern basis, under the historical cost convention and in accordance with the Companies Act 2006 and applicable accounting standards in the United Kingdom. The functional and presentational currency is sterling.

Investments in subsidiary companies

Investments in subsidiary companies are carried at cost less any provision for impairment, which is reviewed on an annual basis.

Capital management

The capital managed by the Company consists of cash held across different bank accounts in several banking institutions. The Company's objectives when managing capital are to safeguard the Group's ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maximise the interest return on funds which have yet to be invested while ensuring there is enough free cash to meet day-to-day liabilities. In order to maintain or adjust the capital structure the Directors have the option to adjust the dividends paid to shareholders, return cash to shareholders, sell assets or delay purchase of individual assets. The Company monitors capital through cash and dividend forecasts which are prepared and reviewed on a quarterly basis. The Company had £2,435,758 of cash at the year end. The Directors intend to retain an amount for working capital at least equal to the next quarter's dividend payment.

Dividend distributions

Dividend distributions to the Company's shareholders is recognised as a liability in the Company's financial statements in the period in which the dividends are approved by the Company's Directors.

3 Results for the year

As permitted by Section 408 of the Companies Act 2006 the Company has elected not to present its own profit and loss account for the financial year. Ground Rents Income Fund plc reported a loss after tax for the financial year of £2,143,081 (2019: loss £1,313,946). Auditors' remuneration and the average number of Directors and their remuneration are set out in notes 3 and 4 of the Group financial statements.

4 Dividends

Details of the Company's dividends paid and proposed are set out in note 18 of the Group financial statements.

5 Investments in subsidiary companies

During the year, an impairment assessment of the investments held by the Company led to an impairment charge of £34,361 (2019: £324,894) being recorded.

The Directors consider that the carrying value of the investments is supported by their underlying net assets.

Details of the subsidiary undertakings of the Company at 30 September 2020, all of which are wholly owned and included in the financial statements, are given below.

The subsidiaries below are registered at the Company's registered office address, being 1 London Wall Place, London, EC2Y 5AU: