TIDMCNN
RNS Number : 5223K
Caledonian Trust PLC
21 December 2022
Information contained within this announcement is deemed by the
Company to constitute inside information as stipulated under the
Market Abuse Regulations (EU) No. 596/2014 ("MAR") which forms part
of Domestic UK Law pursuant to the European Union (Withdrawal) Act
2018.
21 December 2022
Caledonian Trust plc
(the "Company" or the "Group")
Audited Results for the year ended 30 June 2022
Caledonian Trust plc, the Edinburgh-based property investment
holding and development company, announces its audited results for
the year ended 30 June 2022.
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 loss of GBP1,302,000 in the year to 30
June 2022 compared with a profit before tax of GBP460,000 last
year. The loss per share was 11.05p and the NAV per share at 30
June 2022 was 197.3p compared with earnings per share of 3.90p and
NAV per share of 208.4p last year. The net valuation loss in the
year was GBP500,000 compared to a net valuation gain in the
previous year of GBP690,000.
Income from rent and service charges fell to GBP306,000 from
GBP368,000 in 2021. The Directors consider that this is a
non-recurring dip in income. There were no property sales during
the year compared with sales of GBP4,186,000 last year.
Administrative expenses were GBP887,000 (2021: GBP440,000), the
increase being substantially attributable to a non-recurring
purchase of intellectual property to enhance the value of the
potential development of St. Margaret's House for GBP363,000.
Interest payable was GBP139,000 (2021: GBP137,000).
Review of Activities
In the Group's property investment business, the principal
change has been the completion of the lease to Deliveroo of the
largest unit in our high yielding retail / industrial property at
Scotland Street, Glasgow. Deliveroo have completed their extensive
fit out of nine "dark kitchens" within the unit which are all
occupied and trading. We continue to hold our other high yielding
retail properties in Berwick, our North Castle Street offices, four
Edinburgh garages, a public house / restaurant in Alloa, our site
at Belford Road / Bell's Brae, Edinburgh and St. Margaret's
House.
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, which has reconfigured and sub-let all the space
to over 200 artists, artisans and galleries. St Margaret's
continues to have its traditionally high occupancy level.
We have appointed Montagu Evans to market St Margaret's House
for which we hold detailed planning permission for a development of
377 student bedrooms and 107 residential flats. We plan to launch
the marketing campaign in Spring 2023 provided market conditions
are propitious. We continue to receive unsolicited interest from a
broad spectrum of parties in advance of the formal market launch.
Further details in relation to St. Margaret's House can be found in
the Future Progress section.
At Brunstane we commenced construction of the third phase of
development, comprising five new houses over 8,650ft(2) forming the
Steading Courtyard, at the beginning of July 2021 and this
development was completed in September 2022. We completed the sale
of three of the houses in October and November 2022 for an
aggregate GBP2m, and Knight Frank are marketing the remaining two
houses at offers over GBP675,000 and GBP695,000. The application
for 11 new houses (c.20,000ft(2) ) "Upper Brunstane", in the
Stackyard field to the east of the steading was granted in November
2022. We intend to prepare the site for development, take up the
planning consent and secure the requisite building warrant with a
view to undertaking the development once market conditions
stabilise. We have made an application to modify the consent for
"Plot 10", lying between Phase 3 and Upper Brunstane, by replacing
the single large (3,500ft(2) ) house with two smaller houses of
similar combined size which will complete the small courtyard
leading into Upper Brunstane.
At Wallyford we are currently finalising several minor but
important variations to the planning consent for six detached
houses and four semi-detached houses over 13,350ft(2) and we have
received detailed tender prices, but are reviewing when to start
construction in light of current market uncertainty. 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. To the south of Wallyford a very large development of
new houses is being built at St Clement's Wells on ground rising to
the south, affording extensive views over the Forth estuary to
Fife. Towards the eastern edge, Persimmon completed a development
of 131 houses last year. On an adjacent site Taylor Wimpey
completed a development of 80 houses earlier this year and have
started development of a second site comprising 148 houses which
are selling at prices of GBP340/ft(2) for small three-bedroom
semi-detached houses and GBP275/ft(2) for larger four-bedroom
detached houses. On the western side of St Clement's Wells,
Barratts are building almost 500 three and four-bedroom houses of
which more than half are completed with prices currently at
GBP327/ft(2) for small three-bedroom semi-detached and terraced
houses and GBP280/ft(2) for larger four-bedroom detached houses.
The Master Plan for the St Clement's Wells development includes a
primary school, separate nursery and community facilities, which
opened in 2021, and a Learning Campus, including a new secondary
school, on an adjacent site which is scheduled to open in August
2023. Planning consent in principle has been granted for a further
750-800 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 been considered "difficult". To
dispel this myth, we have created a workable access to the site;
cleared rubble and spoil; 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. We have now instructed architects to adjust the plans to
meet current statutory requirements to remodel the Belford Road
façade and to reconfigure the internal layout with a more
contemporary open-plan design to reflect current market
requirements. Discussions continue with City of Edinburgh Council
Planning Department.
The Group 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,
and a 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.
The Group's development site at Gartshore 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 most 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. However, values in regions such as Perth and
Kinross and Fife having risen over 8% in the past year, but, with
even more attractive immediate opportunities elsewhere, no
investment is proposed during the current year 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 as Ardonachie is now only 15 minutes
from Perth; Balnaguard, Strathtay and Comrie all 30 minutes; and
Camghouran, a site for holiday houses, 90 minutes.
Economic Prospects
Economics, "just one 'dashed' thing after another...", Rudge
replied, to paraphrase Alan Bennett's "History Boys", on being
asked to define "history". So, indeed, is it proving as the UK
economy, having contracted 0.2% in Q3 2022 (the Bank of England's
forecast was 0.5%) is forecast by the MPC to contract a further
0.3% in Q4 and to fall by 0.75% in H2 2022, so starting a recession
which, using the Bank's normal conditioning, based on market
implied interest rates, is forecast to last until the middle of
2024, before regaining the pre-recession level in five years.
Over the last seven centuries there have been almost 200
business cycles of varying severity, only a few of which were deep
and about 15 lasting five years or more. The worst of these cycles
combined both such injurious features.
Tolstoy's Anna Karenina portrays changes in fortune: "Happy
families are all alike; each unhappy family is unhappy in its own
way". Similarly, economic distress has many different causes, but
they fall into four general headings.
Disease is the most virulent of the four separate, but at times
overlapping causes. The "plague": the Black Death, causing an
economic contraction of 30% between c.1346 - 1353 (there were
subsequent sporadic but lesser outbreaks), resulted in England's
most severe recession. There was a macabre twist, causing it to
fall outside the normal classification of recessions: GDP per
person rose during the economic contraction, as the appalling high
death rate of nearly 50% reduced the population, and
simultaneously, real wages rose as labour scarcities transferred
resources from capital to labour.
The scale of the recession caused by the "plague" was not
repeated in the two subsequent disease induced recessions. The
"Spanish" flu epidemic induced a recession which started in 1918
which was compounded by the sharp change from wartime production
whose deflationary effects were reinforced by strikes in the coal
industry and widespread unemployment. The economy contracted by
about 7% and, before recovering, succumbed to the post WWI
recession of 1920 - 1924, giving a combined reduction estimated at
22% of GDP.
Covid-19 caused the third of the "plague" induced recessions in
which the economy contracted 9.4% in 2020, including a spectacular
19.4% fall in Q2 during the initial "lockdown". This disease led
recession is exceptionable in that, due to the extensive Government
financial support, businesses were largely maintained intact so
that, as the disease became controlled through the extraordinarily
successful vaccination programme, the economy recovered rapidly,
returning to the pre-Covid-19 level in December 2021. Recessions
are a curse on economies, and plagues are the curse of the first
horseman of the apocalypse, "galloping while bending his bow...
with [his] brass quiver filled with poisoned arrows, containing the
germs of all diseases".
Famine, manifests as a black horse, ridden by the third and the
most stealthy of the four horsemen, was a frequent curse of the
economy, but caused fewer direct fatalities. England was
predominantly an agricultural economy until the industrial
revolution in the late 18(th) century and, consequently, "normal"
season to season variations in agricultural output were by far the
major influence on economic output, giving rise to short-term
business cycles whose amplitude is not accurately quantifiable -
but they occurred frequently with roughly 30 such cycles every
hundred years from 1272 to 1772. However, one seasonal variation
did produce one of the greatest recessions in England's economy
(Scotland was less affected), termed the "Great Frost". The winter
of 1708-09 was extremely cold and a severe frost gripped the
countryside for several months, lasting into the late spring. The
thaw was then followed by extensive flooding from the snow melt,
factors resulting in a greatly reduced cropped area, almost all of
which was late sown, and so yielded a very poor harvest.
Simultaneously, the extreme cold winter and late spring caused many
livestock to perish.
There is a colourful contemporary account:-
The economic disaster followed the delay to the spring planting
season. "Pray for an early Spring", I was advised when commencing
farming!
The second horseman, emerging when the second seal of the
Apocalypse was broken, rode a red horse and carried a sword
vertically - the symbol of war, the principal cause of many deep
recessions. Just prior to the "Great Frost" The War of the Spanish
Succession, (principally 1701 - 1708) was the first of many
European great power conflicts, a predecessor to the Napoleonic and
both World Wars, was fought beyond Europe in Florida, Canada and
the West Indies, and in South America, India and West Africa,
between armies each numbering, for the first time, over 100,000, to
whose number Britain contributed less than 20%, but provided
disproportionate financial support and caused over 1 million
casualties. The consequent economic cost to the UK resulted in a
deep 15% recession in 1706 whose cost, having led to a review of
the war objectives, initiated the lengthy negotiation of the
subsequent peace Treaty.
The second Great Power conflict, which concluded with the
victory over Napoleon's France at Waterloo in 1815, caused a
recession of 5.3%, lasting until 1819 in England and 1822 in
Scotland. The recession was exacerbated by a sharp decline in the
textile industry where workers' pay was cut from 15 shillings a
week to 5 shillings or less. The economy was also greatly damaged
by the reallocation of resources to agriculture and the resultant
transfer of income away from the high consuming lower income groups
to the high saving wealthy landowners caused by the passage of the
first of the Corn Laws in 1815 which boosted domestic grain prices
by prohibiting cheaper grain imports for less than the present
equivalent of about GBP1,800 per tonne. (The current, post Ukraine
war, price is about GBP250 per tonne).
The third European Great Power conflict, WWI, induced an even
deeper recession, as GDP fell to 21% in 1921 and output did not
recover to the 1918 peak until 1929, as the adverse effects of the
war were reinforced by the even more contractionary consequences of
the Spanish flu pandemic.
The long-term cost of WW1 to the UK economy was significantly
greater than its costs while it was waged. The war consumed 10% of
the UK's domestic capital and 24% of its overseas assets and 25% of
its GDP. The UK lost 3.6% of its human capital from 715,000
military deaths and more than 1,500,000 injuries. In addition to
the direct domestic economic damage, the long duration of the war
caused far reaching changes to its trading partners throughout the
world, making them less dependent on UK trade, even when the UK had
recovered the necessary capacity. At the outbreak of WWI Britain
was "the" leading member of a worldwide liberal economic order with
54% of its GDP representing world trade, accounting for 27% of the
world exports, and had a net property income equivalent to 9% of
GDP from overseas investments. This all changed: protectionism was
rife, trade fell, and import substitution was widespread as
protectionism gave rise to domestic manufacture, and industries
developed as the UK was unable to supply them. The economic damage
was exacerbated by the post war decision to return to the gold
standard (a fixed exchange rate), particularly one based on the
pre-war parity of $4.86 rather than $4.20, a lower level deemed
necessary for unemployment to fall to previous levels. This move
was controversial and was condemned by Keynes at the time whose
views, subsequently, were proved correct. The role of finance,
monetary and fiscal policy and financial regulation in causing
recessions is the major recurring theme in centuries of recurring
recessions, a topic to be summarised following a brief analysis of
the recession caused by WWII, the most recent of the Great Power
wars.
The WWII victory resulted in another severe recession, as GDP
fell 12.2% from 1943 to 1947, but unlike post WW1 the recovery took
place quickly due to two main factors. First, and most importantly,
there was no "flu" pandemic. Second, because after WWI several
significant economy policy corrective measures were recognised and
largely embraced post WWII, remedial action was both available and
largely taken to mitigate the consequences of the war
devastation.
The most significant change was the reversal of the post WWI
policy of imposing harsh conditions on the debtors, and reparations
from the losers. Significantly, post WWII, Britain had loans
equivalent to 25% of GNP and was the major world debtor, owing the
US GBP3.75bn in "war loans". To assist the UK's and the world's
recovery, these debts were rolled over into a 50-year loan at 2%.
At the same time, the US' European Recovery Programme "The Marshall
Plan" made over $11bn available to European recovery of which 90%
was as grants and of which Britain received GBP3.19bn. Thus, post
WWII western economies were not crippled as they had been after
WWI. However, one financial policy error was repeated, as
subsequent to the Bretton Woods agreement made in 1944, Britain
again agreed to a fixed exchange, on this occasion against the
dollar, which, given the UK's inflation rate, proved to be far too
high and in 1959 Sir Stafford Cripps modified this policy by
devaluing Sterling by 30% from $4.03(23) to $2.80.
The last, the fourth horseman of the Apocalypse was revealed
astride a sickly green grey coloured horse, the pallor of some
slowly spreading affliction. Such a condition aptly describes the
symptoms of recessions inherent in or caused by the economic
"systems" or their operation. These recessions occur only in
monetised systems - not, for instance, in purely subsistence
agricultural economies. One of the longest English recessions
occurred between 1420 and 1490 whose primary cause was a "credit"
crisis, causing silver bullion to be rationed. Imports from the Far
East had greatly expanded, resulting in a trade deficit,
exacerbated by the collapse of England's leading cloth export and
wool, falling by 50% in the four years to 1445, and the deficit was
financed by the export of bullion, notably silver. The shortage of
bullion was reinforced by hoarding of bullion, especially in the
East where, in the late 14(th) century, China's Ming dynasty
reverted to the silver standard, abandoning the Mongol Yuan
dynasty's fiat currency. The credit shortage became so great that
by the 1420s only 13 pence per head was available in England
compared to 56 pence in the previous century. The Great Slump
finally ended about 1490 as bullion supply increased with higher
prices and improved mining methods, together with new supplies from
Portuguese exploitation of African gold supplies and later Spanish
exploitation of South American treasures and mines.
The Long Depression of 1873 to 1879 also originated mainly from
changes in bullion supply, but for different reasons. The US
Coinage Act of 1873 ended the bimetallic standard of both gold and
silver and moved to a purely gold standard. The elimination of
silver abruptly contracted the money supply, drove down the silver
price and closed many mines, particularly those in the extensive
new mining area in Nevada. A worldwide recession followed,
particularly severe in Central Europe, then recovering from the
1870 Franco-Prussian War, but extending to the UK, which, although
enjoying an industrial boom, was suffering a long recession in the
domestic Agricultural Sector, having become exposed to cheaper
international competition. The United States economy, having
experienced a long boom after the 1861-1865 Civil War, then
experienced a deep recession.
The "Great Depression" lasting from 1929 to 1939 in the USA,
primarily a finance-based downturn, is worthy of its reputation as
the world's most notable economic downturn, as between 1929 and
1932 world GDP fell by 15%, peak to trough, and remained depressed
below its previous level for a considerably longer time. The Great
Depression was most severe in the USA where GDP per head dropped
from $7,100 to $4,950 or 30% by 1933 and GDP did not recover to its
1929 level until 1939. In the US between 1929 and 1932 industrial
production fell 46%, wholesale prices 32%, trade by 70%, and the
unemployment level increased seven times. The reduced severity of
the recession in the UK facilitated its economy's recovery to its
pre-recession level by 1934.
The causes of the Great Depression, originating in the USA, have
competing interpretations of its primary and ancillary causes, but
all of them are fundamentally "financial". A colourful popular
interpretation is that the stock market crash was a primary cause
of the Great Depression, rather than a reflection of the cause.
However, stock market valuations do not reliably reflect the
reality, as promulgated by proponents of the "efficient market
hypothesis", but are greatly influenced by the perceptions of the
preconceptions of others, iteratively: they are guided, to varying
extents, by human behavioural traits as well as by analytical
assessments, or even, anecdotally, by New York cabbies who then
became self-styled stock market gurus. The American economy grew
rapidly in the late 1920s, facilitated by a major expansion of the
credit base, widely extending consumers' credit in various formats,
including the establishment of a "never, never" or Hire Purchase
("HP") purchase culture which reinforced the boom in business
profitability, where stock price rises were reinforced by the
extension of 90% broker credit, attracting even more speculative
demand. In 1929 the market was "spooked": consumer sales were
considered to be falling. Almost overnight there were margin calls
on stock, their sales causing further drops, bank withdrawals and
asset sales to fund credit requirements, leading to falling asset
valuations and then to loan defaults undermining confidence in
banks, bank runs and then to bank failures, all in a vicious
self-reinforcing spiral.
The causes of the scale, the depth and the extent of the Great
Depression are disputed. The current preferred explanation of why a
possibly "normal" business cycle recession cycle so escalated is
provided by the monetary explanations of Milton Friedman and Anna J
Schwartz who held that the US Federal Bank did not intervene, but
permitted both the collapse of the banks and maintained high
interest rates, and allowed the money supply to contract by 35%. In
short, the US Federal Bank attempted to control the economy by
following a contractionary policy which had the directly opposite
result. Unfortunately, the damage resulting from the failure of the
US policy was a contagion that spread across the world.
Following recovery from WWII the UK, together with most of the
Western World, enjoyed growth with minor deviations of up to 5% pa
until mid-1973. The economy benefited from various relaxations,
particularly the deregulation of the house mortgage market which
permitted Banks, as well as Building Societies, to lend for house
purchases. Increased credit increased house prices and the
increased house wealth boosted demand throughout the economy, a
demand which was intensified by the mass distribution of credit
cards, (reminiscent of the HP credit expansion in the US in 1920s).
Demand was further increased by "Barber's Boom", the then
Chancellor, Tony Barber's(32) , "dash for growth", designed to
raise productivity and growth, a policy similar to that espoused,
all so briefly, by Prime Minister Truss.
A major factor contributing to "Barber's Boom" contained the
seeds of its destruction. From the late 1950s cheapening oil prices
had stimulated the economy as it substituted for coal, but was
systematically destroying the coal industry. In 1956 an output of
207 million tonnes was produced by 700,000 men, but by 1971 fewer
than 290,000 men produced 133 million tonnes from many fewer
collieries. Falling demand reduced the bargaining power of the
miners who, in 1957, enjoyed a wage premium of 22% above their male
counterparts in manufacturing, but by 1967 their wage was 2% below
that of a manufacturing employee. Such resentments resulted in the
miners' strike, 9 January - 28 February 1972, with severe effects
on electricity supply and the economy.
It is indeed ironic that the strike demonstrated the continuing
importance of the coal industry only months before an unexpected
event made it even more important. In October 1973 the brief Yom
Kippur War caused the Saudi led OPEC countries to ban all exports
to the USA and to use their cartel position to increase its price
from about $3 to $14 by 1976. Oil supplies to the UK were
interrupted and power generation became increasingly dependent on
coal. Against a background of rapidly rising prices and a looming
oil shortage, the miners called a strike in December 1973, reducing
also this primary fuel source for power stations with the
consequent emergency regulations, including rationing of
electricity and the three-day working week, all together causing a
severe contraction in the economy.
The 1973 Barber Boom had led to an inflationary spiral, which
was fuelled by the Oil Price surge and reinforced by wage rises,
gained by commercial advantage, all combined to cause high
inflation, peaking at 25% in 1975 whose high prices reduced export
volumes, so resulting in the sterling crisis of 1976, a crisis from
which the economy was rescued by the record IMF loan of $39bn.
Ominously, while the economy did recover, peaking in late 1979,
inflation was still high, rising to 16.4% in 1980, the underlying
problems of the 1970s remained unresolved.
The Thatcher government's inheritance on replacing Labour in
1979 was an economy with high inflation, expectations of high
inflation, a disaffected labour force, many of whose traditional
industries, having become uncompetitive, were closing. The
underlying cause of this inheritance was the poor competitiveness
of the UK economy, permeated by lax fiscal and monetary policies to
which the continuing rapid rise in the prices by 1980 proved to be
the "last straw". Temporising economic policies had exacted their
reckoning. The Thatcher government embraced monetarist policies and
instigated far reaching financial management reforms, principally,
tightening monetary policy, but including fiscal tightening, and
widespread measures to improve competition and, hence,
productivity. In consequence, a deep recession followed, employment
peaked at 11.9%, GDP fell by 4.5% at its nadir, company earnings
declined 3.5%, and a recovery took three and a quarter years.
The stringencies of the early 1980s gave way to an economic
boom, the "Lawson Boom" - with echoes of the "Barber Boom" - partly
due to the deregulation of many financial controls and restrictions
which greatly improved the supply side of the economy, allowing
higher growth without inflation. However, the stimulation of demand
again proved even greater than the supply capacity, leading once
more to an extensive inflation, reduced international
competitiveness and a major balance of payments deficit.
Unfortunately, possibly for political reasons rather than sound
financial ones, the UK had entered into a fixed exchange rate, the
Exchange Rate Mechanism ("ERM"), and, being unable to devalue, was
forced to defend the fixed exchange rate by raising interest rates,
a peak of 15% being momentarily reached (3 1/2 % today seems
high!). These measures had caused the economy to fall into
recession early in 1990, reducing economic output for 3 1/2 years
by a maximum of 2.5% and climaxing dramatically on 16 September
1992 when the UK left the ERM and devalued the GBP by 20%. Again,
failed financial policies had prejudiced the economy.
The next financially induced recession, starting in 2008, was
different, very different, from the "classic" inflation induced
recessions of the 1980s and 1990s, the "Barber" and "Lawson" booms,
where demand had been fostered beyond the supply capacity of the
economy, a barrier the revolutionary policies of the Thatcher
administration (Times 30.11.22) had only mitigated.
Following the 1990s recession, Gordon Brown, the then
Chancellor, recognising that Fiscal and Monetary Policy were both
politically controlled and both used financially unwisely by
incumbent governments for political reasons announced (on 6 May
1997) the setting up of an independent Monetary Policy Committee
("MPC") chaired by the Governor of the Bank of England to determine
the interest rate necessary to deliver the Government's target
inflation rate, thus removing monetary policy from direct political
control. Such independence, likely coincident with benign
inflationary conditions, appeared to deliver stable growth and
inflation. Accordingly, Gordon Brown, in his pre-budget speech of 6
December 2006 said,
"tenth consecutive year of growth ... the longest period of
sustained growth in our history, but of all the major economies -
America, France, Germany, Japan - Britain has enjoyed the longest
post war period of continuous growth ... sustained under this
government for a record 38 quarters [and] will continue into its
39(th) and 40(th) and beyond ...".
Such pride did come before a fall, a spectacular one, heralded
within nine months when in early September 2007 a Scottish paper
published a photograph resembling an old-fashioned bank run -
depositors outside the Northern Rock ("NR") offices in Edinburgh
waiting to withdraw their money. Next day the Bank announced an
emergency liquidity supply.
There appeared, initially, to be a classic "bank run", the first
in the UK since Overend, Gurney & Company in 1866, but the
"run" on NR had a different and more subtle and other underlying
cause. Unusually, NR relied not primarily on retail depositors who
constituted only 23% of its liabilities, but on a combination of
short-term borrowing and other and building society long-term
funding, such as Preferred Stock, but not on Collateralised Debt
Obligations ("CDOs") or other "structured" assets. NR's total
assets had grown from GBP17.4bn on flotation in 1998 to GBP113.5bn
in January 2007, an asset growth financed largely by substantial
debt and reserve notes, such that total assets divided by common
equity, which in June 1998 was 22.8, (high even by US investment
bank's high standards of c.25.0 at that time) became 60.0 in June
2007 and 86.3 in October 2007. With such very high borrowing, or
"leverage", an even very small discounting of the value of
non-equity liabilities would wipe out the miniscule common equity.
Leverage determines the degree of risk taken by unsecured
creditors, especially those lending at a discount to the face value
of the security which in 2007 was normally 2% to 5%, the quaintly
termed "haircut". It implies, if the haircut is 2%, that the
borrower needs GBP2 equity per GBP98 security or a ratio of 50. If
the haircut rate is 4%, then the borrower can only borrow GBP46
security: thus, if the "haircut" increases, either even more equity
is required for a given amount or less security can be borrowed.
Highly leveraged entities such as NR were, therefore, very
"exposed" to changes in the perceived creditors' risk or "haircut"
level, as determined by the credit "market".
On 9 August 2007 a key event occurred when the French Bank
Paribas closed three investment vehicles using short-term money
such as was used by NR, a very public illustration of a widespread
credit funding difficulty then affecting more and more
institutions. Critically, while NR had almost no exposure to the
subprime market in which Paribas lent, it was "fishing" - borrowing
- in the same financial pool, which abruptly shrank and many
institutions and investment vehicles fishing there were
experiencing difficulties in renewing their loans. For NR its high
leverage resulted in that financing market closing to them and the
management was forced to turn to the Bank of England for support,
which granted loans for GBP28.4bn in December 2007.
That support of the Bank was given before the "run" on NR - it
was not the "run" that caused NR's difficulties, but the earlier
withdrawal of credit facilities by wholesale markets, sophisticated
institutional investors, due to a sudden change of or reappraisal
of international and individual credit risk. NR's liquidity crisis
was different to a normal "bank run". In normal "runs" when assets
are impaired each individual depositor runs for fear that the
others will run, leaving no assets left for those that do not run,
deemed "co-ordination failure". NR assets were secure at that time.
NR was a prime mortgage lender to UK households when house prices
were rising and employment was stable, and at that point there was
no sign of any deterioration in the loan quality.
Thus, NR did not represent a normal bank failure: it was the
change in risk in credit, or the perceived change in its risk that
required higher returns and, therefore, a higher equity cover that
undermined NR. Such a risk is separate from the security of banks'
loans and their related regulation and lies with the extent of
capital market risk, and as such banking and capital market
conditions should have been considered jointly and so
regulated.
Consideration of the credit market was a lesson, self-evidently,
lost on the Royal Bank of Scotland ("RBS") when in October 2007 RBS
took over ABN Amro in the largest deal in financial history. The
FCA - FSA Board Report found that, subsequent to the takeover, RBS
had, on present criteria, Tier 1 capital of less than 2%, echoing
the capital structure of NR. The changed credit risk environment
was a time bomb which was primed when the Wall Street investment
bank, Bear Stearns, was rescued by JP Morgan Chase in March 2008
and exploded dramatically when Lehman Brothers collapsed
precipitously in September 2008. Neither the prospect nor the
extent of this credit bomb were, presumably, foreseen by financial
regulators, as presumably they had not been seen by the RBS, who
pressed forward with the ABN Amro takeover regardless. (Or was it
one or more of: momentum; hubris; incompetence; autocracy; or
"ostrich"?). One wag declared it represented the ultimate triumph
of Marxism: the capital owners were denuded and the banks' workers
enriched. As the late Queen Elizabeth said to Professor Luis
Garicano, Director of Research at the London School of Economics
Management Department: "If these things were so large, how (come)
everybody missed them?" Certainly, the Bank of England were
oblivious of the burning fuse as it increased interest rates from 5
1/2 % to 5 3/4 %(42) in July 2007 on the eve of one of the largest
and longest recent recessions.
The recession starting in Q2 2008 was qualitatively different
from all recent financially induced recessions. These have
generally occurred following restrictive monetary policies imposed
by the Bank to reduce inflation following booms due to excess
demand over supply and not by recessions directly delivered by
external creditors: this was a financial balance sheet, or credit
crisis, the first since the 1930s Great Depression. It is pertinent
to enquire, given the scale of the bailout to financial
institutions, and the cost to the economy of what has proved to be
a long period of exceptionally poor economic performance with a
continuing lasting heritage, if it would not have been very much
cheaper to have scotched the problem earlier. For example, if,
importantly, Lehman had been saved, or on a much smaller scale NR,
and credit or credit assurances flooded the market, as was
undertaken with the rescue of the clearing banks, would not then
the subsequent cost of the recession proved so very much smaller?
The Fed's and the Bank of England's early decisions may just have
more than a slight resemblance to the policy failures causing the
Great Depression - doing the wrong thing! In striking contrast was
Mario Draghi's epic undertaking "Whatever it takes...".
The Great Recession caused the economy to contract by 6.25% and
it did not recover to its former level for 5 years in the UK,
longer even than the Great Depression in the 1930s. More
significantly, during recovery there was no higher rate "catch-up"
growth, such that usually restores real GDP to that level implied
by the previous growth rate, but rather growth stalled and
experienced a double dip recession in 2011, partly caused by the
misjudged fiscal austerity measures of the Cameron / Osborne
administration. In the Eurozone, the even greater austerity
measures, caused a longer depression in contrast to the US' laxer
policy, led by Bernanke's effective endorsement of the monetary
interpretation of the causes of the Great Depression, which
restored their economy more rapidly.
Further damage to the economy has been caused by an apparent
widespread lasting effect on productivity, particularly in the UK
where productivity, adjusted for inflation and the exchange rate,
grew only 0.27% p.a. between 2008 and 2019 in contrast to 0.70%
p.a. in France and Germany and 1.00% p.a. in the US. Until 2007 UK
output per hour was the second highest in the G7, but by 2019 it
was second lowest, 18% lower than France. The degree of uncertainty
is often cited as a deterrent to investment, especially its timing.
Investment only is made when a favourable outturn is expected, but,
as in all investments, there is a probability of an unfavourable
outcome. If the possible cost of the unfavourable outcome can be
reduced by waiting by more than the opportunity cost of delaying
that investment, it is logically correct to delay. Furthermore, in
practice, as the "behavioural" cost of a loss is greater than the
"economic" cost - and behaviour tends to shun losses more than it
embraces profit - then investment is even more likely to be
delayed. In practice few Boards will sanction big investments when
by waiting, even at net overall cost, the prospect of big losses
can be avoided. Interestingly, I consider that to be a precise
interpretation of many present decisions, as described colloquially
as "uncertainty": forgetting everything is "uncertain", taxes and
death excepted!
There is a separate constraint on investment: just as success
breeds success so investment is both a cause and a consequence of a
healthy economy - it results from robust demand and delivers
stronger supply. Such an understanding may have been implicit in
the abandoned economic policy that Prime Minister Truss sought to
introduce - a stimulus to the economy producing a self-perpetuating
investment boom. Unfortunately, that policy, possibly enlightened
under some circumstances, quickly proved unworkable as the policy
raised investment costs, particularly interest costs in credit
markets, and the exchange rate of the pound fell. The New Deal in
the US was introduced when markets accepted such a policy. Perhaps,
as is averred, the bond markets really do determine the fate of
advanced economies.
The economy has made the most remarkable recovery from the Covid
induced recession and by Q2 2022 had just regained the pre-Covid
level of Q4 2019, a slightly worse outcome than Germany, and
considerably worse than the US which has grown 2.5%, while the two
other major European countries, Italy and France, grew about 1.0%.
The war in Ukraine has inevitably reversed the recovery and in the
UK the economy has started to contract, falling 0.2% in Q3 2022,
taking it 0.4% below its pre-Covid level in Q2 2019 and is expected
by the Bank to contract a further 0.5% in Q4, before continuing to
contract throughout all 2023 and H1 2024.
The long recession now forecast has multiple coincident causes,
including shortcomings in financial management. The singular most
obvious cause of the recession are the soaring prices of fuel,
mineral oil and gas, and food commodities, grains and vegetable
oils, caused by the war in Ukraine and the response of the Western
powers to that war. If Ukraine had been allowed to fall, the
economic consequences would have been relatively insignificant.
Much blood and treasure is being, and will continue to be, spent on
principle and perceived strategic protection. Fortunately, for the
EU and the whole of the Western "alliance", the majority of that
price is being and will be paid by Ukraine and the US. The bitter
irony is that amongst those countries in receipt of most benefit,
lies the greatest aversion. It is primarily the US shield that
safeguards Europe, not any European nation nor any combination of
European nations, and it is European security that is primarily
threatened.
Perversely, the war poured "oil" on a burgeoning fire. Covid, a
cataclysm saved by the brilliance of research and of its
application, together with exceptionally gifted administrative
decisions, notably in the UK, and rescued by very generous fiscal
reliefs and the injection of unprecedented accommodative monetary
measures, caused spending to surge rapidly in the recovery. That
surge in demand encountered an array of constraining supply
restrictions: restarting production chains; crowded ports; shipping
shortages; and manifold other supply problems caused by this
outbreak of Covid, weather and restrictions in labour, capital and
facilities, causing inflation. The war started before these
restrictions had been removed, greatly compounding them.
Unfortunately, monetary responses, especially in the UK lagged this
reality. Bank rate was 0.1% until December 2021 and rose in May
2022 after the start of the war to only 1.0% when the Bank
said:
"After the peak in 2022 Q4, the upward pressure on CPI inflation
is expected to dissipate rapidly, as global commodity prices are
assumed to rise no further, global bottlenecks ease, and domestic
inflationary pressures subside in response to weaker growth of
demand and a rising degree of excess supply. CPI inflation is
projected to fall to just above the 2% target in two years' time,
largely reflecting the waning influence of external factors, and to
1.3% in three years, well below the target, reflecting weaker
domestic pressures".
And in August 2022(46) , when it raised interest rates to 1.75%,
the MPC said:
"We expect inflation to begin to fall next year.
It is unlikely that the prices of energy and imported goods will
continue to rise so rapidly.
We expect that some of the production difficulties businesses
are facing will ease.
The slowdown in demand for goods and services should also put
downward pressure on prices.
We expect inflation will be close to our 2% target in around two
years...".
In November the MPC raised the interest rate to 3%, saying:
"There has been a material tightening on financial conditions...
As a result, the UK economy is expected to be in recession
throughout 2023 and 2024 H1 and GDP is expected to recover only
gradually thereafter".
The Bank is set at catching up with events: rates had been too
low for too long. Strikingly, this has been the inverse of the
MPC's decision in response to the onset of the Great Recession in
2008 when it held interest rates too high for too long: having
raised interest rates in the teeth of the threatening storm in July
2007 to 5.75% the MPC only cut the rate by 0.5 percentage points in
December 2007 while the main cuts were delayed until October 2008
and March 2009 when rates were reduced to 0.5%. Then, as now, they
were behind the curve.
The depth and the extent of the recession into which the economy
is entering is varyingly forecast. The Bank of England have a
forecast based on Bank Rate, implied by recent financial markets
peaking at 5.25%, and an alternative one based on interest rates at
3%. Using the higher interest rates a 0.75% fall in output in 2022
Q3 and Q4 reduces 2022 growth to 0.1% with a fall of 1.9% in 2023
and another fall of 0.1% in 2024. Judged quarterly, the economy is
expected to have a maximum contraction of 3% enduring from the
8(th) to 12(th) quarters from Q3 2022 and then to recover to the
previous level of Q2 2022 in just over 5 years' time, an almost
similar length of recovery time to the Great Depression. Less
pessimistically, if peak 3% interest rates are assumed, - an
unlikely forecast - the recession is less than 2% in the worst
quarters and the economy recovers to the pre-recession level in
about four years. Patently, while the alternative forecast
represents a far less unfavourable outcome, the basis of its
assumption is improbable, although the peak rate of 5.25% used in
the Bank's forecast has already been shown to be most improbable,
any revised forecast would be more favourable than their core
forecast.
The OBR's forecast corresponds relatively closely with the
Bank's alternative forecast with a peak to trough fall of 2%, but
the economy is forecast to regain its pre-recession level more
quickly in about 2 1/4 years time. The Bank's survey of independent
forecasters' reported their forecasts were on average in line with
the Bank's alternative and less severe forecast, and after a small
fall in 2023 expected growth to return to 1.8% in 2024 and in
2025.
A recession, possibly not deep, but probably long, seems almost
certain, given the relatively benign Economists' consensus.
However, of certainties Keynes said: "the inevitable never happens
and the unexpected constantly occurs", a dictum unfortunately true
of consensus economic forecasts, as demonstrated by the failure of
the consensus view in forecasting the US recessions since 1970 -
not one of them had been forecast! The unexpected is a constant in
markets, sometimes flying in as a "black swan", but on another
"wing" there is always the possibility of a "bluebird" event
bringing unexpected joy - a warm winter or peace...!
The betting odds, as those of us habitually backing outsiders
know to our cost, are usually good forecasters as are the markets,
unlike consensus economists. In this case, most regrettably they
agree with the economists: we may have to wait a while for that
bluebird. Much may depend, as Larry Summers asks, whether the Bank
considers interest rates to be as antibiotics or to be as steroids:
with antibiotics it is better to take the full course of medicine
whether the affliction appears to have passed or not; with steroids
it is better to stop as soon as possible to avert possible serious
harm. In the past they have prescribed antibiotics, missing the
inflexion point.
I forecast that, provided there is no serious escalation of the
Ukraine war, interest rates will not rise above 4.25% and that
inflation will fall back quickly as commodity prices become at or
below the comparison level and as supply restrictions ease further
and demand is reduced by high interest rates. Thus, interest rates
should fall from the peak quickly and return gradually to "normal"
levels of about 2.5%, rather than the abnormal levels obtaining
past the 2008 Great Recession.
Property Prospects
Economic prospects do not portend well for property as the
economy falls into recession which, according to the OBR, is likely
to last until late 2023 with a peak to trough fall of GDP of 2.1
percentage points or according to the Bank of England's central
projection until H2 2024 with a peak to trough fall of 3.0
percentage points, and returning to the pre-recession level in
2027.
The Bank of England's central projection is based on the
interest rates path then implied by financial markets which (in the
UK) rose to a peak of 5.25% in Q3 2023, before falling back. This
path is around 2.25 percentage points higher on average than in the
Bank's August projection. The Bank's alternative November
projection, not conditioned by the interest rate path implied by
the financial markets, is based on interest rates being constant at
3%. In this alternative projection the peak to trough fall is only
1.75 percentage points, as the economy comes out of recession
slightly earlier and returns to the pre-recession level in
2026.
The dramatic and continuing tightening of the money supply is
rapidly raising interest rates, reducing credit availability and
the solvency ratio of loans, and reducing the margin between the
return on property and other investment classes, and more secure
investments. In consequence the demand for both investment and
residential property is falling, and, with the expected further
monetary tightening, will fall faster and further.
Interest rate rises will increase financial distress in both
business and residential property owners and increase the supply of
property. Simultaneously, lower business profitability margins and
lower consumer incomes will reduce demand for both business
premises and residential premises, reducing property rents for
business premises, and values for all property types. These
deleterious influences on the property sector are being reinforced
by the economic disruption caused by strikes which will reduce
output and result in a greater supply of property and, a lesser
demand for it: a vicious circle.
From next year these adverse effects will be reinforced by the
tightening of fiscal policy, mostly resulting from the fiscal drag
implied by not indexing most tax allowances. Currently the EPC
provides a fiscal transfer, principally to consumers, by
rescheduling fiscal costs.
Comment on financial and political causes of the recession are
not germane to analysis of the effects on property of the impending
recession. However, there are three main factors that assist
interpretation. First, low interest rates were maintained post
Covid for longer than required to support the economy, resulting in
an inflationary surge. Second, low interest rates resulted in
capital appreciation of all asset classes and increased incomes of
the minority benefiting from all aspects of asset handling,
managing and transferring, while productivity increases and output
gains were very low. The small growth in the economy achieved was
disproportionately allocated. Third, the military war in Eastern
Europe has, unsurprisingly, increasingly embraced an economic war
whose consequences include a disruption of fuel supplies both by
sanction and by renewed exploitation of the oligopoly enjoyed by
the OPEC+ cartel of oil and gas suppliers. These mechanisms have
allowed an immediate transfer of economic wealth from the consuming
economies to the supplying economies.
These seeds of distress which have been sown, unfortunately, are
now germinating. Early indications of distress in the property
sector are given in the IPD Index, which over 10 years has given a
return of 8.1% p.a., and 4.1% last year, has declined a record 6.5%
in October 2022 alone, faster even than in any month during the
2008 financial crisis.
The November 2022 CBRE reports on the investment yields of 39
separate classes and sub-classes of commercial property and 24
separate classes and sub-classes of "bed" residential property and
described all 63 categories as "trending" weaker, or falling in
value, a similar trend to that previously shown in October 2022.
Since December 2021, commercial property yields have increased
generally about 0.5 percentage points except for secondary
investments which remain unchanged at high levels. Offices and
Industrials have become considerably weaker with all yields rising
about 0.75 percentage points except for "secondary" sub-classes all
rising about 1.25 percentage points. The four other commercial
classes, Healthcare, Leisure, Pubs and "Car" mostly rising between
0.3 and 0.5 percentage points. In the "bed" sector, Build to Rent
("BTR"), Purpose Built Student Accommodation ("PBSA") and London
hotel yields are little changed since last year in spite of
"trending" weaker.
Within the retail sector since June 2022 only the yield of Prime
Supermarkets has changed appreciably, rising from 3.50% to 5.0%,
with the capital value falling 30%. Office yields have risen by a
minimum of 0.25 percentage points in the West End, but by 1.0
percentage point in regional cities and up to 2.0 percentage points
in secondary locations. Industrials have suffered similar large
rises in yield, a maximum of 1.50 percentage points from 3.25% to
4.75% for the Prime Distribution sub-class, their capital value
falling 32%.
The leisure and pub class has generally increased yields since
January by 0.75 percentage points, but the healthcare yield has
risen between 0.25 percentage points and 0.5 percentage points. In
the "Bed" group Residential yields since January have not changed
in London and rose only by up to 0.25 percentage points elsewhere.
Hotel yields rose only 0.25 percentage points in London but up to
0.90 percentage points in Prime Regions. Prime Student
accommodation yields have risen only 0.25 percentage points in
London and by 0.5 percentage points, elsewhere, with higher rises
for other sectors.
The yield figures quoted in November for student accommodation
are consistent with CBRE's earlier analysis.
"Yields - There continues to be demand for good quality assets
in cities with favourable supply and demand characteristics. Yields
are now starting to come under pressure from the wider economic
headwinds but there is a lack of direct evidence to support any
movement in Q3 2022. As such the sector is currently in a period of
pricing discovery."
"Outlook - Demand for higher education is the highest it has
ever been, and this is translating into strong occupational demand
for operational PBSA, which is likely to translate into a period of
sustained rental growth. The wider economic headwinds are placing
some pressure on the sector. However, with several portfolio deals
currently in the market, and the Student Roost portfolio
transaction proceeding investment volumes in 2022 could still mark
a new record".
The downturn in Capital values reported by CBRE is consistent
with recent Investment Property Forum ("IPF") surveys of commercial
property. In the May 2022 survey "All Property" capital growth was
estimated to be 5.9%, but by September 2022 this had been
downgraded to 2.3% and the most recent November forecast for 2022
is a contraction of 6.4%. The values of all categories of
investment property fell by between 6.1% and 8.1% except Retail
Warehouse whose fall is restricted to 1.0%. In Winter 2021 the
Capital Value growth for 2022 was forecast as 1.8%, a forecast
rising in Spring 2022 to 5.9% before falling to the current -6.4%,
a turn round of 8.2 percentage points.
Forecast of capital value returns in 2023 have been similarly
downgraded and are currently estimated at -7.1% compared to 1.9% in
Spring of 2022, with all sectors, losing value of from 6.8%,
Industrial, to 8.0%, Shopping Centres.
The rental growth in the industrial sector has continued to be
high, gaining an estimated 10.1% in 2022, which, together with a
small rise in office rental values, offset continuing falls amongst
the retail sector to give an All-Property rental rise of 3.7%.
However, in 2023 a further small growth in industrial rental value
is outweighed by falls in all other sectors and the rental value
increase is forecast to be 0.6%. Rents are estimated to contribute
only 4.5% p.a. to the All-Property Total return in the years to
2026. Changes in that return are almost wholly due to changing
capital values.
Capital values are estimated to increase from 2024, but by only
1.9%, 6% and 3.4% in the years to 2026 while stable rents add 4.5%
to the total return, resulting in the total returns, negative in
2022 and 2023, rising to 6.8% in 2024, and a peak 9.0% in 2025 as
capital values recover, presumably in line with projected future
interest rate reductions, post-recession, but reducing to 8.0% in
2026. The estimated total return over the five years to end 2026 is
3.6% p.a., almost 2.00 percentage points lower than was forecast as
recently as September 2022.
Thus, the estimated prospects for property returns are very
poor, although there is an estimated medium term recovery
dependent, presumably, on interest rates falling and economic
growth returning before 2025.
The poor returns to commercial property over the next few years
have three separate but distinct strands. First in a "normal"
business, or inflationary "Minsky" cycle, there is a pattern of a
fall and then a recovery to the pre-cycle level. The recession is
expected to develop into a recovery with continuing economic
growth. However, a second separate strand influencing this cycle is
non-recurring. Since the start of the Great Recession in 2008,
interest rates have been held at abnormally low levels by
aggressive monetary policies. Capital asset values, including all
commercial property, have correspondingly reflected the low cost of
capital which has boosted asset values by increasing their value,
or, when falling for other reasons, moderating their fall. However,
the recent atypical period of unnaturally low interest rates has
ended abruptly, and will result in a significant change to property
values and to the value of entities investing in them.
The third strand affecting property capital values is that of
secular change, whose nature is specific to each sector.
Unfortunately, there are deleterious secular changes in all the
three main commercial sectors: office; retail; and industrial.
The demand for office space is being spectacularly reduced by
"hybrid" working, or working from home. The extent of this change
is substantial but not yet quantifiable, although in certain main
office areas office occupancy rates, while recovering, continue
below 50%. A recent survey concluded that the long-term reduction
in space needed would be between 20% and 40%.
The demand for even "modern", but not "state of the art",
offices will be further reduced by the increased demand for office
environments that are "greener", less energy intensive and more
sociologically attractive. The effect of such changes are not yet
reflected in the market where the industry shelters behind a façade
of "prime will be fine"!! The same mantra was repeated in the
retail sector, when the retail downturn started, but the prime
sector, initially appearing immune to value falls, ultimately
succumbed, as the downturn persisted. The same is forecast to
happen to office values: the commercial property industry, like
most industries responds reasonably rapidly to general economic
change, such as interest rate change and recession but to changes
in the industry - secular changes - the response, while slow at
first will finish fast - as "Mike" replied in Hemingway's, The Sun
Also Rises, when asked "How did you go bankrupt ?". "Two ways" he
said " Gradually and then suddenly". Disruptive changes in industry
are sometimes, surprisingly quick: think Kodak!
In Retail a similar secular change continues to have deleterious
effects. Online shopping before the pandemic accounted for about
18% of retail sales and, unsurprisingly, peaked during "lockdown"
at 37.8% but is still at 26.4%, and although considerable
adjustments have been made, the process of adjustment to the value
of retail assets is incomplete, as retailers were traditionally
tied into longer term upward only leases, delaying all the required
adjustment.
The industrial sector, specifically its logistics sub-sector,
servicing online businesses, has just completed a large
transformation in adjusting to the booming online revolution. The
sudden growth in demand resulted in yields dropping from their
traditional high levels, usually 8% to 10%, to a record 3.0% in
Prime London and 4.5% in good secondary locations, and in rents
rising by as much as 10% in early 2022. However, quite suddenly,
this has changed, as this rapidly rising sector consolidates.
Colliers note that in H2 2022 yields are shifting out rapidly and
capital values are falling by 10.2% and they expect yields to
continue to soften by 1.50 percentage points, and rental growth to
slow from the current high of 10.3% to 2.9% in 2023. Thus, all
sectors of the commercial market, excluding the bed sector -
considered below - are unlikely to prosper in the coming years, a
long-term trend that has persisted with exceptions such as the
logistics sector since 2007, the peak of the market.
The residential market is not undergoing the secular and
structural changes being experienced in the commercial sector. A
cyclical change is occurring, possibly a moderately severe one, but
the factors underlying the strength of the residential market are
unlikely to change in the medium term. Indeed, part of the
residential market is and will continue to be very strong. In July
rental growth was 12.3% in the UK, 14.0% in London and 14.7% (Q3)
in Edinburgh, where agents report they have "never operated in a
more competitive market". Current and even forecast lower house
prices together with difficulties in mortgage availability and the
Financial Policy Committee's stress test restrictions will support
rental demand. The supply of property to let is being progressively
reduced by the reduction of individual mortgage interest relief to
20%, tighter credit controls, higher buy to let mortgage interest
costs, and increasingly severe and unpredictable regulatory
impositions - especially in Scotland where currently, evictions,
even for the non-payment of rent, are unlawful until at least April
2023. Historically, rents do not fall in line with house prices
and, even in the Great Financial Crisis in 2008, English rents fell
only 2.2% from which they recovered in just over a year.
Unsurprisingly, Savills forecast that rents (of second-hand
properties) will continue to rise at 6.5% in 2023 and 4.0% in 2024
before reducing to 2.5% p.a. thereafter.
Savills reduction in rental growth from 2025 is based, in my
view questionably, on a much increased supply of property from
house owners either gaining vacant possession in forced
circumstances such as repossession, divorce, or care or being
unwilling to sell into a perceived poor market. Doubtless this will
occur, but the "difficulties" of owning property to let have now
become so onerous that I forecast that there will continue to be a
reduction in the supply of privately owned rental property.
Certainly, in an even more recent report on UK "Prime Residential",
Savills conclude that in spite of such "accidental landlords,
supply shortages are predicted to remain a lasting feature...".
For PBSA there are no such "accidental" landlords and supply,
while increasing, is insufficient to meet the growing demand and
rents are expected to continue to rise after a pause due to
uncertain demand during the Covid pandemic. Unite, the leading
student housing provider expects rents to have increased 3.5% this
year and to increase a further 4.5% to 5% next year. The FT's
summary is: -
the "student housing is the bubble that won't burst..." it has
"the sort of market that private equity dreams are made of: a
sector with a structural supply imbalance, supported by resilient
demand from wealthy foreign students and well-off middle-class
parents who prioritise spending on their offspring's
education".
House prices do not have the same benign short-term expectation.
Prices have risen dramatically since Covid peaking in the year to
September 2022 at 9.9% Halifax and 7.5% Nationwide; and in Scotland
in June 2022 at 9.1% Acadata, since when prices have fallen further
each month and by 2.3% in November, the largest monthly fall since
2008. The causes of house price falls are increasing mortgage
rates, increasing deposits, stricter terms, lower disposable
incomes and a higher degree than usual of economic uncertainty,
being reinforced by a "wait and see" if prices fall even more.
The Bank report that house prices are expected to continue to
fall, and the OBR optimistically records falls of 1.2% in 2023,
5.7% in 2024, but a recovery in 2025 of 1.2%. Other forecasters are
more sanguine: peak to trough falls of 10% are forecast by Knight
Frank and 12% by Capital Economics.
Savills predicate their forecast on two important assumptions:
that unemployment a critical determinant in earlier recessions will
rise less than is usual to "only" 4.8% and that interest rates
"only" to 4% and fall in 2024. On these assumptions they forecast
that UK prices will fall 10.0% in 2023, recover to a 1% rise in
2024 and will then rise rapidly to increase by 6.2% over the five
(1.2% / year) years to 2027. These 5-year averages include
considerably poorer figures for London of 2%, for the South-East
and East of England 3.0% and over 11.0% for North of England,
Yorkshire and Wales with an intermediate 9.5% for Scotland.
Savills differentiates the "Prime Market" from the "Mainstream".
The Prime Market is less influenced by the price or the
availability of credit and is not expected to be so adversely
affected in the forthcoming downturn as the mainstream market. In
2023 Regional "Prime" houses will fall by 6.5% in value, rather
than the 10.0% fall for mainstream and then recover similarly in
2024 and achieve a 9.9% growth over 5 years to, and including,
2027, a slightly higher increase than mainstream prices. In
Scotland the pattern is expected to be similar with a lower fall of
5.0% in 2023 and an overall rise of 12.7% by end 2027 - a modest
increase!
How far will prices fall in this recession? In the Great
Recession, a much deeper and slightly longer one than forecast
generally, Nationwide recorded peak to trough falls of All Houses
18.6%, New Houses 12.9%, Modern 18.8% and Older Houses 19.6%. The
current recession, while significantly a finance induced recession,
is unlikely to impact house prices as much as the Great Recession.
Credit levels are lower, equity is higher, many more mortgages are
fixed, and the lending criteria for mortgages has been
significantly tightened since then. Most importantly, unemployment
is forecast by the Bank to peak at 6.4% in the MPC's central
projections but only at 4.9% by the OBR, significantly lower than
the unemployment in the Great Recession which rose to 8.04% in
2011.
Indeed, most forecasts are for price reduction of about 10%, but
for a reasonably quick recovery. I forecast that the rates will
rise less than the Bank expected and that inflation will fall
quickly as the one-off fuel prices drop off comparisons and there
is a contraction of the supply, adjusting to lowering prices,
already so evident in many commodities such as oil and other
commodities. Indeed, disasters foreseen often fade: one unlikely
risk to this forecast is external: a serious escalation of the war;
and the other but equally unlikely risk is internal: political
difficulties emanating from a reduction in living standards in some
sectors of society.
The Halifax index previously peaked at the GBP199,000 recorded
in August 2007. The equivalent RPI inflation-adjusted price in
October 2022 would have been 71.8% higher or GBP341,938, and the
current Halifax price in October 2022 is GBP292,406. In spite of
this year's rapid rises, the current price is still 14.5% lower in
real terms. If house prices rise at 4.0% per annum and inflation is
2.0% per annum, then just less than 12 more years must elapse
before the August 2007 peak is regained in real terms.
House prices are difficult to forecast and historically,
notably, recently, errors have been large, especially around the
timing of reversals or unusual events such as we have just
experienced. For the long-term, I repeat my previous forecasts,
"... the key determinant of the long-term housing market will be a
shortage in supply, resulting in higher prices".
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 Horsemill phase of our Brunstane development sold out very
successfully in Q1 2021, allowing a start to the adjacent Steading
phase of five stone faced dwellings in a courtyard, whose
construction was completed in the Autumn of 2022. Three houses have
been sold since 1 July 2022 at above the Home Report Valuation and
the remaining two houses, while still attracting considerable
market interest, remain unsold.
The current pause in the housing market and the very
considerably increased construction costs have delayed the start to
our 10 house development near the station in the centre of
Wallyford, a very rapidly expanding commuter suburb adjoining
Musselburgh. Currently, we are redesigning the project to reduce
costs and intend to commence development at a time when the planned
completion will coincide with an upturn in sales, expected in 2024.
We intend to follow this, having gained planning consent last
month, with the penultimate phase of our Brunstane development of
10 houses, which, unlike the previous two phases, is of simpler
construction.
We continue to work with our architects to update our existing
consents at Belford Road with improvements within the existing
consent, so providing 20 modern high amenity flats in keeping with
the high quality and varied style of the location. The improved
design incorporates changes necessary for new insulation standards
and other environmental improvements. The design improves
fenestration and the internal layout, and the external and internal
finishes. The planning process has been subject to even greater
delays than usual and this updated design, while originally deemed
suitable, is now having to be further refined to meet the planners'
revised requirements.
Whenever market conditions are more favourable, we intend to
market St. Margaret's House for which we hold detailed planning
consent. We are currently taking steps to undertake a limited
amount of work on site sufficient to safeguard the planning
consent. Last year we delayed bringing the property to market in
November as at that time the market was considered likely to be
further improved by the Spring of 2022. We had continuing
unsolicited offers to purchase the property and in January 2022 we
entered into an exclusivity agreement with an attractive indicative
non-binding offer, albeit one arguably reflecting the market price
at that point in time rather than those special conditions
pertaining to the failed higher Drum offer. The proposal made
earlier this year required the use of the existing Intellectual
Property ("IP") and the finalisation of all the agreements
necessary with the neighbours, Network Rail and the Scottish
Ministers, as well as road access approvals from the City of
Edinburgh Council. These were obtained after very considerable
delays and cost in August 2022, but by this time the interests of
the prospective purchaser had changed in view of greatly increased
construction costs, higher interest costs and lower investment
value, and a rise in uncertainty and they ultimately declined to
proceed. Now, a year later, we are proposing to market the property
in Spring 2023, having all the necessary consents, providing
conditions are propitious. We are currently receiving further
unsolicited proposals which are being considered. Simultaneously,
being now responsible for the planning process, we are
investigating the possibility of considerable construction cost
savings and an enhanced planning consent.
Our developments require a stable and liquid housing market but,
in spite of the current cost inflation, 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 in 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.
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 fully recovered or had to be recapitalised, and to avoid the
extensive loss in value associated with the Covid-19 pandemic and
the changes that are currently very seriously affecting most of the
property investment sector.
On behalf of the members of the Group, I pay tribute to all our
employees who have worked for a third year unstintingly and well
under the difficult conditions persisting throughout the long
Covid-19 pandemic for which the final restrictions were lifted on
18 April 2022.
The closing mid-market share price on 20 December 2022 was 145p,
a discount of 26% per share to the NAV as at 30 June 2022. 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 economy is entering a very difficult period. A contraction
will take place due to an immediate adjustment to a short-term
inflationary spike and to two longer term, very unfavourable,
underlying circumstances. These adjustments will be difficult
because of inherent cultural and sociological factors and of
economic performance since the Great Recession, which will cause
the adjustment to the underlying circumstances to be longer and
more difficult. Fortunately, these adjustments will impinge on an
economy that recovered more quickly from the Covid induced
recession and with less economic scarring that was originally
feared.
The economy is undergoing a classic Minsky cycle of high
inflation resulting from an excess of demand over supply, a
principal cause of which is the long, and inflationary, period of
very loose monetary policy - inflation has been allowed to fester
rather than being "nipped in the bud": this has been caused by the
Bank's recent mistiming: ironically, it mirrors exactly the
mistiming made by the Bank when it raised interest rates in July
2007 just as the economic crisis unfolded.
The first of the two long-term economic problems is directly due
to the cost of the response to the Covid pandemic which allowed so
rapid an economic recovery. The scientific innovations that led to
the creation of vaccines, and the implementation and management of
the vaccination and lockdown programmes were triumphs of research,
management and of Government decision making. The democratic
processes that sanctioned and implemented the programmes were
resounding endorsements of UK democracy and, to a notably lesser
extent than that of the EU and USA democracies, that stand in
distinct contrast to the failed Covid policy of Chinese
autocracy.
A gross subsidy which was provided as a key part of this
response prevented the Covid crisis from undermining the economy
was effectively a capital investment which provided huge benefits.
However, these benefits were achieved at very great cost, financed
by very great borrowing from the UK Treasury and, like all
borrowing, it imposes interest and principal payments on the
recipients, the UK taxpayer.
The second underlying unfavourable economic circumstance has
been the sudden rise in fuel costs. Russia's invasion of Ukraine,
together with its restriction of gas supplies, and its acting,
together with the OPEC+ oil cartel to reduce oil supplies, have
caused all fuel prices to rise far above free market prices. This
effects a transfer of wealth from the consumers, such as the UK, to
the producers.
Thus, for two quite separate reasons, the UK economy is poorer,
although much of this diminution in wealth comprises the increased
borrowing of the Government, a financial concept synonym for the UK
economy and which is not an independent entity, contrary to
apparent popular belief. Some sections of society expect some
non-existent party to pay these debts, some materialised ghost,
but, certainly not "me" - but someone, anyone - else.
Unfortunately, obligations will continue to burden the economy, the
non-acceptance of which, in some increasingly dependent sectors of
society, will hinder the adjustments appropriate in the economy to
ensure an optimal growth rate.
The impact of the two burdens posed by increased borrowing and
the transfer of wealth to energy producers falls on an already
economically stressed society. Like most societies, such increases
in financial burdens appear less burdensome when they constitute a
reduction in an increase in income rather than an actual decrease
in income, even although the same quantum of reduction is applied.
A lesser gain in income is more bearable than an equivalent loss.
Unfortunately, UK increases in output since 2007 have been both
small and unevenly distributed. Thus, in certain sectors of society
the financial burden of the necessary adjustments will reduce
income rather than diminish the extent of its increase, a
psychologically more difficult burden. In the slow economic growth
the distribution of increased wealth changed, increasingly in
favour of services, and of capital, partly due to the rapid
increase in asset values accompanying artificially low interest
rates at the cost of labour, which distinction, when there is
little growth in the economy, becomes stark. Moreover, increased
income and capital appreciations have been seen, notably in the
case of financial services, to be unrelated to performance or
merit, as so spectacularly amplified by the banking scandals, and
more generally in those protected by professional cartels. The
malign influence of such "Distributional Coalitions", as so well
analysed by the American economist, Mancur Olson, is
widespread.
These and many other factors all contribute to the inhibition of
increased productivity which has proved so limited since the Great
Recession and have not provided the necessary, and even expected,
better and continuously improving living standards that would have
facilitated the economic adjustments now necessary. Paul Krugman
said "Productivity isn't everything, but in the long run it's
almost everything".
Only by improving productivity will economic progress be made,
but there are many different requirements. The first, and generally
accepted requirement, is for progressive technical change;
appropriate education and improved skills; and adaptiveness. The
second is for sociological changes, including greater freedoms,
less dependency, the advancement by application and achievement
rather than by affiliation and association. The third is for
attitudinal changes, including less dependency, greater freedoms,
requiring an understanding and then acceptance that all
improvements to public goods and services, including amenity
greening, and energy substitution require resources which can only
be met without diminution elsewhere by increased output, not
miraculously conjured up "out of thin air" or from a mythical
Government. The fourth is an institutional change that rewards
entrepreneurship and that encourages competition and destroys
oligopolies, including professional ones. Lastly, a political
change is required to encourage trade and the interchange of ideas,
the independence of universities, and research and its development
and to support growth and not failing industries or areas.
These barriers to economic growth can be lifted but it is
politically and economically unrealistic to introduce major changes
until the present economic crises are resolved, which, fortunately,
present policies will achieve, but not without cost. Thus, things
will get worse before they can get better.
I D Lowe
Chairman
21 December 2022
Strategic report for the year ended 30 June 2022
_______________________________________________________________
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 loss for the year after taxation amounted to
GBP1,302,000 (2021 profit: GBP460,000). The directors do not
propose a dividend in respect of the current financial year (2021:
Nil). The Group net asset value amounts to GBP23,253,000 (2021:
GBP24,555,000).
Business review
A full revie w 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 and 3 and Future Progress on pages
17 to 19. In accordance with legislation the accounts have been
prepared in accordance with UK-adopted 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 property market, all of which are
discussed in the Chairman's Statement. No substantial cash outlays
are expected on investment properties in the coming year and sales
of development properties are expected to realise cash to reinvest
in the Group's development programme 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 highest value 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 or other
funding to undertake its developments and for future property
acquisitions. Where appropriate, bank facilities will be negotiated
and tailored to each project in terms of quantum and timing.
The directors believe that funding should be 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.
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.
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 24 and 25.
M J Baynham
Secretary
21 December 2022
Corporate Governance
QCA Code Compliance and Section 172 Statement
for the year ended 30 June 2022
_______________________________________________________________
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 and 3 of the Group's annual report and accounts for the
year ended 30 June 2022. The 'Future Progress' section of the
Chairman's Statement on pages 17 to 19 of the Group's annual report
and accounts for the year ended 30 June 2022 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 21 and 22 of the Group's annual
report and accounts for the year ended 30 June 2022.
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 22 and 23 set out how the Board has discharged its
duties.
It is important to note that the executive directors are the two
largest shareholders, together 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. Shareholders
can continue their engagement with the Directors through any of the
channels already mentioned.
The Board dedicates 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
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 and part-time
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. A pay review took
effect from 1 November 2022.
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 2022, 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 21 and 22 of the Company's
annual report and accounts for the year ended 30 June 2022.
The risks which the Group faces are subject to change and the
measures to counter or to mitigate them are reviewed regularly. 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 21 December 2022 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 since the banking crisis
of 2007 a private company under his control, Leafrealm Limited, has
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 owed to Leafrealm Limited 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 seven occasions during the year to 30
June 2022 and all directors attended all 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 2022 with all members of the committee attending. The
Remuneration Committee met once during the year with all committee
members attending.
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 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 2022, 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 Limited.
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 2022, 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 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
and the Company therefore does not comply with the QCA Code in this
respect. 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
2022. 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
The Executive Directors had previously agreed to waive some or
all of their remuneration, given the financial constraints created
by Covid lockdowns and restrictions. The Board resolved to
reinstate the salary of one of the Executive Directors to its
previous level and to pay a modest salary to the Chair and Chief
Executive with effect from 1 December 2021 and 1 November 2021
respectively.
The Remuneration Committee terms of reference can be found here
www.caledoniantrust.com/CR11-REMUNERATION-COMMITTEE-M0918.pdf .
As ID Lowe is a member of the remuneration Committee, the
Remuneration Committee is not made up of independent directors as
envisaged by the QCA Code and the Company therefore does not comply
with the QCA Code in this respect.
No director who sits on the Remuneration Committee takes part in
discussions or votes on matters pertaining to their individual
performance or remuneration.
Details of the directors' remuneration can be found in Note 6 of
the consolidated accounts for the year ended 30 June 2022.
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 and in the reports of
the Audit Committee and Remuneration Committee.
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 Group engages in open communication with its shareholders
and endeavours to reply 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 in
respect of Principle Nine above. All shareholders are encouraged to
attend the Company's Annual General Meeting.
M J Baynham
Secretary
21 December 2022
Corporate Governance
Audit Committee report for the year ended 30 June 2022
_______________________________________________________________
Statement from the Chairman of the Audit Committee
On behalf of the Board, I am pleased to present the Audit
Committee Report for the year to 30 June 2022. This report provides
shareholders with an overview of the activities carried out by the
Audit Committee during the year. The Audit Committee ensures the
financial performance of the Group is properly measured and
reported.
Committee Members
The Audit Committee comprises R J Pearson (Chairman) and I D
Lowe. R J Pearson is the independent non-executive Director.
Other members of the Board occasionally attend Audit Committee
meetings when requested by invitation. In the year to 30 June 2022
the Audit Committee met three times with both members being
present, and the other member of the Board attended all of those
meetings.
Responsibilities
The Audit Committee, inter alia, determines and examines matters
relating to the financial affairs of the Group including the terms
of engagement of the Company's auditor and, in consultation with
the auditor, the scope of the annual audit. It receives and reviews
reports from management and the Company's auditor relating to the
half yearly and annual accounts and the accounting and internal
control and risk management systems in use throughout the Group;
reviews the Group's overall risk appetite and strategy; and
monitors, on behalf of the Board, the Group's current risk
exposures. The Audit Committee monitors the integrity of the
financial statements produced by the Group and makes
recommendations to the Board on accounting policies and their
application. The Audit Committee receives reports from compliance
functions within the Group and is responsible for reviewing and
approving the means by which the Group seeks to comply with its
regulatory obligations. The Committee also ensures that the
arrangements for employees and contractors to raise concerns
confidentially about possible wrongdoing in financial reporting (or
other matters) are proportionate and allow for independent
investigation. The duties of the Audit Committee are set out in its
terms of reference, which are available from the Company's website.
These are regularly reviewed to ensure they remain applicable and
up-to-date with legislation, regulation and best practice.
The Audit Committee meets at least twice a year. For the year
ended 30 June 2022, the Audit Committee has met three times to
consider the planning of the statutory audit and to review the
Group's draft half year and full year results prior to Board
approval and to consider the external auditor's detailed
reports.
Internal Audit
The Group does not currently have an internal audit function.
The Audit Committee considered the size and nature of the Group and
believes that existing management within the Group is able to
derive assurance as to the adequacy of internal control and risk
management systems without the introduction of an internal audit
function.
Risk Management and Internal Controls
The Group has a range of internal controls, policies and
procedures in place. The Audit Committee works alongside the Board
to review, and where necessary suggest changes to, the current
systems in place.
The Audit Committee is satisfied that the current systems in
place are operating effectively.
External Audit
Johnston Carmichael LLP were re-appointed for the year to 30
June 2022. The Audit Committee monitors the relationship with the
external auditor to ensure independence and objectivity at all
times. The Audit Committee also reports to the Board on the
independence, objectivity and effectiveness of the external
auditor. Johnston Carmichael have been the external auditor for the
Group since 2017 with David Holmes as the Partner for three years
and Grant Roger taking responsibility as Partner in 2020. The Audit
Committee has recommended that Johnston Carmichael LLP are
appointed for the next financial year. Johnston Carmichael LLP do
not carry out any non-audit work for the Group.
External Audit Process
Johnston Carmichael LLP prepare an audit plan. This plan sets
out the scope and timetable of the audit as well as the areas to be
specifically targeted. The plan is provided to the Audit Committee
for approval in advance of the audit. On completion of the audit,
the findings are presented to the Audit Committee by the auditor
for discussion. There were no significant areas of concern
highlighted by the auditor this year.
The Group accountant has regular contact and communication with
the auditor during the year. This allows for any areas of concern
or of significance to be raised with the auditor throughout the
year.
Main Issues Discussed and Conclusions
The table below highlights the issues at the audit close
meeting: -
Issue How it was addressed by the
Audit Committee
Revenue recognition
Revenue from sales of investment No property disposals were
and trading properties is completed during the year
recognised on legal completion and the committee is satisfied
which is when the buyer takes that no sales fell to be recognised
control of the property whether as revenues in the year ended
it is commercial property, 30 June 2022.
private houses or plots of
land. Using legal completion
minimises the management judgements
required to determine when
ownership is transferred.
One rent free period arose
Revenue from rents are spread during the year and was spread
over the life of the lease over the life of the lease
and for service charges over concerned.
the period to which the service
relates.
--------------------------------------
Fair value
The approach to assessing The Committee discusses each
fair value of investment properties of the valuations with its
is conservative. Montagu Evans, external valuer. The external
Chartered Surveyors, were valuation process and the
engaged by the Group to provide values ascribed to specific
it with independent external assets are also considered
valuations of all investment and commented upon in the
properties at 30 June 2022. audit report by our auditor,
Johnston Carmichael LLP.
Valuations were prepared in
accordance with relevant industry
standards using transactional
evidence and an established
methodology.
Development properties held
as stock
The Committee monitors progress
Trading properties are carried and intentions for each location
at the lower of cost and net and the timing of work to
realisable value. The net ensure that planning consents
realisable value is an area already given endure.
of judgement based on demand,
future costs and the availability
of planning consent.
-----------------------------------
R J Pearson
Chairman of the Audit Committee
21 December 2022
Corporate Governance
Remuneration Committee report for the year ended 30 June
2022
_______________________________________________________________
The Remuneration Committee comprises, R J Pearson (Chairman),
the independent, non-executive director and I D Lowe.
The Committee met once during the year, with both members being
present, to review the remuneration of the Executive Directors.
During the financial constraints of Covid lockdowns and
restrictions, the Executive Directors had waived their entitlement
to some or all of their remuneration. No director who sits on the
Remuneration Committee takes part in discussions or votes on
matters pertaining to their individual performance or remuneration.
It was resolved that following the easing of the constraints of
Covid-19, the remuneration of the Executive Directors be reinstated
to previous levels with effect from 1 November and 1 December 2021
but the Chair and Chief Executive immediately waived the majority
of his remuneration for the time being.
There was no change to the remuneration of the Non-Executive
Director.
Details of the directors' remuneration can be found in Note 6 of
the consolidated accounts for the year ended 30 June 2022.
R J Pearson
Chairman of the Remuneration Committee
21 December 2022
Directors' report for the year ended 30 June 2022
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 30 June
held 2022 2021
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
The interest of I D Lowe in the unsecured loans of GBP4,380,000
(2021: GBP4,380,000) is as controlling shareholder of the lender,
Leafrealm Limited.
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.
Rule 9 of the UK City Code on Takeovers and Mergers (the
"Takeover Code") provides, among other things, that where any
person who, together with persons acting in concert with him, holds
over 50 per cent. of the voting rights of a company, acquires any
further shares carrying voting rights, then they will not generally
be required to make a general offer to the other shareholders to
acquire the balance of their shares.
Douglas Lowe is part of a concert party pursuant to the Takeover
Code, which includes the interests in the Company's Ordinary Shares
of his Close Relatives (as defined in the Takeover Code) and
Leafrealm Limited and Sheriffhall Business Park Limited, companies
where Douglas Lowe is the controlling shareholder (the "Douglas
Lowe Concert Party"), which holds in aggregate over 50% of the
voting rights of the Company. The Douglas Lowe Concert Party is
interested in a total of 9,527,582 Ordinary Shares which carry
80.9% of the voting rights of the Company. Douglas Lowe or entities
controlled by Douglas Lowe may accordingly increase their aggregate
interests in shares without incurring any obligation to make an
offer under Rule 9.
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
21 December 2022
Directors' Responsibilities Statement in respect of the annual
report and financial statements
The directors are responsible for preparing the Annual Report
and the Group and parent Company financial statements in accordance
with applicable law and regulations.
Company law requires the directors to prepare Group and parent
Company financial statements for each financial year. As required
by the AIM Rules of the London Stock Exchange they are required to
prepare the group financial statements in accordance with
UK-adopted International Accounting Standards and applicable law
and the directors have elected to prepare the parent company
financial statements on the same basis.
Under company law the directors must not approve the financial
statements unless they are satisfied that they give a true and fair
view of the state of affairs of the Group and parent Company and of
the profit or loss of the Group for that period. In preparing each
of the Group and parent Company financial statements, the directors
are required to:
-- select suitable accounting policies and then apply them consistently;
-- make judgements and estimates that are reasonable and prudent;
-- state whether they have been prepared in accordance with
International Accounting Standards in conformity with the
requirements of the Companies Act 2006; and
-- prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the Group and the parent
Company will continue in business.
The directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Group's and the
parent Company's transactions and disclose with reasonable accuracy
at any time the financial position of the Group and the parent
Company and enable them to ensure that its financial statements
comply with the Companies Act 2006. They have general
responsibility for taking such steps as are reasonably open to them
to safeguard the assets of the Group and parent Company and to
prevent and detect fraud and other irregularities.
The directors are responsible for the maintenance and integrity
of the corporate and financial information included on the parent
Company's website. Legislation in the UK governing the preparation
and dissemination of financial statements may differ from
legislation in other jurisdictions.
Consolidated statement of comprehensive income for the year
ended 30 June 2022
2021
2022
Note GBP000 GBP000
Revenue
Revenue from development property sales - 4,186
Gross rental income from investment properties 306 368
Total Revenue 5 306 4,554
Cost of development property sales - (3,930)
Property charges (90) (128)
---------- -------------------
Cost of Sales (90) (4,058)
---------- -------------------
Gross Profit 216 496
Administrative expenses (887) (440)
Other income 8 2
---------- -------------------
Net operating (loss)/profit before investment
property
disposals and valuation movements (663) 58
---------- -------------------
Valuation gains on investment properties 10 190 690
Valuation losses on investment properties 10 (690) -
Loss on disposal of investment property - (151)
Net (loss)/gains on investment properties (500) 539
---------- -------------------
Operating (loss)/profit 5 (1,163) 597
---------- -------------------
Financial expenses 7 (139) (137)
---------- -------------------
Net financing costs (139) (137)
---------- -------------------
(Loss)/profit before taxation (1,302) 460
Income tax 8 - -
(Loss)/profit and total comprehensive
income for the financial year attributable
to equity holders of the parent Company (1,302) 460
========== ===================
(Loss)/earnings per share
Basic and diluted (loss)/profit per share
(pence) 9 (11.05)p 3.90p
The notes on pages 51 - 71 form an integral part of these
financial statements.
Consolidated balance sheet as at 30 June 2022
2021
2022
Note GBP000 GBP000
Non-current assets
Investment property 10 16,610 17,110
Plant and equipment 11 8 3
Investments 12 1 1
--------- ---------
Total non-current assets 16,619 17,114
--------- ---------
Current assets
Trading properties 13 10,672 9,313
Trade and other receivables 14 134 135
Cash and cash equivalents 15 1,317 3,020
--------- ---------
Total current assets 12,123 12,468
Total assets 28,742 29,582
--------- ---------
Current liabilities
Trade and other payables 16 (1,109) (647)
Interest bearing loans and
borrowings 17 (360) (360)
--------- ---------
Total current liabilities
Non-current liabilities (1,469) (1,007)
Interest bearing loans and
borrowings 17 (4,020) (4,020)
--------- ---------
Total liabilities (5,489) (5,027)
--------- ---------
Net assets 23,253 24,555
========= =========
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 17,976 19,278
--------- ---------
Total equity attributable
to equity holders of the
parent Company 23,253 24,555
========= =========
NET ASSET VALUE PER SHARE 197.3p 208.4p
The financial statements were approved by the board of directors
on 21 December 2022 and signed on its behalf by:
I D Lowe
Director
The notes on pages 51 - 71 form an integral part of these
financial statements.
Consolidated statement of changes in equity as at 30 June
2022
Capital Share Retained
Issued
share redemption premium earnings Total
capital reserve account
GBP000 GBP000 GBP000 GBP000 GBP000
At 1 July 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
(Loss) and total
comprehensive expenditure
for the year - - - (1,302) (1,302)
______ ______ ______ ______ ______
At 30 June 2022 2,357 175 2,745 17,976 23,253
====== ====== ====== ====== ======
Consolidated statement of cash flows for the year ended 30 June
2022
2021
2022
Note GBP000 GBP000
Cash flows from operating activities
(Loss)/profit for the year (1,302) 460
Adjustments for:
Net loss on sale of investment property - 151
Net loss/(gains) on revaluation of investment
properties 500 (690)
Depreciation 5 1
Loss on sale of fixed assets - 1
Net finance expense 139 137
_______ _______
Net operating cash flows before
movements
in working capital (658) 60
(Increase)/decrease in trading
properties (1,359) 3,693
Decrease/(increase) in trade
and other receivables 1 (13)
Increase/(decrease) in trade
and other payables 574 (370)
_______ _______
Cash (absorbed by)/generated
from operations (1,442) 3,370
Interest paid (251) (333)
_______ _______
Net cash (outflow)/inflow from
operating activities (1,693) 3,037
_______ _______
Investing activities
Proceeds from sale of investment
properties - 1,149
Proceeds from sale of fixed assets - 5
Acquisition of property, plant
and equipment (10) -
_______ _______
Cash flows (absorbed by)/generated
from investing activities (10) 1,154
_______ _______
Financing activities
(Decrease) in borrowings - (1,243)
_______ _______
Cash flows (used) from financing
activities - (1,243)
_______ _______
Net (decrease)/increase in cash and cash
equivalents (1,703) 2,948
Cash and cash equivalents at
beginning of year 3,020 72
_______ _______
Cash and cash equivalents at
end of year 1,317 3,020
Notes to the consolidated financial statements as at 30 June
2022
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 2022 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 c/o Womble Bond Dickinson, The Spark, Draymans
Way, Newcastle Helix, Newcastle upon Tyne, NE4 5DE 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 UK-adopted International
Accounting Standards. The company has elected to prepare its parent
Company financial statements in accordance with International
Accounting Standards; these are presented on pages 72 to 91.
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
UK-adopted 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 20. 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 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 assume the Group
will make property sales in the normal course of business to
provide sufficient cash inflows to finance the Group's
activities.
The Group and parent Company finance their day to day working
capital requirements through related party loans and bank funding
is considered for specific development projects. The related party
lender has indicated its willingness to continue to provide
financial support and not to demand repayment of its principal loan
during 2023.
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 based on a third party valuation
provided by an external independent valuer as at 30 June 2022 . The
independent valuation is based upon assumptions including future
rental income, anticipated letting void cost and the appropriate
discount rate or yield or, if appropriate, the development value.
The independent valuer also takes into consideration market
evidence for comparable properties in respect of both transaction
prices and rental agreements.
-- 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 after taking account of the construction cost to
complete the properties. 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 uncertainty regarding the availability and 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 2020, 30 June
2021 or 30 June 2022.
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
2021 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 2022 and relevant to the Group. The
directors have considered standards which are issued but are not
yet effective and do not expect them to have any significant impact
on financial measurement and disclosures.
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 (loss)/profit 2022 2021
GBP000 GBP000
Revenue comprises: -
Rental income 306 368
Sale of properties - 4,186
306 4,554
======= =======
All revenue is derived from the United Kingdom
2022 2021
GBP000 GBP000
The operating profit is stated after charging:
-
Depreciation 5 1
Amounts received by auditors and their associates
in respect of:
- Audit of these financial statements (Group
and Company) 19 17
- Audit of financial statements of subsidiaries
pursuant to 10 9
legislation
======= =======
6 Employees and employee benefits 2022 2021
GBP000 GBP000
Employee remuneration
Wages and salaries 232 177
Social security costs 17 12
Other pension costs 28 28
_______ _______
277 217
====== ======
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
_______ _______
5 6
====== =======
2022 2021
Remuneration of directors GBP000 GBP000
Directors' emoluments 135 64
Company contributions to money purchase
pension schemes 25 25
====== ======
Salary and Pension 2022 2021
Director Fees Benefits Contributions Total Total
GBP000 GBP000 GBP000 GBP000 GBP000
I D Lowe 28 5 - 33 6
M J Baynham 94 - 25 119 75
R J Pearson 8 - - 8 8
______ ______ ______ ______ ______
130 5 25 160 89
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 GBP173,491 (2021: GBP94,067).
2022 2021
Retirement benefits are accruing to the
following number of
directors under:
Money purchase schemes 1 1
====== ======
7 Finance expenses
2022 2021
GBP000 GBP000
Finance expenses
Interest payable:
- Other loan interest 139 137
==== ====
8 Income tax
There was no current nor deferred tax charge in the current or
preceding year.
Reconciliation of effective
tax rate
2022 2021
GBP000 GBP000
(Loss)/profit before tax (1,302) 460
===== =====
Current tax at 19% (2021:
19%) (247) 87
Effects of:
Expenses not deductible
for tax purposes 72 (10)
Excess depreciation over
capital allowances (6) (6)
Losses carried forward 86 6
Effect of indexation - (57)
Loss on sale of revalued
investment property
- 111
Revaluation of property
not taxable 95 (131)
______ ______
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:
2022 2021
GBP000 GBP000
(Loss)/profit for financial period (1,302) 460
====== ======
No . No.
Weighted average no. of shares:
for basic earnings per share and
for diluted
earnings per share 11,783,577 11,783,577
======== ========
(11.05)
Basic (loss)/earnings per share p 3.90 p
(11.05)
Diluted (loss)/earnings per share p 3.90 p
The diluted figure per share is the same as the basic figure
per share as there are no dilutive shares.
Investment properties
10
2022 2021
GBP000 GBP000
Valuation
At 1 July 17,110 17,720
Disposed in year - (1,300)
Revaluation in year (500) 690
________ ________
Valuation at 30 June 16,610 17,110
======== ========
The carrying value of investment property is the fair value at
the balance sheet date based on valuations by Montagu Evans,
Chartered Surveyors, as at 30 June 2022. The external valuer is not
connected with the Group.
The valuation methodology applied by the external valuer was in
accordance with the RICS Valuation - Global Standards effective
from 31 January 2020 ("the Red Book") published by the Royal
Institution of Chartered Surveyors ("RICS"). The definition of Fair
Value, as adopted by the International Accounting Standards Board
(IASB) in International Financial Reporting Standard (IFRS) 13 and
as stated in paragraph 7 of VPS4 of the Red Book is as follows:
"The price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market
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
2022 is GBP8,805,509 (2021: GBP8,805,509). The cumulative amount of
interest capitalised and included within historical cost in respect
of the Group's investment properties is GBP451,000 (2021:
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 7.5% and 11% 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 GBP221,000 (2021: GBP224,000). An
increase of 1% in the yields would result in a decrease in the fair
value of GBP181,000 (2021: GBP171,000).
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 2022 this was a fair value loss of GBP500,000 (2021: profit
GBP690,000). 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. There were
no realised gains or losses on the disposal of investment
properties in the year ended 30 June 2022.
11 Plant and equipment
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
========== ============== =========== ========
Motor Fixtures Other
Vehicles and fittings equipment Total
GBP000 GBP000 GBP000 GBP000
Cost
At 30 June 2021 1 15 69 85
Additions in year - 10 - 10
At 30 June 2022 1 25 69 95
---------- -------------- ----------- --------
Depreciation
At 30 June 2021 1 15 66 82
Charge for year - 3 2 5
At 30 June 2022 1 18 68 87
---------- -------------- ----------- --------
Net book value
At 30 June 2022 - 7 1 8
========== ============== =========== ========
12 Investments
2022 2021
GBP000 GBP000
Listed investments 1 1
====== ======
13 Trading properties
2022 2021
GBP000 GBP000
At start of year 9,313 13,006
Additions 1,359 237
Sold in year - (3,930)
_________ _________
At end of year 10,672 9,313
======== ========
Finance costs related to borrowings specifically for a
development are included in the cost of developments. At 30 June
2022 the total finance costs included in stock and work in progress
was GBP53,055 (2021: GBPNil).
14 Trade and other receivables 2022 2021
GBP000 GBP000
Amounts falling due within one year
Other debtors 103 108
Prepayments and accrued income 31 27
_______ _______
134 135
====== ======
The Group's exposure to credit risks and impairment losses
relating to trade receivables is given in note 18.
15 Cash and cash equivalents 2022 2021
GBP000 GBP000
Cash 1,317 3,020
====== ======
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
2022 2021
GBP000 GBP000
Trade creditors 59 54
Other creditors including taxation 14 13
Accruals and deferred income 1,036 580
_______ _______
1,109 647
====== ======
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
2022 2021
GBP000 GBP000
Unsecured loan 360 360
====== ======
Non-current liabilities
Unsecured loans 4,020 4,020
======= =======
Net debt reconciliation
2022 2021
GBP000 GBP000
Cash and cash equivalents 1,317 3,020
Liquid investments 1 1
Borrowings - repayable with
one year (360) (360)
Borrowings - repayable after
one year (4,020) (4,020)
Net debt (3,062) (1,359)
Cash and liquid investments 1,318 3,021
Gross debt - variable interest
rates (4,380) (4,380)
Net debt (3,062) (1,359)
17 Other interest bearing loans and borrowings (continued)
Cash/bank Liquid Borrowing Borrowing
overdraft investments due within due after
1 year 1 year Total
GBP000 GBP000 GBP000 GBP000 GBP000
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)
Cashflows (1,703) - - - (1,703)
Net debt at
30 June 2022 1,317 1 (360) (4,020) (3,062)
=========== ============= ============ =========== ========
Terms and debt repayment schedule
Terms and conditions of outstanding loans were as follows:
2022 2021
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
loan GBP Base +0.5% 360 360 360 360
4,380 4,380 4,380 4,380
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 the Bank of Scotland
base rate. 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 the Bank of Scotland base rate.
The weighted average interest rate of the floating rate
borrowings was 3.2% (2021: 3.3%).
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:
2022 2021
Fair value Carrying Fair value Carrying
amount amount
GBP000 GBP000 GBP000 GBP000
Trade and other receivables 103 103 108 108
Cash and cash equivalents 1,317 1,317 3,020 3,020
------------- --------- ----------- ------------
1,420 1,420 3,128 3,128
------------- --------- ----------- ------------
Loans from related parties 4,380 4,380 4,380 4,380
Trade and other payables 1,100 1,100 639 639
------------- --------- ----------- ------------
5,480 5,480 5,019 5,019
------------- --------- ----------- ------------
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 considers whether or not dividends
should be paid 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.
Investments
The Group does not actively trade in equity investments.
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
2022 2021
GBP000 GBP000
Investments 1 1
Other receivables 103 108
Cash and cash equivalents 1,317 3,020
________ ________
1,421 3,129
======= =======
The Group made an allowance for impairment on trade receivables
of GBP31,000 (2021: GBPNil). As at 30 June 2022, trade
receivables of GBP37,000 (2021: GBP74,000) 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: 2022 2021
Number of days past due date GBP000 GBP000
Less than 30 days 19 25
Between 30 and 60 days 1 8
Between 60 and 90 days 5 7
Over 90 days 12 34
________ ________
37 74
======= =======
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 8 tenants (2021: 11 tenants).
One tenant accounts for 34% (2021: 36%) 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 2-5
30 June 2022 GBP'000 amount cash flows or less months years
---------------------------
Unsecured loan
4,020 4,261 136 4,020
Unsecured development
loan 360 365 365 105 -
Trade and other payables 1,109 1,109 1,109 - -
-------- ----------- -------- ------- ----------
Carrying Contractual 6 months 6-12 2-5
30 June 2021 GBP'000 amount cash flows or less months 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 - -
-------- ----------- -------- --------- ----------
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 the Bank of Scotland base rate.
The interest rate profile of the Group's borrowings as at
the year-end was as follows:
2022 2021
GBP000 GBP000
Unsecured loan - Base +3% 4,020 4,020
Unsecured loan - Base +0.5% 360 360
===== =====
A 1% movement in interest rates would be expected to change
the Group's annual net interest charge by GBP43,800 (2021:
GBP43,800).
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:
2022 2021
GBP000 GBP000
Less than one year 209 179
Between one and five years 352 407
Greater than five years 261 316
_____ _____
822 902
===== =====
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 2022, the Group has a potential deferred tax asset of
GBP1,662,000 (2021: GBP1,488,000) of which GBP120,000 (2021:
GBP79,000) 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
GBP1,542,000 (2021: GBP1,409,000). This has not been recognised due
to uncertainty regarding the availability and timing of future
taxable profits.
Movement in unrecognised deferred tax asset
Balance Additions Balance Additions/ Balance
1 July / 30 June (reductions) 30 June
20 (reductions) 21 22
at 19% at 25% at 25%
GBP000 GBP000 GBP000 GBP000 GBP000
Investment
properties 84 (5) 79 41 120
Tax losses 1,090 319 1,409 133 1,542
_____ ______ _____ ______ _____
Total 1,174 314 1,488 174 1,662
_____ ______ _____ ______ _____
21 Issued share capital
30 June 2022 30 June 2021
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.
Transactions with key management personnel (continued)
Lowe Dalkeith Farms, a business wholly owned by I D Lowe, used
land at one of the Company's investment properties as grazings for
farming until April 2021. Rent was agreed and paid at GBP1,575 per
annum.
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 2022 was
GBP4,020,000 (2021: GBP4,020,000) with interest payable at 3% over
Bank of Scotland base rate per annum. The margin applies with
effect from 1 July 2020 in line with the terms of the loan.
Interest charged in the year amounted to GBP135,694 (2021:
GBP124,620).
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 2022 was
GBP360,000 (2021: GBP360,000) with interest payable at a margin of
0.5% over base rate. Interest charged in the year amounted to
GBP3,200 (2021: GBP2,160).
In the year ended 30 June 2021, the Company also had an
unsecured facility due to Leafrealm Limited, a company of which I D
Lowe is the controlling shareholder. The maximum balance drawn down
was GBP115,000 with interest payable at 8% per annum. Interest
charged in the year amounted to GBPNil (2021: GBP5,508) and the
facility was repaid in full 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 2022 amounts to GBP8,219 (2021: GBP2,311) 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 2022 was GBP630 (2021: GBPNil).
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 2022 amounts to GBP2,249 (2021: GBP2,068) 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 2022
was GBP630 (2021: GBPNil).
Property advisory services on two investment property
transactions was undertaken by RJ Pearson Property Consultants
Limited, a company under the control of R J Pearson. The value of
the work done charged in the accounts for the year to 30 June 2022
amounts to GBP25,000 (2021: GBPNil) at rates which do not exceed
normal commercial rates. The balance payable to RJ Pearson Property
Consultants Limited in respect of invoices for this work at 30 June
2022 was GBPNil (2021: GBPNil).
For a full listing of investments and subsidiary undertakings
please see note 7 of the parent Company financial statements.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
RNS may use your IP address to confirm compliance with the terms
and conditions, to analyse how you engage with the information
contained in this communication, and to share such analysis on an
anonymised basis with others as part of our commercial services.
For further information about how RNS and the London Stock Exchange
use the personal data you provide us, please see our Privacy
Policy.
END
FR ZZMZZKMMGZZM
(END) Dow Jones Newswires
December 21, 2022 10:26 ET (15:26 GMT)
Caledonian (LSE:CNN)
Historical Stock Chart
From Apr 2024 to May 2024
Caledonian (LSE:CNN)
Historical Stock Chart
From May 2023 to May 2024