TIDMCNN
RNS Number : 0666B
Caledonian Trust PLC
30 March 2017
30 March 2017
Caledonian Trust plc
("Caledonian Trust" or the "Company")
Unaudited interim results for the six months ended 31 December
2016
Caledonian Trust plc, the Edinburgh-based property investment
holding and development company, announces its unaudited interim
results for the six months 31 December 2016.
Enquiries:
Caledonian Trust plc
Douglas Lowe, Chairman and Chief Executive Officer Tel: 0131 220 0416
Mike Baynham, Finance Director Tel: 0131 220 0416
Allenby Capital Limited
(Nominated Adviser and Broker)
Nick Athanas Tel: 0203 328 5656
Charles Donaldson
Introduction
The Group made a pre-tax loss of GBP138,000 in the six months to
31 December 2016 compared with a pre-tax loss of GBP180,000 for the
same period last year. The loss per share was 1.17p and the NAV per
share was 151.7p compared with a loss per share of 1.53p and NAV
per share of 150.5p last year.
In the period under review no investment property was sold and
investment property values are unchanged from 30 June 2016. Income
from rent and service charges was GBP229,000 compared with
GBP175,000 last year. Administrative expenses were GBP305,000
compared with GBP332,000 last year.
Review of Activities
The Group's emphasis continues to be on development, including
works to secure existing planning consents, and the provision of
infrastructure for development plots, and the marketing of house
plots and houses.
We have four main development sites in Edinburgh. Brunstane Home
Farm is in east Edinburgh, but is just off the A1, and lies
immediately adjacent to Brunstane railway station with services to
Edinburgh (seven minutes) and south via the recently re-opened
Borders Railway to Tweedbank/Galashiels.
We undertook extensive alterations to four listed Georgian
stone-built, two-bedroom cottages and put in some of the
infrastructure necessary for the next stages of the development.
The cottages sold for up to GBP300/ft(2) and the last sale
completed in the spring of 2016.
On the open ground to the south of these cottages we secured
consent in 2014 to construct two new semi-detached houses which,
together with a mature wood to the west, completes a traditional
farm courtyard. These two new houses are of modern construction but
with the elevations faced with natural stone. Last year we gained
consent to extend the easterly gable and to add a conservatory to
the west elevation, increasing the total area to 2,850ft(2) .
Construction commenced in August 2016 with an expected completion
early in 2017, but the contractor went into liquidation in February
2017. A replacement has been appointed and we expect to market
these completed houses in the late Spring at around GBP300/ft(2)
.
Work started over two years ago on the "The Horse Mill Phase",
the reconstruction and conversion of five stone arched cartsheds, a
single storey cottage, the main grain barn and an unusual hexagonal
horsemill to five houses. Very extensive stone repairs and renewals
have been completed and the Horse Mill should be completed shortly,
having been delayed by detailed archaeological investigations.
Tenders for the 7,000ft(2) Horse Mill Phase have been issued and
the development is expected to complete early next year and to
produce a surplus over further construction costs of over
GBP0.75m.
The "Steading" phase, also over circa 7,000ft(2) , will follow
and, as the site is already cleared, and, with the exception of one
elevation, is to be all "new build", should allow higher
development margins. East of the "Steading" lies a derelict
farmhouse and piggeries and beyond them an open area, all of which
properties have just been abstracted from the Green Belt in the
newly adopted Edinburgh Local Plan. Proposals for the development
of this two-acre site, and the existing ruinous farmhouse and
piggeries have been accepted in principle, suitable for a
development of 19 new-build houses over 25,149ft(2) . Beyond this
site, The EDI Group Ltd ("EDI"), a property development company
owned by City of Edinburgh Council, have lodged a planning
application for an extensive residential development.
At Wallyford, Musselburgh, we have implemented a consent for six
detached houses and four semi-detached houses over 12,469ft(2) .
The site lies within 400m of the East Coast mainline station, is
near the A1/A720 City Bypass junction and is contiguous with a
recently-completed development of 250 houses. Taylor Wimpey and
Persimmon have nearby sites of about 400 plots and 50 plots
respectively which have nearly sold out at prices of between
GBP200/ft(2) and GBP250/ft(2) . South of Wallyford groundworks for
a 1,050 unit housing development are due to complete this year and
a further expansion east is planned. A 1,000 plot site north of
Wallyford is being extensively canvassed for housing development.
Given the buoyancy in the market, I expect to continue the
development once further work is complete at Brunstane.
The third of our delayed sites is in Edinburgh at Belford Road,
a quiet cul-de-sac less than 500m from Charlotte Square and the
west end of Princes Street, where we have taken up an office
consent for 22,500ft(2) and fourteen cars and a separate
residential consent for twenty flats over 21,000ft(2) and twenty
cars. This site has long been considered "difficult". To dispel
this myth we are completing preliminary investigations. We have
created a workable access to the site; cleared collapsed rubble and
soil; exposed the retaining south wall and the friable but strong
bedrock in parts of the site; and recently completed an extensive
archaeological survey. Only about 300 tonnes of mainly loose
material remain to be extracted from the site and a local sewer
diverted before piling and retention works are required prior to
building. The investigations have revealed that the extent of those
works is much reduced compared to earlier estimates. We are
currently assessing development and financing options for a Gross
Development Value of about GBP10m.
St Margaret's House, London Road, is our largest Edinburgh
development site where PPP for a 231,000ft(2) development was
renewed and the Section 75 planning agreement registered in
November 2016. We continue to consider a variety of possible
options for St Margaret's House under improving market conditions.
Immediately west of St Margaret's lies the Meadowbank sports
complex which the City of Edinburgh Council (CEC) decided in
February 2017 to redevelop in four separate sections. CEC will
develop the section north of the site, wrapping round a new sports
centre, and a second section, the most easterly triangle, just over
the railway from St Margaret's, into 374 affordable houses of
various tenures, both sections entering off Marionville Road. The
new sports complex, entering off London Road as at present, will be
redeveloped by CEC on a more compact scale, an investment of about
GBP42m, and the fourth section, a two-hectare site east of the
stadium and west of St Margaret's also entering off London Road, is
expected to be sold later this year for "commercial development".
It appears at present that student accommodation for up to 2,000
students, together with other uses, is likely.
A large commercial development adjacent to St Margaret's and the
siting of the main sports complex on the street, rather than the
"dated" spectator stadium, will greatly improve the streetscape,
and extend it on an uninterrupted basis as far as St Margaret's,
continuing the line of residential development virtually unbroken
up to St Margaret's, so integrating it into the City. Our office
tenant, the acclaimed arts charity Edinburgh Palette ("EP"), has
been able to reduce somewhat the high subsidy it gives the artists
who occupy the studios and this, together with improved management
systems and continuing innovations, is allowing EP to fulfil its
charitable function at a lower discount to a reasonable rent. These
processes continue and revised rents, together with a more
realistic contribution from the car park tenants, Registers of
Scotland, and an expected new contribution from the advertising
hoarding will yield rents at a rate of over GBP250,000, a figure
still below market level.
The Group has three large development sites in the Edinburgh and
Glasgow catchment areas. Two sites are at Cockburnspath on the A1
just east of Dunbar and the East Lothian border where we have
implemented both planning consents for 72 detached and four
semi-detached family houses. We have delayed development as market
conditions have been unfavourable, prices in the Scottish Borders
falling 7.3% in 2015 and rising by only 0.3% in 2016 and by only
0.2% in neighbouring East Lothian in 2016.
The third site is seven miles from central Glasgow at Gartshore,
Kirkintilloch, on the Forth and Clyde Canal and comprises the
nucleus of the large estate formerly owned by the Whitelaw family.
We are promoting the creation of a new village of a few hundred
cottages and houses together with local amenities within the
existing designed landscape which complements our proposals for a
high-amenity business park in a rural setting, including an hotel
and a destination leisure centre. This is a long-term project which
meets existing needs and development criteria and is gaining local
support. We have refurbished a period stable and associated hayloft
as a 500ft(2) exhibition centre illustrating the history of the
estate and our proposals. The exhibition centre is part of a most
attractive 12,000ft(2) purpose-built stables complete with elegant
clock tower whose essential maintenance will delay the opening of
the exhibition centre until later this year.
The Group owns fourteen separate rural development
opportunities, nine in Perthshire, three in Fife and two in Argyll
and Bute, all set in areas of high amenity. In Perthshire at
Tomperran, a thirty-acre smallholding in Comrie on the River Earn,
we hold an endured consent for twelve houses over 19,206ft(2) and,
subject to the signing of a Section 75 planning agreement, we will
hold planning consent for a further fourteen houses on land
previously zoned for industrial use over a total of 33,912ft(2) .
At Chance Inn, part of the Loch Leven catchment, we have completed
two-thirds of the phosphate reduction necessary at a cost of over
GBP100,000 to allow our development of ten houses over 21,831ft(2)
. The implementation of a similar phosphate reduction requirement
allowed us to sell a separate plot near Chance Inn Farm House for
over GBP100,000 together with a small paddock for GBP34,000. We
hold sufficient land next to the farm steading to allow the sale of
eleven more such paddocks to purchasers of new houses. The
forthcoming opening of the Queensferry Crossing and the imminent
completion of the associated road works will improve the
marketability of all our development sites north of the Forth
estuary. Further north the A9 is to be dualled over a distance of
c. 7 miles from Luncarty (4 miles north of Perth) to Birnam ("wood
to Dunsinane hill" of Macbeth fame!), giving an uninterrupted dual
carriageway to our site at Ardonachie where we have planning
permission for ten units of over 16,493ft(2) . The extension of the
dual carriageway will also result in our sites at Balnaguard
(15,994ft(2) ) and Strathtay (6,060ft(2) and 10,811ft(2) ) being
only about ten miles from the dual carriageway to Perth.
Work on our three sites near St Andrews, Fife has been suspended
pending an improvement in markets. The expansion of the University
of St Andrews east to Guardbridge marks a significant move away
from the narrow confines of St Andrews which should be reflected in
the local market for houses.
Our largest rural development site is at Ardpatrick, a peninsula
of great natural beauty on West Loch Tarbert within two hours'
drive of Glasgow and central Scotland. We are marketing several
development sites: Bay Cottage, a stone built farm building for
conversion with consent for an extension to form a three-bedroom
house set in a paddock with views to Achadh-Chaorann Bay; Oak
Lodge, a waterfront site with consent for a 1,670ft(2) house; a
further three sites on the UC33, a cul-de-sac, which leads to the
estate; and two plots set in a small field just off the B8024
Kilberry Road. The preconditions for the development of these two
plots have been met and the private access from the public road to
these two plots is currently being installed. In all these plots
work continues to improve their attractiveness and simple amenity
improvements have been made to the approach to the house in order
to improve the amenity and value of all the properties. Repairs to
drainage and the farm infrastructure are resulting in a significant
recovery in the productive capacity of the land and of its quality
and value. The local market continues to be depressed with a large
number of plots and houses for sale.
Economic prospects
The UK economy grew 1.8% in 2016, and was the fastest growing
economy amongst the G7, although growth was lower than the 2.2% in
2015 and the 3.1% in 2014. 2016 was limited by the low growth of
the economy in Q1 of only 0.2%, a reduction in growth occurring
long before any "Brexit" effect. In contrast growth in the three
months to end February 2017 is estimated by NIESR at 0.6%. Had Q1
2016 been "normal", then growth in 2016 would have approximated to
the UK long-term average of 2.25%, normally an unremarkable event.
However, it was remarkable as such high growth completely
contradicted the dire economic forecasts if "Leave" won the June
2016 referendum.
The NIESR observed that, while economists usually disagree, on
Brexit they did agree on the very adverse affect of a Brexit vote.
The Economist noted that "a host of studies - the NIESR, the
Treasury, the Institute of Fiscal Studies, Oxford Economics,
PriceWaterhouseCooper, the Centre for European Reform and the
London School of Economics agreed with the international bodies" -
the IMF and the OECD - "that Brexit would mean less trade, lower
foreign direct investment and slower productivity growth".
Moreover, Brexit was expected to have an immediate effect, a
conclusion not disputed even by the pro-Brexit economists, by a
negative shock, yielding, in the Treasury's view, a "do it yourself
recession". Indeed, the Chancellor George Osborne warned that a
vote to leave would force him to raise taxes or cut spending by
GBP30bn. After the referendum, Martin Wolf endorsed the Treasury
view, saying, "The Treasury might even have been underestimating
the shock. It would be astonishing if there were to be no
recession" and the Economist, in a jeremiad, says "as confidence
plunges, Britain may well dip into recession".
But the immediate effect of the "Leave" vote has proved minimal,
perhaps unsurprisingly, as 'Brexit' has not taken place and is not
likely to do so for at least two years. These dire forecasts were
presumably based on projected reductions in consumption and
investment. But consumption growth was, as the Bank puts it,
"robust" and housing market activity and housing investment have
been more resilient than expected, more than offsetting weaker, but
higher than expected, growth in business investment. An immediate
consumption response to the prospect of Brexit is surely
unsurprising - the vast majority of the population did not vote
"remain", and presumably they were unfearful - and nothing tangible
has yet changed as a result of the vote. Business investment has a
long cycle time and, even if the long-term prospects for investment
returns were diminished, the short-term affect of any policy change
have been minimal.
The resilience of GDP growth in 2016, and the reassessment of
the causes of such resilience, have resulted in forecasts for 2017
being increased considerably from forecasts made in late 2016, post
Brexit, towards those forecasts made pre-Brexit. In June 2016, the
average forecast of growth in the UK economy given in the Economist
poll of forecasters was 2.0%, but in September 2016 the average
forecast dropped to 0.5% before rising to 0.7% in October 2016, to
0.9% in November 2016, to 1.1% in December 2016, 1.2% in January
2017, 1.4% in February 2017 and 1.6% in March 2017. Currently the
Bank forecast growth of 2.0% in 2017, similar to the Economist poll
of 2.0% in June 2016, but below the Bank May 2016 forecast of 2.3%.
In the second half of 2016 there were no material changes in the
growth expected for the USA (2.1%) or for China (6.3%) and it is
reasonable to ascribe the UK prospective changes as primarily due
to changing assessments of the effect of Brexit on the economy.
The UK, having invoked Article 50, remains within the EU until
it leaves or until two years have elapsed, whichever is sooner,
unless an extension is requested and agreed by all 27 EU countries
- an unlikely development. Thus it appears almost certain that the
UK will remain in the EU until early 2019. Until then no formal
changes will take place between the UK and the EU27, nor under the
EU treaties will the UK be permitted to alter trading relationships
with third parties: the position is "frozen". Thus, any changes in
the UK economy caused by 'Brexit' over the next two years will be
as a result of positioning for a post-Brexit UK or anticipating
such a change.
Interestingly, neither the Bank nor the OBR are explicit on the
implied expectation of the outcome of the UK's trading and other
arrangements post Brexit or on the effect of these in the two years
pre-Brexit. Guardedly, the Bank says "Output growth is expected to
be stronger in the near term but weaker than previously anticipated
in the latter part of the forecast period. In part that reflects
the impact of lower real income growth on household spending. It
also reflects uncertainty over future trading arrangements and the
risk that UK-based access to EU markets could be materially
reduced, which could restrain business activity and supply growth
over a protracted period".
The Bank does not specify its assumptions on the Brexit "deal",
but in February 2017 it says "Sterling remains 18% below its peak
in November 2015 reflecting investors' perceptions that a lower
real exchange rate will be required following the UK's withdrawal
from the EU...... higher imported costs resulting from it will
boost consumer prices and cause inflation to overshoot the 2%
target. Monetary Policy cannot prevent either the real adjustment
that is necessary as the UK moves towards its new international
trading arrangements or the weaker real income growth that is
likely to accompany it over the next few years".
The Bank now expects the UK economy to be weaker in 2018 and
2019 than it did in May 2016 and the revised growth forecast for
2018 is 1.6%, 0.5 percentage points lower than its earlier
forecast, and for 2019 - in 2016 outside the forecast period -
"lower than the long-term average". Thus, without specifying what
the Brexit changes will be, the Bank expects 0.5 percentage points
lower growth. The Bank reports that, corroboratively, external
forecasters GDP growth projections are also about 0.5 percentage
points lower, but narrow to 0.3 percentage points in 2020, as
growth recovers towards a "normal" level.
The OBR is less cryptic about its assumptions on the effect of
Brexit. It says "there is no meaningful basis for predicting the
precise end-point of the negotiations as a basis for our forecast.
There is considerable uncertainty about the economic and fiscal
implications of different outcomes, even if they were
predictable....". The OBR assumes the UK leaves the EU in April
2019, new trading agreements slow the pace of export and import
growth for the next 10 years and there is tighter control on
migration. They forecast 2.0% growth in 2017, falling to 1.8% in
2018 and recovering to 2.0% in 2021.
Circumspectly neither the Bank nor the OBR specify the outcome
of the negotiation of the UK withdrawal from the EU. However, given
the political emphasis on control of immigration neither a
Norwegian nor a Swiss model is acceptable. A customs union will
allow the UK tariff free access to the EU, but impose external
tariffs as determined by the EU, but makes no provision for
services, the largest net UK export to the EU. A Free Trade Area
would be preferable to a Customs Union, as it would allow
unrestricted imports from world goods markets, but it would leave
all exports subject to non-tariff barriers which are more
significant barriers to trade than tariffs. In practical terms a
free trade agreement ("FTA") seems unlikely because of its detail
and complexity as evidenced by the Canadian experience with the EU
of over seven years' such negotiations. Fortunately, failing
agreement, trading arrangements would be governed by the WTO rules
of which the EU and all member states are members, and is the
system governing a substantial portion of all world trade, as, for
example, between the USA and the EU. Given such a fall-back
position the UK's trade loss is limited, probably more limited than
many commentators argue. Indeed, some such favourable position is
implied by the small downgrades to post Brexit GDP growth made by
the Bank the OBR.
The UK's WTO fall-back position limits the potential loss from
leaving the single market, and being prepared to lose the single
market, both strengthen the UK's bargaining position with the EU. A
readiness to accept WTO terms is criticised as "Hard Brexit", but,
paradoxically, adopting such a stance increases the probability of
a more favourable outcome. The optimal result would be the
abolition of all restraints to trade, a conclusion benefiting all
parties. The further trade is restricted from the single market to
the WTO rules, the greater is the loss to the EU. Unfortunately,
although the benefit to both parties increases as the deal becomes
"more open" the outcome will be determined by the interplay of
economic advantage, political necessity and, in the last resort,
individual preference.
Unlike trade in goods with the EU the UK has a large surplus on
services, net receipts of c. GBP27bn are offset by only about
GBP12bn net payments, almost wholly resulting from travel.
Financial services alone have net receipts of GBP17bn and this
sector and other associated "City" services are often considered
most at risk of loss to other EU financial centres. A small offset
is that due to sterling's devaluation the 'Travel' sector deficit
is likely to fall. The risk to service trades is different from
that to the goods trade in two main respects. Fortunately, not all
services are subject to EU restrictive practices. Unlike the goods
trade, the restriction to service trade is not primarily caused by
tariffs but by regulations, licensing and other restrictions.
The protection of the service industries is deeply entrenched
throughout the EU with some bizarre instances. In the consumer
market a qualified German hairdresser must requalify in France; in
Austria a corsetiere cannot practice without an Austrian licence;
in the professions an English solicitor cannot convey properties in
most EU countries; and on a commercial level there is no EU banking
union, no unified capital market and no European stock exchange -
indeed the proposed takeover by Deutsche Bourse of the LSE is on
the brink of collapse - and the regulation of financial services is
at national and not EU level. Similarly, most jurisdictions have
national regulation requiring non-domestic providers to undergo
their scrutiny and regulation. To mitigate this restriction of
trade and allow trade in different jurisdictions, financial
institutions in the EU can apply for 'passporting' rights, allowing
trading rights established in one EU member state to be transferred
to another. For this service, many institutions choose Luxemburg as
a base for their subsidiaries from which to gain their passports.
This practice attenuates the effect of this particular trade
restriction. The EU has attempted to introduce similar standards
for retail products, the "Market in Financial Instruments
Directive", but this has not been widely adopted and the core
retail financial activities remain highly protected and UK access
is effectively denied. The City's wholesale business, the most
important component of its services as the world's premier
financial centre, is widely used by the EU and so is considered
vulnerable as the UK withdraws from the single market. But
wholesale financial and professional services can be accessed from
anywhere in the world as they are in New York, Chicago, Dubai, Hong
Kong or Tokyo without "passports". Even euro-denominated
instruments are dealt in and settled in non-euro areas and, if the
Eurozone curtailed such trade, it would erode the euro's
convertibility. In practical terms London supplies the liquidity
and professional services to support these activities which would
be difficult to replicate, however much Paris and Frankfurt would
like to do so. A similar furore was created, presumably based on
City views, when the UK did not join the Eurozone, but that
threatened cataclysm did not occur. A false alarm was also raised
concerning the immediate outcome of a "Leave" vote in the
referendum. Such precedents undermine the credibility of forecast
damage to the wholesale service industry. The limited integration
of other services curtails the damage that might be occasioned by
an unfavourable negotiation of the Brexit terms and as John Kay
says "for most services the single market remains an aspiration
rather than reality".
In contrast, there is a real possibility of damage to the traded
goods sector as it lies within an effective single market, although
the extent of any damage is curtailed by two over-riding factors.
Although the EU tariff on some items, such as cars (of 10%), is
high, the weighted average tariff is low, being 3.2% overall and
2.3% for industrial goods. Such small tariffs can be more than
offset by the gain in sterling from the appreciation of the euro.
For example, if the UK wholesale price of an item is 75% of the
final EU retail price, then for a sterling producer the sterling
price received even after paying a 10% tariff is much higher. This
advantage which will vary among sectors will erode with any
increase in the sterling prices of, say, components in a
manufacturing chain, if they are imported.
The options available to the UK on leaving the EU have become
clear. The political imperative of immigration control precludes
membership of the European Free Trade Association as exemplified by
Norway and of the bilateral arrangement made with Switzerland. A
customs union as existing between Turkey and the EU is unacceptable
as it embraces only goods, imposes the EU tariff and subjects other
external agreements to EU sanction. The negotiation is likely to be
on the terms of a FTA or a modified FTA, both of which failing, a
default to the WTO agreement. A FTA would provide tariff free
access to the EU, but access subject to possible non-tariff
barriers. It would not restrict UK imports from world goods
markets, but all such trade would be subject to detailed
agreements, particularly to stop such products gaining free access
to the EU. Two years is a short time for such a complex
arrangement, given start up times, and the many other parallel
arrangements to be negotiated, some, or even all, of which may
become interdependent. A transitional arrangement pending a later
final settlement, would allow time to secure a mutually beneficial
arrangement. This outcome seems likely and, indeed, is the best
option.
A theoretical analysis of the negotiations would conclude that,
in the given circumstances, each party would optimise the available
gain in what is not a zero sum game. However, the reality is likely
to be different, as many other factors will affect the
negotiations. For the UK, the political decision having been made,
the negotiation is almost exclusively an economic one. But for the
EU27 there are other over-riding factors. The major constituents of
the EU, notably Germany and France, consider the EU primarily as a
political vehicle and the preservation of the means of ensuring
political cohesion, the Euro, cannot be jeopardised. Unity and
cohesion, not just economic advantage, are important objectives,
together with a desire to demonstrate these qualities, to cement
relationships and to discourage further dissent.
As the UK imports more from the EU than it exports the EU
appears to risk a greater economic cost from trade restrictions,
but the UK carries the greater potential loss per capita. The
complexity of the EU's structure and the diversity of the Members'
interests increases the possibility of delays, confusion or
mistakes in the negotiations. The UK is a supplicant, permitted
only two years to complete the negotiation, so providing the EU
with an increasing strategic advantage over time. These variables
add different dimensions to the negotiations.
The UK has many valuable assets to offer the EU to improve its
negotiating position. In particular, the UK is a member of the
security council, is a nuclear power, has the largest and most
effective military force and has an intelligence research and
technical capability superior to that of individual EU members.
The UK continues to exercise "soft" power and to enjoy a
diplomatic influence far beyond that merited by its current
economic standing. All these UK capabilities will underpin the
negotiations, but their distinctive feature is the commitment of
the principal EU members to the political concept of a cohesive
Europe.
The negotiated settlement or interim agreement will be construed
politically as successful. However, even a favourable outcome will
entail a trade adjustment resulting in an economic penalty, one
reasonably well assessed as a reduction in future GDP growth of
about 0.25%-0.40% per annum for at least a few years. There will be
a price for leaving the EU, but it will be a declining one as the
trade pattern adjusts. Leaving the EU provides some insurance
against the real, but unlikely, possibility of an economic or
political rift in the EU and it protects the UK from a possible
change in the EU to a centralised political unit with a
protectionist policy and a mercantilist creed. There will be a
price for leaving the EU, whatever the benefits. By comparison, the
fall in GDP will be very much less than that of a short shallow
recession, and more on a par with the effect of the recent low rate
of increase in productivity compared to the historic rate. Unlike
productivity where a low rate of improvement has persisted for
years, the trading effect of "Leave" will attenuate with the growth
of other trading patterns. The UK has made a political decision to
the short-term detriment of the economy.
The economic consequences of the political "Leave" decision are
small for the UK the economic consequences of a political Sc-exit
decision for Scotland are large. The Scottish independence vote in
2014, the previous referendum date, implied a greater economic
change than seems likely with "Leave" - a new country, currency and
control - and the economic conditions in, and prospects for,
Scotland then were very much more favourable than at present or are
likely to be in the near future. The Union of the Parliaments in
1707 provided a favourable foundation for the recovery of the
Scottish economy from the difficult economic conditions exacerbated
by the disastrous Darien scheme. Whereas The Union facilitated a
great improvement in Scottish living standards, the prospective
Disunion will cause an immediate significant deterioration in
living standards and a continuing relative decline. Analysis of the
economic consequences of Sc-exit is unique in its unambiguity:
self-evidently it is economically disastrous.
Economic growth in the UK in 2016 was 1.9%; economic growth in
Scotland was 0.8%. Economic growth in the UK in Q4 2016 was 0.7%;
economic growth in Scotland was 0.4%. Growth in the UK in 2017 is
forecast to be 2.0%; the average growth forecast in Scotland by
Mackay Consultants "most optimistic" in their own words is 1.2%,
but the average of three other consultants is only 0.4%. Mackay
comments "The Scotland economy has under-performed the UK economy
during the last four years and most people expect that to
continue".
Several factors combine to reduce growth in Scotland. The
Scottish economy has a proportionally larger public sector which
contributes to the low growth of productivity; has a declining
record in education attainment; lies outside the high growth area
in the SE of the UK; suffered severe reversals in the financial
services sector, primarily due to the collapse and subsequent
shrinkage of the RBS, once the largest bank in the world, and the
takeover of the "fallen" Bank of Scotland, once a by-word of Scots'
"canniness"; and has proportionately larger former obsolete
industrial areas which underperform the rest of the economy. Until
recently these drags on the Scottish economy were more than
compensated by the extremely buoyant oil sector and its revenues
which, at the time of the 2014 referendum, were forecast by Alex
Salmond to be GBP8bn per annum. That gusher lubricated all latent
liabilities. That well is almost completely depleted and in 2016
estimated revenue from the oil sector was a paltry GBP60m, i.e.
less than 1% of Alex Salmond's forecast! Thus, the latent
liabilities, previously slid over, have become real. Consequently,
if Scotland were an independent country, the ensuing deficit would
be almost 10% of GDP, worse than Greece, and indeed anywhere else
in the developed world. The steps necessary to correct such a
deficit would be extreme and the consequences for the economy
severe. The Sunday Times correspondent says "it would be like
Greece - only wetter and with less healthy food".
There is a case, based on hope over expectation, for a reprieve
for the Scottish economy, a Deus ex Machina, manifested by a return
to earlier higher oil prices, but, failing some cataclysmic event,
the evidence contradicts any such assertion. Significantly, the
five-year Brent future prices continues to be steady at about $5
above the near term futures price.
The current lacuna in Scotland's finances highlights most of the
important 2014 financial arguments, but makes them irrelevant by
comparison. What currency will be used, what central bank, what
will the borrowing capacity be and at what price, what regulatory
framework will be used and who will recognise it? Independence
raises further questions with no satisfactory answer. If an
Independent Scotland does join the EU or EFTA what will be the
effect on its UK trade; what will replace the existing 60% Scottish
trade with the UK; and what will be the financial cost and
political cost of a "hard" border with England? The cost of
borrowing for an independent Scotland would be considerably higher.
The credit ratings of Scotland in 2014 were estimated A to Baa, one
notch above Ba1, "non-investment grade speculative", in contrast to
the UK's Aa1 rate, "prime". An economy with a fiscal deficit of 10%
would get a significantly lower rating, almost certainly Bal or
lower and new borrowing costs would be significantly higher. UK
10yr borrowing costs are 1.28%, and for Italy 2.32%, Portugal 4.23%
and Greece 7.49%. If Scotland assumes a pro-rata share of UK debt
and once all debt is refinanced by Scotland each percentage point
increase in yield would cost GBP227 per person per year, or at
Greece's 7.49%, 6.21 times as much or GBP1,410 and, for a 2.3
people household GBP3,424 per year.
While the current Greek position is an extreme example of the
continuing costs of a distressed economy, there is no doubt
Scotland would pay a very heavy price for independence. However,
such economic arguments are complex and not easily understood;
many, possibly disillusioned by the many incorrect forecasts on the
consequences of Brexit, will not believe them; others will argue
they are incorrect; and others simply will not care. For many the
realisation of an over-riding belief or the ridding of a perceived
colonial yoke or the exercise of worthy traditional Scottish
cussedness mean that the price of independence is worth paying: it
will be a dream come true. Objectively, however, a distressed
economy in an Independent Scotland, submerged in a Union of 28
states, would constitute a true nightmare.
The UK Brexit negotiations will deliver a UK outcome much better
than simply "quitting", but the broad range of non-economic
objectives will result in the settlement failing to optimise the
economic benefits to either party. A demand for a Sc-exit
referendum is likely to be met, but the First Minister, the most
able politician in the UK, is not infallible. The bookies may have
independence as an odds-on favourite but I suspect, on no
demonstrable evidence, that the casual indifferent almost
dismissive mood of many of the electorate who eventually voted "No"
will change markedly when faced with another referendum: having
witnessed the reality of the threat and its extent, resilience and
fervour, they will become sufficiently motivated to mount a much
more robust "Remain" campaign.
The campaign for Sc-exit will probably fail, although only by a
small margin, but the very existence of so severe a threat to the
Scottish economy will impinge unfavourably on Scottish economic
prospects. Like all politicians seeking support, the Scottish
Government will deliver short-term advantages to their electoral
college at the expense of longer-term growth, while still enjoying
the luxury of allocating blame elsewhere. It is quite properly the
right of the Scottish people to seek "independence", albeit a
narrow independence but the long-term cost will be very high. While
this luxury is cheap to gain, it will prove dear to maintain.
Property Prospects
The IPD Index commercial property return was 2.8% in 2016, poor
compared to the cumulative nearly 50% return in the previous three
years, following a three-year recovery of about 5% a year after the
disastrous - 22.5% return in 2008. The 2016 return comprised c.
4.8% "Income" return and -2.0% "Capital" return, as investment
values fell slightly.
The CBRE All Property Yield in December 2014 was 5.45%, a 0.1
percentage point decrease in the year. The 10 Year Gilt Yield fell
0.72 percentage points in the year to December 2015 to 1.24%, 4.2
percentage points lower than the All Property Yield. At the market
peak in May 2007 the all Property Yield was 4.8% compared with the
current 5.45%, or equivalent to a fall in property values of 11.9%,
assuming unchanged rents. The All Property Rent Index was 196 in
December 2016, compared with 131 in 2007 at the market peak. The
2007 Rent Index adjusted for RPI is 274 and the current Rent Index
of 196 represents a fall in real value of 28.5%.
Over the year the All Property Index yield rose 11 basis points,
the largest rise of 34 basis points occurring in Retail Warehouses,
and shops were unchanged. In the last quarter yields generally fell
marginally. The all Property Rent rose 3.7%, the largest rise being
for shops, 5.4%, and the lowest for Retail Warehouses, 1.2%. In the
last quarter rents were unchanged apart from a 1.1% rise in
Industrials.
The commercial property market has now come full circle from its
nadir in 2008, the year of the Great Recession, though an initial
recovery in 2010, with a brief relapse in 2012, followed by high
returns until 2015. This time last year the Investment Property
Forum forecast total returns of 9.3% in 2016, but this has not been
achieved primarily because of a fall in capital values subsequent
to the 23 June 2016 "Leave" vote. The IPF, based on replies in the
three months to February 2017, forecast total All Property returns
of 3.2% for 2017 as forecasts of rental growth improved from -0.7%
in August 2016 and -0.5% in November 2016 to 0.2 in February 2017
and capital value "growth" rates became less negative over that
period, rising to - 1.6% in February 2017. Such poor returns are
forecast to persist as rental growth is forecast at less than 1%
until 2020, rising to a peak of 1.8% in 2021. Average rental growth
is only forecast at 0.8% over the next five years. Further erosion
in capital values is expected in 2017 and 2018 with capital values
expected to peak following 1.5% growth in 2020. Over the next five
years the All Property average capital growth forecast is only 0.2%
p.a.
Industrials are expected to return 6.6% in 2017, twice the All
Property return, and to be the best performing sector over the
five-year period, returning 2.3 percentage points more per annum
than the lowest performing office sector. It seems likely that the
forecasters consider that, as a result of the "Leave" vote and the
subsequent devaluation of sterling, that Industrials will benefit,
while the expectation of a reduced demand for office services,
especially in the City and South-East, will restrict the demand for
offices. Last year I said, "I repeat my previous assessment that
segments of the investment market will continue to suffer a secular
erosion caused by technical obsolescence, loss of locational
primacy and competition from new formats". Such trends are likely
to continue, especially as the delivery systems of online retailers
have become exceptionally refined and the systems for handling
customers' requirements become very sophisticated, more consumer
orientated and now widespread. From being unusual this distribution
channel is now routinely used for a large proportion of the
consumer goods market. Such trends make it increasingly unlikely
that many segments of the investment market will ever recover the
2007 peak.
In 2016 the residential market maintained the improvement
started in 2013 after four years of little change. In Scotland, the
LSL House Price Index rose 2.2%, lower than the rises of 2.5% in
2015, 4.2% in 2014 and 3.1% in 2013. In December 2016, the average
house price in Scotland was GBP172,204. In England and Wales, the
LSL House Price Index rose 3.1%, less than the 6.6% in 2015 and the
exceptional 9.0% in 2014. In December 2016, the average house price
in England and Wales was GBP297,678. In 2015 prices in Central
London fell by 8.7% and falls continued there in 2016 with prices
in Westminster down 3.2%. In London overall the average price has
fallen each month since March 2016, but still gained 1.3% over the
year. Boroughs peripheral to central London, SE areas, and cities
peripheral to the London urban area all performed well in 2016.
Peripheral London boroughs such as Barking and Dagenham rose 12%,
Slough and Southend-on-Sea rose over 10% while Birmingham and
Greater Manchester experienced new peak prices. Outlying areas, the
North East, Yorkshire and Humberside and Wales rose 2% or less. The
ripple effect evident last year has continued to spread, but not to
the outlying areas, or not yet.
Within the 2.2% average price rise in Scotland in 2016 there are
wide variations. The most notable change is the continuing fall in
Aberdeen prices of 4.0% in 2016, following 6.8% in 2015. In Glasgow
prices rose 5.9% in 2016 following 9.5% in 2015, but Edinburgh
price changes are in line with the overall average both years.
Higher Glasgow prices rippled out to East Renfrewshire and West
Dunbartonshire, giving rises of 11.5% and 7.1% and the lower
Aberdeen prices extended to Aberdeenshire where prices fell 4.0%.
The outlying areas had no discernible pattern with Shetland rising
13.2% and Inverclyde falling 9.4%.
While the past is no guide to the future, recent trends will
continue in Scotland. House markets in areas associated with the
oil industry will continue to fall, while cities apart from
Aberdeen will tend to continue to grow more rapidly than the
Scottish average. Independent forecasts for UK prices published by
HMT are for rises of 2.8% in 2017 and of 1.5% in 2018. The OBR
March 2017 review has reduced their November 2016 forecast of HPI
in 2017 from 6.2% to 3.6% and expect prices to rise by about 22.5%
in five years' time. They expect "house price inflation to persist
at rates somewhat above earnings growth, consistent with historical
trends in the UK". Savills distinguish between "Mainstream" and
"Prime" housing markets. UK Mainstream prices, including London,
are expected to rise in the years from 2017 by 0.0%, 2.0%, 5.5%,
3.0% and 2.0%, rising 13.0% over that five-year period. In
Scotland, "Mainstream" prices are expected to "rise" by -2.5% in
2017 and then by 1.5%, 5.0%,2.5% and 2.5% or by 9.0% over five
years. These projections are lower than those made last year, and
even lower than those made two years ago, and more subject to error
as the "Leave" vote "has the capacity to shape the market over the
next five years", but these projections are for a "slowdown" rather
than a "reversal" as experienced from 2007.
The "Prime" housing market is equally affected by the "Leave"
slowdown but is projected to recover more strongly from 2019. In
2017 Prime house prices are not expected to change appreciably,
although they are expected to fall in London. The five year "Prime"
forecast shows a 21% gain in central London, 20% gains in
"commuting" areas near London and gains of around 12%-17%
elsewhere, including Scotland.
The continuing stability forecast for the UK economy together
with adequate credit, at least within the limits of the Bank's
criteria, and crucially for first-time buyers, the Government Help
to Buy schemes, will sustain demand. House supply entails a long
production cycle, including particularly planning, and continues to
be restricted by the elimination of many small house builders and
by the cost and availability of finance for them. Given forecast
political stability, prices will continue to increase, especially
for family homes for which the supply seems most constrained and
for which the potential demand seems greatest.
Conclusion
The UK economy has recovered quickly form the unexpected 'shock'
of the "Leave" vote in June 2016 and current growth rates are
returning to long-term trend rates. The uncertainty of the outcome
of the forthcoming Brexit negotiations and the expected settlement
with the EU will adversely affect UK growth over the next few
years.
Scottish independence would have a deleterious affect on the
Scottish economy, given its inherent structural difficulties and
the expected continuing low oil price. The clamour for Independence
is fuelled by the uncertainties of the outcome of the "Leave"
negotiations and by inaccurate forecasts, including the misplaced
fear of "hard Brexit". Much of this exaggeration will attenuate
over the next few years as growth continues. At the same time the
reality of the difficulties faced by an Independent Scotland,
especially if in the EU, will influence the electorate sufficiently
to result in a "Remain" majority, if a referendum is called.
I judge market and economic conditions to be sufficiently
promising, notwithstanding the Brexit negotiations, to bring
forward selected sites for development. In our existing portfolio,
most development properties are valued at cost, usually based on
existing use, and when these sites are developed or sold, I expect
their considerable upside will be realised.
I D Lowe
Chairman
30 March 2017
Consolidated income statement for the six months ended 31
December 2016
6 months 6 months Year
ended ended ended
31 Dec 31 Dec 30 June
2016 2015 2016
Note GBP000 GBP000 GBP000
Revenue from development
property sales 145 220 438
Gross rental income 229 175 351
Property charges (104) (114) (241)
____ ____ _____
Net rental and related
income 270 281 548
____ ____ _____
Cost of development
properties sales (103) (217) (391)
Administrative expenses (305) (332) (635)
Other income 11 1 15
____ ____ _____
Net operating loss
before investment property
disposals and valuation
movements (127) (267) (463)
____ ____ _____
Gain on sale of investment
properties - 99 99
Valuation gains on investment
properties - - 675
Valuation losses on
investment properties - - (185)
____ ____ ____
Net valuation gains - 99 589
on investment properties ____ ____ ____
(127) (168) 126
Operating (loss)/profit
Finance income - - 1
Finance expenses (11) (12) (22)
____ ____ ____
Net financing costs (11) (12) (21)
____ ____
(Loss)/profit before
taxation (138) (180) 105
Income tax expense 5 - - -
____ ____ ____
(Loss)/profit for the
financial period attributable
to equity holders of
the Company (138) (180) 105
==== ==== ====
(Loss)/profit per share
Basic (loss)/profit
per share (pence) 4 (1.17p) (1.53p) 0.89p
Diluted (loss)/profit
per share (pence) 4 (1.17p) (1.53p) 0.89p
Consolidated statement of changes in equity for the six months
ended 31 December 2016
Share Other Retained
capital reserves earnings Total
GBP000 GBP000 GBP000 GBP000
At 1 July 2016 2,357 2,920 12,738 18,015
Loss for the period - - (138) (138)
_____ _____ ______ ______
At 31 December 2016 2,357 2,920 12,600 17,877
==== ==== ===== =====
At 1 July 2015 2,357 2,920 12,633 17,910
Loss for the period - - (180) (187)
_____ _____ ______ ______
At 31 December 2015 2,357 2,920 12,453 17,158
==== ==== ===== =====
At 1 July 2015 2,357 2,920 12,633 17,345
Profit for the period - - 105 105
_____ _____ ______ ______
At 30 June 2016 2,357 2,920 12,738 18,015
==== ==== ===== =====
Other reserves consist of the share premium account GBP2,745,000
and the capital redemption reserve of GBP175,000.
Consolidated balance sheet as at 31 December 2016
31 Dec 31 Dec 30 June
2016 2015 2016
Note GBP000 GBP000 GBP000
Non current assets
Investment property 10,905 10,415 10,905
Property, plant and
equipment 17 25 15
Investments 1 1 1
______ ______ ______
Total non-current
assets 10,923 10,441 10,921
Current assets
Trading properties 11,462 11,273 11,166
Trade and other receivables 229 161 153
Cash and cash equivalents 18 179 103
______ ______ ______
Total current assets 11,709 11,613 11,422
______ ______ ______
Total assets 22,632 22,054 22,343
______ ______ ______
Current liabilities
Trade and other payables (815) (694) (698)
Interest bearing loans - (3,530) -
and borrowings
______ ______ ______
Total current liabilities
Non current liabilities (815) (4,224) (698)
Interest bearing loans
and borrowings (3,940) (100) (3,630)
______ ______ ______
Total liabilities (4,755) (4,324) (4,328)
______ ______ ______
Net assets 17,877 17,730 18,015
===== ===== =====
Equity
Issued share capital 6 2,357 2,357 2,357
Other reserves 2,920 2,920 2,920
Retained earnings 12,600 12,453 12,738
______ ______ ______
Total equity attributable
to equity holders
of the parent company 17,877 17,730 18,015
===== ===== =====
Net asset value per
share 151.7p 150.5p 152.88p
Consolidated cash flow statement for the six months ended 31
December 2016
6 months 6 months Year
ended ended ended
31 Dec 31 Dec 30 June
2016 2015 2016
GBP000 GBP000 GBP000
(Loss)/profit for the
period (138) (180) 105
Adjustments
Profit on sale of investment
property - (99) (99)
Investment property valuation
movements - - (490)
Depreciation - - 11
Net finance expense 11 11 22
____ ____ ___
Operating cash flows
before movements
in working capital (127) (268) (451)
(Increase)/decrease in
trading properties (296) 144 252
(Increase) in trade and
other receivables (76) (65) (57)
Increase in trade and
other payables 107 39 30
_____ _____ _____
Cash outflows from operating (392) (150) (226)
activities
Interest received - - 1
_____ _____ _____
Cash outflows from operating (392) (150) (225)
activities _____ _____ _____
Investing activities
Proceeds from sale of
investment property 200 199
Purchases of property,
plant and equipment (3) (2) (2)
_____ _____ _____
Cash (outflows)/inflows
from investing activities (3) 198 197
_____ _____ _____
Financing activities
Increase in borrowings 310 - -
_____ _____ _____
Cash flows from financing - - -
activities
_____ _____ _____
Net (decrease)/increase
in cash and
cash equivalents (85) 48 (28)
Cash and cash equivalents
at beginning
of period 103 131 131
_____ _____ _____
Cash and cash equivalents
at end of period 18 179 103
==== ==== ====
Notes to the interim statement
1 This interim statement for the six month period to 31 December
2016 is unaudited and was approved by the directors on 30 March
2017. Caledonian Trust PLC (the "Company") is a company domiciled
in the United Kingdom. The information set out does not constitute
statutory accounts within the meaning of Section 434 of the
Companies Act 2006.
2 Going concern basis
After making enquiries, the Directors have a reasonable
expectation that the Company and the Group have adequate resources
to continue in operational existence for the foreseeable future.
Accordingly, they continue to adopt the going concern basis in
preparing this interim statement.
3 Accounting policies
Basis of preparation
The consolidated interim financial statements of the Company for
the six months ended 31 December 2016 comprise the Company and its
subsidiaries, together referred to as the "Group". The financial
information set out in this announcement for the year ended 30 June
2016 does not constitute the Group's statutory accounts for that
period within the meaning of Section 434 of the Companies Act 2006.
Statutory accounts for the year ended 30 June 2016 are available on
the Company's website at www.caledoniantrust.com and have been
delivered to the Registrar of Companies. These accounts have been
prepared in accordance with International Financial Reporting
Standards ("IFRS") as adopted by the European Union. The auditors
have reported on those financial statements; their reports were (i)
unqualified, (ii) did not include references to any matters to
which the auditors drew attention by way of emphasis without
qualifying their reports, and (iii) did not contain statements
under Section 498 (2) or (3) of the Companies Act 2006.
The financial information set out in this announcement has been
prepared in accordance with International Financial Reporting
Standards as adopted by the European Union ("adopted IFRS"). The
financial information is presented in sterling and rounded to the
nearest thousand.
The financial information has been prepared applying the
accounting policies and presentation that were applied in the
preparation of the company's published consolidated financial
statements for the year ended 30 June 2016.
In the process of applying the Group's accounting policies,
management necessarily makes judgements and estimates that have a
significant effect on the amounts recognised in the interim
statement. Changes in the assumptions underlying the estimates
could result in a significant impact to the financial information.
The most critical of these accounting judgement and estimation
areas are included in the Group's 2016 consolidated financial
statements and the main areas of judgement and estimation are
similar to those disclosed in the financial statements for the year
ended 30 June 2016.
4 Profit or loss per share
Basic profit or loss per share is calculated by dividing the
profit or loss attributable to ordinary shareholders by the
weighted average number of ordinary shares outstanding during the
period as follows:
6 months 6 months
ended ended Year
ended
31 Dec 31 Dec 30 June
2016 2015 2016
GBP000 GBP000 GBP000
(Loss)/profit for financial
period (138) (180) 105
=== === ===
No. No. No.
Weighted average no.
of shares:
For basic and diluted
profit or
loss per share 11,783,577 11,783,577 11,783,577
======== ======== ========
Basic (loss)/profit
per share (1.17p) (1.52p) 0.89p
Diluted (loss)/profit
per share (1.17p) (1.52p) 0.89p
5 Income tax
Taxation for the 6 months ended 31 December 2016 is based on the
effective rate of taxation which is estimated to apply to the year
ending 30 June 2017. Due to the tax losses incurred there is no tax
charge for the period.
In the case of deferred tax in relation to investment property
revaluation surpluses, the base cost used is historical book cost
and includes allowances or deductions which may be available to
reduce the actual tax liability which would crystallise in the
event of a disposal of the asset. At 31 December 2016 there is a
deferred tax asset which is not recognised in these accounts.
6 Issued share
capital
31 December 31 December 30 June 2016
2016 2015
No GBP000 No. GBP000 No. GBP000
000 000 000
Issued and
fully paid
Ordinary shares
of 20p each 11,784 2,357 11,784 2,357 11,784 2,357
===== ==== ===== ==== ===== ====
This information is provided by RNS
The company news service from the London Stock Exchange
END
IR BSGDXXXXBGRG
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