SLI.L Regulatory News (SLI)

STANDARD LIFE INVESTMENTS PROPERTY INCOME TRUST

ANNUAL FINANCIAL REPORT IN RESPECT OF THE YEAR ENDED 31 DECEMBER 2014

Strategic Report: Financial Highlights

· Net Asset Value total return of 23.2% for the year ended 31 December 2014.

· Share price increased by 11.9% over the year to 78.3p.

· Dividend yield of 5.9% based on year end share price of 78.3p.

· 12 properties purchased for £94.2m excluding costs and 4 properties sold for £27.0m excluding costs.

· £65.9m of new equity raised over the year at an average premium to Net Asset Value of 5.8%, increasing the number of shares in issue by 57.6%.

1 Calculated under International Financial Reporting Standards as adopted in the EU.

2 EPRA NAV represents the value of an entity's equity on a long-term basis. Some items, such as fair value of derivatives, are therefore excluded.

3 Calculated as bank borrowings less all cash as a percentage of the open market value of the property portfolio as at 31 December 2014.

4 Dividends paid during the 12 months to 31 December 2014.

5 The net income receivable for the period expressed as a percentage of the capital employed. Quarterly figures are compounded over the period to give the rate over twelve months.

6 source: IPD quarterly version of the monthly index funds (excludes cash).

7 The sum of capital growth and net income for the year expressed as a percentage of capital employed excluding cash.

* The percentage change in the net asset value or share price over a given time period with income reinvested.

** The European Public Real Estate Association (EPRA) is a common interest group, which aims to promote, develop and represent the European public real estate sector.

*** Calculated as Investment management fees, auditor's fees, directors' fees and other administration expenses divided by the average NAV for the year to 31 December 2014.

Strategic Report: Chairman's Statement

2014 has been a watershed year for the Company with the conclusion of the REIT conversion project, approved by shareholders in November 2014, and the significant increase in the net assets following successful fund raisings. Indeed the market capitalisation of the Company increased by 76% during the period to end the year at £191m with total assets increased to £278.7m. The share price rose by 11.9% and the net asset value per share ('NAV') increased by 15.3%. The NAV total return to shareholders was 23.2%. As a result of the solid performance of the Company, the Board was able to increase the quarterly dividend in May 2014 by 2.5%. Overall, performance was ahead of the most commonly accepted benchmarks.

Awards

I am delighted to report to shareholders that the Company won two awards in 2014 in recognition of the Company's strong investment performance track record. Both Investment Week and Investment Adviser 100 Club awarded the Company "Property Trust of the Year".

The Property Portfolio and Performance

The Investment Manager's report provides detailed information on the portfolio. At the end of the year, it was valued at £270.2m. Additionally, there was a positive cash balance of £5.4m. Total assets were £278.7m (2013: £191.6m). The Company's NAV at year end was 75.5p per share (2013: 65.5p), an uplift of 15.3% over the period. The table below sets out the components of the movement in the NAV.

The net income return on capital invested at year end was 7.5% and there were no material arrears of rent. On average, 99% of rents were received within 21 days of the relevant quarter date and voids are at 1.4% of the income stream. The IPD average void rate is reported as being 7.0%.

The most significant changes to the portfolio during the year were the sales of the largest asset for £16.1m, a logistics unit in Bolton let to Tesco, and three retail warehouses for £10.9m. The major acquisitions included a Grade A office in Farnborough for £14.9m, three logistics units in Derbyshire for £27.3m, a logistics and industrial investment in Rotherham for £14.6m, five industrial and logistics units for £23.7m and a mixed use retail and leisure investment in Glossop for £10.1m. Important asset management agreements were completed for Bourne House Staines and St James House Cheltenham. The Managers have been active in managing expiry risk and improving the quality of the rental income at attractive valuations. 2014 represented a very busy year with £94.2m of purchases and £27.0m of sales (excluding costs).

Shares and Share Price

At the year end, there were 244,216,165 shares in issue, an increase of 57.6% over the year. Our plans for the size of the Company are set out in the Strategic Overview.

The share price on 31 December 2014 was 78.3p, an uplift of 11.9% over the 12 month period, and represented a premium of 5.4% over NAV at the year end, after adjusting for the Q4 dividend.

Earnings and Dividends

During the year the Board increased the quarterly dividend by 2.5% to 1.161p per share reflecting a combination of lower interest costs, improving outlook for rents and lower void rates. The shares provided a dividend yield of 5.9% based upon the current annualised dividend of 4.644p per share and the share price at year end.

Management Expenses

As reported in the Prospectus and the Interim Report the Board negotiated a new tiered management fee structure that will improve the Company's ongoing charges ratio. For total assets above £200m the fee is now 0.7% and for total assets above £300m the fee reduces to 0.65%.

Loan to Value ratio

At 31 December 2014, the LTV ratio was 29.2%, which is within the parameter of up to 45% determined by the Board. Our loan agreement with RBS sets out an upper limit of 65% until December 2016, reducing to 60% for the remaining two years.

The Board and Corporate Governance

Following the retirement of the past chairman Paul Orchard Lisle, Robert Peto was elected as a director and he has a wealth of experience in UK commercial real estate. Following the conversion of the Company to a REIT, Shelagh Mason decided to retire at the year end. The Board would like to thank Shelagh for her excellent contribution to the Company since its formation in 2003.

The Board agreed to appoint Standard Life Investments as the Company's Alternative Investment Fund Manager ('AIFM'). The manager will not be increasing their fees for their additional regulatory responsibilities. However there will be additional expenses for the Company in the form of depository costs.

REIT Conversion

On 20 November 2014 shareholders approved the proposals for the Company to make the necessary changes to the Articles to become tax resident in the UK for the purposes of entering the UK REIT regime. Following notification being given to HMRC this change was effective from 1 January 2015.

Fund Raising

The Company published a Prospectus on 1 July 2014 seeking to issue up to 100m new shares via an Initial Placing and Offer for Subscription for up to 50m shares and a Placing Programme for up to a further 50m shares. On 28 July 2014 the Company announced that the first tranche had been fully subscribed with the issue of 50m new shares that raised £36.5m. Subsequently, under the Placing Programme the Company issued 7m shares on 22 September 2014 and 26.5m shares on 13 November 2014 raising a total of £25.3m. In each case the new shares were issued at a 5% premium to the prevailing NAV and the proceeds invested timeously into UK commercial real estate properties at attractive yields. The Company also raised a further £4.1m through tap issues in the first quarter of 2014.

In February 2015 the Company raised £25.5m through the issue of 16.5m shares, the balance of its Prospectus authority, and also 16.1m shares relating to the 10% disapplication of pre-emption rights authority approved by shareholders at last year's AGM.

Outlook

UK commercial real estate capital values are continuing to rise and rents are gathering further momentum. Investors are allocating more capital to the sector and are prepared to take more risk. I expect location to be particularly important for returns this year. Prime and good quality secondary assets in better locations are likely to provide the best opportunities in the strong economy I anticipate in 2015. My expectations for the future have to be tempered by the uncertainty of the outcome of the General Election in May of this year and the length of time that low interest rates will continue. Even so, I believe that real estate will remain a favoured asset class.

On the whole however, the Board is confident that the Company has a portfolio that is fit for purpose and that good investment management and asset management will produce further growth.

Richard Barfield

Chairman

31 March 2015

Strategic Report: Strategic Overview

Objective

The objective of the Company is to provide shareholders with an attractive level of income together with the prospect of income and capital growth.

Investment Policy and Business Model

The Board intends to achieve the investment objective by investing in a diversified portfolio of UK commercial properties. The majority of the portfolio will be invested in direct holdings within the three main commercial property sectors of retail, office and industrial, although the Company may also invest in other commercial property such as hotels, nursing homes and student housing. Investment in property development and investment in co-investment vehicles, where there is more than one investor, is permitted up to a maximum of 10% of the property portfolio.

In order to manage risk, without compromising flexibility, the Board applies the following restrictions to the property portfolio, in normal market conditions:

· No property will be greater by value than 15% of total assets.

· No tenant (excluding the Government) will be responsible for more than 20% of the Company's rent roll.

· Gearing, calculated as borrowings as a percentage of gross assets, will not exceed 65%. The Board's current intention is that the Company's loan to value ratio (calculated as borrowings less all cash as a proportion of property portfolio valuation) will not exceed 45%.

As part of its strategy, the Board has contractually delegated the management of the property portfolio, and other services, to Standard Life Investments (Corporate Funds) Limited ('Investment Manager').

Strategy

During the year, the Board reassessed its strategy, with the help of its Investment Manager and other advisers.

The Board's overall intention is to continue to distribute an attractive income return alongside growth in the NAV and to provide a good overall total return.

At a property level, it is intended that the Company remains primarily invested in the commercial sector, while keeping a watching brief on other classes such as student accommodation and care homes. The Company is principally invested in office, industrial and retail properties and intends to remain so. In all sectors, poor secondary and tertiary locations are regarded as high risk and will be avoided.

The Board's preference is to buy into good, but not necessarily prime locations, where it perceives there will be good continuing tenant demand, and to seek out properties where the asset management skills within the Investment Manager can be used to beneficial effect. The Board will continue to have very careful regard to tenant profiles.

In last year's Strategic Overview, the Board noted its intention to seek out opportunities for further growth in the Company and achieved this during 2014 by raising an additional £65.9m of capital through an initial placing and offer for subscription. Subsequent to the year end, a further £25.5m capital has been raised. The maintenance of a tax efficient structure has also been achieved by converting the Company to a UK REIT.

Retail Distribution

On 1 January 2014, the FCA introduced rules relating to the restrictions on the retail distribution of unregulated collective investment schemes and close substitutes (non-mainstream investment products). UK REITs are excluded from these restrictions.

As a result, the Company's shares are excluded securities under the new rules and the FCA's restrictions on retail distribution do not apply.

The Board

The Board currently consists of a non-executive Chairman and three non-executive Directors, with a range of property, investment, commercial and professional experience. There is also a commitment to achieve the proper levels of diversity. At 31 December 2014, the Board consisted of one female and three male Directors. The Company does not have any employees.

Key Performance Indicators

The Board meets quarterly and at each meeting reviews performance against a number of key measures:

· Property income and total return against the Quarterly Version of the Investment Property Databank Balanced Monthly Funds Index ('the Index').

The Index provides a benchmark for the performance of the Company's property portfolio and enables the Board to assess how the portfolio is performing relative to the market. A comparison is made of the Company's property returns against the Index over a variety of time periods (quarter, annual, three years and five years)

· Property voids

Property voids are unlet properties. The Board reviews the level of property voids within the Company's portfolio on a quarterly basis and compares the level to the market average, as measured by the Investment Property Databank. The Board seeks to ensure that proper priority is being given by the Investment Manager to replacing the Company's income.

· Rent collection dates

The Board assesses rent collection by reviewing the percentage of rents collected within 21 days of each quarter end.

· Net asset value total return

The net asset value total return reflects both the net asset value growth of the Company and also the dividends paid to shareholders. The Board regards this as the best overall measure of value delivered to shareholders. The Board assesses the net asset value total return of the Company over various time periods (quarter, annual, three years, five years) and compares the Company's returns to those of its peer group of listed, closed-ended property investment companies.

· Premium or discount of the share price to net asset value

The Board closely monitors the premium or discount of the share price to the net asset value and believes that a key driver to the level of the premium or discount is the Company's long term investment performance. However, there can be short term volatility in the premium or discount and the Board takes powers at each AGM to enable it to issue or buy back shares with a view to trying to limit this volatility.

· Dividend per share and dividend yield

A key objective of the Company is to provide an attractive, sustainable level of income to shareholders and the Board reviews, at each Board meeting, the level of dividend per share and the dividend yield, in conjunction with detailed financial forecasts, to ensure that this objective is being met and is sustainable.

The Board considers the performance measures both over various time periods and against similar funds.

A record of these measures are disclosed in the Financial Highlights, Chairman's Statement and Investment Manager's Report.

Principal Risks and Uncertainties

The Company's assets consist of direct investments in UK commercial property. Its principal risks are therefore related to the commercial property market in general, but also the particular circumstances of the properties in which it is invested, and their tenants. The Board and Investment Manager seek to mitigate these risks through a strong initial due diligence process, continual review of the portfolio and active asset management initiatives. All of the properties in the portfolio are insured, providing protection against risks to the properties and also protection in case of injury to third parties in relation to the properties.

The Board has also identified a number of other specific risks that are reviewed at each Board meeting. These are as follows:

· The Company and its objectives become unattractive to investors. This is mitigated through regular contact with shareholders, a regular review of share price performance and the level of the discount or premium at which the shares trade to net asset value and regular meetings with the Company's broker to discuss these points and address any issues that arise.

· Poor selection of new properties for investment. A comprehensive and documented initial due diligence process, which will filter out properties that do not fit required criteria, is carried out by the Investment Manager. Where appropriate, this is followed by detailed review and challenge by the Board prior to a decision being made to proceed with a purchase. This process is designed to mitigate the risk of poor property selection.

· Tenant failure or inability to let property. Due diligence work on potential tenants is undertaken before entering into new lease arrangements. In addition, tenants are kept under constant review through regular contact and various reports both from the managing agents and the Investment Manager's own reporting process. Contingency plans are put in place at units that have tenants that are believed to be in financial trouble. The Company subscribes to the Investment Property Databank Iris Report which updates the credit and risk ranking of the tenants and income stream, and compares it to the rest of the UK real estate market.

· Loss on financial instruments. The Company has entered into a number of interest rate swap arrangements. These swap instruments are valued and monitored on a monthly basis by the counterparty bank. The Investment Manager checks the valuation of the swap instruments internally to ensure they are accurate. In addition, the credit rating of the bank that the swaps are taken out with is assessed regularly.

Other risks faced by the Company include the following:

· Strategic - incorrect strategy, including sector and property allocation and use of gearing, could all lead to poor return for shareholders.

· Tax efficiency - the structure of the Company or changes to legislation could result in the Company no longer being a tax efficient investment vehicle for shareholders.

· Regulatory - breach of regulatory rules could lead to the suspension of the Company's Stock Exchange Listing, financial penalties or a qualified audit report.

· Financial - inadequate controls by the Investment Manager or third party service providers could lead to misappropriation of assets. Inappropriate accounting policies or failure to comply with accounting standards could lead to misreporting or breaches of regulations.

· Operational - failure of the Investment Manager's accounting systems or disruption to the Investment Manager's business, or that of third party service providers, could lead to an inability to provide accurate reporting and monitoring, leading to loss of shareholder confidence.

· Economic - inflation or deflation, economic recessions and movements in interest rates could affect property valuations and also bank borrowings.

The implementation of AIFMD during 2014 and the conversion of the Company to a UK REIT have introduced new regulatory risks to the Company in the form of ensuring compliance with the respective regulations. In relation to AIFMD, the Board has put in place a system of regular reporting from the AIFM and the depositary to ensure both are meeting their regulatory responsibilities in respect of the Company. In relation to UK REIT status, the Board has put in place a system of regular reporting to ensure that the requirements of the UK REIT regime are being adequately monitored and fully complied with.

The Board seeks to mitigate and manage all risks through continual review, policy setting and enforcement of contractual obligations. It also regularly monitors the investment environment and the management of the Company's property portfolio, levels of gearing and the overall structure of the Company.

Social, Community and Employee Responsibilities

The Company has no direct social, community or employee responsibilities. The Company has no employees and accordingly no requirement to separately report in this area as the management of the portfolio has been delegated to the Investment Manager. In light of the nature of the Company's business there are no relevant human rights issues and there is thus no requirement for a human rights policy. The Board does, however, closely monitor the policies of its suppliers to ensure that proper provision is in place.

Environmental Policy

The Investment Manager acquires and manages properties on behalf of the Company. It is recognised that these activities have both direct and indirect environmental impacts.

The Board has endorsed the Investment Manager's own environmental policy which is to work in partnership with contractors, suppliers, tenants and consultants to minimise those impacts, seeking continuous improvements in environmental performance and conducting regular reviews.

The Investment Manager's policy focuses on energy conservation, mitigating greenhouse gas ('GHG') emissions, maximising waste recycling and water conservation.

As an investment company, the Company's own direct environmental impact is minimal and GHG emissions are therefore negligible. Information on the GHG emissions in relation to the Company's real estate portfolio is disclosed in the Standard Life Investments annual Sustainable Real Estate Investment report, a copy of which can be obtained on request from the Investment Manager. The Company was awarded Green Star status from the Global Real Estate Sustainability Benchmark for 2014.

Bank Debt

The Company has a fully drawn down debt facility of £84m with RBS, expiring in December 2018. The maximum LTV under the facility is 65% (reducing to 60% after December 2016). The Company has taken out an interest rate swap over the full amount, with an all in cost of debt of 3.8%.

Approval of Strategic Report

The Strategic Report of the Company and its subsidiary, Standard Life Investments Property Holdings Limited, comprises the Financial Highlights, Chairman's Statement, Strategic Overview and Investment Manager's Report. The Strategic Report was approved by the Board on 31 March 2015 and signed on its behalf by:

Richard Barfield

Chairman

31 March 2015

Strategic Report: Investment Manager's Report

The economic fundamentals supporting the UK economy remain robust with a consensus of economists expecting growth of around 2.6% in 2015. Along with economic growth, business sentiment and consumer confidence remain at high levels. The UK commercial property sector has been a key beneficiary of these factors as total returns, as measured by the IPD Monthly Index, for the twelve months to end December reached 17.9%. Capital values grew by 11.8%, in the main still driven by yield compression as the sector continued to attract a large amount of capital from both foreign and domestic participants. Rental growth continued to improve on a quarterly basis at a broad level with rents expected to pick up further into the recovery. Rents rose by 3.6% p.a. in the twelve months to end December.

Within the sectors, there was a change in relative performance, with offices being knocked off the top spot, to be replaced by industrial. Total returns in the office sector remain buoyant at 22.2% in the twelve months to end December against 17.9% for All Property whilst industrial assets were marginally ahead of offices with a return of 22.6%. The retail sector continued to be the laggard with a total return of 13.1%.

The UK listed real estate equities sector remained positive over the year with the FTSE EPRA/NAREIT UK rising by 17.7%. The UK listed sector outperformed the FTSE All Share and FTSE 100 Indices which declined by 2.1% and 2.7% respectively over the same timeframe (all figures capital only). The UK listed real estate sector was relatively volatile over the fourth quarter although the underlying fundamentals for the sector remain robust.

Investment Outlook

A recovery is continuing to come through strongly in the All Property commercial real estate sector with prices maintaining reasonable growth and rents gathering further momentum. In the favourable environment of improving confidence, reducing void rates and falling bond yields, investors are allocating more capital to the sector and consequently, given the increased weight of capital, risk appetite is increasing. Our view remains that poorer quality secondary and tertiary centres remain unattractive in general although there will be opportunities for repositioning assets or generating reasonably good returns on a comparable basis from some poorer quality secondary assets. This is likely to involve a reasonable amount of hard work and effort from investors on the asset management side and the risk of an extended void period continues to be elevated for these types of assets. In terms of outlook, we expect positive total returns of around 7% per annum on average for UK real estate on a three year holding period due to the strong income component and modest further capital appreciation. The sector remains attractive from a fundamental point of view with strengthening economic drivers and a limited pipeline of future new developments. Rising interest rates are an emerging risk although there is a reasonable buffer in pricing to compensate if the market prices in a further acceleration of rate rises. The retail sector continues to face a series of headwinds that may hold back recovery in weaker locations due to oversupply and structural issues but the prospects for retail towards the South East and Central London are expected to improve further as economic recovery gains more traction. Opportunities are arising to purchase reasonable quality secondary buildings where these assets can be repositioned as prime. There is also likely to be a further rebound for secondary asset prices due to the elevated margin in pricing between prime and secondary which could reduce as risk appetite improves. We expect locational choices to be the defining characteristics contributing to returns over 2015. Prime, good quality and selective poorer quality secondary assets in stronger locations are likely to provide the best opportunities in the robust economic environment we anticipate over 2015.

Investment Strategy

The investment strategy remains focused on achieving the Company's objective of producing an attractive income return with the prospect of income and capital growth.

2014 was a year of growth for the Company. An important part of the growth strategy was to protect and enhance existing shareholders' interests. This was done by issuing shares at a reasonable premium to the then NAV, normally 5%, and minimising cash drag by only raising funds when we were confident the money could be deployed within a reasonable time period in attractive investments.

Even during times of growth it is important to manage existing assets, and we remained focussed on regearing leases and disposing of assets that had specific risk to the fund. More details of these can be found below.

Performance

During the year the NAV grew by 15.3% and the Board was able to increase the dividend in the first quarter by 2.5%. At the year end share price the dividend yield was 5.9%. The Board will continue to seek to pay a covered dividend.

The income yield on the portfolio has to be sufficient to maintain a covered dividend. The income yield from the Company's portfolio has been consistently higher than the more general market as recorded by the IPD monthly index.

Although income is a key focus for the Company, the NAV total return to investors is equally important, as is raising new equity at a reasonable premium to the then NAV so that purchase costs do not negatively impact existing shareholders. It is also important, when raising equity in a rising market, to try and avoid cash drag by raising too much at one time and not being able to invest it. The cash drag impacts both capital returns and also the ability to maintain a covered dividend.

Portfolio Valuation

The Company's investment portfolio was valued by Jones Lang La Salle on a quarterly basis throughout 2014. At the year end the portfolio was valued at £ 270.2m, and the Company held £5.4m of cash. This compares to £176.4m and £12.3m respectively as at end 2013.

Prior to the year end the Company had exchanged contracts for the sale of an office in Chelmsford for £3.5m (due to be completed in December 2015) and on a small office in Weybridge, the sale of which completed in January 2015. The Company had also exchanged contracts for the purchase of a retail warehouse asset in Preston for £15.8m which completed on 3 March 2015 following a further successful fund raising.

Lease Expiry Profile

The Company has an average unexpired lease term to the earliest of lease end or tenant break of 6.5 years. This compares to the IPD average of 7.4 years (excluding leases over 35 years). Early in the cycle we focussed on buying short term income as we have a good track record of renewing leases and removing breaks; indeed in 2014 only one tenant did not renew (and we already have solicitors instructed on a new lease for the space from another tenant). At the start of 2015 we have secured 54% of income at risk of expiry in the next 12 months, and have actively taken some space back to refurbish and relet at higher rents. We continue to meet with tenants to explore lease regears that will provide the Company with security of income.

Purchases

The purchase philosophy of the Company is to acquire assets that offer an attractive income return and have good medium or long term prospects for capital growth. During 2014 we generally bought slightly longer dated income as we found that provided more attractive prospects than the short let / active management stock we had previously targeted because the pricing arbitrage had shifted.

During the course of 2014, 12 properties were purchased totalling £94.2m excluding costs, and we exchanged on another for £15.8m excluding costs.

Cullen Sq Livingston Scotland: £3.6m, 10.5% yield - two highly specified logistics units let for just over 5 years to two good covenants.

Chester House Farnborough: £14.9m, 8.1% yield - a modern grade A office on an established business park let to BAE for a further 9 years.

Tetron 93,Tetron 141 Swadlincote and Denby 242 Derby: £27.3m, 7% yield - three modern logistics units let for terms certain of 3 ½ to 6 years purchased as a portfolio.

Symphony Rotherham: £14.6m, 7% yield - three industrial and logistics units on one site and let to the Symphony Group for 20 years with a tenant break in year 15 and fixed uplifts every five years.

Howard Town Retail Park Glossop: £10.1m, 6.6% yield - the property forms a mixed use retail and leisure development adjacent to the town centre. The main tenants are M&S Simply Food, Weatherspoons and Travelodge, all on long leases.

Rio Portfolio: £23.7m, 7.3% yield - 5 industrial and logistics units located in Milton Keynes (x2), Cheltenham, Oldham, and Birmingham. The units are well located and let with an average income profile of over 5 years duration.

DSG Preston: £15.8m, 7% yield - completed March 2015 - stand alone modern retail warehouse located adjacent to the dominant park and opposite a major foodstore, and let to DSG for a further 16 years with five yearly fixed increases in rent.

Sales

The Company undertook several sales to reduce specific expiry risk and to capture profit.

Tesco Logistics Unit Bolton: £16.1m, 7.25% yield - a large logistics unit with a lease expiry in 2016 and the Company's largest rental income - sold early in 2014 to avoid expiry risk and capture profit.

Halfords Paisley, Poundland Wymondham, and Clough Rd Retail Park Hull - portfolio of three retail warehouses sold for £10.9m. The investments had poor growth prospects and some voids, so were sold in early 2014 to improve portfolio quality and return expectations.

Chancellors Place Chelmsford: £3.5m, 13.5% yield - over rented offices with lease expiries in December 2015 and requirement for a full refurbishment. The property was sold to a residential developer with a delayed completion, the Company receiving all rent to lease end in Dec 2015.

De Ville Court Weybridge: £3.2m, 8.5% yield - over rented office with a lease expiry in March 2015 and tenant will be vacating, with capital expenditure required. Sold to a residential developer (Completed January 2015).

Asset management

Asset management is central to how we run the portfolio. We like to meet with our tenants and make sure that the property we own meets occupiers' needs. During the course of 2014 we completed five new lettings and nine lease regears. As a result we ended the year with voids of just 1.4%, well below the IPD benchmark level 7.0%.

It is noticeable that in many parts of the UK the supply of good quality accommodation is low, with increasing tenant demand. This is leading to rental growth and in some cases best bids being called. In this environment it is important to understand tenant needs not just to maintain income security, but also to add value through lease regears and taking surrenders to refurbish space and upgrade it.

Jason Baggaley

Fund Manager

Statement of Directors' Responsibilities

The Directors are responsible for preparing the Annual Report and the Group financial statements for each year which give a true and fair view, in accordance with the applicable Guernsey law and those International Financial Reporting Standards ("IFRSs") as adopted by the European Union.

The Directors are required to prepare Group financial statements for each financial year which give a true and fair view of the state of affairs of the Group and of the financial performance and cash flows of the Group for that period. In preparing those Financial Statements, the Directors are required to:

· select suitable accounting policies in accordance with IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors and then apply them consistently;

· make judgement and estimates that are reasonable and prudent;

· present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;

· provide additional disclosures when compliance with the specific requirements in IFRSs as adopted by the European Union is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Group's financial position and financial performance;

· state that the Group has complied with IFRSs as adopted by the European Union, subject to any material departures disclosed and explained in the Group financial statements; and

· prepare the Group Financial Statements on a going concern basis unless it is inappropriate to presume that the Group will continue in business.

The Directors confirm that they have complied with the above requirements in preparing the Financial Statements.

The Directors are responsible for keeping adequate accounting records, that are sufficient to show and explain the Group's transactions and disclose with reasonable accuracy at any time, the financial position of the Group and to enable them to ensure that the Financial Statements comply with The Companies (Guernsey) Law, 2008. They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud, error and non compliance with law and regulations.

The maintenance and integrity of the Company's website is the responsibility of the Directors; the work carried out by the auditors does not involve considerations of these matters and, accordingly, the auditors accept no responsibility for any change that may have occurred to the Financial Statements since they were initially presented on the website. Legislation in Guernsey governing the preparation and dissemination of the financial statements may differ from legislation in other jurisdictions.

Responsibility Statement of the Directors' in respect of the Consolidated Annual Report

Statement under the Disclosure and Transparency Rules

The Directors each confirm to the best of their knowledge that:

· the Consolidated Financial Statements, prepared in accordance with IFRSs as adopted by European Union, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group; and

· the management report, which is incorporated into the Strategic Report, Directors' Report and Investment Manager's Report, includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that they face.

Statement under the UK Corporate Governance Code

The Directors each confirm to the best of their knowledge and belief that:

· the Annual Report and Consolidated Financial Statements taken as a whole are fair, balanced and understandable and provide the information necessary to assess the Group's performance, business model and strategy.

Approved by the Board on

31 March 2015.

Richard Barfield

Chairman

All enquiries to:

The Company Secretary

Northern Trust International Fund Administration Services (Guernsey) Limited

Trafalgar Court

Les Banques

St Peter Port

Guernsey

GY1 3Ql

Tel: 01481 745001

Fax: 01481 745051

Gordon Humphries

Standard Life Investments Limited

Tel: 0131 245 2735

Jason Baggaley

Standard Life Investments Limited

Tel: 0131 245 2833

AUDITED FINANCIAL STATEMENTS

Consolidated Statement of Comprehensive Income

for the year ended 31 December 2014

All items in the above Consolidated Statement of Comprehensive Income derive from continuing operations.

Consolidated Balance Sheet

as at 31 December 2014

Approved by the Board of Directors on 31 March 2015.

Richard Barfield

Chairman

Consolidated Statement of Changes in Equity

for the year ended 31 December 2014

Consolidated Statement of Changes in Equity

for the year ended 31 December 2013

Consolidated Cash Flow Statement

for the year ended 31 December 2014

Standard Life Investments Property Income Trust Limited

Notes to the Consolidated Financial Statements

for the year ended 31 December 2014

1 GENERAL INFORMATION

Standard Life Investments Property Income Trust Limited ("the Company") and its subsidiaries (together the "Group") carries on the business of property investment through a portfolio of freehold and leasehold investment properties located in the United Kingdom. The Company is a limited liability company incorporated and domiciled in Guernsey, Channel Islands. The Company has its listing on the London Stock Exchange.

The address of the registered office is Trafalgar Court, Les Banques, St Peter Port, Guernsey.

These audited Consolidated Financial Statements were approved for issue by the Board of Directors on 31 March 2015.

2 ACCOUNTING POLICIES

2.1 Basis of preparation

The audited Consolidated Financial Statements of the Group have been prepared in accordance with and comply with International Financial Reporting Standards as adopted by the European Union ("IFRS"), and all applicable requirements of The Companies (Guernsey) Law, 2008. The audited Consolidated Financial Statements of the Group have been prepared under the historical cost convention as modified by the measurement of investment properties and derivative financial instruments at fair value. The consolidated financial statements are presented in pound sterling and all values are not rounded except when otherwise indicated.

Changes in accounting policy and disclosure

The accounting policies adopted are consistent with those of the previous financial year. There have been other new and amended standards issued or have come into effect from 1 January 2014 but either these were not applicable or did not have a material impact on the annual consolidated financial statements of the Group and hence not discussed.

The following new and amended standards and interpretations in issue are not yet effective and have not been adopted by the Group:

· Amendment to IAS 19 regarding defined benefit plans

· Annual improvements to IFRSs 2010-2012 Cycle

· Annual Improvements to IFRSs 2011-2013 Cycle

The directors do not expect the adoption of these EU adopted standards and interpretations to have a material impact on the consolidated or company financial statements in the period of initial application.

2.2 Significant accounting judgements, estimates and assumptions

The preparation of the Group's financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the disclosure of contingent liabilities, at the reporting date. However, uncertainty about these assumptions and estimates could result in outcomes that could require a material adjustment to the carrying amount of the asset or liability affected in the future periods. The most significant estimates and judgements are set out below.

Judgements other than estimates

Fair value of investment properties

Investment properties are stated at fair value as at the Balance Sheet date. Gains or losses arising from changes in fair values are included in the Consolidated Statement of Comprehensive Income in the year in which they arise. The fair value of investment properties is determined by independent real estate valuation experts using recognised valuation techniques. The fair values are determined based on recent real estate transactions with similar characteristics and locations to those of the Group's assets.

The determination of the fair value of investment properties requires the use of valuation models which use a number of judgements and assumptions. The only model used was the income capitalisation method. Under the income capitalisation method, a property's fair value is judged based on the normalised net operating income generated by the property, which is divided by the capitalisation rate (discounted by the investor's rate of return). Under the income capitalisation method, over (above market rent) and under-rent situations are separately capitalised (discounted).

The sensitivity analysis in note 7 details the decrease in the valuation of investment properties if equivalent yield increases by 25 basis points or rental rates (ERV) decreases by 5%.

Fair value of financial instruments

When the fair value of financial assets and financial liabilities recorded in the Consolidated Balance Sheet cannot be derived from active markets, they are determined using a variety of valuation techniques that include the use of mathematical models. The input to these models are taken from observable markets where possible, but where this is not feasible, a degree of judgement is required in establishing fair value. The judgements include considerations of liquidity and model inputs such as credit risk (both own and counterparty's), correlation and volatility. Changes in assumptions about these factors could affect the reported fair value of financial instruments. The models are calibrated regularly and tested for validity using prices from any observable current market transactions in the same instrument (without modification or repackaging) or based on any available observable market data.

The valuation of interest rate swaps used in the Balance Sheet is provided by The Royal Bank of Scotland. These values are validated by comparison to internally generated valuations prepared using the fair value principles outlined above.

The sensitivity analysis in note 3 details the increase and decrease in the valuation of interest rate swaps if market rate interest rates had been 100 basis points higher and 100 basis points lower.

Estimates

Deferred Tax Asset

The Group recognised a deferred tax asset for the year ending 31 December 2013 as detailed in note 6. As a result of the Group converting to a UK REIT on 1 January 2015 the deferred tax asset was fully utilised at the Balance Sheet date. The deferred tax asset utilisation is recognised as an expense in the Statement of Comprehensive Income for the year ended 31 December 2014. See note 6 for further details.

2.3 Summary of significant accounting policies

A Basis of consolidation

The audited consolidated financial statements comprise the financial statements of Standard Life Investments Property Income Trust Limited and its only material wholly owned subsidiary undertaking, Standard Life Investments Property Holdings Limited, a company with limited liability incorporated and domiciled in Guernsey, Channel Islands.

During the year the Group, through its subsidiary Standard Life Investments Property Holdings Limited, acquired two wholly owned subsidiaries as detailed in note 9, both of which are not considered as being material as at the Balance Sheet date.

Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement with subsidiaries and has the ability to affect those returns through its power over the subsidiary. Specifically, the Group controls a subsidiary if, and only if, it has:

- Power over the subsidiary (i.e., existing rights that give it the current ability to direct the relevant activities of the subsidiary) - Exposure, or rights, to variable returns from its involvement with the subsidiary - The ability to use its power over the subsidiary to affect its returns

The Group assesses whether or not it controls a subsidiary if facts and circumstances indicate that there are changes to one or more of the three elements of control. Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary.

Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated statement of other comprehensive income from the date the Group gains control until the date when the Group ceases to control the subsidiary.

The financial statements of the subsidiaries are prepared for the same reporting period as the parent company, using consistent accounting policies. All intra-group balances, transactions and unrealised gains and losses resulting from intra-group transactions are eliminated in full.

B Functional and presentation currency

Items included in the financial statements of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates ("the functional currency"). The consolidated financial statements are presented in pound sterling, which is also the Company's functional currency.

C Revenue recognition

Revenue is recognised as follows;

i) Bank interest

Bank interest income is recognised on an accruals basis.

ii) Rental income

Rental income from operating leases is net of sales taxes and value added tax ("VAT") recognised on a straight line basis over the lease term for lease agreements with stepped rent increases. The initial direct costs incurred in negotiating and arranging an operating lease are recognised as an expense over the lease term on the same basis as the lease income. The cost of any lease incentives provided are recognised over the lease term, on a straight line basis as a reduction of rental income. The resulting asset is reflected as a receivable in the Consolidated Balance Sheet. The valuation of investment properties is reduced by the total of the unamortised lease incentive balances. Any remaining lease incentive balances in respect of properties disposed of are included in the calculation of the profit or loss arising at disposal.

Contingent rents, being those payments that are not fixed at the inception of the lease, for example increases arising on rent reviews, are recorded as income in periods when they are earned. Rent reviews which remain outstanding at the year end are recognised as income, based on estimates, when it is reasonable to assume that they will be received.

The surrender premiums received for the year ended 2014 were £38,469 (2013: £nil) as detailed in the Statement of Comprehensive Income and related to two tenant breaks during the year.

iii) Property disposals

Where revenue is obtained by the sale of properties, it is recognised when the significant risks and returns have been transferred to the buyer. This will normally take place on exchange of contracts unless there are significant conditions attached. For conditional exchanges, sales are recognised when these conditions are satisfied.

D Expenditure

All expenses are accounted for on an accruals basis. The investment management and administration fees, finance and all other revenue expenses are charged through the Consolidated Statement of Comprehensive Income as and when incurred. The Group also incurs capital expenditure which can result in movements in the capital value of the investment properties. The movements in capital expenditure are reflected in the Statement of Comprehensive Income as a valuation gain/(loss). The Group had no properties during the year that did not earn any income during the 12 months to 31 December 2014 (2013: no non-income producing properties).

E Taxation

i) Taxes

The Group is subject to income tax in the United Kingdom and is exempt from capital gains tax. Significant judgement is required to determine the total provision for current and deferred taxes.

The Group recognises liabilities for current taxes based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income and deferred tax provisions in the period in which the determination is made. Deferred tax assets and liabilities are recognised on a net basis to the extent they relate to the same fiscal unity and fall due in approximately the same period.

ii) Current income tax

Current income tax assets and liabilities are measured at the amount expected to be recovered from or paid to taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the reporting date. Current income tax relating to items recognised directly in equity is recognised in equity and not in the income statement. Positions taken in tax returns with respect to situations in which applicable tax regulations are subject to interpretation are reviewed periodically and provisions are established where appropriate.

iii) Deferred income tax

Deferred income tax is provided using the liability method on all temporary differences at the reporting date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes, with the following exceptions:

· Where the temporary difference arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination that, at the time of the transaction, affects neither accounting nor taxable profit or loss.

· In respect of taxable temporary differences associated with investments in subsidiaries where the timing of the reversal of the temporary differences can be controlled by the parent, and it is probable that the temporary differences will not reverse in the foreseeable future.

Deferred income tax assets are recognised only to the extent that it is probable that taxable profit will be available against which deductible temporary differences, carried forward tax credits or tax losses can be utilised.

The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities. In determining the expected manner of realisation of an investment property measured at fair value a rebuttable presumption exists that its carrying amount will be recovered through sale. For more details on the judgements used to determine the deferred tax asset please see note 6.

Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date. Deferred income tax relating to items recognised directly in equity is recognised in equity and not in profit or loss. Deferred tax items are recognised in correlation to the underlying transaction either in other comprehensive income or directly in equity.

Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set off current tax assets against current income tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority.

F Investment properties

Investment properties comprise completed property and property under construction or re-development that is held to earn rentals or for capital appreciation or both. Property held under a lease is classified as investment property when the definition of an investment property is met.

Investment properties are measured initially at cost including transaction costs. Transaction costs include transfer taxes, professional fees for legal services and initial leasing commissions to bring the property to the condition necessary for it to be capable of operating. The carrying amount also includes the cost of replacing part of an existing investment property at the time that cost is incurred if the recognition criteria are met.

Subsequent to initial recognition, investment properties are stated at fair value. Fair value is based upon the market valuation of the properties as provided by the independent valuers as described in note 2.2. Gains or losses arising from changes in the fair values are included in the Consolidated Statement of Comprehensive Income in the year in which they arise. For the purposes of these financial statements, in order to avoid double counting, the assessed fair value is:

i) Reduced by the carrying amount of any accrued income resulting from the spreading of lease incentives and/or minimum lease payments.

ii) Increased by the carrying amount of any liability to the superior leaseholder or freeholder that has been recognised in the Balance Sheet as a finance lease obligation.

Acquisitions of investment properties are considered to have taken place on exchange of contracts unless there are significant conditions attached. For conditional exchanges acquisitions are recognised when these conditions are satisfied.

Investment properties are derecognised when it has been disposed of or permanently withdrawn from use and no future economic benefit is expected from its disposal. Any gains or losses on the retirement or disposal of investment properties are recognised in the Consolidated Statement of Comprehensive Income in the year of retirement or disposal.

Gains or losses on the disposal of investment properties are determined as the difference between net disposal proceeds and the carrying value of the asset in the previous full period financial statements.

G Non-current assets held for sale

Non-current assets (and disposal groups) classified as held for sale are measured at the lower of carrying amount and fair value less costs to sell.

Non-current assets and disposal groups are classified as held for sale if their carrying amount will be recovered through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset (or disposal group) is available for immediate sale in its present condition. Management must be committed to the sale which should be expected to qualify for recognition as a completed sale within one year from the date of classification.

When the Group is committed to a sale plan involving loss of control of a subsidiary, all of the assets and liabilities of that subsidiary are classified as held for sale when the criteria described above are met, regardless of whether the Group will retain a non-controlling interest in its former subsidiary after the sale.

H Trade and other receivables

Trade receivables are recognised and carried at the lower of their original invoiced value and recoverable amount. Where the time value of money is material, receivables are carried at amortised cost. A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments (more than 30 days overdue) are considered indicators that the trade receivable is impaired. The amount of the provision is the difference between the asset's carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The carrying amount of the asset is reduced through use of an allowance account, and the amount of the loss is recognised in the Consolidated Statement of Comprehensive Income. When a trade receivable is uncollectible, it is written off against the allowance account for trade receivables. Subsequent recoveries of amounts previously written off are credited in the Consolidated Statement of Comprehensive Income.

I Cash and cash equivalents

Cash and cash equivalents are defined as cash in hand, demand deposits, and other short-term highly liquid investments readily convertible within three months or less to known amounts of cash and subject to insignificant risk of changes in value.

J Borrowings and interest expense

All loans and borrowings are initially recognised at the fair value of the consideration received, less issue costs where applicable. After initial recognition, all interest-bearing loans and borrowings are subsequently measured at amortised cost. Amortised cost is calculated by taking into account any discount or premium on settlement. Borrowing costs are recognised within finance costs in the Consolidated Statement of Comprehensive Income as incurred.

K Accounting for derivative financial instruments and hedging activities

Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured at their fair value. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group documents at the inception of the transaction the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedging transactions. The Group also documents its assessment both at hedge inception and on an ongoing basis of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are recognised in other comprehensive income in the Consolidated Statement of Comprehensive Income. The gains or losses relating to the ineffective portion are recognised in operating profit in the Consolidated Statement of Comprehensive Income.

Amounts taken to equity are transferred to profit or loss when the hedged transaction affects profit or loss, such as when the hedged financial income or financial expenses is recognised.

When a derivative is held as an economic hedge for a period beyond 12 months after the end of the reporting period, the derivative is classified as non-current consistent with the classification of the underlying item. A derivative instrument that is a designated and effective hedged instrument is classified consistent with the classification of the underlying hedged item.

L Service charge

The Company has appointed a managing agent to deal with the service charge at the investment properties and the Company is acting as an agent for the service charge and not a principal. As a result the Group recognises void expenses in the Consolidated Statement of Comprehensive Income. The table in note 21 is a summary of the service charge during the year. It shows the amount the service charge has cost the tenants for the 12 months to 31 December 2014, the amount the tenants have been billed based on the service charge budget and the amount the Group has paid in relation to void units over the year. The table also shows the balancing service charge that is due back to the tenants as at the Balance Sheet date.

M Other financial liabilities

Trade and other payables are recognised and carried at invoiced value as they are considered to have payment terms of 30 days or less and are not interest bearing. The balance of trade and other payables are considered to meet the definition of an accrual and have been expensed through the income statement or Balance Sheet depending on classification. VAT payable at the Balance Sheet date will be settled within 31 days of the Balance Sheet date with Her Majesty's Revenue and Customs ("HMRC") and deferred rental income is rent that has been billed to tenants but relates to the period after the Balance Sheet date. Rent deposits recognised in note 12 are those that are due within one year as a result of upcoming tenant expiries.

3 FINANCIAL RISK MANAGEMENT

The Group's principal financial liabilities, other than derivatives, are loans and borrowings. The main purpose of the Group's loans and borrowings is to finance the acquisition and development of the Group's property portfolio. The Group has rent and other receivables, trade and other payables and cash and short-term deposits that arise directly from its operations.

The Group is exposed to market risk (including interest rate risk and real estate risk), credit risk, capital risk and liquidity risk. The Group is not exposed to currency risk or price risk. The Group is engaged in a single segment of business, being property investment in one geographical area, the United Kingdom. Therefore the Group only engages in one form of currency being pound sterling. The Group currently invests in direct non-listed property and is therefore not exposed to price risk.

The Board of Directors reviews and agrees policies for managing each of these risks which are summarised below.

Market risk

Market risk is the risk that the fair values of financial instruments will fluctuate because of changes in market prices. The financial instruments held by the Group that are affected by market risk are principally the derivative financial instruments.

i) Interest Rate risk

As described below the Group invests cash balances with RBS and Citibank. These balances expose the Group to cash flow interest rate risk as the Group's income and operating cash flows will be affected by movements in the market rate of interest. There is considered to be no fair value interest rate risk in regard to these balances.

The bank borrowings as described in note 13 also expose the Group to cash flow interest rate risk. The Group's policy is to manage its cash flow interest rate risk using interest rate swaps, in which the Group has agreed to exchange the difference between fixed and floating interest amounts based on a notional principal amount (see note 14). The Group has floating rate borrowings of £72,000,000 and £12,432,692, all of which has been fixed via interest rate swaps.

The bank borrowings are carried at amortised cost and the Group considers this to be a close approximation to fair value. The fair value of the bank borrowings is affected by changes in the market interest rate. The fair value of the interest rate swaps is exposed to changes in the market interest rate as their fair value is calculated as the present value of the estimated future cash flows under the agreements. The accounting policy for recognising the fair value movements in the interest rate swaps is described in note 2.3.

Trade and other receivables and trade and other payables are interest free and have settlement dates within one year and therefore are not considered to present a fair value interest rate risk.

The following tables set out the carrying amount of the Group's financial instruments excluding the amortisation of borrowing costs as outlined in note 5. Bank borrowings have been fixed due to interest rate swaps and are detailed further in note 14:

At 31 December 2014, if market rate interest rates had been 100 basis points higher with all other variables held constant, the profit for the year would have been £182,269 higher (2013: £118,666 higher profit) as a result of the higher interest income on cash and cash equivalents. Other Comprehensive Income and the Capital Reserve would have been £2,313,008 higher (2013: £3,737,770 higher) as a result of an increase in the fair value of the derivative designated as a cash flow hedge of floating rate borrowings.

At 31 December 2014, if market rate interest rates had been 100 basis points lower with all other variables held constant, the profit for the year would have been £127,268 lower (2013: £127,400 lower profit) as a result of the lower interest income on cash and cash equivalents. Other Comprehensive Income and the Capital Reserve would have been £3,254,898 lower (2013: £3,921,801 lower) as a result of a decrease in the fair value of the derivative designated as a cash flow hedge of floating rate borrowings.

ii) Real estate risk

The Group has identified the following risks associated with the real estate portfolio:

a) The cost of the development schemes may increase if there are delays in the planning process. The Group uses advisers who are experts in the specific planning requirements in the scheme's location in order to reduce the risks that may arise in the planning process.

b) A major tenant may become insolvent causing a significant loss of rental income and a reduction in the value of the associated property (see also credit risk below). To reduce this risk, the Group reviews the financial status of all prospective tenants and decides on the appropriate level of security required via rental deposits or guarantees.

c) The exposure of the fair values of the portfolio to market and occupier fundamentals.

The Group aims to manage such risks by taking an active approach to asset management (working with tenants to extend leases and minimise voids), capturing profit (selling when the property has delivered a return to the Group that the Group believes has been maximised and the proceeds can be reinvested into more attractive opportunities) and identifying new investments (generally at yields of 8% plus that are accretive to the revenue account and where the Group believes there will be greater investment demand in the medium term).

Credit risk

Credit risk is the risk that a counterparty will be unable to meet a commitment that it has entered into with the Group. In the event of default by an occupational tenant, the Group will suffer a rental income shortfall and incur additional related costs. The Investment Manager regularly reviews reports produced by Dun and Bradstreet and other sources, including the IPD IRIS report, to be able to assess the credit worthiness of the Group's tenants and aims to ensure that there are no excessive concentrations of credit risk and that the impact of default by a tenant is minimised. In addition to this, the terms of the Group's bank borrowings require that the largest tenant accounts for less than 20% of the Group's total rental income, that the five largest tenants account for less than 50% of the Group's total rental income and that the ten largest tenants account for less than 75% of the Group's total rental income. The maximum credit risk from the tenant arrears of the Group at the financial year end was £1,738,063 (2013: £410,679) as detailed in note 10.

With respect to credit risk arising from other financial assets of the Group, which comprise cash and cash equivalents, the Group's exposure to credit risk arises from default of the counterparty bank with a maximum exposure equal to the carrying value of these instruments. As at 31 December 2014 £4,634,184 (2013: £11,669,292) was placed on deposit with The Royal Bank of Scotland plc ("RBS") and £764,911 (2013: £634,018) was held with Citibank. The credit risk associated with the cash deposits placed with RBS is mitigated by virtue of the Group having a right to off-set the balance deposited against the amount borrowed from RBS should RBS be unable to return the deposits for any reason. Citibank is rated A-2 Negative by Standard & Poor's and P-2 Stable by Moody's, as at the Balance Sheet date.

Liquidity risk

Liquidity risk is the risk that the Group will encounter difficulties in realising assets or otherwise raising funds to meet financial commitments. The investment properties in which the Group invests are not traded in an organised public market and may be illiquid. As a result, the Group may not be able to liquidate its investments in these properties quickly at an amount close to their fair value in order to meet its liquidity requirements. The following table summarises the maturity profile of the Group's financial liabilities based on contractual undiscounted payments.

Year ended 31 December 2014

Year ended 31 December 2013

The disclosed amount for interest rate swaps in the above table are the estimated net undiscounted cash flows.

The Group's liquidity position is regularly monitored by management and is reviewed quarterly by the Board of Directors.

Capital risk

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 maintain an optimal capital structure to reduce the cost of capital.

In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares, increase or decrease borrowings or sell assets to reduce debt.

The Group monitors capital on the basis of the gearing ratio. This ratio is calculated as net debt divided by total capital. Net debt is calculated as total borrowings less cash and cash equivalents. Total capital is calculated as equity, as shown in the Consolidated Balance Sheet, plus net debt.

The gearing ratios at 31 December 2014 and at 31 December 2013 were as follows:

Gearing, calculated as borrowings as a percentage of gross assets at 31 December 2014 was 31% and must not exceed 65%. The Board's current intention is that the Company's loan to value ratio (calculated as borrowings less all cash as a proportion of the property portfolio valuation) will not exceed 45%.

Fair values

Set out below is a comparison by class of the carrying amounts and fair value of the Group's financial instruments that are carried in the financial statements.

Carrying Amount Fair Value

The fair value of the financial assets and liabilities are included at an estimate of the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. The following methods and assumptions were used to estimate the fair value:

- Cash and cash equivalents, trade and other receivables are the same as fair value due to the short-term maturities of these instruments.

- The fair value of bank borrowings is estimated by discounting future cash flows using rates currently available for debt on similar terms and remaining maturities. The fair value approximates their carrying values gross of unamortised transaction costs. This is considered as being valued at level 2 of the fair value hierarchy and has not changed level since 31 December 2013.

- The fair value of the interest rate swap contract is estimated by discounting expected future cash flows using current market interest rates and yield curve over the remaining term of the instrument. This is considered as being valued at level 2 of the fair value hierarchy and has not changed level since 31 December 2013. The definition of the valuation techniques are explained in the significant accounting judgements, estimates and assumptions in note 2.2.

The following table shows an analysis of the fair values of financial instruments recognised in the Balance Sheet by the level of the fair value hierarchy*:

*Explanation of the fair value hierarchy:

Level 1 - Quoted (unadjusted) market prices in active markets for identical assets or liabilities.

Level 2 - Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable.

Level 3 - Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable.

4 FEES

Investment management fees

On 19 December 2003 Standard Life Investments (Corporate Funds) Limited ("the Investment Manager") was appointed as Investment Manager to manage the property assets of the Group. A new Investment Management Agreement ("IMA") was entered into on 7 July 2014, appointing the Investment Manager as the AIFM ("Alternative Investment Fund Manager").

Under the terms of the IMA dated 19 December 2003, the Investment Manager was entitled to receive a fee at the annual rate of 0.85% of the total assets, payable quarterly in arrears except where cash balances exceed 10% of the total assets. The fee applicable to the amount of cash exceeding 10% of total assets was altered to be 0.20% per annum, payable quarterly in arrears. The Investment Manager also agreed to reduce its charge to 0.75% of the total assets of the Group until such time as the net asset value per share returns to the launch level of 97p. This was applicable from the quarter ending 31 December 2008 onwards and did not affect the reduced fee of 0.20% on cash holdings above 10% of total assets.

Under the terms of the IMA dated 7 July 2014, the above fee arrangements apply up to 31 July 2014. From 1 August 2014, the fee was changed to 0.75% of total assets up to £200 million; 0.70% of total assets between £200 million and £300 million; and 0.65% of total assets in excess of £300 million. The total fees charged for the year ended 31 December 2014 amounted to £1,690,233 (year ended 31 December 2013: £1,327,746). The amount due and payable at the year end amounted to £500,165 excluding VAT (year ended 31 December 2013: £347,343 excluding VAT).

Administration, secretarial and registrar fees

On 19 December 2003 Northern Trust International Fund Administration Services (Guernsey) Limited ("Northern Trust") was appointed administrator, secretary and registrar to the Group. Northern Trust is entitled to an annual fee, payable quarterly in arrears, of £65,000. Northern Trust is also entitled to reimbursement of reasonable out of pocket expenses. Total fees and expenses charged for the year ended 31 December 2014 amounted to £82,927 (2013: £80,899). The amount due and payable at the year end amounted to £nil (2013: £nil).

Valuer's fee

On 4 December 2007, Jones Lang LaSalle ("the Valuer"), independent international real estate consultants, was appointed as valuer in respect of the assets comprising the property portfolio. The Valuer is entitled to an annual fee of 0.017% of the average portfolio value calculated over the preceding quarter and a start up fee of 0.0225% (with a minimum fee of £2,500) of the value of each property added to the portfolio. The total valuation fees charged for the year ended 31 December 2014 amounted to £56,542 (2013: £30,260) of which minimum fees of £2,500 per property (2013: £2,500) were incurred due for new properties added to the portfolio. The amount due and payable at the year end amounted to £10,590 excluding VAT (2013: £7,071 excluding VAT).

Auditor's fee

At the year end date Ernst & Young LLP continued as independent auditor of the Group. The auditor's fees for the year ended 31 December 2014 amounted to £46,513 (2013: £45,800) and relate to audit services provided for the 2014 financial year. Ernst & Young LLP also provided non-audit services in respect of advice relating to the potential consequences of REIT conversion for the company in 2014 of £94,000 (2013: £6,000) recognised as an expense in the Consolidated Statement of Comprehensive Income. Ernst & Young LLP also carried out due diligence work for the Group in 2014 recognised as a valuation loss on investment properties in the Consolidated Statement of Comprehensive Income totalling £32,000 (2013: £nil). Total non-audit fees incurred up to the Balance Sheet date amounted to £126,000 (2013: £6,000). A competitive tender process was carried out for legal and tax advice and other third party services in connection with the REIT conversion and fund raising projects.

5 FINANCE INCOME AND COSTS

6 TAXATION

Current income tax

The major components of income tax expense for the years ended 31 December are:

A reconciliation between the tax charge / (credit) and the product of accounting profit multiplied by the applicable tax rate for the year ended 31 December 2014 and 2013 is, as follows:

The Group has available deferred tax assets of £2,075,946 (2013: £2,954,557) due to tax losses which arose in Guernsey that are available for offset against future taxable profits of the Company in which the losses arose. The deferred tax asset of £587,315 recognised at the year ended 31 December 2013 has been utilised in calculation of these losses.

The Company converted from a Guernsey Investment Company to a Real Estate Investment Trust (REIT) on 1 January 2015. As a result, tax losses of the Guernsey Investment Company can no longer be utilised.

The Company and its subsidiary have obtained exempt company status in Guernsey so that they are exempt from Guernsey taxation on income arising outside Guernsey and bank interest receivable in Guernsey. The Board intend to conduct the Group's affairs such that the Company and its subsidiary continue to remain eligible for exemption.

7 INVESTMENT PROPERTIES

*Lease incentives incentives totalling £1,834,473 are split between non current assets of £2,436,976 and current liabilities of £602,503 (note 12).

The valuations were performed by Jones Lang Lasalle, an accredited independent valuer with a recognised and relevant professional qualification and recent experience of the location and category of the investment properties being valued. The valuation model in accordance with Royal Institute of Chartered Surveyors ('RICS') requirements on disclosure for Regulated Purpose Valuations has been applied (RICS Valuation - Professional Standards January 2014 published by the Royal Institution of Chartered Surveyors). These valuation models are consistent with the principles in IFRS 13. The market value provided by Jones Lang Lasalle at the year end was £270,225,000 (2013: £176,415,000) however an adjustment has been made for lease incentives of £1,834,473* (2013: £3,535,038) that are already accounted for as an asset. In accordance with the accounting policy in note 2.3, in order to arrive at fair value the market values of leasehold investment properties have been adjusted to reflect the fair value of finance lease obligations. The year end valuation of £270,225,000 includes £3,150,000 in relation to De Ville Court and £3,575,000 in relation to Chancellors Place, two investment properties held for sale at the Balance Sheet date (see note 8).

Valuation gains and losses from investment properties are recognised in the Consolidated Statement of Comprehensive Income for the period and are attributable to changes in unrealised gains or losses relating to investment properties (completed and under construction) held at the end of the reporting period.

In the Consolidated Cash Flow Statement, proceeds from disposal of investment properties comprise:

**includes the market values of the two properties held for sale as detailed in note 8.

The table below presents the sensitivity of the valuation to changes in the most significant assumptions underlying the valuation of completed investment properties.

Below is a list of how the interrelationships in the sensitivity analysis above can be explained.

In both cases outlined in the sensitivity table the estimated Fair Value would increase (decrease) if:

· The ERV is higher (lower)

· Void periods were shorter (longer)

· The occupancy rate was higher (lower)

· Rent free periods were shorter (longer)

· The capitalisation rates were lower (higher)

8 INVESTMENT PROPERTIES HELD FOR SALE

9 INVESTMENT IN SUBSIDIARY UNDERTAKINGS

The Company owns 100 per cent of the issued ordinary share capital of Standard Life Investments Property Holdings Limited, a company with limited liability incorporated and domiciled in Guernsey, Channel Islands, whose principal business is property investment.

The Group, through its subsidiary, acquired 100 per cent of the issued ordinary share capital of Huris (Farnborough) Limited in June 2014, a company incorporated in the Cayman Islands whose principal business is property investment.

The Group, through its subsidiary, acquired 100 per cent of the issued ordinary share capital of HEREF Eden Main Limited in November 2014, a company incorporated in Jersey whose principal business is property investment.

The two companies were acquired because the vendors were selling the companies and not the individual assets. This provided enhanced returns to the Group in the form of lower purchase costs. The companies were only purchased after full due diligence to ensure the Group is not exposed to unexpected liabilities.

The above acquisitions were accounted for as acquisitions of assets (investment properties of £39,364,944) which generated a gain of £136,938 in the year ended 31 December 2014 as detailed in the Consolidated Statement of Comprehensive Income on page 36. The directors believe that such treatment is appropriate as it better reflects the substance of the transactions i.e. the acquired companies are shell companies which hold investment properties and had immaterial other net assets. The Group intends to liquidate both companies early in the next financial year. As at the balance sheet date the investment properties owned by Huris (Farnborough) Limited and HEREF Eden Main Limited have been transferred to Standard Life Investments Property Holdings Limited. The remaining liabilities of both companies total £44,273 (2013: £nil) at the balance sheet date and have been included in trade and other payables.

10 TRADE AND OTHER RECEIVABLES

Reconciliation for changes in the provision for impairment of trade receivables:

The ageing of these receivables is as follows:

As of 31 December 2014, trade receivables of £1,738,063 (2013: £410,679) were less than 3 months past due but considered not impaired.

11 CASH AND CASH EQUIVALENTS

Cash held at banks earns interest at floating rates based on daily bank deposit rates. Deposits are made for varying periods of between one day and three months, depending on the immediate cash requirements of the Group, and earn interest at the applicable short-term deposit rates.

12 TRADE AND OTHER PAYABLES

Trade payables are non-interest bearing and are normally settled on 30-day terms.

13 BANK BORROWINGS

Other loan covenants that the Group is obliged to meet include the following:

14 INTEREST RATE SWAPS 

The individual swap assets and liabilities are listed below:

15 LEASE ANALYSIS

Lease length