TIDMCNN
RNS Number : 5312W
Caledonian Trust PLC
22 December 2021
22 December 2021
Caledonian Trust plc
(the "Company" or the "Group")
Audited Results for the year ended 30 June 2021
Caledonian Trust plc, the Edinburgh-based property investment
holding and development company, announces its audited results for
the year ended 30 June 2021.
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
Alex Brearley
CHAIRMAN'S STATEMENT
Introduction
The Group made a pre-tax profit of GBP460,000 in the year to 30
June 2021 compared with a profit before tax of GBP95,000 last year.
The earnings per share were 3.90p and the NAV per share at 30 June
2021 was 208.4p compared with earnings per share of 0.81p and NAV
per share of 204.5p last year. The net valuation gain in the year
was GBP690,000 compared to a net valuation gain in the previous
year of GBP250,000.
Income from rent and service charges fell to GBP368,000 from
GBP446,000 in 2020. The reduction is mainly attributable to the
expiry of the licence for the car park at St Margaret's House,
Edinburgh and one vacant unit at Scotland Street, Glasgow. Sales of
five newly developed homes at Brunstane in Edinburgh and the sale
of stock properties at Ardpatrick Estate generated turnover of
GBP4,186,000 as described in the Review of Activities.
Administrative expenses were GBP440,000 (2020: GBP428,000) and
interest payable was GBP137,000 (2020: GBP29,000). The increase in
the interest charge reflects the 3% margin over base being applied
to a related party loan from Leafrealm Limited in accordance with
its terms with effect from 1 July 2020.
During the year, an investment property was sold along with
several stock properties, together comprising Ardpatrick Estate, in
a single transaction. Ardpatrick was originally purchased in 2006
for GBP2,558,775, immediately realising GBP410,000 from the sale of
one property and subsequently selling five refurbished cottages for
total proceeds of GBP848,000 in previous years before the sale of
the remainder this year for GBP2,700,000.
Review of Activities
The Group's property investment business continues but modified
only by the sale of Ardpatrick Estate on 27 April 2021 for GBP2.7m
in cash of which GBP1.2m was attributable to investment property
and GBP1.5m to stock property.
The largest unit in our high yielding retail/industrial property
at Scotland Street, Glasgow has been let from early next year to
Deliveroo for their first "dark kitchen" in Scotland. We continue
to hold our high yielding retail properties and North Castle Street
offices, four Edinburgh garages, a public house / restaurant in
Alloa and Belford Road / Bell's Brae, Edinburgh.
St Margaret's continues to be fully let at a nominal rent,
presently just over GBP1.50/ft(2) of occupied space, to a charity,
Edinburgh Palette, who have reconfigured and sub-let all the space
to over 200 artists, artisans and galleries. Previously I reported
that Edinburgh Palette gained two new and very different premises,
the first at 525 Ferry Road in north central Edinburgh, just west
of the Fettes College playing fields and near to the Western
General Hospital, where a modern 125,000ft(2) grade A office
building has been secured on favourable terms. This central site is
served by eight bus routes and has 125 car parking spaces, 83
single offices and numerous open plan spaces. The second, quite
different premise, is the Stanley Street Container Village where an
innovative landscaped village including parks and communal grounds,
is being assembled, using highly modified shipping containers, on a
site leased until 2043 just north of Portobello golf course and
about half a mile from the A1 and Brunstane rail station. Edinburgh
Palette expect to provide community services and about 80 single
studio units, primarily for local residents currently leasing
spaces at St. Margaret's and for other creative groups and
individuals. The container village was originally expected to open
in the summer of 2019, but is now not likely to open until 2022.
Edinburgh Palette recently secured another site in Granton where
they are developing plans for affordable retail space, high quality
studio and office spaces. St Margaret's continues with its high
long-term occupancy level which has been largely unaffected by the
impact of Covid-19.
Registers of Scotland did not renew the short-term lease of the
car parking spaces at St. Margaret's when it expired at the end of
October as their staff have been working predominantly from home
since March 2020. Their return to the office in greater numbers is
likely to be postponed as a result of the recent Covid-19
announcements.
We have appointed Montagu Evans to market St Margaret's House
and we plan to launch the marketing campaign as soon as the current
difficulties and restrictions on national and international travel
for investors and developers are lifted. Already we have extensive
interest from a broad spectrum of parties in advance of the formal
market launch, including unsolicited offers.
We completed the construction of five new houses in the listed
former farm steading on our site at Brunstane in July 2020
following the lifting of Covid-19 restrictions. The sales of all
five properties have now completed, one in September 2020, one in
November 2020, one in February 2021 and two in March 2021, all at
prices in excess of their home report valuations, which itself was
in excess of our budgeted figures, for a combined consideration of
GBP2.66m or GBP360/ft(2) . We commenced construction of the next
phase of development at Brunstane comprising a further five new
houses over 8650ft(2) forming the Steading Courtyard at the
beginning of July 2021 with a construction programme of 12 months.
We are closely monitoring supply chain shortages and have taken
steps, where necessary, to secure materials in advance to avoid any
disruption to the construction timetable. Apart from a few days
delay in securing delivery of concrete for the foundations in early
July no delays due to supply chain shortages have affected the
programme as yet. The application for 11 new houses (c.20,000ft(2)
) in addition to the converted large farmhouse in the Stackyard
field to the east of the steading continues very slowly through the
planning process but it is now expected that consent to this phase
will be obtained early next year.
At Wallyford we are currently finalising tender documentation
and securing several minor but important variations to the planning
consent for six detached houses and four semi-detached houses over
13,500ft(2) and expect to commence construction in late
spring/early summer 2022, with a phased construction period over 12
months. The site lies within 400m of the East Coast mainline
station, is near the A1/A720 City Bypass junction and is contiguous
with a completed development of houses. Taylor Wimpey have
completed the construction of over 500 houses nearby but on the
other side of the mainline railway, which latterly sold at prices
of around GBP250/ft(2) for smaller 3-bedroom end-terraced houses
and GBP240/ft for larger detached houses. To the south of Wallyford
a very large development of around 2,000 houses has commenced at St
Clement's Wells on ground rising to the south, affording extensive
views over the Forth estuary to Fife and on the eastern edge,
Persimmon have completed a development of 131 houses. On an
adjacent site Taylor Wimpey are constructing 80 houses which are
being marketed at GBP280/ft(2) for smaller 3-bedroom semi-detached
houses and GBP260/ft(2) for 4-bedroom detached houses which are
selling very well. On the western side of St Clement's Wells,
Barratts have sold all of the 245 three and four-bedroom houses in
Phase 1 where semi-detached and terraced three-bed houses realised
GBP221,000 or GBP242/ft(2) . Barratts are currently building 106
three and four bedroom houses in Phase 2 of the St Clement's Wells
site and 141 three and four bedroom houses on an adjoining site.
The Master Plan for the St Clement's Wells development includes a
primary school, separate nursery and community facilities, which
opened earlier this year, and the new secondary school on an
adjacent site is under construction. Planning consent in principle
has been granted for another 600-800 new houses on the adjacent
Dolphingstone site to the South-East. The environment at Wallyford,
no longer a mining village, is rapidly becoming another leafy
commuting Edinburgh suburb on the fertile East Lothian coastal
strip.
The third of our Edinburgh sites is in 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 both an office consent for
22,500ft(2) and fourteen car parking spaces and a separate
residential consent for twenty flats over 21,000ft(2) and twenty
car parking spaces. This site has long been considered "difficult".
To dispel this myth, 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
completed an extensive archaeological survey. In consequence, the
extent of the enabling construction works is much reduced compared
to earlier estimates. Further investment in the site had been
postponed, but we have now instructed architects to remodel the
Belford Road façade and to reconfigure the internal layout with a
more contemporary design to reflect current market requirements.
The delay is not currently proving to our long-term disadvantage as
prime locations in Edinburgh such as Belford Road have continued to
increase in value more rapidly than the cost of construction.
The Company has three large development sites in the Edinburgh
and Glasgow catchments of which two are at Cockburnspath, on the A1
just east of Dunbar. We have implemented the planning consent on
both the 48-house plot northerly Dunglass site and on the 28-house
plot, including four affordable houses, southerly Hazeldean site.
The Dunglass site is fifteen acres of which four acres is woodland,
but the non-woodland area could allow up to a further thirty houses
to be built if the ground conditions, which currently preclude
development, could be remediated.
Gartshore, the third largest development site, is within ten
miles of central Glasgow, near Kirkintilloch (on the Union Canal),
East Dunbartonshire, and comprises the nucleus of the large estate,
previously owned by the Whitelaw family, including 130 acres of
farmland, 80 acres of policies and tree-lined parks, a designed
landscape with a magnificent Georgian pigeonnier, an ornate
15,000ft(2) Victorian stable block, three cottages and other
buildings and a huge walled garden. Glasgow is easily accessible as
Gartshore is two miles from the M73/M80 junction, seven miles from
the M8 (via the M73) and three miles from two separate
Glasgow/Edinburgh mainline stations and from Greenfaulds, a Glasgow
commuter station. Gartshore's central location, historic setting
and inherent amenity forms a natural development site. Accordingly,
proposals have been prepared for a village within the existing
landscape setting of several hundred cottages and houses together
with local amenities. This would complement our separate proposals
for a high-quality business park, including a hotel and a
destination leisure centre within mature parkland.
The Company owns thirteen rural development opportunities, nine
in Perthshire, three in Fife and one in Argyll and Bute, all of
which are set in areas of high amenity where development is more
controversial and therefore subject to wider objection, especially
as such small developments, outwith major housing allocations, may
not merit high priority. Thus, gaining such consents is tortuous,
although such restrictions add value and for many of these rural
opportunities, we have endured planning consents. Until very
recently, the rural housing market had not been experiencing the
rapid growth taking place in Edinburgh and Glasgow and in their
catchment areas with values in regions such as Perth and Kinross,
Fife and Argyll and Bute having risen over 12% in the past year,
but with even more attractive immediate opportunities elsewhere no
investment is proposed in the rural portfolio except to maintain
existing consents or to endure them. The improvements being made to
the A9, notably the completion of the dualling as far north as
Birnam, continue to benefit most of our properties north of the
Forth estuary with Ardonachie now 15 minutes from Perth; Balnaguard
and Strathtay and Comrie 30 minutes; and Camghouran, a site for
holiday houses, 90 minutes.
Economic Prospects
Economic prospects depend on the consequences of the economic
upsurge evident until the beginning of December, prior to the
spread of the Omicron variant - no ordinary recovery nor even a
tidal rush, but a fast, high river bore, whose surge is hindered by
weirs of economic debris deposited after so abrupt a retreat.
Consequent upon the collapse of economic activity, due to the
lockdown restrictions, the UK has had the deepest recession in the
last 300 years, exceeded only between 1706 and 1709 when the War of
the Spanish Succession was followed by a period of exceptionally
cold wet weather, culminating in the Great Frost of 1709. The Bank
of England's illustrative scenario in 2020 estimated a 14% fall in
2020 real GDP while the Office for Budget Responsibility (OBR)
forecast a fall of 11.3%, an out-turn subsequently computed as
9.8%. The early 1700s economic recovery was very rapid as output
was largely determined by the weather's influence on harvests and
there was no long supply chain - containers of essential parts
being shipped from the Far East. However, when the tide turned in
2020, a massive bore of demand swept up the economy, a surge of
17.7% Q3 on Q2 in 2020 and a second surge in 2021 of 5.5% Q2 on
Q1.
The Bank of England is forecasting growth in 2021 to be 1.5% in
Q3; and 0.8% in Q4; and 6.7% for the year. Most forecasters have
similar 2021 forecasts - National Institute of Economic and Social
Research (NIESR) 6.9%; OBR 6.5%; International Monetary Fund (IMF)
6.8%; and HM Treasury (HMT) 7.0%. At Q3 2021 GDP was 2.1% below the
level achieved in Q4 2019 (GDP growth Oct - Dec 2019 was nil) when
the coronavirus pandemic originated. If Q4 2021 growth is 0.8%, as
estimated by NIESR, then at the end of 2021 GDP will be about 1.3%
below the level before the pandemic struck. Growth forecasts for
2022 approach those for 2021: Bank of England 5.0% (reduced from
5.9% in August); OBR 6.0%; NIESR 5.3%; IMF 5.0% and HMT 5.6%.
Unsurprisingly, such quite exceptional growth in demand has
encountered supply problems, restricting output and causing
inflation. Those supply problems are caused not only by the sudden
resurgence of demand, but also by Covid related changes to the
economy, the trading rearrangements necessary from Brexit and a
reduction in the supply of energy, partly as a result of "green"
policy, closing power stations and restricting investment in new
supply. Consequently, the remarkable growth has been accompanied by
a sharp rise in inflation (as measured by CPI) to 4.2% in October,
up from 3.1% in September, and the Bank of England expects
inflation to continue to rise from 4.25% in 2021 to 5.0% in April
2022, but to fall to 3.25% in December 2022 and to 2.25% and 2.0%
thereafter. Independent forecasters, sampled by HMT, whose November
forecasts were reached before the "shock" official October
inflation figure was announced, are on average lower than the Bank
at only 2.4% for 2021, but higher than the Bank thereafter,
forecasting 4.0% in 2022 and 2.6%, 2.5% and 2.3% in subsequent
years, all above the 2.0% current CPI target. The HMT November
forecasts were partly conditioned by their forecast of Bank rate of
about 0.60% in 2022, rising progressively to 1.73% in 2025. I
consider that these forecasts, made before the Bank of England's
November statement, are likely to be revised up.
The economic significance of inflation is not linear. It has a
malign influence below a key minimum level and has a benign
influence up to a maximum level, these levels being highly
contentious and varying with the actual economic conditions
prevailing. The upside and downside risks are asymmetric, as above
the maximum level deleterious economic effects increase
exponentially and may, in a few extreme conditions, lead to
hyper-inflation, often followed by economic collapse.
The risks of inflation breaking the maximum safe level and
rising exponentially are manifest, and past examples in the
post-industrial era include France during the French revolution,
where monthly inflation peaked at 143% and Hungary in 1946 when
prices doubled over 15.6 hours; and similar grotesque inflation in
Zimbabwe in 2008; Yugoslavia in 1994; Germany in October 1923 and
Greece in 1944. Nor is the risk historic, as Venezuela, Lebanon and
Argentina are all on the verge of such a hyperinflation. What these
examples have in common is a "breakdown" in other areas of the
economy, such as is caused by conflict or political or social
factors. Fortunately, such conditions for hyperinflation are
currently inapplicable in developed countries, but there is a
maximum inflation rate, much lower than such hyperinflation rates,
a "break point", that is considered the maximum that is benign and
below the risks of inflation "escaping": a "Goldilocks" level.
No inflation is not beneficial and low inflation is probably not
optimal. Economic growth is dependent on constant change and
adjustment, and the attainment of political objectives, such as
climate change or trading relationships, requires similar
adjustments. In all cases economic resources are required to move:
capital is redeployed and labour transfers from less productive
jobs to more productive ones. Wages have a ratchet tendency - once
they move up, they are extremely difficult to re-adjust down - and
if the activity becomes less productive or prices have to be
adjusted down to meet changed market conditions, such an adjustment
is much more easily achieved if real wages are adjusted down by not
rising with inflation. Such easier economic adjustment gives higher
growth. Central banks with inflation policies are mandated to
target inflation above zero, currently the Monetary Policy
Committee (MPC) 2%, symmetrically, over an appropriate time
horizon. The measurement of inflation used, CPI, is arbitrary and,
although, adjusted as perceived necessary, it tends to overstate
"inflation" by undervaluing the "quality" effects and utility of
technological improvements, including, particularly, electronic
devices: how much "value" is attributable to a smart phone, a
computer with a telephone, compared to early models? Given such
quality anomalies, the effective inflation target is probably lower
than 2%.
The inflexion point where inflation becomes a net disbenefit has
not been determined, but, self-evidently, it is not 2%. An argument
against a modestly higher inflation level is that it becomes
self-reinforcing i.e. "runs away", an argument relevant to the USA
inflationary disasters of the 1970s. Then President Lyndon Johnson
said of the classic theoretical economic trade-off between "guns
and butter": "I believe we can do both ... And as long as I am
President, we can do both" sic! This unwise policy, followed
shortly by two oil shocks, led to highly inflationary conditions
which the Federal Reserve Bank failed to counteract because of
political intimidation, an intrigue worthy of "House of Cards".
President Richard Nixon's dirty tricksters (of Watergate fame?)
promoted a smear story about the Federal Reserve Bank Chair, Arthur
Burns, and Nixon refused to retract it until Burns promised looser
monetary policy! This avoidable and unusual inflationary prelude is
considered to have led to the establishment of an inflationary
psychology in the US which, having been established, required a
long brutal period of repression and recession to eliminate.
When the inflation genie (Arabic jinni, a magical creature of
fire) is released from its confining bottle or lamp by rubbing with
a mythical magic ring, he "escapes", evading recapture. The
"Aladdins" controlling the central banks' "lamps" have been
noticeably reluctant to use their magic ring, rather keeping their
inflation levels at below those optimal for economic growth. Alan
Greenspan's deputy, Princeton's Professor of Economics, Alan
Blinder, strongly disputed the conventional view saying "The myth
that the inflationary demon, "genie", unless exorcised, will
inevitably grow is exactly that - a myth". He considered that at
such inflationary levels the economic damage of joblessness was
considerably more serious than a residual, if nugatory, risk of
inflation, "labour unused in a year ... would be lost forever".
Indeed, the Bank of England research shows that a one percentage
point increase in Base rate reduces output by "up to 0.6 per cent"
after two to three years, implying destroying about 200,000 jobs.
Low inflation rates, certainly too low inflation rates such as the
current MPC mandate, do not optimise economic growth.
Where then is the "Goldilocks" compromise: the porridge not too
hot and not too cold, and not fluctuating, except in a very short
cycle - such changes as the Bank considers able to "see through"?
Capital Economics considers "the costs" outweigh "the benefits"
once inflation rises above 5% particularly in more developed
countries. Because of the asymmetric nature of the risk, probably 3
1/2 % +/- 1% is an appropriate target.
The level of interest rates is not, however, determined by that
rate consistent with optimum economic growth or even one considered
by the Bank necessary to maintain inflation stable within +/-1%,
but by that rate considered necessary by the Bank to keep to the
arbitrary inflationary target. The original targeting required of
the Bank, made in the wake of the 1970s inflationary disaster, was
probably conservative - the influence of the then recent
inflationary history may have weighed disproportionately on
judgement. It is possible to posit a causal relationship between
present target inflation rates and inflationary histories: in
Germany (and EU subsequently) post the Weimar hyperinflation the
target rate is very low; and in the US, where inflation rates in
the 1970s were not so extreme as in the UK, target rates are both
higher and more flexible. The outcome set as desirable is partly
conditional on the historic inflationary setting, rather than the
optimal rate.
Unfortunately, the UK target rate of 2% is lower than, or at the
lowest margin of, a rate that optimises economic growth as the
spectre of past 1970s inflation continues to haunt judgement.
Capital Economics suggest that, while the current trade-off between
lower inflation and economic growth is sub-optimal, the attitude of
governments and central banks is shifting, following a decade in
which deflation has posed a greater threat than inflation. For
instance, the Federal Reserve Bank has already moved to an average
inflation target and, in a break from the past, is putting more
emphasis on full employment, part of its dual mandate. More radical
changes to their policy frameworks are expected.
Change may also occur in the UK. Interestingly, there is now a
more Machiavellian motivation to the targeting of higher inflation
rates because of the Government's greatly increased borrowing. The
higher the inflation rate the greater the erosion of the real value
of debt, a consideration of particular value if accompanied by
lower interest rates, which would be allowable if target inflation
was higher, as these would reduce the cost of the Government's
short-term debt, now a much larger proportion of Government debt
following the Covid crisis measures. Such benefits hark back to the
purpose of the Bank's creation in 1694 to raise money "for carrying
on the War against France", and consequently, management of the
Government debt, a function that became increasingly important and
continued until this major function, debt management, was hived off
to the newly created Debt Management Office ("DMO") in 1997 when
the MPC was charged by Gordon Brown with the independent control of
inflation. This marked a change from the use of fiscal (tax and
spending) policy operated by the Treasury under the Chancellor to
control the economy, with monetary policy (interest rates; open
market policy) to be controlled by the Bank.
Debt management had been a central function of Government since
WWI when debt as a percentage of GNP rose to nearly 200% and again
to nearly 250% post WWII. Unfortunately, post WWI high borrowing
and defence of the Gold Standard required high interest rates and
severely crippled the economy until it was abolished in 1931. In
contrast, post WWII the Treasury controlled monetary policy without
the burden of the Gold Standard and interest rates were kept down,
but inflation rose, often steeply. In consequence, real interest
rates were negative for more than half the period 1945-80 during
which the resulting high inflation allowed, according to Carmen
Reinhart, most of the debt reduction to under 50% of GNP since WWII
to take place with much lower real capital repayments, while low
real current interest payments provided corresponding benefits.
Patently, while the opportunity to use inflation to reduce real
debt in the 1945-1980 period was obvious, now a much less obvious
route exists. A recent survey of the 18 largest UK gilt managers
noted that the asset purchases Quantitative Easing (QE) by the
Bank, which are designed to lower interest costs, closely followed
the debt issued by the DMO: they surmised the purpose of asset
purchases was to lower Government borrowing costs and cause
inflation rates to be above interest rates, thus eroding the real
value of Government debt. Such possible sleight of hand is rarely
noticed, but the recent Bank of England Chief Economist warned of
the risk of returning to the "fiscal dominance" implied by such
policies (i.e. monetary policy being used for Treasury purposes)
and Lord Mervyn King branded QE a "dangerous addiction". The
Economist notes that "when debt is high temptation will always be
strong". Yielding to such temptation is surely unthinkable: or is
it? The "use" of inflation presents an interesting parallel: for
labour, inflation allows the "painless" transfer of economic
resources from lower productivity to higher productivity
activities; for capital, it allows the "painless" transfer to
capital from debtors to creditors. Magic, really!
Thus, strong forces bear on current monetary policy, which is
already less constricting than previously. While the target
inflation rate is 2%, the MPC's remit includes "supporting the
Government economic policy" and, in recent years, to "depart from
its target as a result of shocks and disturbances [to avoid]
undesirable volatility in output ... and vary the appropriate
horizon for returning inflation to the target". In this context the
MPC November report says "in recent unprecedented circumstances,
the economy has been subject to very large shocks. Given the lag
between changes in monetary policy and their effects on inflation,
the Committee, in judging the appropriate policy stance, will as
always focus on the medium-term prospects for inflation, including
medium-term inflation expectation, rather than factors that are
likely to be transient".
The MPC's reaction to the recent surge in inflation and in
particular the maintenance of Base Rate at 0.1% in November was
shaped by an increased emphasis on managing the economy as it
reports "Looking beyond the coming months, the Committee will, as
always, contrive to focus on the medium-term prospects for
inflation".
The short-term factors are caused primarily by the obstacles,
detours and restrictions to the passage of the economic upsurge or
"bore" consequent upon recovery from the major recession. Economic
difficulties have been augmented by the end of Britain's
transitional membership of the EU Single Market and Customs Union
on 31 December 2020. The anomalous position of N.I. restricts trade
and seems difficult to solve. Tariff Free trade has been agreed
with the EU, but is encumbered by many non-tariff restrictions such
as VAT rules, sanitary and phytosanitary certification and,
overreachingly, by "delay", some politically "manufactured", which
incurs additional costs, especially for perishables, fish,
harvested crops, nursery stock and animal products as shelf life is
reduced and wastage increased. Many such problems may be
circumvented, or new trade routes established, leaving a small
residue of higher costs and, regrettably, at times unviable
enterprises.
Short-term imbalances between supply and demand increase prices.
Demand may surge but supply is necessarily slower as it may require
the re-opening of facilities and their repair, stocking and
manning. Many products, even "simple" goods, are assembled from a
whole range of parts and from different suppliers, the delay of any
one of which will hold up the end product. A complex good, a car,
has thousands of components but is not a car without that vital
bit, however small: no electronic chip, currently in short supply,
no car! Such components not only have to be manufactured, but they
have to be delivered and the surge in demand has led to a shortage
in and long lead times for shipping containers, costing up to ten
times more, and a further delay in delivering the goods because
many container delivery ships queue for days in overcrowded ports,
especially in China and the USA. Causing separate transport delays,
HGV drivers have become scarce, delaying deliveries, as many
foreign drivers have not returned or are not able to return because
of UK immigration rules, but significantly, because there is a
backlog of 40,000 HGV drivers awaiting certification due to Covid
related staff shortages. This delay may only be one instance of a
more general cause of "shortage" - the necessary poor productivity
of some types of staff "home working" or, as alternatively put,
"living at work"! Additionally, Covid has caused premises to close
because of quarantine, also interrupting supply. Truly, there are
many present causes of insufficient supply, leading to higher
prices.
Clearly most of these supply shortages will prove short lived
and any resulting current inflationary influence eliminated; ports
will be cleared; containers freed up; drivers trained; Covid
closures reduced if not eliminated and alternative supply routes
and suppliers gained - the inflation derived from those shortages
will be eliminated as recent history demonstrates: the driver
induced petrol crisis is soon forgotten; and on what supermarket
shelf is a reasonable supply of EU fruits and vegetables not
available? Supply disruptions have caused significant price
increases but, as supply and demand adjust, most of such
bottlenecks will be eliminated, no longer causing inflation.
A major source of inflation lies elsewhere. The Bank's forecast
of a 4.3% rise in CPI in 2021, includes 1.25 percentage points
attributable "Energy prices - direct contribution to CPI
inflation", falling next year to 3/4 of a percentage point and nil
in 2023 and 2024 as energy prices stabilise at current levels. The
probable continuance of such elevated energy prices is exhibited by
the five-year futures price of Brent crude oil which was of $72.890
on Friday 26 November having just fallen from nearly $90 before the
Covid Omicron variant was identified. Prices of all quoted energy
supplies have risen 50% or more over a year, with Coal rising 175%
and Natural Gas 92%.
The economic damage caused by energy price rises is partially
self-induced, resulting from implementing "green" policies,
primarily related to climate change, including anti-nuclear
sentiment - ironically, surely the most green and nil carbon
emitting electricity generating policy possible! The UK's almost
entire switch from its coal power generation has increased its
reliance for base load generation on gas and on wind power, a
variable energy source, manifestly unsuitable for meeting base load
requirements. Thus, when the wind does not blow the UK becomes, as
the Economist says, "painfully dependent on natural gas imports,
especially in calm weather". Because of the calm weather and
because UK gas storage has been reduced to 2% of annual demand from
30%, gas has had to be imported at the current high spot price.
This huge gas price increase has been directly felt in the consumer
market and following the collapse of numerous unhedged suppliers,
their consumers are now being subsidised by the Government.
The UK has endorsed the EU's carbon emissions - trading scheme
which has increased the cost of energy stored in fossil fuels,
particularly, coal, the cheapest energy resource. These fossil
fuels are vast stores of photosynthetically derived energy formed
as a result of one of many biological interventions in the climate,
including the current one. The climatic influences of life has an
epochally long tradition, each one as different, as "earth
shattering"! Common to all such cases is quantum - changes
resulting from unimaginably large numbers and long periods. The
current "green" crisis arises as the product of the population
number and of each individual's contribution - an effective control
would be to reduce numbers - population control, - but advice on
such behaviour is muted, presumably being too direct!
The world has experienced several biologically induced
transformations traceable back for more than 2.5 billion years.
Then, quite "shockingly", the atmosphere was almost all greenhouse
gases, predominantly methane and CO(2) , and some nitrogen but no
oxygen. This atmosphere resulted from the physiology of the then
existing organisms who processed and used the energy stored in
inorganic chemicals producing carbon based by-products,
particularly methane (CH(4) ) and CO(2) . The world was extremely
hot! Then, about 2.4 billion years ago, "the great oxidation event"
occurred when "plants" harnessed the sun's radiant energy by
photosynthesis. They stored the radiant energy in carbon based
organic chemicals - sugars - the carbon being derived from the
atmospheric CO(2) and the oxygen released into the atmosphere. The
previously dominant bacteria like methane producing organisms were
largely replaced. Photosynthetic activity replaced the
super-heating carbon gas-based blanket, substituting oxygen. The
climate reversed and a deep ice age, extending as far as the
equator, became established. The resulting high levels of oxygen,
an active chemical which allows a rapid release of energy by
"burning", permitted the evolution of intensive energy consuming
life forms such as animals. Subsequent evolutionary progress led to
the development of land plants that used photosynthesis both for
the storage of energy rich carbon for use physiologically but also
photosynthetically produced carbon based supporting structural
elements such as lignin, a type of polymerised sugar (wood!).
Earlier examples included giant club mosses, cycads and tree ferns,
culminating in evolution of the flowering plants, including trees.
As these "ligneous" elements were resistant to digestion by
herbivores, they remained unconsumed and, under certain conditions,
undecomposed. But these undigested plant remains stored vast
amounts of carbon, so great that the benign carbon warming gases
(as they were then - how things changed) were reduced and
temperatures fell. Now, another life activity is releasing those
vast stores of carbon energy reserves by oxidising them; the latest
change in more than 2.5 billion years of fluctuations in atmosphere
and temperature.
The preliminary costs of green policies are just an
"amuse-bouche" - a gross tasting menu follows. The climate change
committee estimate the cost of the UK's policy as GBP1.3 trillion
spent mostly over the next 20 years, peaking in 2027, with
meaningful savings (e.g. lower heating bills) starting in the 2040s
with a net cost after future, but undiscounted to present value,
savings of GBP991 billion. The method of, the timing of, and the
responsibility for achievement of environmental gain is in danger
of becoming a shibboleth like "mom and apple pie", unquestionable,
universally held and supported because "they", the Government,
someone else, is going to deliver its benefits, but is free for
"them", the proponents. Like many virtues it is more observed in
aspiration than in execution. For example, the taxable cost of
vehicles going "green" is about GBP30 billion per year but in a
survey only 37% of even those with "green" credentials support road
taxes to replace that lost tax revenue. On this survey the
Economist comments: "Treasury insiders fear that, along the path to
net zero, public enthusiasm will evaporate". That the rise in fuel
duty, due to be increased yearly unless countermanded, has been
frozen at 57.95p since 2011 illustrates the scale of the political
cost of increasing carbon taxes.
The political hurdle of paying for "Green" will prove very high.
The current estimate of "greening" is surely suspect as it is
produced by an organisation with an inherent interest in its
fulfilment. Even more importantly, it embraces obscure technical
aspirations, assumes complex technological advance and is vast.
What Government programme embracing any one of these complex
variables ever delivered on time and on budget!? Certainly not HS2,
the Channel Tunnel, the NHS IT system, Test and Trace, the
Edinburgh tram system or the Scottish Parliament whose GBP40
million budget ballooned to GBP414 million. The Scots have an
appropriate expression: "Nae chance". But what will be the actual
cost - at least three to five times more - so, why is it mainstream
policy? Possibly, because it is "good", particularly as "someone
else" is to pay for it. Deleterious atmospheric changes are
undeniably occurring but how, when, by whom and to what extent they
should be countered, appear taboo questions, heresies in a settled
faith. Unfortunately, for faith, as for intuition, the nobel
laureate, Daniel Kahneman comments, "intuition [and faith] feels
just the same when its wrong as when its right, that's the
problem". The proper concern for climate change is causing a reflex
action, which, while honourably intended, will not necessarily
achieve the optimal balance of advantage or the optimum method of
the achievement.
Intuitively, it is "right" to mitigate conditions that damage
the world, but the UK's moral leadership has a disproportionate
economic cost. Fossil fuels account for 83.1% of all energy
consumption. The UK's consumption of all fossil fuels in 2020 was
1.12% of world fossil fuel energy consumption. The UK's total
elimination of fossil fuel use in 2019 would have reduced world
consumption of fossil fuels then by 1.24%.
The insignificance of the UK's expensive mitigation of fossil
fuel use is highlighted as the UK's actual fossil fuel savings in
2019 compared to 2018 (2020 is distorted by the recession) of 0.26
exajoules (an exajoule equals 1 joule x 10(18) ) is wholly
insignificant compared to China's increase from 116.60 exajoules in
2018 to 120.64 exajoules in 2019, a 4.04 exajoules increase in one
year.
The UK's economy is also damaged by ill-considered policy
measures, presumably based on the importance of "green" at whatever
costs - whatever it takes! An exceptionally ill-considered "green"
policy has been applied to electric power generation. All UK coal
using power stations have been closed, wind sources greatly
expanded and the storage of gas reduced to 2% of annual requirement
from 30%, making the UK depend on gas bought on the spot market to
meet fluctuations in demand.
This year the UK experienced the longest period of calm weather
in 30 years and wind supplies fell 15% on average, increasing the
need for gas generation. The recovery of the world economy has
greatly increased the demand for gas and without reserves gas
prices have soared from 30p to 130p per therm. Consequently,
unnecessary economic costs fall on consumers, Government by
subsidy, and on business, resulting in plant closures and
consequent shortages of essential supplies (e.g. CO(2) ) stoking
inflation. Continuation of the "full frontal" approach to climate
change will be much more damaging than one aimed to achieve the
maximum return or lowest cost per degree of saving. Keynes put this
proposition more succinctly: "It is not sufficient that the state
of affairs which we seek to promote should be better than the state
which preceded it; it must be sufficiently better to make up for
the evils of transition".
There are many energy saving policies that are either simple or
achieve high returns without far-reaching deleterious effects. For
instance, energy wastage in US industry is estimated to be up to
50% in spite of often being self-financing in areas including heat
recycling, insulation, lighting, product development and building
and machinery design. Similarly, obvious self-financing consumer
savings, universally applicable, include lighting, insulation and
design. In addition to such carrots the stick of increased prices
is an immediate and effective method of reducing consumption. The
freezing of fuel duty since 2012 continues to create the reverse
incentive. The use of such short-term, high return measures could
produce cheaper results while other technologies are developed,
such as cheaper nuclear power, fusion or fission, sky radiation
reflections, CO(2) storage and the emission reduction or oxidation
of methane, the most damaging of all the radiation reflecting
gases. Most importantly, time might allow resolution of the most
important limit to global warming: others don't share our concern
or they rather would not bear the cost. In spite of great cost, the
UK will achieve little benefit while China's and Russia's policies
add to the problem more quickly than others solve it, or share the
Secretary General of OPEC, René Ortiz's, view of the Gulf state oil
companies "[who] don't care about the political pressure to reduce
emissions".
Unfortunately, "green" abhorrence of OPEC's apparent
indifference flies in the face of reality. Oil and gas currently
provides 55.9% of all world energy needs and 76.9% of energy needs,
if coal, the most damaging of fossil fuels, is excluded. Moreover,
even given the present "green" policy, the continuing world
economic expansion will result in global oil demand continuing to
increase each year for the next five years, if only by small
amounts, or about 5% cumulatively (BP Annual Report 2021). Without
an economic paralysis, reliance on energy supply of those
magnitudes can only be changed slowly. But even on a smaller scale
it would be counter- productive to burden the UK's economy by
reducing UK's fossil fuel outputs while those outputs are replaced
elsewhere.
The UK's current focus on its moral role in world climate
control could be expensive and inflationary. Green policies will
certainly raise energy prices and inflation to an uncertain degree
on a continuing basis as more expensive energy sources replace
cheaper ones. Such discretionary self-imposed policies are likely
to be complemented by the exogenous factors of worldwide supply and
demand. Demand for energy is directly related to economic growth
and is forecast to continue to increase the demand for oil and gas,
independent of "green" savings. However, arbitrary supply
restrictions will increase the OPEC+ share and seem likely to
increase prices. Thus, I do not share the Bank's view that, while
energy prices contributed 1 1/4 % inflation in 2021 out of an
estimated total 4 1/4 %, they will reduce to nil in 2023. Rising
energy prices are one of many macrotrends pointing to higher
inflation and include, particularly, the diminution of the overhang
of China's cheap labour, the increasing world trade barriers,
especially due to the US / China decoupling, and changing
demographics, reducing the labour force as a percentage of the
whole population in Western economies. However, past inflationary
forces have largely been exorcised by increased labour flexibility
and the changed balance of power and inflationary expectations are
lower. These changes limiting inflation are being constantly
reinforced by new technologies, including the yet unfulfilled
promise of the digital age, and by some public and political
improvement in economic understanding. Such factors will contain
inflation below the maximum safe "Goldilocks" level and above the
currently held 2% target.
I consider real interest rates will be negative with the
consequent benefits for investors and debtors, especially the
Government, and asset prices, including house prices, are likely to
be supported. It would be economically beneficial if inflation
rates were covertly allowed to rise to, say, 3.5%, while Bank Rate
was maintained at a lower level and, while such an overt policy
change seems too removed from current conventional thinking to be
likely, a covert move which allowed higher inflation rates without
affecting Bank Rate, as seems to be US practice, could be
implemented and would be beneficial. Encouragingly, the Bank
forecast Bank Rate to remain at 1% for the next three years except
briefly in 2023.
The Scottish economy is very largely dependent on the UK economy
and will benefit similarly from the relatively benign economic
prospects forecast. However, two shadows fall on the Scottish
economy. The oil and gas industry represents a disproportionately
large percentage of the Scottish economy and its likely further
contraction as evidenced by the probable denial of the licence at
Cambo off Shetland, would be most unfavourable. In Scotland the
pivotal influence of the Green Party on economic policy extends
damagingly into so many areas of productive investment, including,
particularly, transport: is it just too simple to observe that its
current opposition to road improvements will be rendered entirely
redundant as soon as electrically powered vehicles predominate?
The Scottish economy has continued to deteriorate in relation to
the UK's. Lack of growth has resulted in Scotland's tax revenue
falling GBP190m below the level it would have received through the
previous block grant, a shortfall estimated by the Scottish Fiscal
Commission to rise to GBP417m in five years. The threat of
independence continues to damage the Scottish economy, relocating
or diverting resources, investment and personnel. It is a
masterpiece of political skill that the party that bemoans the
trade tragedy of Brexit should ardently seek to embrace a much
greater trade tragedy through Scexit! If the Irish border is
difficult to surmount, then Hadrian's Wall, even dilapidated, is
unscalable. It is entirely proper for Scotland to choose political
preference over economic advantage, provided the costs are not
hidden. But such a trade has a very long, very expensive and very
unfruitful tradition.
Property Prospects
In the previous investment cycle the CBRE All Property Yield
peaked at 7.4% in November 2001, fell to 4.1% in May 2007 before
rising to 7.8% in February 2009, a yield surpassed only very
briefly since 1970, when the Bank Rate was over 10%. Subsequently,
yields fell to a low of 5.3% in August 2017 then rose again over
three years to an estimated 5.9% in September 2020, and have now
fallen slightly to 5.8%.
This year Savill's prime yields have risen in four of their 14
identified sectors and are unchanged only for South East Offices
and Foodstores at 5.50% and 4.50%, but last year's rise in yields
for High Street Retail and Shopping Centres and both Leisure
categories, Parks and Pubs, has been extended with rises of up to
0.5% points. Significant falls in yield of 0.75% points have
occurred in Retail Warehouses and in both Industrial Distribution
and Industrial Multi-lets, all probably reflecting the continued
move away from the High Street Retail to Warehouses and Online
delivery services.
The All Property yield peaked at 7.8% in February 2009, during
the Great Recession, 4.6 percentage points higher than the 10-year
Gilt, the widest "yield gap" since the series began in 1972 and 1.4
percentage points above the previous record in February 1999. The
2012 yield of 6.3% marked a new record yield gap of 4.8 percentage
points, due largely to the then exceptionally low 1.5% Gilt yield.
The yield gap fell to a low of 3.3 percentage points in 2014, but
rose steadily to 4.1 percentage points in 2018, due largely to a
fall in the 10-year Gilt yield, and rose further to 4.8 percentage
points in 2019 and again in 2020 to 5.6 percentage points. This
year, due to a 0.6% rise in the 10-year Gilt yield to 0.7%, the
yield gap has fallen back to 5.0 percentage points. The
inconsistency in the yield gap is reflected in the absence of an
obvious connection between inflation and yields. Since 2009,
Savill's prime property yields have varied very little within the
range of about 4.75% to 5.75% while inflation (CPI), falling from a
peak of just over 5% in 2008, has moved since then between plus
3.00% and slightly negative. Over the same period the spread in
yields between secondary and prime properties has narrowed
consistently by almost 1.0 percentage points.
The All Property Rent Index, except in 2003, rose consistently
from 1994 to 2009 when it fell by 12.3%. Immediately following the
Great Recession there were three small annual increases totalling
1.6%, but subsequently rental growth averaged, 3.6% in the five
years to 2017, reducing to 0.8% in 2018, but have fallen
subsequently. In 2019 a fall of 0.1% was caused by falls of 3.8%
for Retail Warehouses and 4.9% for Shopping Centres, these last two
sectors having had the worst performance in the previous year. The
pattern was repeated in 2020 as a fall of 2.1% in All Property
Rental values resulted from Retail falls of: Standard Retail 6.0%;
Retail Warehouses 4.2%; and Shopping Centres 10.8%, followed in
2021 by 0.7% as a result of further retail falls of: Standard
Retail 7.0%; Retail Warehouses 3.1%; and Shopping Centres 9.1%.
These losses were only partially offset by a 3.9% rise in
industrial rents.
In the 12 months to October 2021 capital values have risen
slightly by 2.3%, but have fallen 15% for Shopping Centres, and 7%
for Standard Retail, and are virtually unchanged for Retail
Warehouses, but Industrials have risen again this year by 12%.
However, a more insidious continuing fall has been the erosion of
real value by inflation, as since the market peak in 1990/1991 the
extended CBRE rent indices, as adjusted by RPI inflation, have
fallen by: All Property 40%; Offices 41%; Shops 40%; and
Industrials 29%.
It is no consolation for the current falls in capital values
that in the 24 months following the beginning of the Great
Recession All Property capital values fell by an astonishing
44%.
Fortunately, forecasts for 2022 and for the years up to 2025 are
better. The Investment Property Forum ("IPF") averaging the results
of 23 surveys which vary significantly among them. For example, the
All Property return for 2022 showed a difference among individual
forecasts of 3.25% to 18.50%! Forecasting is hazardous. However,
more distant forecasts are consistent as differences vary only by
+/-2 percentage points. The IPF forecasts All Property returns of
6.7% for 2022 and an average of 6.4% for 2022 - 2025, due to
slightly lower rental and capital growth. Retail rental and capital
values are forecast to fall again in 2022, but to be positive from
2023, resulting in a total return of 3.4% in 2022 and of 4.0%
annually from 2023 to 2025. Office rental and capital values each
increase by 1% to 2% each year, giving a total return of about 6.3%
in each of the years 2022 to 2025. IPF Industrial forecasts are
surprisingly low, given other information, averaging 6.9% in each
of 2022 to 2025 following only about 1.0% annual increases in both
Retail and Capital Value. In contrast, Colliers have much higher
forecasts for "Logistics and Industrial" which may arise from their
emphasis on "Logistics", the distribution systems necessary for
online shopping, in which very rapid rises in value are forecast
with returns averaging 10.6% per year from 2021 to 2025, including
a spectacular increase of 31.3% in 2021, when investment yields
fell sharply, in places to under 3.0%.
IPF distinguish "Retail" between Standard, Shopping Centre and
Retail Warehouse formats, where forecasts distinctly differ. While
Standard rental values and capital values are forecast to continue
to fall in 2022, they are expected to stabilise over the three
years to 2025. Shopping Centres are estimated to return -9.5% in
2021 and are forecast to continue to fall consistently in both
Rental and Capital Value in both 2022 and 2023, before recovering
significantly in 2024 and 2025 to give a Total Return of about 2.0%
in each of the four years to 2025, due to the now high yields.
Retail Warehouses are by far the best performing sub-sector of the
Retail Market as Rental Value and Capital Value are forecast to
recover in 2022 to give a total return of over 7.0% in each of the
years to 2025.
The poor investment performance of most "traditional" asset
classes, typically as analysed above, has attracted attention to
"niche" or other smaller asset classes, that have delivered or are
expected to deliver higher returns of which one asset class,
"land"; has had both the lowest and the highest return. While
agricultural land, has given nil returns over the last five years
and is expected to return only a meagre 0.1% over the next five
years - too small to measure really - forestry land has returned
15.3% per year and is expected to return a further 11.4% per year
over the next five years! In the residential market London "buy to
let" is forecast to return only 5.2% per year, but North West "buy
to let" a 9.0% return per year, and ranks second to Forestry. Two
other "residential" asset classes rank third and fourth in return:
Student Housing 8.6% and Build to Rent 7.7%. In general, Savills'
forecast "Beds and Sheds" (distribution warehouses) to perform well
above "traditional" investments.
Savills consider Edinburgh as a niche investment class that will
continue to attract attention, noting international investment
buyers bought 78.3% by value of office investments in 2020, an
increase from the high level of 73.2% in 2019. In spite of the
prospect of a second Scottish referendum, a prospect considered of
less concern than other geopolitical risks because of the UK's
traditional long leases and its stable legal system, and because of
higher Edinburgh prime office yields of 4.75% compared with
London's West End of 3.25% and City of 3.75%. Edinburgh commands a
premium in two respects: as a capital city internationally
recognised for its architectural quality, cultural life and
intellectual heritage, coupled with its renowned educational
institutions and consequently highly qualified workforce and, as,
outside London, having the fourth highest GDP per head of the UK's
179 International Territorial Levels (ITL). Market results attest
to Edinburgh's attraction as Edinburgh was the only regional office
market where 2020 office take up was higher than in 2019 and where
rents have increased consistently, rising to GBP35.50/ft(2) for
Grade A space and seem likely to continue to do so as development
is tightly limited by space and planning considerations. In
contrast, comparable yields in Glasgow are 5.25% and in Aberdeen
are reported as 6.75%, a yield almost certain to rise given the
continuing contraction in investment in the oil industry, now
further threatened by political opposition.
The retail sector's resilience had been severely tested long
before the restrictions to reduce the spread of Covid-19 were
introduced in March 2020. For several years household income has
changed little, retail competition has increased, especially from
discounters, and retail costs, notably labour costs and rates, have
risen rapidly while online competition has been taking an
increasing share of retail sales: a toxic combination that has had
a most damaging effect. Retail units have been declining starting
in 2015 when only a net 338 units closed in Great Britain, but
rising to 5,493 in 2017 and, after peaking in 2020 at 11,319, is
expected in 2022 still to be as many as 9,145, or one unit per
7,000 people - say, a shop closing in a small town. Since 2017
vacancy rates have risen by 45% to 11.1% of all premises in the
"leisure" sub-sector, (bars, cafes, restaurants, etc.) and by a
lesser 30% in the "retail" sub-sector. But by far the most
insidious of the adverse factors has been the increase in online
sales. In the UK these had already risen from 3% of total retail
sales in 2006 to 19% in 2019, representing the world's highest
percentage of internet retail sales. This strong base in online
sales expanded rapidly following the Covid-19 restrictions and
reached a maximum of 37% in June 2021, falling recently to 26%.
The forecast property returns to retailing indicate that the
retail sector as a whole is expected to stabilise next year.
Pre-Covid-19 online sales gained about 1.5 percentage points of the
market each year. However, in most markets initial high growth
rates attenuate. As online retailing expanded it captured the
easiest share first - the low hanging fruit - and those retailers
remaining are likely to be less susceptible to online marketing or
have become more competitive, some embracing online techniques. In
mirror image some online retailers moved into "bricks and mortar"
to reinforce and to widen their appeal. In contrast to continuing
expansion, some online sales appear to be "loss leaders" as return
rates on many fashion items and shoes are so high that repacking
and wastage costs may make some sales uneconomic. The net effect is
that, while I expect online sales to continue to grow, I estimate
growth will fall to say, 1.5 percentage points more of retail sales
per year. In such a situation if retail sales of, say, GBP100, 26%
of which are online, increase 4% per
year, then after five years, retail sales will total GBP121.70
and, if the online sales percentage rises 1.5 percentage points
each year, the online share will be 33.5% or GBP40.77 of the total
GBP121.70 sales and non-online sales will be GBP80.93, which is a
rise, albeit a small one, from the current GBP74.00. Surely, all is
not lost.
"Retail" encompasses both traditional goods and goods that
include a major "convenience" service attraction, for which demand
has been increasing and which, by definition, is typically
unavailable online. For instance, in H1 2021 "convenience" service
shops comprised nine out of the 10 largest growing type of retail
stores, opening the following net new stores: fast food 333;
convenience stores 332; groceries 208; pizza 129; and takeaway food
shops 103 followed by personal services shops - barbers 318; beauty
salons 107; and nail salons 60. Such demands seem likely to
continue to increase with population growth coupled with an
increased frequency of visiting and by extension of the customers'
age groups - older grannies and younger teenagers, all demand
further assisted by increasing disposable income. Exceptionally,
Charity Shops had the largest closures, 446, but, as such closures
were often due to Covid induced staff shortages, a large number are
likely to re-open. Fashion Shops 349, clothes "women" 411; and
clothes "men" 271 were the largest group of closures followed by
various services, replaced online, such as bookmakers 342; banks
188; and estate agents 166. Such analysis of the retail market
neglects the important functions the opening of "brick and mortar"
premises provides for online retailers. Such premises facilitate
online fulfilment and returns, are key in their brand positioning
and promotion, and provide customers with a physical and
psychological "contact" with the brand.
The offline retail crisis contains the seeds of its own revival,
as it is resulting in lower rents and lower valuations which will
reduce rents and lower rates. Such lower costs will allow a wider
range of occupiers to trade profitably. Separately, the political
implications of a failing high street will result in some
assistance to the retail sector by changing planning restrictions,
upgrading town centre infrastructure and effecting environmental,
especially "green", improvements. Thus, the present offline decline
will not continue inexorably.
The ugly industrial duckling has been transformed into a
beautiful logistics swan with excellent genes and long-life
expectancy. The industrial sector, previously often associated with
grimy premises and multi-let conversions is now focused on huge
modern high tech "Logistics" distribution and warehouse units.
Yields that were typically 7% to 9% now emulate the best West End
offices with investments sold for less at 2.8% at Park Royal,
Deptford and at less than 3% in 13 other locations this year.
Occupier demand is reported as "buoyant" by Colliers because of "a
sustained occupier focus on future-proofing supply chains".
Patently, any previous apprehension of the consequences of Brexit
on the industrial market has proved unimportant.
Similarly, the apprehension of the Brexit effect on the office
market has proved unfounded. Initially City figures "predicted an
exodus", 200,000 in one case. Such exaggerated claims have proved
to be just that, as the total number of Brexit jobs lost until
August 2021 was estimated by the EY Tracker to be "almost 7,600",
and EY adds "the days of significant swathes of asset and job
relocation appear to have passed". The City's distaste for Brexit
allowed them to convince themselves that the effect would be much
larger than it is proving to be. Instead of a torrent it is likely
to be a continuous dribble of loss to the EU capitals, it would
appear primarily because of obstructive political decisions by the
EU, unless that loss is outweighed by an inflow of other
international but non-EU business into the City.
The long-term effect of office occupation from Covid is likely
to be significant. Initially, any contraction in space used was
caused by the lockdown measures necessary to contain the rampant
spread of the plague. This changed dramatically early this year as
outstanding scientific achievements allowed the rapid development
and deployment of a range of very effective vaccines.
Unfortunately, the spread of the disease throughout the community
appears inevitable unless and until it reaches a level of natural
attrition or immunity, as has occurred with some other viruses.
More likely it will persist in specific segregated areas, breaking
out occasionally or when variants emerge that are less controllable
and then another epidemic occurs. It will become like influenza, a
virus recurring in various forms capable of being attenuated by
designed vaccines, but deadly for some, especially those
unvaccinated or not vaccinated sufficiently against the specific
variants. It will be a disease with which we must live, or not! In
2021 it is estimated 150,000 will have died from Covid-19. In 2019
29,516 deaths were attributed to influenza or pneumonia.
No doubt the much greater understanding of Covid disease will
result in measures by the public, by health boards, by law, and by
employers which will reduce the spread of this and all such viruses
- vaccines obviously - but also ventilation, filtration of
circulating air, early warning systems, distancing, testing, and
strict hygiene disciplines. In time the "health" effect of the
virus on office attendance will become less significant. It will
become more like flu which, until now, has not affected working
practices or office attendance and nor will Covid, but with very
significant exceptions. The perceptions and culture of the
population have been modified by better understanding of virus
diseases and by bitter experience and, consequently, both employees
and employers will be anxious to avoid working conditions that
facilitate the spread of such diseases. These concerns will modify
the environmental conditions in which the employees choose to work
and, consequently, the office conditions required to be provided by
employers.
The second more significant effect of the awareness of viral
infections on office accommodation lies in the perception and
demands of office workers who have become accustomed to working at
home part or full time. The significance of the effect will depend
on the type of work - routine, capable of external supervision at
one extreme, group collaborative work or managerial at the other.
Such reticence will be offset by measures likely to be taken by
employers to provide safer more attractive, more socially rewarding
environments and by the need to provide more space for the
occupiers. There is no clear trend: JP Morgan and Goldman Sachs,
for instance, require office attendance, but Apple employees voted
against office working. The outcome will vary between those
functions where overall cost is no more remotely than in the office
and those functions where the cost of remote working is higher. For
those functions that can be performed online cheaper there are
potentially huge savings by transferring work to lower cost remote
locations such as India or even the Isles of Scotland. These
economic factors will be skewed by individuals' choice of hubbub
over suburb or rural tranquillity and other personal preferences.
For some working at home is home at work - complete with "domestic"
overheads.
In summary, there will be a reduction in office use, primarily
because of part-time home work, especially for routine and clerical
work. This will be offset by better, bigger space per person or a
move to smaller local or compact offices, probably technologically
interconnected. The "value" between up to date "premises" and those
not up to date will widen dramatically and rent rates will rise for
the former and fall for the latter. Unfortunately, the demand for
office space is highly inelastic and unused supply which is not or
cannot economically be upgraded will give rise to high vacancy
rates and result in significantly lower values.
This time last year forecasts for UK house prices were
universally gloomy. OBR, the most pessimistic, forecast prices to
"fall back" 8% in fiscal 2021/2022 and HMT's Average of Forecasts
was for a fall of 2.1% in 2021 followed by falls of 0.9%, 3.0% and
3.9% in the three years to 2024. In September 2020 Savills revised
their 2021 forecast down to 0% growth. These forecasts have been
wholly confounded as the expected outturn for 2021 is for one of
unprecedented growth. For the 12 months to end November 2021
Halifax reports growth of 8.2%; Nationwide 10.0%; and Acadata 4.1%
(England and Wales to October) and 13.2% (Scotland to
September).
The reports almost always emphasise the same common factors
causing the large rise in prices, but with separate considerations
for the apparently anomalous Acadata's (England and Wales) lower
reported price rises. The common factors are: low interest rates;
shortage of available properties; low unemployment; and high
economic growth, coupled with high savings. Acadata point to "life
style" changes as buyers looked to move to larger premises, often
linked to the need to work from home, and Nationwide to "ongoing
shifts in house preferences, as a result of the pandemic".
The anomalously low rise in England and Wales, recorded by
Acadata, has many causes. First, Acadata's figures include all
sales, not just sales based on mortgages, which are skewed both by
a higher than average percentage of new houses, and by a higher
percentage of first-time buyers where prices have probably risen
more than average. Additionally, they are skewed geographically
away from London and the South East where prices have risen
relatively slowly and they are not based on actual sales but are
based on "model" houses, seasonally adjusted raising estimated
prices. Also, the mortgage lenders portfolio includes a much higher
proportion than average than Acadata of semi-detached houses whose
prices have risen most. In contrast Acadata's survey includes a
much larger proportion of expensive but slow price rising London
houses, many of which are purchased with cash or through specialist
mortgages. But, in accordance with the mortgage lenders, Acadata
report an above average rise in non-central regions such as: Wales
10.8%; North West 6.9%; and West Midlands 5.7% and consider these
regions benefited from both a higher percentage of semi-detached
homes that offer more space and garden space than terraces and
flats and from falling in the extended temporary reduction in SDLT
tax "holiday" category from GBP500,000 to GBP250,000 which ended in
late September. Lastly, Acadata excludes Scotland where it reports
price rises of 13.2%, above the average rise of the UK wide survey
of the mortgage lenders. A general finding is that the increase in
Covid led demand for property outside London and the East and South
East England has been reinforced by "value". Acadata give as a
classic sample the sale of a 250m(2) stone-built, detached house
overlooking the River Clyde for GBP850,000, the price of a
three-bedroom 120m(2) Victorian terrace in Ealing!
Scotland has enjoyed an unprecedented boom with house prices
rising 13.2%, a higher rate of increase than in any of the other
United Kingdom regions, to GBP212,832, a new record. Apart from a
maverick change of -0.5% in the Outer Isles, the lowest price
increases were 7.5% in North Lanarkshire and around 9% in West
Dunbartonshire and Stirling. Even in Aberdeen City, which has
recently suffered price falls, prices rose 9.4%. Price rises for
larger premises have been proportionately higher due to increased
demand from those relocating and the supply of such houses,
primarily existing substantially built houses, has been low.
In general, city centre properties, especially flats, have had
modest increases. However, a recovery in demand for a specialist
sector of such properties may be taking place as exemplified by the
reported sale by Acadata of a "flat" in Edinburgh's Heriot Row for
GBP1.3m. It may be that, with the Covid threat reduced, relocators
from London still prefer spacious elegant central period flats to
"country living", which for some relocators suffering "rural
buyers" remorse, the new pandemic property trend is proving an
evanescent ideal rather than idyll. Certainly, the ESPC's House
Price Report, covering the south east of Scotland, confirm an 8%
rise in value of Edinburgh's New Town/West End flats. This rise is
distinguished from the overall City of Edinburgh price rise of only
0.2% in the year to November. This anomaly was caused because,
excluding the New Town's 8.2% and the prestigious
Morningside/Merchiston flats 10.9% rises, all other flatted
property only rose 1.2% and six inlying Edinburgh suburbs suffered
falls of between 10.2% and 20.6%. However, Suburban areas, outside
the City, mostly had larger rises: East Lothian 8.7%; West Fife and
Kinross 6.2%; and West Lothian 5.2%. Thus, Edinburgh's rises were
concentrated in the highest quality central properties and its
suburban peripheries.
House price forecasts are less varied than the extreme of the
forecasts made in 2020, notably the OBR's - 8%. This year the OBR
forecasts steady increases of 2.2%, 1.0%, 2.2%, 3.1% and 3.6% over
the next five fiscal years (i.e. to 31 March) or 21.5% overall. The
HMT's average of forecasts is also cautious forecasting rises of
1.3%, 1.1%, 2.4% and 3.2% over the next four calendar years.
Savills provide the most comprehensive and the most frequent
forecasts, and a comparison of recent forecasts demonstrates the
perceived volatility of the market. In June 2020 UK mainstream
house prices were forecast to decline 7.5% in 2020 and in the five
years to 2024 to rise by 15.1%, but in September they revised the
2020 mainstream forecast to a rise of 4.0%, an 11.5 percentage
point swing, and correspondingly improved their forecast for the
five-year period to 2024 to 20.4%.
Savills Winter 2021 UK forecasts this year, lower than OBR's,
are for small increases of 3.5%, 3.0%, 2.5%, 2.0% and 1.5% or 13.1%
over the five years. This UK average includes a forecast of the
continuing lead in price rise of the "north" with the North West
(the highest), and of Yorkshire/Humber Wales all above 18.6% over
five years. The 15.9% forecast for Scotland is lower than for the
"North" and the lowest price rises of 5.6% are forecast for London.
Many of these forecasts fall below any reasonable expectation of
inflation, which, if over the next five years averages only 2.5%,
will be 13.1%, exactly the forecast average house price increase
over the next five years. Such low levels of real price increases
are forecast because of an expected rise in interest costs which
will increase the overall mortgage cost (capital and interest) to
an "average" household from about the current 7% of income to about
12% over the next five years. The corresponding stress testing
hurdle for mortgage approval purposes corresponding to about 27% of
income, presenting a considerable barrier to mortgage availability
and servicing.
Prime UK Residential forecasts are for increases well above
inflation, totalling 19.3% over the next five years, including
2026, and are higher for Scotland at 22.8%. Savills's forecast is
partly based on the large rise of 8.5% in Scotland's prime
properties in 2021, a rise dominated by Edinburgh (251 transactions
above GBP1m), but supported by Glasgow (34 transactions above
GBP1m) and spreading also to Perthshire and Elie, Strathtay and
Comrie as well as Gleneagles and some such sales in Glasgow's
"countryside" at Bridge of Allan, Dunblane and Strathblane.
The Halifax index previously peaked at the GBP199,000 recorded
in August 2007. The equivalent RPI inflation-adjusted price in
October 2021 would have been 50.5% higher or GBP299,500, and the
current Halifax price in October 2021 is GBP272,992. In spite of
this year's rapid rises, the current price is still 9.0% lower in
real terms. If house prices rise at 3.5% per annum and inflation is
2.0% per annum, then just less than eight more years will elapse
before the August 2007 peak is regained in real terms.
House prices are difficult to forecast and historically and,
notably last year, errors have been large, especially around the
timing of reversals or unusual events such as we have just
experienced. While, without hesitation, I repeat my previous
forecasts, "... the key determinant of the long-term housing market
will be a shortage in supply, resulting in higher prices", for the
year I add a caveat: provided inflationary led interest rate
increases do not reduce demand: supply and demand may be much more
finely balanced than in previous years.
Future Progress
The Group's strategy continues to be the development of its
sites in the Edinburgh housing market areas and the geographical
extension north and east that is occurring, while maximising the
value of its investment portfolio.
The strategy is unchanged from last year, but its implementation
has been delayed largely by the direct and indirect effect of the
Covid-19 virus pandemic. In March 2020 work was halted on our
development at Brunstane, just before the tarmac and other
finishing items were undertaken and work was not restarted until
mid-summer. When marketing eventually took place in July 2020, all
the five properties went "under offer" within two months at prices
above the Home Report and all "offers" were higher than our budget
prices. Two Brunstane sales were completed in quarters 3 and 4 of
2020, while the other three were delayed by sales of the
purchasers' existing properties and only completed in quarter 1 of
2021. This delayed the next phase at Brunstane, due both to site
conditions and to funding restrictions.
Covid has also been largely responsible for a further delay in
the sale of St Margaret's House. The initial delay resulted from
difficulties the developer experienced in gaining the full planning
consent necessary coupled with a change in the prospective
occupiers' accommodation policy. Once the policy became clear the
option to the developer was extended, unfortunately, just before
the Covid crisis resulted in the restrictions which caused a
disruption to demand for student accommodation and great
uncertainty and instability in the student market. Such conditions
have persisted until recently and, paradoxically, the market now
appears stronger than before the first 2020 lockdown. Thus, we plan
to re-market St Margaret's House into this now buoyant market in
the New Year.
The sale of Ardpatrick for GBP2.7m was agreed in December 2020
and was completed on 27 April 2021, a delay caused by the
logistical problem of location, the weather and Covid, which
prevented normal transport and removal arrangements. This sale has
permitted the release of working capital to fund our developments
which have been greatly hindered by both the cost and availability
of credit. For example, a 60% loan to cost at Brunstane together
with ancillary expenses cost GBP160,000, over GBP31,000 per house
and over 10% per annum. We will now fund developments using this
available capital. Moreover, if funding is deemed advantageous,
then for those low base cost properties acquired without planning,
we will be able to provide equity sufficient to meet the 40% cost
to value required by the lenders.
Since the sale of Brunstane and Ardpatrick we have been delayed
in bringing forward new developments by unusually severe delays in
the planning process, often caused by the inefficiencies of the
current Covid working practices. In addition to these delays,
personnel changes have resulted in additional requirements, reviews
and changing interpretations. We continue to strive to circumvent
these constraints.
The working capital now available has also allowed us to
instruct the updating of our existing consents at Belford Road with
improvements within the existing consent, so providing a modern 20
high amenity flat development in keeping with the high quality and
varied style of the location.
Our developments require a stable and liquid housing market, but
we do not depend on any increase in prices for the successful
development of most of our sites, as most of these sites were
purchased unconditionally for prices not far above their existing
use value. A major component of the Group's enhancement of value
lies in securing planning permission, and to the extent of that
permission, and it is relatively independent of changes in house
values. For development or trading properties, unlike investment
properties, no change is made to the Group's balance sheet even
when improved development values have been obtained. Naturally,
however, the balance sheet will reflect such enhanced value as the
properties are sold or developed.
The strategy of the Group continues to be conservative, but
responsive to market conditions, so continuing a philosophy that
underlay the change from primarily investment property to include
our now extensive development programme. This change in strategy
allowed us to escape the devastation caused by the 2008 Great
Recession from which most sections of the property sector either
never recovered or had to be recapitalised and to avoid the
extensive loss in value associated with the Covid-19 pandemic and
the changes continuing to affect adversely most retail and many
office investments.
On behalf of the members of the Group I pay tribute to all our
employees who have worked for a second year unstintingly and well
under the difficult conditions persisting throughout the long and
continuing Covid-19 pandemic.
The closing mid-market share price on 21 December 2021 was 112p,
a discount to the NAV of 208.4p as at 30 June 2021. The Board does
not recommend a final dividend, but intends to restore dividends
when profitability and consideration for other opportunities and
obligations permit.
Conclusion
The recovery from the effects of the Covid virus is occurring
more quickly and with less economic scarring than appeared likely.
The rapidity of the recovery is causing short term supply cost and
inflation concerns, which are unlikely to bear on the economy in
the long-term. Inflation, while trending higher, may be tacitly
accepted, as the selection of the precise target rate between
certain limits is arbitrary. Higher inflation rates facilitate the
redeployment of both labour and capital to more productive activity
and reduce the real capital burden of debt. A higher tolerance of
inflation permits lower interest rates, reducing the interest cost
of Government debt.
The main aim of economic management should be to increase the
productivity and hence living standards, and tolerance of higher
inflation would remove an impediment to more rapid growth. Recent
improvements to productivity have been very limited in spite of the
availability of electronic and digital technology. The realisation
of this potential may require an all-encompassing network together
with more widespread use. The significance of a network, or a
quantum change in working practice is that an output greater than
the sum of the parts is achievable. For example, while the value of
each of the first few rail connections was significant to each of
the connected parties, the sum of the value to them of the
interconnected network was much greater. Similarly, while
self-evidently containerisation is a more productive method of
moving goods, its potential value was only achieved when several
incompatible systems were standardised. When such quantum changes
are achieved their full potential is usually reached over a long
period as experience with steam, electricity, internal combustion
engines, microbiological and advanced genetic engineering
demonstrate: Kaizen, the Japanese doctrine of constant reappraisal
and analysis is consciously embraced in Japan.
In the UK there is a bias against continuous reappraisal
including rational analysis of investment and entrenched social
structures exist, restricting the implementation of change and of
investment inimical to their groups. That neglect of an appropriate
rational analysis of investment is a major cause of poor
productivity growth. A clear example is the unqualified acceptance
of certain green investment policies by groups who support such
policies almost as if an article of faith.
A consequence of such faith is the absence of formal assessment
of the societal benefit of investing immense capital in unproved
green ventures, a criticism especially true of trophy investment.
There appears to be no definitive analysis of which projects bring
the highest returns now, which projects may be delayed as they are
likely to be replaced by better technology later and why or whether
the UK's economic welfare should be sacrificed to attempt to attain
aims that are wholly frustrated by actions being undertaken
elsewhere. Importantly, the value of green investment is not even
considered in the cohort of whether a greater good would be served
by such investment in other enterprises. For example, whether more
lives would be saved or enhanced by investing in attainable simple
measures that will produce immediate but tangible enduring results
such as "clean" water, working technologies, wider education, and
the reduction of the misappropriation of aid and of political
corruption. The most honourable intentions of green philanthropists
require careful analysis of the achievable good, at what cost to
other good that is foregone, and whether or not that good they seek
would be achievable later more cheaply, so avoiding the current
opportunity cost.
Scottish Independence also evidences the triumph of faith over
analysis, as its achievement would cause a distinct reduction in
economic welfare. Understandably, while this may be recognised by a
minority as an acceptable or desirable trade-off for entirely
proper and justifiable political objectives, such recognition may
be tainted by a self-deception that any such disadvantage will fall
"elsewhere" or "go away". Belief supplants reason.
The absence of objective analyses originates from our existing
culture and its accepted practices which unquestionably permits
orthodoxies to persist: it is not "Kaizen". Examples of such
orthodoxies are manifest in many cultures and over many centuries
and are features of many religious doctrines, the medieval guild
system, caste categorisation and, germanely, the current highly
cartelised professions. They provide, what the prize winning
economist, Mancur Olson terms, "distribution coalitions" -
collusive, collaborative and lobbying networks to gain and maintain
economic advantage to those few controlling them, but to the
disadvantage of all others. All such structures abhor change and
rigorous analysis, as self-preservation and advancement are their
objective. A great gift to Scotland was the Enlightenment, the gift
of reason, a gift foresworn in a society that prefers preferences
and the preferred to objectivity. The corollary, unfortunately, is
lower productivity and poorer living standards.
I D Lowe
Chairman
22 December 2021
Strategic report for the year ended 30 June 2021
Operating and Financial Review
Principal Activities
The principal activities of the Group are the holding of
property for both investment and development purposes.
Results and proposed dividends
The Group profit for the year after taxation amounted to
GBP460,000 (2020 profit: GBP95,000). The directors do not propose a
dividend in respect of the current financial year (2020: Nil). The
Group net asset value amounts to GBP24,555,000 (2020:
GBP24,095,000).
Business review
A full review of the Group's business results for the year and
future prospects is included in the Chairman's Statement within the
Review of Activities on pages 2 to 4 and Future Progress on pages
17 and 18. In accordance with legislation the accounts have been
prepared in accordance with International Accounting Standards. As
permitted by Section 408 of the Companies Act 2006, the profit and
loss account of the parent Company is not presented as part of
these financial statements.
Key performance indicators
The key performance indicators for the Group are property
valuations, planning progress and the stability of house prices,
all of which are discussed in the Chairman's Statement. The
intention in the coming year is to realise cash from the sale of
assets to provide funding for its development programme, repay
certain existing debt and provide general working capital.
Principal risks and uncertainties
There are a number of potential risks and uncertainties, which
have been identified within the business and which could have a
material impact on the Group's long-term performance.
Development risk
Developments are undertaken where appropriate value is judged to
be obtainable after consideration of economic prospects and market
assessments based on both internal analysis and external
professional advice. Committed developments are monitored
regularly.
Planning risk
Properties without appropriate planning consent are purchased
only after detailed consideration of the probabilities of obtaining
planning within an appropriate timescale. The risk that planning
consent is not obtained is mitigated by ensuring purchases are made
at near to existing use value. In such purchases the Group adopts a
portfolio approach seeking an overall return within which it
accepts a small minority will be less successful.
Property values
The Group's principal investment properties have either
development prospects or a development angle which should insulate
them against the full effect of any general investment downgrade of
commercial property.
Availability of funding
The Group has cash resources but it may also use bank funding to
undertake its developments and for future property acquisitions.
Bank facilities will be negotiated and tailored to each project in
terms of quantum and timing. Any intended borrowings for future
projects will be at conservative levels of gearing.
Funding is readily available, provided the banks' current strict
criteria are met and the relatively high rates of interest are
accepted.
The low acquisition cost of some of the Group's sites reduces
the overall development cost and hence the level of funding
available under current formulaic lending processes based on loan
to cost.
Covid-19
While the timing of certain activities, principally the
completion and sale of new homes on one development site and the
sale of an investment property, have been affected by Covid-19, the
Group expects that Covid-19 will have less of an ongoing impact due
to the availability of vaccines and that demand will be maintained
from tenants for small commercial properties and for quality
housing sales.
Tenant relationships
All property companies have exposure to the covenant of their
tenants as rentals drive capital values as well as providing
income. The Group seeks to minimise exposure to any single sector
or tenant across the portfolio and continually monitors payment
performance.
Environmental policy
The Group recognises the importance of its environmental
responsibilities, monitors its impact on the environment and
designs and implements policies to reduce any damage that might be
caused by Group activities.
Brexit
The Group does not expect Brexit to impact significantly on its
operations or assets as it and its customers are all based in the
UK.
Corporate Governance
The directors recognise the need for sound corporate governance.
As a company whose shares are traded on AIM, the Board adopted the
Quoted Companies Alliance's Corporate Governance Code ("the QCA
Code"). Its corporate governance statement including any
disclosures required pursuant to the QCA Code is published on the
Company's website www.caledoniantrust.com.
Section 172 Compliance
Section 172 of the Companies Act 2006 imposes a general duty on
every Director to act in a way they consider, in good faith, would
be the most likely to promote the success of the Group and Company
for the benefits of its shareholders as a whole. In doing so,
Directors should have regard to several matters including:
a) The likely consequences of any decision in the long term;
b) The interests of the Company's employees;
c) The need to foster the Group and Company's business
relationships with suppliers, customers and others;
d) The impact of the Group and Company's operations on the community and environment;
e) The desirability of the Group and Company maintaining a
reputation for high standards of business conduct; and
f) The need to act fairly as between members of the Company.
The Board factors stakeholder interest into its long-term
policies and objectives. The business of the Group and Company
requires engagement with shareholders, customers and tenants, local
planning authorities, employees and suppliers.
When considering stakeholder interest, the Board is responsible
for ensuring that the long-term policies and objectives implemented
allow the Group and Company to provide tenants with properties
which meet their needs and to produce consistently high quality
homes on its developments.
The Executive Directors are responsible for the operations of
the business while the Non-Executive Director is independent and
well positioned to provide objective judgement and scrutiny over
decisions made by the Board.
Information about stakeholders and how the Board has discharged
its duties are included on pages 23 and 24.
M J Baynham
Secretary
22 December 2021
Corporate Governance
QCA Code Compliance and Section 172 Statement
for the year ended 30 June 2021
The corporate governance report is intended to provide
shareholders with a clear understanding of the Group's corporate
governance arrangements, including analysing compliance with the
Quoted Companies Alliance 2018 Corporate Governance Code ("the QCA
Code") and where the Group does not comply with the QCA Code, an
explanation of why it does not.
The QCA Code provides a robust framework which enables the Group
to maintain high standards of corporate governance appropriate for
the size of the Group. The QCA Code sets out ten principles and
each principle and the Group's actions in relation related thereto
are set out below. Douglas Lowe, in his capacity as Executive
Chairman, is responsible for ensuring the Group has the necessary
corporate governance framework in place and that, except for
Principle Five, the ten principles are followed across the
Group.
Principle One
Business Model and Strategy
The Group's business model is that of a property investment and
development company, which is focused on the Scottish property
market. Further details regarding application of the Group's
business model, its activities and its properties can be found in
the 'Review of Activities' section of the Chairman's Statement on
pages 2 to 4 of the Group's annual report and accounts for the year
ended 30 June 2021. The 'Future Progress' section of the Chairman's
Statement on pages 17 and 18 of the Group's annual report and
accounts for the year ended 30 June 2021 provides a summary of the
Group's strategy. The key challenges in the execution of the
Group's business model and strategy and how the Group seeks to
address these can be found in the 'Principal risks and
uncertainties' section on pages 20 and 21 of the Group's annual
report and accounts for the year ended 30 June 2021.
Principle Two
Section 172 Statement and Understanding Shareholder Needs and
Expectations
As well as compliance with the QCA Code, Directors are required
in accordance with Section 172 of the Companies Act 2006 to include
a statement of how they have taken into account the shareholders in
promoting the success of the Company. This section and information
on pages 21 and 22 set out how the Board has discharged its
duties.
The Board is committed to maintaining good communications and
having constructive dialogue with its shareholders in order to
understand the needs and expectations of the Company's
Shareholders. It is important to note that the executive directors
are the two largest shareholders, holding over 85% of the Company's
share capital.
Investors have access to current information on the Company
through its website, www.caledoniantrust.com, through its
regulatory announcements, its annual and interim accounts and
through the directors who are available to answer investor related
enquiries.
Shareholders may contact the Company in writing via email
(webmail@caledoniantrust.com), by telephone on 0131 220 0416 or in
writing to the Company's Head Office, 61A North Castle Street,
Edinburgh EH2 3LJ. Any information provided in response to any such
enquiries will be information that is freely available in the
public domain.
All shareholders are encouraged to attend the Company Annual
General Meeting where the Directors listen to the views of the
shareholders formally during the AGM and informally following the
AGM. In the event of a voting decision not being in line with its
expectations the Board would seek to engage with those shareholders
to understand and address any concerns as appropriate. The
arrangements for the 2022 AGM may again be affected by Covid-19
precautions and the Directors will encourage shareholders to
continue their engagement with the Directors through any of the
channels already mentioned.
The Board seeks to encourage discussion with its shareholders to
whom they make themselves available. The Board dedicate sufficient
time to ensure that communication is effective with existing and
potential shareholders and other key stakeholders. The Board
believes the Company's mode of engaging with shareholders is
adequate and effective.
Principle Three
Wider Stakeholder and Social Responsibilities
The Group follows Scottish Government guidance on the Covid-19
pandemic and implemented socially distanced working within the
Group's administrative office. Where possible, staff also worked
from home.
On the basis of the Directors' knowledge and long experience of
the operations of the Group the Board recognises that the long-term
success of the Group is reliant upon the efforts of the employees
of the Group, its professional advisors and its contractors. The
directors engage directly on a regular basis with all these
stakeholders which ensures that there is close Board oversight and
contact with the Group's key resources and relationships.
Employees: The Group has a small number of full time and
seasonal employees. The Executive Directors are in regular contact
with the Group's employees, which provides an opportunity for
employees to discuss matters they wish to raise. The administrative
staff are in contact with the Directors on a daily basis and
employees working remotely are in contact with the Chairman
regularly by phone. No pay review has taken place due to the
uncertainties caused by the Covid-19 pandemic.
Customers: The Group aims to deliver quality homes and other
developments. It invests in strong design features and should any
snagging work be required, it ensures rectification is completed
quickly. The Group's interaction with its tenants is constructive
and cordial and any contentious points are quickly resolved. The
Group recognises the important role of all relevant Regulations and
seeks to conform with both the spirit and the requirement of the
regulations.
Suppliers and professional advisors: The Group engages
contractors after appropriate formal and informal vetting, and for
larger projects after formal tendering. The Executive Directors
meet with contractors regularly throughout large projects to review
their recommendations and to review progress. Advisors are selected
on the basis of suitability and experience for the advice required.
For each firm engaged an agreed nominated partner or director is
responsible for the Group's instructions and advice who reports to
the executive directors as required.
Environment: The Board recognises the growing awareness and
requirements in respect of environmental issues and is working with
its professional advisors to promote an environmentally friendly
approach to the design of its new developments.
The Group takes into account feedback received from its key
stakeholders and considers making amendments to working
arrangements and operational plans where appropriate and where such
amendments are consistent with the Group's strategy and objectives.
However, no material changes to the Group's working processes were
required over the year to 30 June 2021, or more recently, as a
result of stakeholder feedback received by the Company.
Principle Four
Risk Management
In addition to its other roles and responsibilities, the Audit
and Compliance Committee is responsible to the Board as a key
control for ensuring that procedures are in place, and are being
effectively implemented to identify, assess and manage the
significant risks faced by the Group in respect of the execution
and delivery of the Group's strategy. The Board and executive
management team also consider and monitor risk on an ongoing
basis.
The principal risks and uncertainties which have been identified
within the business and which could have a material impact on the
Group's long-term performance can be found in the 'Principal risks
and uncertainties' section on pages 20 and 21 of the Company's
annual report and accounts for the year ended 30 June 2021.
The risks which the Group faces are subject to change and the
measures to counter or to mitigate them are reviewed as required.
The Board considers that an internal audit function is not
necessary, due to the close day to day control exercised by the
executive directors.
Principle Five
Maintaining a Well Functioning Board of Directors
As at 22 December 2021 the Board comprised the Chairman and
Chief Executive Officer Douglas Lowe, one executive director,
Michael Baynham and one non-executive director, Roderick Pearson.
Of the Board's members, Mr Pearson is considered to be independent.
A further commentary on this topic is provided below.
Mr Lowe has been both Chairman and Chief Executive Officer of
the Company for many years. He is the largest shareholder holding
over 79% of the issued share capital and has since the banking
crisis of 2007 provided significant loans to the Group to fund its
working capital requirements. The Board believes that Mr Lowe's
shareholding aligns his interests with the other members' interests
and there is ample evidence to support this.
The Board consider that in these circumstances it is in the best
interests of the Group to maintain Mr Lowe's positions as both
Chairman and Chief Executive Officer contrary to recommended best
practice in the QCA Code. The Board has been assured that, subject
to all debt being repaid, a return to normal remuneration levels
and normal investment and trading conditions, further Board
appointments and changes will be made. Separately, the Board has
received an undertaking from Mr Lowe that if he ceases to work
full-time, appropriate Board changes will be made.
The Company presently does not comply with the QCA Code
recommendation to have at least two non-executive directors who are
identified as independent. For those reasons the Board believes
that, given the present size of the Company and the nature of its
business and operations it is well served by the current
composition of the Board which functions effectively and is well
balanced. This position is considered regularly and where
appropriate and necessary further appointments will be made.
Mr Pearson has been a non-executive director since March 2007
and the rest of the Board consider him to continue to be
independent. Mr Pearson brings the weight of his professional
qualification and experience to the valuations of investment
properties but is sufficiently removed from the day to day
operations of the Company to retain a critical and independent
view. As such he represents the best interests of all the
shareholders.
Mr Lowe and Mr Baynham work full time and Mr Pearson currently
works on average two days per month. Biographical details of the
current directors are set out below. Executive and non-executive
directors are not presently subject to re-election.
The Board met formally on ten occasions during the year to 30
June 2021. Mr Lowe did not attend one meeting concerned with a
topic in which he had an interest but all directors attended the
other nine meetings. It has established an Audit and Compliance
Committee and a Remuneration Committee, details of which are set
out further below. The Audit and Compliance Committee met on three
occasions during the year ended 30 June 2021. As the Board resolved
not to amend the remuneration of the Directors, the Remuneration
Committee was not required to meet during the year ended 30 June
2021.
As appointments to the Board are made by the Board as a whole it
is not considered necessary to create a Nominations Committee.
Principle Six
Appropriate Skills and Experience of the Directors
The Board currently consists of three directors. Mr Baynham is
also the Group Company Secretary. The Board recognises that it
currently has a limited diversity and increasing diversity will be
considered as and when the Board concludes that replacement or
additional directors are required.
The Board is satisfied that with the Directors, it has an
effective and appropriate balance of skills and experience to
deliver the strategy of Group for the benefit of the shareholders
over the medium to long-term. All directors are able to take
independent professional advice in the furtherance of their
duties.
During the year ended 30 June 2021, neither the board nor any
committee has sought external advice on a significant matter and no
external advisers to the board or any of its committees have been
engaged.
I Douglas Lowe
Chairman and Chief Executive Officer
Mr Lowe is a graduate of Clare College Cambridge (MA Hons in
Natural Science and Diploma in Agriculture) and Harvard Graduate
School of Business Administration (MBA and Certificate in Advanced
Agricultural Economics). Until 1977 he was Chief Executive of his
family business, David Lowe and Sons of Musselburgh, property
owners, farmers and market growers established in 1860, which
farmed intensively 2,000 acres and employed over 200 people.
In 1978 and 1979 Mr Lowe was Deputy Managing Director of
Bruntons (Musselburgh), a listed company which manufactured mainly
wire and wire rope and employed approximately 1,000 people. He was
a significant shareholder and, from 1986 until shortly after
joining the Company, Executive Deputy Chairman of Randsworth Trust
PLC, a property company with a dealing facility on the Unlisted
Securities Market. The market capitalisation of Randsworth Trust
PLC increased from GBP886,000 to over GBP250 million between April
1986 and sale of the company in 1989.
Mr Lowe purchased shares in Caledonian Trust PLC in August 1987,
at which time he became Chief Executive. Mr Lowe attends two
broadly constituted private political and economics discussion
groups throughout the year. He maintains close contact with all of
the Group's professional advisers in order to discuss and identify
any new laws, regulations or standards which may affect the Group.
He studies a wide range of relevant economic, political and
technical publications and undertakes extensive research in
preparation of the Chairman's Statements, which accompany the
Annual and Interim Accounts. Mr Lowe's experience in many senior
executive positions in many organisations ensures that he has the
necessary ability to develop and implement the Group's
strategy.
Michael J Baynham
Executive Director and Company Secretary
Mr Baynham graduated in law (LLB (Hons)) from Aberdeen
University in 1978. Prior to joining the Company in 1989, he worked
as a solicitor in private practice specialising in commercial
property and corporate law. He was a founding partner of Orr
MacQueen WS in 1981 and from 1987 to 1989 was an associate with
Dundas & Wilson CS.
Mr Baynham maintains his Practising Certificate with the Law
Society of Scotland and attends professional development seminars
and other relevant seminars on a regular basis throughout the year.
He maintains close contact with all of the Group's professional
advisers in order to understand and apply any new laws, regulations
or standards relevant to the business.
Mr Baynham's experience of corporate law, commercial property
law, commercial property finance, investment and development
ensures that he has the necessary ability to implement the Group's
strategy.
Roderick J Pearson
Non-Executive Director
Mr Pearson is a graduate of Queens' College Cambridge (MA Modern
Languages and Land Economy) and is a Fellow of the Royal
Institution of Chartered Surveyors. He has held senior positions in
Ryden
and Colliers International, practising in Edinburgh, Aberdeen
and Glasgow, and now has his own practice, RJ Pearson Property
Consultants.
Mr Pearson's experience of property as a surveyor in private
practice together with his experience in senior management
positions ensures that he has the ability to support the executive
directors and also to challenge strategy, and decision making and
to scrutinise performance.
All three members of the Board bring relevant sector experience
through their long and varied careers throughout the property,
financial, legal and consulting sectors. The Board believes that
its members possess the relevant qualifications and skills
necessary to effectively oversee and execute the Group's
strategy.
Principle Seven
Evaluation of Board Performance
The directors consider that the size of the Company does not
justify the use of third parties to evaluate the performance of the
Board on an annual basis. The Company does not currently have a
formal appraisal process for Directors but the Chairman assesses
the effectiveness of the Board as a whole and the individual
directors to ensure that their contribution is relevant and
effective. This process is performed over the course of the year.
He also assesses the effectiveness of the Audit Committee and the
Remuneration Committee. During the year ended 30 June 2021, the
Chairman's assessment did not find any shortcoming in Board or
committee effectiveness and did not lead to any material
recommendations for any changes.
The Chairman is the majority shareholder and the above
arrangements are acceptable to him. The Board has not received any
communication from independent shareholders raising an issue on
Board effectiveness. The Board will continue to assess this
position on at least an annual basis, and if and when it is deemed
appropriate it will establish more prescribed evaluation
processes.
The Directors have given consideration to succession planning
and have in place a strategy to address succession as and when it
becomes necessary. The Board believes the current board and current
committee structure and membership is appropriate, but will
consider whether any board and other senior management appointments
are required on at least an annual basis and will consider the
feedback from the Chairman's assessments, as described above, in
this process.
Principle Eight
Corporate Culture
The Board acknowledges that their decisions on strategy and risk
determine the corporate culture of the Group and its performance.
High standards of ethical, moral and social behaviour is deemed
important in achieving the Group's corporate objectives and
strategy and such standards are actively promoted.
The Group only has a small number of employees who work closely
with the Executive directors. Accordingly, the Board is always well
placed to assess its culture which respects all individuals,
permits open dialogue and facilitates the best interest of all of
the Group's stakeholders. The Board are prepared to take
appropriate action against unethical behaviour, violation of
company policies or misconduct.
The Company has adopted a policy for directors' and employees'
dealings in the Company's shares which is appropriate for a company
whose securities are traded on AIM, and is in accordance with rule
21 of the AIM Rules and the Market Abuse Regulation of the European
Union.
Principle Nine
Maintenance of Governance Structures and Processes
Board Roles and Responsibilities
Ultimate authority for all aspects of the Group's activities
rests with the Board, with the respective responsibilities of the
Directors delegated by the Board. Given the size and nature of the
Group's business both of the executive directors engage directly
with all key stakeholders on a regular basis.
As noted in the disclosure above in respect of Principle Five,
Mr Lowe is both Chairman and Chief Executive Officer of the
Company. In his role as Chairman, Mr Lowe has overall
responsibility for corporate governance matters in the Company,
leadership of the board and ensuring its effectiveness on all
aspects of its role. In his role as Chief Executive Officer Mr Lowe
leads the Group's staff and is responsible for implementing those
actions required to deliver on the agreed strategy.
Matters reserved specific to the Board include formulating,
reviewing and approving the Group's strategy, budget, major items
of capital expenditure, acquisitions and disposals, and reporting
to shareholders and approving the Annual and Interim Statements.
The Board is also responsible for assessing the risks facing the
Group and where possible developing a strategy to mitigate such
risk.
The Board complies with the Companies Act 2006 and all other
relevant rules and regulations including their duty to act within
their powers; to promote the success of the Group; to exercise
independent judgement; to exercise reasonable care, skill and
diligence; to avoid conflicts of interest; not to accept benefits
from third parties and to declare any interest in any proposed
transaction or arrangement.
At present, the Board is satisfied with the Group's corporate
governance, given the Group's size and the nature of its
operations, and there are no specific plans for changes to the
Company's corporate governance arrangements in the shorter term. As
the Group expands and when its programme of developments increase,
future Board appointments and Board changes will be considered.
Audit Committee
During the period under review the Audit Committee was chaired
by Mr Pearson. It met to review the Interim Report, the Annual
Report, to consider the suitability of and to monitor the internal
control processes and to review the valuations of its investment
and stock properties. The Audit Committee reviewed the findings of
the external auditor and reviews accounting policies and material
accounting judgements.
The independence and effectiveness of the external auditor is
reviewed annually and the Audit Committee meets at least once per
financial year with the auditor to discuss their independence and
objectivity, the Annual Report, any audit issues arising, internal
control processes, auditor appointment and fee levels and other
appropriate matters.
The Audit Committee have reported that they are satisfied that
the internal control processes are robust. The accounting policies
meet regulatory requirements and any material judgements are stated
in Note 3 of the consolidated accounts for the year ended 30 June
2021. The Audit Committee is satisfied that the external auditor is
independent and effective.
The Audit Committee terms of reference can be found here
http://www.caledoniantrust.com/CR11-AUDIT-COMMITTEE-M0918.pdf .
Remuneration Committee
As the Board resolved not to amend the remuneration of the
Directors the Remuneration Committee was not required to meet
during the year and as such there was no report from the
Remuneration Committee in respect of the year ended 30 June
2021.
The Remuneration Committee terms of reference can be found here
www.caledoniantrust.com/CR11-REMUNERATION-COMMITTEE-M0918.pdf .
Nomination Committee
The Board have agreed that appointments to the Board will be
made by the Board as a whole and have not created a Nomination
Committee.
At present, the Board is satisfied with the Company's corporate
governance, given the Company's size and the nature of its
operations, and as such there are no specific plans for changes to
the Company's corporate governance arrangements in the shorter
term.
As the Group expands and when its programmes of developments
increase, future Board appointments and Board changes to reflect
such changes will be considered, as appropriate.
Principle Ten
Shareholder Communication
The work of the Company's Audit Committee and Remuneration
Committee during the year is described above.
As the Board resolved not to amend the remuneration of the
Directors the Remuneration Committee was not required to meet
during the year, so no report from this committee is available.
Shareholders have access to current information on the Company
through its website, http://www.caledoniantrust.com, though its
regulatory announcements, its annual and interim financial reports
and via Mr Lowe, Chairman, who is available to answer investor
relations enquiries. Shareholders may contact the company in
writing, via email (webmail@caledoniantrust.com) or by telephone on
0131 220 0416. Enquiries that are received will be directed to the
Chairman, who will consider an appropriate response.
The results of voting on all resolutions in future general
meetings will be posted to the Group's website and announced via
RNS. Where a significant proportion of votes (e.g. 20% of
independent votes) have been cast against a resolution at any
general meeting, the Board will post this on the Group's website
and will include, on a timely basis, an explanation of what actions
it intends to take to understand the reasons behind that vote
result, and, where appropriate, any different action it has taken,
or will take, as a result of the vote.
The Company's financial reports since 2002 can be found here
http://www.caledoniantrust.com/accounts_details.html . Notices of
General Meetings of the Company for the last five years can be
found here http://www.caledoniantrust.com/AGM_Notices.html .
The Board is committed to maintaining good communication and
having constructive dialogue with its shareholders. The Group
engages in full and open communication with its shareholders and
endeavours to reply promptly to all shareholder queries received.
The Chairman prepares a detailed summary of the Group's activities
in his Statement which accompanies the Annual and Interim Financial
Statements. Regulatory announcements are distributed in a timely
fashion through appropriate channels to ensure shareholders are
able to access material information on the Group's progress. A
report of the audit and remuneration committees is included with
Principle Nine above. All shareholders are encouraged to attend the
Company's Annual General Meeting.
M J Baynham
Secretary
22 December 2021
Directors' report for the year ended 30 June 2021
Directors
The directors who held office at the year end and their
interests in the Company's share capital and outstanding loans with
the Company at the year-end are set out below:
Beneficial interests - Ordinary shares
of 20p each
Percentage 30 June 2021 30 June 2020
held
GBP GBP
I D Lowe 79.1 9,324,582 9,324,582
M J Baynham 6.2 729,236 729,236
R J Pearson - - -
Beneficial interests - Unsecured loans
I D Lowe 100.0 4,380,000 4,380,000
M J Baynham 100.0 - 99,999
The interest of I D Lowe in the unsecured loans of GBP4,380,000
(2020: GBP4,380,000) is as controlling shareholder of the lender,
Leafrealm Limited. The interest of M J Baynham in the unsecured
loan of GBPNil (2020: GBP99,999) was in respect of a loan made by
his wife, Mrs V Baynham.
No rights to subscribe for shares or debentures of Group
companies were granted to any of the directors or their immediate
families or exercised by them during the financial year.
Political and charitable donations
Neither the Company nor any of its subsidiaries made any
charitable or political donations during the year.
Disclosure of information to auditor
The directors who held office at the date of approval of the
Directors' Report confirm that, so far as they are each aware,
there is no relevant audit information of which the Group's auditor
is unaware; and each director has taken all the steps that he ought
to have taken as a director to make himself aware of any relevant
audit information and to establish that the Group's auditor is
aware of that information. This confirmation is given and should be
interpreted in accordance with the provisions of Section 418 of the
Companies Act 2006.
Auditor
In accordance with Section 489 of the Companies Act 2006, a
resolution for the re-appointment of Johnston Carmichael LLP will
be put to the Annual General Meeting.
By Order of the Board
M J Baynham
Secretary
22 December 2021
Consolidated statement of comprehensive income for the year
ended 30 June 2021
2021 2020
Note GBP000 GBP000
Revenue
Revenue from development property sales 4,186 90
Gross rental income from investment properties 368 446
Total Revenue 5 4,554 536
Cost of development property sales (3,930) (82)
Property charges (128) (172)
--------- -------------------
Cost of Sales (4,058) (254)
--------- -------------------
Gross Profit 496 282
Administrative expenses (440) (428)
Other income 2 20
--------- -------------------
Net operating profit/(loss) before investment
property
disposals and valuation movements 58 (126)
--------- -------------------
Valuation gains on investment properties 10 690 250
Loss on disposal of investment property (151) -
Net gains on investment properties 539 250
--------- -------------------
Operating profit 5 597 124
--------- -------------------
Financial expenses 7 (137) (29)
--------- -------------------
Net financing costs (137) (29)
--------- -------------------
Profit before taxation 460 95
Income tax 8 - -
Profit and total comprehensive income
for the financial year attributable to
equity holders of the parent Company 460 95
========= ===================
Earnings per share
Basic and diluted earnings per share
(pence) 9 3.90p 0.81p
The notes on pages 47 - 67 form an integral part of these
financial statements.
Consolidated balance sheet as at 30 June 2021
2021 2020
Note GBP000 GBP000
Non-current assets
Investment property 10 17,110 17,720
Plant and equipment 11 3 10
Investments 12 1 1
--------- ---------
Total non-current assets 17,114 17,731
--------- ---------
Current assets
Trading properties 13 9,313 13,006
Trade and other receivables 14 135 122
Cash and cash equivalents 15 3,020 72
--------- ---------
Total current assets 12,468 13,200
Total assets 29,582 30,931
--------- ---------
Current liabilities
Trade and other payables 16 (647) (1,213)
Interest bearing loans and
borrowings 17 (360) (1,503)
--------- ---------
Total current liabilities 17 (1,007) (2,716)
Non-current liabilities (4,020) (4,120)
Interest bearing loans and
borrowings
--------- ---------
Total liabilities (5,027) (6,836)
--------- ---------
Net assets 24,555 24,095
========= =========
Equity
Issued share capital 21 2,357 2,357
Capital redemption reserve 22 175 175
Share premium account 22 2,745 2,745
Retained earnings 19,278 18,818
--------- ---------
Total equity attributable
to equity holders of the
parent Company 24,555 24,095
========= =========
NET ASSET VALUE PER SHARE 208.4p 204.5p
The financial statements were approved by the board of directors
on 22 December 2021 and signed on its behalf by:
I D Lowe
Director
The notes on pages 47 - 67 form an integral part of these
financial statements.
Consolidated statement of changes in equity as at 30 June
2021
Issued Capital Share Retained
share redemption premium earnings Total
capital reserve account
GBP000 GBP000 GBP000 GBP000 GBP000
At 1 July 2019 2,357 175 2,745 18,723 24,000
Profit and total
comprehensive income
for the year - - - 95 95
______ ______ ______ ______ ______
At 30 June 2020 2,357 175 2,745 18,818 24,095
Profit and total
comprehensive income
for the year - - - 460 460
______ ______ ______ ______ ______
At 30 June 2021 2,357 175 2,745 19,278 24,555
====== ====== ====== ====== ======
Consolidated statement of cash flows for the year ended 30 June
2021
2021 2020
Note GBP000 GBP000
Cash flows from operating activities
Profit for the year 460 95
Adjustments for:
Net loss on sale of investment property 151 -
Net gains on revaluation of investment properties (690) (250)
Depreciation 1 5
Loss on sale of fixed assets 1 -
Net finance expense 137 29
_______ _______
Net operating cash flows before
movements
in working capital 60 (121)
Decrease/(Increase) in trading
properties 3,693 (608)
(Increase)/decrease in trade
and other receivables (13) 29
(Decrease)/increase in trade
and other payables (370) (22)
_______ _______
Cash generated from/(absorbed
by) operations 3,370 (722)
Interest paid (333) -
_______ _______
Net cash inflow/(outflow) from
operating activities 3,037 (722)
_______ _______
Investing activities
Proceeds from sale of investment
properties 1,149 -
Proceeds from sale of fixed assets 5 -
Acquisition of property, plant
and equipment - (9)
_______ _______
Cash flows generated from/(absorbed
by) investing activities 1,154 (9)
_______ _______
Financing activities
(Decrease)/increase in borrowings (1,243) 672
_______ _______
Cash flows (used)/generated from
financing activities (1,243) 672
_______ _______
Net increase/(decrease) in cash and cash
equivalents 2,948 (59)
Cash and cash equivalents at
beginning of year 72 131
_______ _______
Cash and cash equivalents at
end of year 3,020 72
Notes to the consolidated financial statements as at 30 June
2021
1 Reporting entity
Caledonian Trust PLC is a public company incorporated in England
and domiciled in the United Kingdom. The consolidated financial
statements of the company for the year ended 30 June 2021 comprise
the Company and its subsidiaries as listed in note 7 in the parent
Company's financial statements (together referred to as "the
Group"). The Group's principal activities are the holding of
property for both investment and development purposes. The
registered office is St Ann's Wharf, 112 Quayside, Newcastle upon
Tyne, NE99 1SB and the principal place of business is 61a North
Castle Street, Edinburgh EH2 3LJ.
2 Statement of Compliance
The Group financial statements have been prepared and approved
by the directors in accordance with International Accounting
Standards in conformity with the requirements of the Companies Act
2006. The company has elected to prepare its parent Company
financial statements in accordance with International Accounting
Standards; these are presented on pages 68 to 87.
3 Basis of preparation
The financial statements are prepared on the historical cost
basis except for investments and investment properties which are
measured at their fair value.
The preparation of the financial statements in conformity with
International Accounting Standards requires the directors to make
judgements, estimates and assumptions that affect the application
of policies and reported amounts of assets and liabilities, income
and expenses. The estimates and associated assumptions are based on
historical experience and various other factors that are believed
to be reasonable under the circumstances, the results of which form
the basis of making the judgements about carrying values of assets
and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates.
These financial statements have been presented in pounds
sterling which is the functional currency of all companies within
the group. All financial information has been rounded to the
nearest thousand pounds.
Going concern
The Group's business activities, together with the factors
likely to affect its future development, performance and position
are set out in the Chairman's Statement on pages 2 to 19. The
financial position of the Group, its cash flows, liquidity position
and borrowing facilities are described in note 18 to the
consolidated financial statements.
In addition, note 18 to the financial statements includes the
Group's objectives, policies and processes for managing its
capital; its financial risk management objectives; details of its
financial instruments; and its exposures to credit risk and
liquidity risk.
The Group and parent Company finance their day to day working
capital requirements through related party loans and bank funding
for specific development projects. A related party lender has
indicated its willingness to continue to provide financial support
and not to demand repayment of its principal loan during 2022.
The directors have prepared projected cash flow information for
the period ending eighteen months from the date of their approval
of these financial statements. These forecasts include the
directors' assessment of the impact of the Covid-19 pandemic and
assume the Group will make property sales in the normal course of
business to provide sufficient cash inflows to allow the Group to
continue to trade.
Should these sales not complete as planned, the directors are
confident that they would be able to sell sufficient other
properties within a short timescale to generate the income
necessary to meet the Group's liabilities to third party creditors
as they fall due.
For these reasons they continue to adopt the going concern basis
in preparing the financial statements.
Areas of estimation uncertainty and critical judgements
Information about significant areas of estimation uncertainty
and critical judgements in applying accounting policies that have
the most significant effect on the amount recognised in the
financial statements is contained in the following notes:
Estimates
-- Valuation of investment properties (note 10)
The fair value has been assessed by the directors at 30 June
2021. The valuations take account of rental streams and comparable
transactions. The valuations take cognisance of valuations provided
by an external independent valuer at 30 June 2019. The
non-executive director holds an appropriate profession
qualification with current experience of the relevant markets.
Valuations take account of the impact of Covid-19 which has not had
a significant impact on them due to the nature of the properties
and demand being maintained for small commercial properties and for
quality housing.
-- Valuation of trading properties (note 13)
Trading properties are carried at the lower of cost and net
realisable value. The net realisable value of such properties is
based on the amount the Group is likely to achieve in a sale to a
third party. This is then dependent on availability of planning
consent and demand for sites which is influenced by the housing and
property markets.
Judgements
-- Deferred Tax (note 20)
The Group's unrecognised deferred tax asset relates to tax
losses being carried forward and to differences between the
carrying value of investment properties and their original tax
base. A decision has been taken not to recognise the asset on the
basis of the uncertainty of the timing of future taxable
profits.
4 Accounting policies
The accounting policies below have been applied consistently to
all periods presented in these consolidated financial
statements.
Basis of consolidation
The financial statements incorporate the financial statements of
the parent Company and all its subsidiaries all of which have the
same accounting date. Subsidiaries are entities controlled by the
Group. Control exists when the Group has the power to determine the
financial and operating policies of an entity so as to obtain
benefits from its activities. The financial statements of
subsidiaries are included in the consolidated financial statements
from the date that control commences until the date it ceases.
Inter-company balances are eliminated on consolidation.
Revenue
Turnover is the amount derived from ordinary activities, stated
after any discounts, other sales taxes and net of VAT.
Revenue from the sale of investment and trading properties is
recognised in the income statement on legal completion, being the
date on which control passes to the buyer.
Rental income from properties leased out under operating leases
is recognised in the income statement on a straight-line basis over
the term of the lease. Costs of obtaining a lease and lease
incentives granted are recognised as an integral part of total
rental income and spread over the period from commencement of the
lease to the earliest termination date on a straight-line
basis.
Other income
Other income comprises income from agricultural land and other
miscellaneous income recognised on receipt.
Finance income and expenses
Finance income and expenses comprise interest payable on bank
loans and other borrowings. All borrowing costs are recognised in
the income statement using the effective interest rate method.
Interest income represents income on bank deposits using the
effective interest rate method.
Taxation
Income tax on the profit or loss for the year comprises current
and deferred tax. Income tax is recognised in the income statement
except to the extent that it relates to items recognised directly
in equity, in which case the charge / credit is recognised in
equity. Current tax is the expected tax payable on taxable income
for the current year, using tax rates enacted or substantively
enacted at the reporting date, adjusted for prior years under and
over provisions.
Deferred tax is calculated using the balance sheet liability
method in respect of all temporary differences between the values
at which assets and liabilities are recorded in the financial
statements and their cost base for taxation purposes. Deferred tax
includes current tax losses which can be offset against future
capital gains. As the carrying value of the Group's investment
properties is expected to be recovered through eventual sale rather
than rentals, the tax base is calculated as the cost of the asset
plus indexation. Indexation is taken into account to reduce any
liability but does not create a deferred tax asset. A deferred tax
asset is recognised only to the extent that it is probable that
future taxable profits will be available against which the asset
can be utilised.
Investment properties
Investment properties are properties owned by the Group which
are held either for long term rental growth or for capital
appreciation or both. Properties transferred from trading
properties to investment properties are revalued to fair value at
the date on which the properties are transferred. When the Group
begins to redevelop an existing investment property for continued
future use as investment property, the property remains an
investment property, which is measured based on the fair value
model, and is not reclassified.
The cost of investment property is recognised on legal
completion and includes the initial purchase price plus associated
professional fees and historically also includes borrowing costs
directly attributable to the acquisition. Subsequent expenditure on
investment properties is only capitalised to the extent that future
economic benefits will be realised.
Investment property is measured at fair value at each balance
sheet date. The directors assess market value at each balance sheet
date and external independent professional valuations are prepared
at least once every three years. The fair values are based on
market values, being the estimated amount for which a property
could be exchanged on the date of valuation between a willing buyer
and a willing seller in an arms-length transaction after proper
marketing wherein the parties had each acted knowledgeably,
prudently and without compulsion.
Any gain or loss arising from a change in fair value is
recognised in the income statement.
Tangible assets
Tangible assets are stated at cost, less accumulated
depreciation and any provision for impairment. Depreciation is
provided on all tangible assets at varying rates calculated to
write off cost to the expected current residual value by equal
annual instalments over their estimated useful economic lives. The
periods used are:
Fixtures and fittings - 3 years
Motor vehicles - 3 years
Other equipment - 5 years
Trading properties
Trading properties held for short term sale or with a view to
subsequent disposal are stated at the lower of cost or net
realisable value. Cost is calculated by reference to invoice price
plus directly attributable professional fees. Interest and other
finance costs on borrowings specific to a development are
capitalised through stock and work in progress and transferred to
cost of sales on disposal. Net realisable value is based on
estimated selling price less estimated cost of disposal.
Financial instruments
The Group had no hedge relationships at 1 July 2019, 30 June
2020 or 30 June 2021.
Financial assets
Investments
The Group's investments in equity instruments are measured
initially at fair value which is normally transaction price.
Subsequent to initial recognition investments which can be measured
reliably are measured at fair value with changes recognised in the
profit or loss. Other investments are measured at cost less
impairment in profit or loss. Dividend income is recognised when
the Group has the right to receive dividends either when the share
becomes ex dividend or the dividend has received shareholder
approval.
Current receivables
Trade and other receivables with no stated interest rate and
receivable within one year are recorded at transaction price
including transaction costs. Assessments for impairment are
performed at each reporting date and any losses are recognised in
the statement of comprehensive income. Impairment reviews take into
account changes in behaviours and the patterns of receipts from
tenants on a case by case basis.
Cash and cash equivalents
Cash includes cash in hand, deposits held at call (or with a
maturity of less than 3 months) with banks, and bank overdrafts.
Bank overdrafts that are repayable on demand and which form an
integral part of the Group's cash management are shown within
current liabilities on the balance sheet and included with cash and
cash equivalents for the purpose of the statement of cash
flows.
Financial liabilities
Current payables
Trade payables are non-interest-bearing and are initially
measured at fair value and thereafter at amortised cost.
Interest bearing loans and borrowings
Interest-bearing loans and bank overdrafts are initially carried
at fair value less allowable transactions costs and then at
amortised cost.
Changes in accounting policies
There are no new standards or amendments to existing standards
which are effective for annual periods beginning on or after 1 July
2020 which are relevant to the Group. There are no new standards or
amendments to existing standards or interpretations that are
effective as at 30 June 2021 and relevant to the Group. After
Brexit, the Group will continue to apply International Accounting
Standards in conformity with the requirements of the Companies Act
2006.
Operating segments
The Group determines and presents operating segments based on
the information that is internally provided to the Board of
Directors ("The Board"), which is the Group's chief operating
decision maker. The directors review information in relation to the
Group's entire property portfolio, regardless of its type or
location, and as such are of the opinion that there is only one
reportable segment which is represented by the consolidated
position presented in the primary statements.
5 Operating profit 2021 2020
GBP000 GBP000
Revenue comprises: -
Rental income 368 446
Sale of properties 4,186 90
4,554 536
======= =======
All revenue is derived from the United Kingdom
2021 2020
GBP000 GBP000
The operating profit is stated after charging:
-
Depreciation 1 5
Amounts received by auditors and their associates
in respect of:
- Audit of these financial statements (Group
and Company) 17 15
- Audit of financial statements of subsidiaries
pursuant to 9 8
legislation
======= =======
6 Employees and employee benefits 2021 2020
GBP000 GBP000
Employee remuneration
Wages and salaries 177 174
Social security costs 12 13
Other pension costs 28 29
_______ _______
217 216
====== ======
Other pension costs represent contributions to defined
contribution plans.
The average number of employees including executive directors
during the year was as follows:
No. No.
Management 2 2
Administration 3 3
Other 1 2
_______ _______
6 7
====== =======
2021 2020
Remuneration of directors GBP000 GBP000
Directors' emoluments 69 52
Company contributions to money purchase
pension schemes 25 25
====== ======
Director Salary and Benefits Pension 2021 2020
Fees Contributions Total Total
GBP000 GBP000 GBP000 GBP000 GBP000
I D Lowe - 6 - 6 6
M J Baynham 50 - 25 75 63
R J Pearson 8 - - 8 8
______ ______ ______ ______ ______
58 6 25 89 77
The Company does not operate a share option scheme or other
long-term incentive plan.
Key management personnel are the directors, as listed above. The
total remuneration of key management personnel, including social
security cost, in the year was GBP94,067 (2020: GBP85,010).
2021 2020
Retirement benefits are accruing to the following
number of
directors under:
Money purchase schemes 1 1
====== ======
7 Finance expenses
2021 2020
GBP000 GBP000
Finance expenses
Interest payable:
- Other loan interest 137 29
==== ====
8 Income tax
There was no current nor deferred tax charge in the current or
preceding year.
Reconciliation of effective
tax rate
2021 2020
GBP000 GBP000
Profit before tax 460 95
===== =====
Current tax at 19% (2020:
19%) 87 18
Effects of:
Expenses not deductible
for tax purposes (10) (6)
Excess depreciation over
capital allowances (6) (3)
Losses carried forward 6 38
Effect of indexation (57) -
Loss on sale of revalued
investment property 111 -
Revaluation of property
not taxable (131) (47)
______ ______
Total tax charge - -
===== =====
An increase in the UK corporation tax rate from 19% to 25%
(effective from 1 April 2023) was substantively enacted on 24 May
2021. This will increase the Group's tax charge accordingly.
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 (see note 20).
9 Earnings per share
Basic earnings per share is calculated by dividing the
(loss)/profit attributable to ordinary shareholders by the weighted
average number of ordinary shares outstanding during the period as
follows:
2021 2020
GBP000 GBP000
Profit for financial period 460 95
====== ======
No. No.
Weighted average no. of shares:
for basic earnings per share and
for diluted
earnings per share 11,783,577 11,783,577
======== ========
Basic earnings per share 3.90 p 0.81 p
Diluted earnings per share 3.90 p 0.81 p
The diluted figure per share is the same as the basic figure
per share as there are no dilutive shares.
10 Investment properties
2021 2020
GBP000 GBP000
Valuation
At 1 July 17,720 17,470
Disposed in year (1,300) -
Revaluation in year 690 250
________ ________
Valuation at 30 June 17,110 17,720
======== ========
The fair value of investment property at 30 June 2021 was
determined by the directors based on changes in leases for one
property and changes in market conditions for others. The
non-executive director holds an appropriate professional
qualification and has recent experience in the location and
category of property being valued. Cognisance was also taken of the
independent valuation by Montagu Evans, Chartered Surveyors as at
30 June 2019.
The valuation methodology applied by the directors and the
external valuers was in accordance with the RICS Valuation Global
Standards July 2017 which is consistent with the required IFRS 13
methodology. IFRS 13 defines fair value as the price that would be
received to sell an asset or paid to transfer a liability in an
orderly transaction between market sector participants at the
measurement date. The properties were valued individually and not
as part of a portfolio.
The 'review of activities' and 'property prospects' within the
Chairman's statement provides commentary on the Group's
properties.
The historical cost of investment properties held at 30 June
2021 is GBP8,805,509 (2020: GBP9,521,406). The cumulative amount of
interest capitalised and included within historical cost in respect
of the Group's investment properties is GBP451,000 (2020:
GBP451,000).
Valuations were based on vacant possession, rental yields or
residual (development) appraisal rather than investment income in
order to achieve the highest and best use value. To obtain the
residual valuation the end development value is discounted by
profit for a developer and cost to build to reach the base
estimated market value of the investment. Only two properties were
valued using an appropriate yield with allowance for letting voids,
rent free periods and letting/holding costs for vacant
accommodation and early lease expiries/break options, together with
a deduction for purchaser's acquisition costs in accordance with
market practice. The resulting net yields have also been assessed
as a useful benchmark. Yields of 8.25% and 9.25% were applied
respectively.
Assuming all else stayed the same, a decrease in net rental
income or estimated future rent will result in a decrease in the
fair value whereas a decrease in the yields will result in an
increase in fair value. A decrease of 1% in the yields would result
in an increase in valuation of GBP224,000 (2020: GBP160,000). An
increase of 1% in the yields would result in a decrease in the fair
value of GBP171,000 (2020: GBP160,000).
All the investment properties have been categorised as Level 2
in both years as defined by IFRS 13 Fair Value Measurement. Level 2
means that the valuation is based on inputs other than quoted
prices that are observable for the asset, either directly (i.e. as
prices) or indirectly (i.e. derived from prices).
The amount of unrealised gains or losses on investment
properties is charged to the statement of comprehensive income as
the movement in fair value of investment property. For the year to
30 June 2021 this was a fair value profit of GBP690,000 (2020:
profit GBP250,000). During the year ended 30 June 2021, an
investment property was sold along with several stock properties,
together comprising Ardpatrick Estate, in a single transaction. The
price allocated to the investment property realised a net loss on
sale of GBP151,000. There were no realised gains or losses on the
disposal of investment properties in the year ended 30 June
2020.
The valuations take account of the impact of Covid-19 which has
not had a significant impact on the value of the Group's investment
properties due to the nature of the properties and demand being
maintained for small commercial properties and for quality
housing.
11 Plant and equipment
Motor Fixtures Other
Vehicles and fittings equipment Total
GBP000 GBP000 GBP000 GBP000
Cost
At 30 June 2019 20 16 72 108
Disposals in year (8) - - (8)
Additions in year 9 - - 9
---------- -------------- ----------- --------
At 30 June 2020 21 16 72 109
---------- -------------- ----------- --------
Depreciation
At 30 June 2019 19 16 67 102
Disposals in year (8) - - (8)
Charge for year 3 - 2 5
At 30 June 2020 14 16 69 99
---------- -------------- ----------- --------
Net book value
At 30 June 2020 7 - 3 10
========== ============== =========== ========
Motor Fixtures Other
Vehicles and fittings equipment Total
GBP000 GBP000 GBP000 GBP000
Cost
At 30 June 2020 21 16 72 109
Disposals in year (20) (1) (3) (24)
At 30 June 2021 1 15 69 85
---------- -------------- ----------- --------
Depreciation
At 30 June 2020 14 16 69 99
Disposals in year (13) (1) (4) (18)
Charge for year - - 1 1
At 30 June 2021 1 15 66 82
---------- -------------- ----------- --------
Net book value
At 30 June 2021 - - 3 3
========== ============== =========== ========
12 Investments
2021 2020
GBP000 GBP000
Listed investments 1 1
====== ======
13 Trading properties
2021 2020
GBP000 GBP000
At start of year 13,006 12,398
Additions 237 690
Sold in year (3,930) (82)
_________ _________
At end of year 9,313 13,006
======== ========
Finance costs related to borrowings specifically for a
development are included in the cost of developments. At 30 June
2021 the total finance costs included in stock and work in progress
was GBPNil (2020: GBP117,000).
14 Trade and other receivables 2021 2020
GBP000 GBP000
Amounts falling due within one year
Other debtors 108 89
Prepayments and accrued income 27 33
_______ _______
135 122
====== ======
The Group's exposure to credit risks and impairment losses
relating to trade receivables is given in note 18.
15 Cash and cash equivalents 2021 2020
GBP000 GBP000
Cash 3,020 72
====== ======
Cash and cash equivalents comprise cash at bank and in hand.
Cash deposits are held with UK banks. The carrying amount
of cash equivalents approximates to their fair values. The
Company's exposure to credit risk on cash and cash equivalents
is regularly monitored (note 18).
16 Trade and other payables
2021 2020
GBP000 GBP000
Trade creditors 54 133
Other creditors including taxation 13 100
Accruals and deferred income 580 980
_______ _______
647 1,213
====== ======
The Group's exposure to currency and liquidity risk relating
to trade payables is disclosed in note 18.
17 Other interest bearing loans and borrowings
The Group's interest bearing loans and borrowings are measured
at amortised cost. More information about the Group's exposure
to interest rate risk and liquidity risk is given in note
18.
Current liabilities
2021 2020
GBP000 GBP000
Unsecured loan 360 360
Secured development loan - 1,143
_______ _______
360 1,503
====== ======
Non-current liabilities
Unsecured loans 4,020 4,120
======= =======
Net debt reconciliation
2021 2020
GBP000 GBP000
Cash and cash equivalents 3,020 72
Liquid investments 1 1
Borrowings - repayable with
one year (360) (1,503)
Borrowings - repayable after
one year (4,020) (4,120)
Net debt (1,359) (5,550)
Cash and liquid investments 3,021 73
Gross debt - variable interest
rates (4,380) (5,623)
Net debt (1,359) (5,550)
Cash/bank Liquid investments Borrowing Borrowing
overdraft due within due after
1 year 1 year Total
GBP000 GBP000 GBP000 GBP000 GBP000
Net debt at 30
June 2019 131 1 (881) (4,070) (4,819)
Cashflows (59) - (622) (50) (731)
Net debt at 30
June 2020 72 1 (1,503) (4,120) (5,550)
Cashflows 2,948 - 1,143 100 4,191
Net debt at 30
June 2021 3,020 1 (360) (4,020) (1,359)
=========== =================== ============ =========== ========
Terms and debt repayment schedule
Terms and conditions of outstanding loans were as follows:
2021 2020
Nominal interest Fair Carrying Fair Carrying
Currency rate value amount value amount
GBP000 GBP000 GBP000 GBP000
Unsecured loan GBP Base +3% 4,020 4,020 4,020 4,020
Unsecured development GBP Base +0.5% 360 360 360 360
loan
Unsecured loan GBP Base +3% - - 100 100
Secured bank
loan GBP Base +5.1% - - 1,143 1,143
4,380 4,380 5,623 5,623
The unsecured loan of GBP4,020,000 is from Leafrealm Limited and
is repayable in 12 months and one day after the giving of notice by
the lender. Interest is charged at 3% over Bank of Scotland base
rate but the lender waived its right to the margin over base rate
until 30 June 2020. The margin applied with effect from 1 July 2020
in line with the terms of the loan.
The short-term unsecured development loan of GBP360,000 is from
Leafrealm Limited and is repayable after the disposal of Phase 3 of
the Brunstane development. Interest is charged at a margin of 0.5%
over Bank of Scotland base rate.
The unsecured loan of GBP99,999 was repaid during the year in
line with its terms. Interest was charged at a margin of 3% over
Bank of Scotland base rate.
The bank loan was secured by a standard security over one of a
subsidiary's developments, by a floating charge over the assets of
that subsidiary and by a limited guarantee by Caledonian Trust PLC.
The loan was repaid during the year. Interest was charged at 5.1%
over Bank of Scotland base rate.
The weighted average interest rate of the floating rate
borrowings was 3.3% (2020: 3.9%). As set out above, a lender varied
its right to the margin of interest above base rate until 30 June
2020 and so the rate of interest charged in that year was
1.64%.
18 Financial instruments
Fair values
Fair values versus carrying amounts
The fair values of financial assets and liabilities, together
with the carrying amounts shown in the balance sheet, are
as follows:
2021 2020
Fair value Carrying Fair value Carrying
amount amount
GBP000 GBP000 GBP000 GBP000
Trade and other receivables 108 108 89 89
Cash and cash equivalents 3,020 3,020 72 72
------------ ---------- -------------------- ---------
3,128 3,128 161 161
------------ ---------- -------------------- ---------
Loans from related parties 4,380 4,380 4,480 4,480
Bank loan - - 1,143 1,143
Trade and other payables 639 639 1,196 1,196
------------ ---------- -------------------- ---------
5,019 5,019 6,819 6,819
------------ ---------- -------------------- ---------
Estimation of fair values
The following methods and assumptions were used to estimate
the fair values shown above:
Trade and other receivables/payables - the fair value of
receivables and payables with a remaining life of less than
one year is deemed to be the same as the book value.
Cash and cash equivalents - the fair value is deemed to
be the same as the carrying amount due to the short maturity
of these instruments.
Other loans - the fair value is calculated by discounting
the expected future cashflows at prevailing interest rates.
Overview of risks from its use of financial instruments
The Group has exposure to the following risks from its use
of financial instruments:
* credit risk
* liquidity risk
* market risk
The Board of Directors has overall responsibility for the
establishment and oversight of the Group's risk management
framework and oversees compliance with the Group's risk management
policies and procedures and reviews the adequacy of the risk
management framework in relation to the risks faced by the
Group.
The Board's policy is to maintain a strong capital base so as to
cover all liabilities and to maintain the business and to sustain
its development.
The Board of Directors also monitors the level of dividends to
ordinary shareholders.
For the purposes of the Group's capital management, capital
includes issued share capital and share premium account and all
other equity reserves attributable to the equity holders. There
were no changes in the Group's approach to capital management
during the year.
Neither the Company nor any of its subsidiaries are subject to
externally imposed capital requirements.
The Group's principal financial instruments comprise cash and
short term deposits. The main purpose of these financial
instruments is to finance the Group's operations.
As the Group operates wholly within the United Kingdom, there is
currently no exposure to currency risk.
The main risks arising from the Group's financial instruments
are interest rate risks and liquidity risks. The board reviews and
agrees policies for managing each of these risks, which are
summarised below:
Credit risk
Credit risk is the risk of financial loss to the Group if
a customer or counterparty to a financial instrument fails
to meet its contractual obligations and arises principally
from the Group's receivables from customers, cash held at
banks and its investments.
Trade receivables
The Group's exposure to credit risk is influenced mainly
by the individual characteristics of each tenant. The majority
of rental payments are received in advance which reduces
the Group's exposure to credit risk on trade receivables.
Other receivables
Other receivables consist of amounts due from tenants and
purchasers of investment property along with a balance due
from a company in which the Group holds a minority investment.
Credit risk (continued)
Investments
The Group does not actively trade in equity investments.
Bank facilities
One subsidiary had a bank facility to fund a specific development.
The facility amounted to GBP1,415,000 of which GBP1,143,000
had been drawn down at 30 June 2020 and it was repaid during
the year ended 30 June 2021.
Exposure to credit risk
The carrying amount of financial assets represents the maximum
credit exposure. The maximum exposure to credit risk at
the reporting date was:
Carrying value
2021 2020
GBP000 GBP000
Investments 1 1
Other receivables 108 89
Cash and cash equivalents 3,020 72
________ ________
3,129 162
======= =======
The Group made an allowance for impairment on trade receivables
of GBPNil (2020: GBP11,000). As at 30 June 2021, trade
receivables of GBP74,000 (2020: GBP52,000) were past due
but not impaired. These are long standing tenants of the
Group and the indications are that they will meet their
payment obligations for trade receivables which are recognised
in the balance sheet that are past due and unprovided.
The ageing analysis of these trade receivables is as follows: 2021 2020
Number of days past due date GBP000 GBP000
Less than 30 days 25 18
Between 30 and 60 days 8 17
Between 60 and 90 days 7 2
Over 90 days 34 15
________ ________
74 52
======= =======
Credit risk for trade receivables at the reporting date
was all in relation to property tenants in United Kingdom.
The Group's exposure is spread across a number of customers
and sums past due relate to 11 tenants (2020: 9 tenants).
One tenant accounts for 36% (2020: 54%) of the trade receivables
past due by more than 90 days.
Liquidity risk
Liquidity risk is the risk that the Group will not be
able to meet its financial obligations as they fall due.
The Group's approach to managing liquidity is to ensure,
as far as possible, that it will always have sufficient
liquidity to meet its liabilities when due without incurring
unacceptable losses or risking damage to the Group's
reputation. Whilst the directors cannot envisage all
possible circumstances, the directors believe that, taking
account of reasonably foreseeable adverse movements in
rental income, interest or property values, the Group
has sufficient resources available to enable it to do
so.
The Group's exposure to liquidity risk is given below
Carrying Contractual 6 months 6-12 months 2-5
30 June 2021 GBP'000 amount cash flows or less years
---------------------------
Unsecured loan
4,020 4,364 219 125 4,020
Unsecured development
loan 360 362 1 361 -
Trade and other payables 639 639 639 - -
-------- ----------- -------- ----------- ----------
Carrying Contractual 6 months 6-12 2-5
30 June 2020 GBP'000 amount cash flows or less months years
---------------------------
Unsecured loan 4,020 4,177 95 62 4,020
Unsecured development
loan 360 375 - 375 -
100
Unsecured loan 124 20 2 102
1,143
Secured bank loan 1,295 934 361 -
Trade and other payables 1,196 1,196 1,196 - -
--------- ----------- -------- ------------- ----------
Market risk
Market risk is the risk that changes in market prices, such as
interest rates, will affect the Company's income or the value of
its holdings of financial instruments. The objective of market risk
management is to manage and control market risk exposures within
acceptable parameters, while optimising the return.
Interest rate risk
The Group borrowings are at floating rates of interest based
on Bank of Scotland base rate.
The interest rate profile of the Group's borrowings as at
the year-end was as follows:
2021 2020
GBP000 GBP000
Unsecured loan - Base +3% 4,020 4,020
Unsecured loan - Base +0.5% 360 360
Unsecured loan - Base +3% - 100
Secured loan - Base +5.1% - 1,143
===== =====
A 1% movement in interest rates would be expected to change
the Group's annual net interest charge by GBP43,800 (2020:
GBP56,230).
19 Operating leases
Leases as lessors
The Group leases out its investment properties under operating
leases. Operating leases are those in which substantially
all the risks and rewards of ownership are retained by the
lessor. Payments, including prepayments made under operating
leases (net of any incentives such as rent free periods)
are charged to the income statement on a straight line basis
over the period of the lease. The future minimum receipts
under non-cancellable operating leases are as follows:
2021 2020
GBP000 GBP000
Less than one year 179 204
Between one and five years 407 199
Greater than five years 316 137
_____ _____
902 540
===== =====
The amounts recognised in income and costs for operating leases
are shown on the face of the income statement.
20 Deferred tax
At 30 June 2021, the Group has a potential deferred tax asset of
GBP1,488,000 (2020: GBP1,174,000) of which GBP79,000 (2020:
GBP84,000) relates to differences between the carrying value of
investment properties and the tax base. In addition, the Group has
tax losses which would result in a deferred tax asset of
GBP1,409,000 (2020: GBP1,090,000). This has not been recognised due
to the uncertainty over the timing of future taxable profits.
Movement in unrecognised deferred tax asset
Balance Additions/ Balance Additions/ Balance
1 July (reductions) 30 June (reductions) 30 June
19 20 21
at 17% at 19% at 25%
GBP000 GBP000 GBP000 GBP000 GBP000
Investment
properties 75 9 84 (5) 79
Tax losses 942 148 1,090 319 1,409
_____ ______ _____ ______ _____
Total 1,017 157 1,174 314 1,488
_____ ______ _____ ______ _____
21 Issued share capital 30 June 2021 30 June 2020
No GBP000 No. GBP000
Authorised share capital
Ordinary shares of 20p
each 20,000,000 4,000 20,000,000 4,000
======== ======= ======== =======
Issued and
fully paid
Ordinary shares of 20p
each 11,783,577 2,357 11,783,577 2,357
======== ======= ======== =======
Holders of ordinary shares are entitled to dividends declared
from time to time, to one vote per ordinary share and a share of
any distribution of the Company's assets.
22 Capital and reserves
The capital redemption reserve arose in prior years on redemption
of share capital. The reserve is not distributable.
The share premium account is used to record the issue of
share capital above par value. This reserve is not distributable.
23 Ultimate controlling party
The ultimate controlling party is Mr I D Lowe.
24 Related parties
Transactions with key management personnel
Transactions with key management personnel consist of
compensation for services provided to the Company. Details are
given in note 6.
Lowe Dalkeith Farm, a business wholly owned by I D Lowe, used
land at one of the Group's investment properties as grazings for
its farming operation. Rent was agreed and paid at GBP1,575 per
annum (2020 : GBP1,575).
Other related party transactions
The parent company has a related party relationship with its
subsidiaries.
The Group and Company has an unsecured loan due to Leafrealm
Limited, a company of which I D Lowe is the controlling
shareholder. The balance due to this party at 30 June 2021 was
GBP4,020,000 (2020: GBP4,020,000) with interest payable at 3% over
Bank of Scotland base rate per annum. Leafrealm Limited varied its
right to the margin of interest over base rate until 30 June 2020.
The margin applies with effect from 1 July 2020 in line with the
terms of the loan. Interest charged in the year amounted to
GBP124,620 (2020: GBP22,069).
The Company also has an unsecured development loan due to
Leafrealm Limited, a company of which I D Lowe is the controlling
shareholder. The balance due to this party at 30 June 2021 was
GBP360,000 (2020: GBP360,000) with interest payable at a margin of
0.5% over base rate. Interest charged in the year amounted to
GBP2,160 (2020: GBP3,806).
The Company also had an unsecured facility during the year due
to Leafrealm Limited, a company of which I D Lowe is the
controlling shareholder. The maximum balance drawn down during the
year was GBP115,000 with interest payable at 8% per annum. Interest
charged in the year amounted to GBP5,508 (2020: GBPNil) and the
facility was repaid in full in line with its terms during the
year.
The Company had an unsecured loan on normal commercial terms
from Mrs V Baynham, the wife of a director. The balance due to this
party at 30 June 2020 was GBP99,999 with interest payable at 3%
over Bank of Scotland base rate per annum. Interest charged in the
year amounted to GBP2,421 (2020: GBP3,564). The loan was repaid in
line with its terms during the year ended 30 June 2021.
Contracting work on certain development and investment property
sites has been undertaken by Leafrealm Land Limited, a company
under the control of I D Lowe. The value of the work done by
Leafrealm Land Limited charged in the accounts for the year to 30
June 2021 amounts to GBP2,311 (2020: GBP2,333) at rates which do
not exceed normal commercial rates. The balance payable to
Leafrealm Land Limited in respect of invoices for this work at 30
June 2021 was GBPNil (2020: GBP91,638).
Lowe Dalkeith Farms, a business wholly owned by I D Lowe,
provided equipment used in the maintenance of the Group's
investment or development sites. The value of the equipment hire
from Lowe Dalkeith Farms charged in the accounts for the year to 30
June 2021 amounts to GBP2,068 (2020: GBPNil) at rates which do not
exceed normal commercial rates. The balance payable to Lowe
Dalkeith Farms in respect of invoices for this work at 30 June 2021
was GBPNil (2020: GBPNil).
For a full listing of investments and subsidiary undertakings
please see note 7 of the parent Company financial statements.
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