REG - Caledonian Trust PLC - Audited Results for the year ended 30 June 2021

Caledonian TrustAnnouncement

22/12/2021 14:55

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RNS Number : 5312W  Caledonian Trust PLC  22 December 2021

 

 

22 December 2021

 

Caledonian Trust plc

 

(the "Company" or the "Group")

 

Audited Results for the year ended 30 June 2021

 

Caledonian Trust plc, the Edinburgh-based property investment holding and
development company, announces its audited results for the year ended 30 June
2021.

 

Enquiries:

 

 Caledonian Trust plc
 Douglas Lowe, Chairman and Chief Executive Officer  Tel: 0131 220 0416
 Mike Baynham, Finance Director                      Tel: 0131 220 0416

 Allenby Capital Limited

 (Nominated Adviser and Broker)
 Nick Athanas                                        Tel: 0203 328 5656

 Alex Brearley

 

CHAIRMAN'S STATEMENT

 

 

Introduction

 

The Group made a pre-tax profit of £460,000 in the year to 30 June 2021
compared with a profit before tax of £95,000 last year.  The earnings per
share were 3.90p and the NAV per share at 30 June 2021 was 208.4p compared
with earnings per share of 0.81p and NAV per share of 204.5p last year.  The
net valuation gain in the year was £690,000 compared to a net valuation gain
in the previous year of £250,000.

 

Income from rent and service charges fell to £368,000 from £446,000 in
2020.  The reduction is mainly attributable to the expiry of the licence for
the car park at St Margaret's House, Edinburgh and one vacant unit at Scotland
Street, Glasgow.  Sales of five newly developed homes at Brunstane in
Edinburgh and the sale of stock properties at Ardpatrick Estate generated
turnover of £4,186,000 as described in the Review of Activities.
Administrative expenses were £440,000 (2020: £428,000) and interest payable
was £137,000 (2020: £29,000). The increase in the interest charge reflects
the 3% margin over base being applied to a related party loan from Leafrealm
Limited in accordance with its terms with effect from 1 July 2020.

 

During the year, an investment property was sold along with several stock
properties, together comprising Ardpatrick Estate, in a single transaction.
Ardpatrick was originally purchased in 2006 for £2,558,775, immediately
realising £410,000 from the sale of one property and subsequently selling
five refurbished cottages for total proceeds of £848,000 in previous years
before the sale of the remainder this year for £2,700,000.

 

 

Review of Activities

 

The Group's property investment business continues but modified only by the
sale of Ardpatrick Estate on 27 April 2021 for £2.7m in cash of which £1.2m
was attributable to investment property and £1.5m to stock property.

 

The largest unit in our high yielding retail/industrial property at Scotland
Street, Glasgow has been let from early next year to Deliveroo for their first
"dark kitchen" in Scotland.  We continue to hold our high yielding retail
properties and North Castle Street offices, four Edinburgh garages, a public
house / restaurant in Alloa and Belford Road / Bell's Brae, Edinburgh.

 

St Margaret's continues to be fully let at a nominal rent, presently just over
£1.50/ft(2) of occupied space, to a charity, Edinburgh Palette, who have
reconfigured and sub-let all the space to over 200 artists, artisans and
galleries.  Previously I reported that Edinburgh Palette gained two new and
very different premises, the first at 525 Ferry Road in north central
Edinburgh, just west of the Fettes College playing fields and near to the
Western General Hospital, where a modern 125,000ft(2) grade A office building
has been secured on favourable terms.  This central site is served by eight
bus routes and has 125 car parking spaces, 83 single offices and numerous open
plan spaces.  The second, quite different premise, is the Stanley Street
Container Village where an innovative landscaped village including parks and
communal grounds, is being assembled, using highly modified shipping
containers, on a site leased until 2043 just north of Portobello golf course
and about half a mile from the A1 and Brunstane rail station.  Edinburgh
Palette expect to provide community services and about 80 single studio units,
primarily for local residents currently leasing spaces at St. Margaret's and
for other creative groups and individuals.  The container village was
originally expected to open in the summer of 2019, but is now not likely to
open until 2022.  Edinburgh Palette recently secured another site in Granton
where they are developing plans for affordable retail space, high quality
studio and office spaces.  St Margaret's continues with its high long-term
occupancy level which has been largely unaffected by the impact of Covid-19.

 

Registers of Scotland did not renew the short-term lease of the car parking
spaces at St. Margaret's when it expired at the end of October as their staff
have been working predominantly from home since March 2020.  Their return to
the office in greater numbers is likely to be postponed as a result of the
recent Covid-19 announcements.

 

We have appointed Montagu Evans to market St Margaret's House and we plan to
launch the marketing campaign as soon as the current difficulties and
restrictions on national and international travel for investors and developers
are lifted.  Already we have extensive interest from a broad spectrum of
parties in advance of the formal market launch, including unsolicited offers.

 

We completed the construction of five new houses in the listed former farm
steading on our site at Brunstane in July 2020 following the lifting of
Covid-19 restrictions.  The sales of all five properties have now completed,
one in September 2020, one in November 2020, one in February 2021 and two in
March 2021, all at prices in excess of their home report valuations, which
itself was in excess of our budgeted figures, for a combined consideration of
£2.66m or £360/ft(2).  We commenced construction of the next phase of
development at Brunstane comprising a further five new houses over 8650ft(2)
forming the Steading Courtyard at the beginning of July 2021 with a
construction programme of 12 months.  We are closely monitoring supply chain
shortages and have taken steps, where necessary, to secure materials in
advance to avoid any disruption to the construction timetable.  Apart from a
few days delay in securing delivery of concrete for the foundations in early
July no delays due to supply chain shortages have affected the programme as
yet.  The application for 11 new houses (c.20,000ft(2)) in addition to the
converted large farmhouse in the Stackyard field to the east of the steading
continues very slowly through the planning process but it is now expected that
consent to this phase will be obtained early next year.

 

At Wallyford we are currently finalising tender documentation and securing
several minor but important variations to the planning consent for six
detached houses and four semi-detached houses over 13,500ft(2) and expect to
commence construction in late spring/early summer 2022, with a phased
construction period over 12 months.  The site lies within 400m of the East
Coast mainline station, is near the A1/A720 City Bypass junction and is
contiguous with a completed development of houses.  Taylor Wimpey have
completed the construction of over 500 houses nearby but on the other side of
the mainline railway, which latterly sold at prices of around £250/ft(2) for
smaller 3-bedroom end-terraced houses and £240/ft for larger detached
houses.  To the south of Wallyford a very large development of around 2,000
houses has commenced at St Clement's Wells on ground rising to the south,
affording extensive views over the Forth estuary to Fife and on the eastern
edge, Persimmon have completed a development of 131 houses.  On an adjacent
site Taylor Wimpey are constructing 80 houses which are being marketed at
£280/ft(2) for smaller 3-bedroom semi-detached houses and £260/ft(2) for
4-bedroom detached houses which are selling very well.  On the western side
of St Clement's Wells, Barratts have sold all of the 245 three and
four-bedroom houses in Phase 1 where semi-detached and terraced three-bed
houses realised £221,000 or £242/ft(2).  Barratts are currently building
106 three and four bedroom houses in Phase 2 of the St Clement's Wells site
and 141 three and four bedroom houses on an adjoining site.  The Master Plan
for the St Clement's Wells development includes a primary school, separate
nursery and community facilities, which opened earlier this year, and the new
secondary school on an adjacent site is under construction.  Planning consent
in principle has been granted for another 600-800 new houses on the adjacent
Dolphingstone site to the South-East.  The environment at Wallyford, no
longer a mining village, is rapidly becoming another leafy commuting Edinburgh
suburb on the fertile East Lothian coastal strip.

 

The third of our Edinburgh sites is in Belford Road, a quiet cul-de-sac less
than 500m from Charlotte Square and the west end of Princes Street, where we
have taken up both an office consent for 22,500ft(2) and fourteen car parking
spaces and a separate residential consent for twenty flats over 21,000ft(2)
and twenty car parking spaces.  This site has long been considered
"difficult".  To dispel this myth, we have created a workable access to the
site; cleared collapsed rubble and soil; exposed the retaining south wall and
the friable but strong bedrock in parts of the site; and completed an
extensive archaeological survey.  In consequence, the extent of the enabling
construction works is much reduced compared to earlier estimates.  Further
investment in the site had been postponed, but we have now instructed
architects to remodel the Belford Road façade and to reconfigure the internal
layout with a more contemporary design to reflect current market
requirements.  The delay is not currently proving to our long-term
disadvantage as prime locations in Edinburgh such as Belford Road have
continued to increase in value more rapidly than the cost of construction.

 

The Company has three large development sites in the Edinburgh and Glasgow
catchments of which two are at Cockburnspath, on the A1 just east of Dunbar.
We have implemented the planning consent on both the 48-house plot northerly
Dunglass site and on the 28-house plot, including four affordable houses,
southerly Hazeldean site.  The Dunglass site is fifteen acres of which four
acres is woodland, but the non-woodland area could allow up to a further
thirty houses to be built if the ground conditions, which currently preclude
development, could be remediated.

 

Gartshore, the third largest development site, is within ten miles of central
Glasgow, near Kirkintilloch (on the Union Canal), East Dunbartonshire, and
comprises the nucleus of the large estate, previously owned by the Whitelaw
family, including 130 acres of farmland, 80 acres of policies and tree-lined
parks, a designed landscape with a magnificent Georgian pigeonnier, an ornate
15,000ft(2) Victorian stable block, three cottages and other buildings and a
huge walled garden.  Glasgow is easily accessible as Gartshore is two miles
from the M73/M80 junction, seven miles from the M8 (via the M73) and three
miles from two separate Glasgow/Edinburgh mainline stations and from
Greenfaulds, a Glasgow commuter station.  Gartshore's central location,
historic setting and inherent amenity forms a natural development site.
Accordingly, proposals have been prepared for a village within the existing
landscape setting of several hundred cottages and houses together with local
amenities.  This would complement our separate proposals for a high-quality
business park, including a hotel and a destination leisure centre within
mature parkland.

 

The Company owns thirteen rural development opportunities, nine in Perthshire,
three in Fife and one in Argyll and Bute, all of which are set in areas of
high amenity where development is more controversial and therefore subject to
wider objection, especially as such small developments, outwith major housing
allocations, may not merit high priority.  Thus, gaining such consents is
tortuous, although such restrictions add value and for many of these rural
opportunities, we have endured planning consents.  Until very recently, the
rural housing market had not been experiencing the rapid growth taking place
in Edinburgh and Glasgow and in their catchment areas with values in regions
such as Perth and Kinross, Fife and Argyll and Bute having risen over 12% in
the past year, but with even more attractive immediate opportunities elsewhere
no investment is proposed in the rural portfolio except to maintain existing
consents or to endure them.  The improvements being made to the A9, notably
the completion of the dualling as far north as Birnam, continue to benefit
most of our properties north of the Forth estuary with Ardonachie now 15
minutes from Perth; Balnaguard and Strathtay and Comrie 30 minutes; and
Camghouran, a site for holiday houses, 90 minutes.

 

 

Economic Prospects

 

Economic prospects depend on the consequences of the economic upsurge evident
until the beginning of December, prior to the spread of the Omicron variant -
no ordinary recovery nor even a tidal rush, but a fast, high river bore, whose
surge is hindered by weirs of economic debris deposited after so abrupt a
retreat.  Consequent upon the collapse of economic activity, due to the
lockdown restrictions, the UK has had the deepest recession in the last 300
years, exceeded only between 1706 and 1709 when the War of the Spanish
Succession was followed by a period of exceptionally cold wet weather,
culminating in the Great Frost of 1709.  The Bank of England's illustrative
scenario in 2020 estimated a 14% fall in 2020 real GDP while the Office for
Budget Responsibility (OBR) forecast a fall of 11.3%, an out-turn subsequently
computed as 9.8%.  The early 1700s economic recovery was very rapid as output
was largely determined by the weather's influence on harvests and there was no
long supply chain - containers of essential parts being shipped from the Far
East.  However, when the tide turned in 2020, a massive bore of demand swept
up the economy, a surge of 17.7% Q3 on Q2 in 2020 and a second surge in 2021
of 5.5% Q2 on Q1.

 

The Bank of England is forecasting growth in 2021 to be 1.5% in Q3; and 0.8%
in Q4; and 6.7% for the year.  Most forecasters have similar 2021 forecasts -
National Institute of Economic and Social Research (NIESR) 6.9%; OBR 6.5%;
International Monetary Fund (IMF) 6.8%; and HM Treasury (HMT) 7.0%.  At Q3
2021 GDP was 2.1% below the level achieved in Q4 2019 (GDP growth Oct - Dec
2019 was nil) when the coronavirus pandemic originated.  If Q4 2021 growth is
0.8%, as estimated by NIESR, then at the end of 2021 GDP will be about 1.3%
below the level before the pandemic struck.  Growth forecasts for 2022
approach those for 2021: Bank of England 5.0% (reduced from 5.9% in August);
OBR 6.0%; NIESR 5.3%; IMF 5.0% and HMT 5.6%.  Unsurprisingly, such quite
exceptional growth in demand has encountered supply problems, restricting
output and causing inflation.  Those supply problems are caused not only by
the sudden resurgence of demand, but also by Covid related changes to the
economy, the trading rearrangements necessary from Brexit and a reduction in
the supply of energy, partly as a result of "green" policy, closing power
stations and restricting investment in new supply.  Consequently, the
remarkable growth has been accompanied by a sharp rise in inflation (as
measured by CPI) to 4.2% in October, up from 3.1% in September, and the Bank
of England expects inflation to continue to rise from 4.25% in 2021 to 5.0% in
April 2022, but to fall to 3.25% in December 2022 and to 2.25% and 2.0%
thereafter.  Independent forecasters, sampled by HMT, whose November
forecasts were reached before the "shock" official October inflation figure
was announced, are on average lower than the Bank at only 2.4% for 2021, but
higher than the Bank thereafter, forecasting 4.0% in 2022 and 2.6%, 2.5% and
2.3% in subsequent years, all above the 2.0% current CPI target.  The HMT
November forecasts were partly conditioned by their forecast of Bank rate of
about 0.60% in 2022, rising progressively to 1.73% in 2025.  I consider that
these forecasts, made before the Bank of England's November statement, are
likely to be revised up.

 

The economic significance of inflation is not linear.  It has a malign
influence below a key minimum level and has a benign influence up to a maximum
level, these levels being highly contentious and varying with the actual
economic conditions prevailing.  The upside and downside risks are
asymmetric, as above the maximum level deleterious economic effects increase
exponentially and may, in a few extreme conditions, lead to hyper-inflation,
often followed by economic collapse.

 

The risks of inflation breaking the maximum safe level and rising
exponentially are manifest, and past examples in the post-industrial era
include France during the French revolution, where monthly inflation peaked at
143% and Hungary in 1946 when prices doubled over 15.6 hours; and similar
grotesque inflation in Zimbabwe in 2008; Yugoslavia in 1994; Germany in
October 1923 and Greece in 1944.  Nor is the risk historic, as Venezuela,
Lebanon and Argentina are all on the verge of such a hyperinflation.  What
these examples have in common is a "breakdown" in other areas of the economy,
such as is caused by conflict or political or social factors.  Fortunately,
such conditions for hyperinflation are currently inapplicable in developed
countries, but there is a maximum inflation rate, much lower than such
hyperinflation rates, a "break point", that is considered the maximum that is
benign and below the risks of inflation "escaping": a "Goldilocks" level.

 

No inflation is not beneficial and low inflation is probably not optimal.
Economic growth is dependent on constant change and adjustment, and the
attainment of political objectives, such as climate change or trading
relationships, requires similar adjustments.  In all cases economic resources
are required to move: capital is redeployed and labour transfers from less
productive jobs to more productive ones.  Wages have a ratchet tendency -
once they move up, they are extremely difficult to re-adjust down - and if the
activity becomes less productive or prices have to be adjusted down to meet
changed market conditions, such an adjustment is much more easily achieved if
real wages are adjusted down by not rising with inflation.  Such easier
economic adjustment gives higher growth.  Central banks with inflation
policies are mandated to target inflation above zero, currently the Monetary
Policy Committee (MPC) 2%, symmetrically, over an appropriate time horizon.
The measurement of inflation used, CPI, is arbitrary and, although, adjusted
as perceived necessary, it tends to overstate "inflation" by undervaluing the
"quality" effects and utility of technological improvements, including,
particularly, electronic devices: how much "value" is attributable to a smart
phone, a computer with a telephone, compared to early models?  Given such
quality anomalies, the effective inflation target is probably lower than 2%.

 

The inflexion point where inflation becomes a net disbenefit has not been
determined, but, self-evidently, it is not 2%.  An argument against a
modestly higher inflation level is that it becomes self-reinforcing i.e. "runs
away", an argument relevant to the USA inflationary disasters of the 1970s.
Then President Lyndon Johnson said of the classic theoretical economic
trade-off between "guns and butter": "I believe we can do both …  And as
long as I am President, we can do both" sic!  This unwise policy, followed
shortly by two oil shocks, led to highly inflationary conditions which the
Federal Reserve Bank failed to counteract because of political intimidation,
an intrigue worthy of "House of Cards".  President Richard Nixon's dirty
tricksters (of Watergate fame?) promoted a smear story about the Federal
Reserve Bank Chair, Arthur Burns, and Nixon refused to retract it until Burns
promised looser monetary policy!  This avoidable and unusual inflationary
prelude is considered to have led to the establishment of an inflationary
psychology in the US which, having been established, required a long brutal
period of repression and recession to eliminate.

 

When the inflation genie (Arabic jinni, a magical creature of fire) is
released from its confining bottle or lamp by rubbing with a mythical magic
ring, he "escapes", evading recapture.  The "Aladdins" controlling the
central banks' "lamps" have been noticeably reluctant to use their magic ring,
rather keeping their inflation levels at below those optimal for economic
growth.  Alan Greenspan's deputy, Princeton's Professor of Economics, Alan
Blinder, strongly disputed the conventional view saying "The myth that the
inflationary demon, "genie", unless exorcised, will inevitably grow is exactly
that - a myth".  He considered that at such inflationary levels the economic
damage of joblessness was considerably more serious than a residual, if
nugatory, risk of inflation, "labour unused in a year … would be lost
forever".  Indeed, the Bank of England research shows that a one percentage
point increase in Base rate reduces output by "up to 0.6 per cent" after two
to three years, implying destroying about 200,000 jobs.  Low inflation rates,
certainly too low inflation rates such as the current MPC mandate, do not
optimise economic growth.

 

Where then is the "Goldilocks" compromise: the porridge not too hot and not
too cold, and not fluctuating, except in a very short cycle - such changes as
the Bank considers able to "see through"?  Capital Economics considers "the
costs" outweigh "the benefits" once inflation rises above 5% particularly in
more developed countries.  Because of the asymmetric nature of the risk,
probably 3½% ± 1% is an appropriate target.

 

The level of interest rates is not, however, determined by that rate
consistent with optimum economic growth or even one considered by the Bank
necessary to maintain inflation stable within ±1%, but by that rate
considered necessary by the Bank to keep to the arbitrary inflationary
target.  The original targeting required of the Bank, made in the wake of the
1970s inflationary disaster, was probably conservative - the influence of the
then recent inflationary history may have weighed disproportionately on
judgement.  It is possible to posit a causal relationship between present
target inflation rates and inflationary histories: in Germany (and EU
subsequently) post the Weimar hyperinflation the target rate is very low; and
in the US, where inflation rates in the 1970s were not so extreme as in the
UK, target rates are both higher and more flexible.  The outcome set as
desirable is partly conditional on the historic inflationary setting, rather
than the optimal rate.

 

Unfortunately, the UK target rate of 2% is lower than, or at the lowest margin
of, a rate that optimises economic growth as the spectre of past 1970s
inflation continues to haunt judgement.  Capital Economics suggest that,
while the current trade-off between lower inflation and economic growth is
sub-optimal, the attitude of governments and central banks is shifting,
following a decade in which deflation has posed a greater threat than
inflation.  For instance, the Federal Reserve Bank has already moved to an
average inflation target and, in a break from the past, is putting more
emphasis on full employment, part of its dual mandate.  More radical changes
to their policy frameworks are expected.

 

Change may also occur in the UK.  Interestingly, there is now a more
Machiavellian motivation to the targeting of higher inflation rates because of
the Government's greatly increased borrowing.  The higher the inflation rate
the greater the erosion of the real value of debt, a consideration of
particular value if accompanied by lower interest rates, which would be
allowable if target inflation was higher, as these would reduce the cost of
the Government's short-term debt, now a much larger proportion of Government
debt following the Covid crisis measures.  Such benefits hark back to the
purpose of the Bank's creation in 1694 to raise money "for carrying on the War
against France", and consequently, management of the Government debt, a
function that became increasingly important and continued until this major
function, debt management, was hived off to the newly created Debt Management
Office ("DMO") in 1997 when the MPC was charged by Gordon Brown with the
independent control of inflation.  This marked a change from the use of
fiscal (tax and spending) policy operated by the Treasury under the Chancellor
to control the economy, with monetary policy (interest rates; open market
policy) to be controlled by the Bank.

 

Debt management had been a central function of Government since WWI when debt
as a percentage of GNP rose to nearly 200% and again to nearly 250% post
WWII.  Unfortunately, post WWI high borrowing and defence of the Gold
Standard required high interest rates and severely crippled the economy until
it was abolished in 1931.  In contrast, post WWII the Treasury controlled
monetary policy without the burden of the Gold Standard and interest rates
were kept down, but inflation rose, often steeply.  In consequence, real
interest rates were negative for more than half the period 1945-80 during
which the resulting high inflation allowed, according to Carmen Reinhart, most
of the debt reduction to under 50% of GNP since WWII to take place with much
lower real capital repayments, while low real current interest payments
provided corresponding benefits.

 

Patently, while the opportunity to use inflation to reduce real debt in the
1945-1980 period was obvious, now a much less obvious route exists.  A recent
survey of the 18 largest UK gilt managers noted that the asset purchases
Quantitative Easing (QE) by the Bank, which are designed to lower interest
costs, closely followed the debt issued by the DMO: they surmised the purpose
of asset purchases was to lower Government borrowing costs and cause inflation
rates to be above interest rates, thus eroding the real value of Government
debt.  Such possible sleight of hand is rarely noticed, but the recent Bank
of England Chief Economist warned of the risk of returning to the "fiscal
dominance" implied by such policies (i.e. monetary policy being used for
Treasury purposes) and Lord Mervyn King branded QE a "dangerous addiction".
The Economist notes that "when debt is high temptation will always be
strong".  Yielding to such temptation is surely unthinkable: or is it?  The
"use" of inflation presents an interesting parallel: for labour, inflation
allows the "painless" transfer of economic resources from lower productivity
to higher productivity activities; for capital, it allows the "painless"
transfer to capital from debtors to creditors.  Magic, really!

 

Thus, strong forces bear on current monetary policy, which is already less
constricting than previously.  While the target inflation rate is 2%, the
MPC's remit includes "supporting the Government economic policy" and, in
recent years, to "depart from its target as a result of shocks and
disturbances [to avoid] undesirable volatility in output … and vary the
appropriate horizon for returning inflation to the target".  In this context
the MPC November report says "in recent unprecedented circumstances, the
economy has been subject to very large shocks.  Given the lag between changes
in monetary policy and their effects on inflation, the Committee, in judging
the appropriate policy stance, will as always focus on the medium-term
prospects for inflation, including medium-term inflation expectation, rather
than factors that are likely to be transient".

 

The MPC's reaction to the recent surge in inflation and in particular the
maintenance of Base Rate at 0.1% in November was shaped by an increased
emphasis on managing the economy as it reports "Looking beyond the coming
months, the Committee will, as always, contrive to focus on the medium-term
prospects for inflation".

 

The short-term factors are caused primarily by the obstacles, detours and
restrictions to the passage of the economic upsurge or "bore" consequent upon
recovery from the major recession.  Economic difficulties have been augmented
by the end of Britain's transitional membership of the EU Single Market and
Customs Union on 31 December 2020.  The anomalous position of N.I. restricts
trade and seems difficult to solve.  Tariff Free trade has been agreed with
the EU, but is encumbered by many non-tariff restrictions such as VAT rules,
sanitary and phytosanitary certification and, overreachingly, by "delay", some
politically "manufactured", which incurs additional costs, especially for
perishables, fish, harvested crops, nursery stock and animal products as shelf
life is reduced and wastage increased.  Many such problems may be
circumvented, or new trade routes established, leaving a small residue of
higher costs and, regrettably, at times unviable enterprises.

 

Short-term imbalances between supply and demand increase prices.  Demand may
surge but supply is necessarily slower as it may require the re-opening of
facilities and their repair, stocking and manning.  Many products, even
"simple" goods, are assembled from a whole range of parts and from different
suppliers, the delay of any one of which will hold up the end product.  A
complex good, a car, has thousands of components but is not a car without that
vital bit, however small:  no electronic chip, currently in short supply, no
car!  Such components not only have to be manufactured, but they have to be
delivered and the surge in demand has led to a shortage in and long lead times
for shipping containers, costing up to ten times more, and a further delay in
delivering the goods because many container delivery ships queue for days in
overcrowded ports, especially in China and the USA.  Causing separate
transport delays, HGV drivers have become scarce, delaying deliveries, as many
foreign drivers have not returned or are not able to return because of UK
immigration rules, but significantly, because there is a backlog of 40,000 HGV
drivers awaiting certification due to Covid related staff shortages.  This
delay may only be one instance of a more general cause of "shortage" - the
necessary poor productivity of some types of staff "home working" or, as
alternatively put, "living at work"!  Additionally, Covid has caused premises
to close because of quarantine, also interrupting supply.  Truly, there are
many present causes of insufficient supply, leading to higher prices.

 

Clearly most of these supply shortages will prove short lived and any
resulting current inflationary influence eliminated; ports will be cleared;
containers freed up; drivers trained; Covid closures reduced if not eliminated
and alternative supply routes and suppliers gained - the inflation derived
from those shortages will be eliminated as recent history demonstrates: the
driver induced petrol crisis is soon forgotten; and on what supermarket shelf
is a reasonable supply of EU fruits and vegetables not available?  Supply
disruptions have caused significant price increases but, as supply and demand
adjust, most of such bottlenecks will be eliminated, no longer causing
inflation.

 

A major source of inflation lies elsewhere.  The Bank's forecast of a 4.3%
rise in CPI in 2021, includes 1.25 percentage points attributable "Energy
prices - direct contribution to CPI inflation", falling next year to ¾ of a
percentage point and nil in 2023 and 2024 as energy prices stabilise at
current levels.  The probable continuance of such elevated energy prices is
exhibited by the five-year futures price of Brent crude oil which was of
$72.890 on Friday 26 November having just fallen from nearly $90 before the
Covid Omicron variant was identified.  Prices of all quoted energy supplies
have risen 50% or more over a year, with Coal rising 175% and Natural Gas 92%.

 

The economic damage caused by energy price rises is partially self-induced,
resulting from implementing "green" policies, primarily related to climate
change, including anti-nuclear sentiment - ironically, surely the most green
and nil carbon emitting electricity generating policy possible!  The UK's
almost entire switch from its coal power generation has increased its reliance
for base load generation on gas and on wind power, a variable energy source,
manifestly unsuitable for meeting base load requirements.  Thus, when the
wind does not blow the UK becomes, as the Economist says, "painfully dependent
on natural gas imports, especially in calm weather".  Because of the calm
weather and because UK gas storage has been reduced to 2% of annual demand
from 30%, gas has had to be imported at the current high spot price.  This
huge gas price increase has been directly felt in the consumer market and
following the collapse of numerous unhedged suppliers, their consumers are now
being subsidised by the Government.

 

The UK has endorsed the EU's carbon emissions - trading scheme which has
increased the cost of energy stored in fossil fuels, particularly, coal, the
cheapest energy resource.  These fossil fuels are vast stores of
photosynthetically derived energy formed as a result of one of many biological
interventions in the climate, including the current one.  The climatic
influences of life has an epochally long tradition, each one as different, as
"earth shattering"!  Common to all such cases is quantum - changes resulting
from unimaginably large numbers and long periods.  The current "green" crisis
arises as the product of the population number and of each individual's
contribution - an effective control would be to reduce numbers - population
control, - but advice on such behaviour is muted, presumably being too direct!

 

The world has experienced several biologically induced transformations
traceable back for more than 2.5 billion years.  Then, quite "shockingly",
the atmosphere was almost all greenhouse gases, predominantly methane and
CO(2), and some nitrogen but no oxygen.  This atmosphere resulted from the
physiology of the then existing organisms who processed and used the energy
stored in inorganic chemicals producing carbon based by-products, particularly
methane (CH(4)) and CO(2).  The world was extremely hot!  Then, about 2.4
billion years ago, "the great oxidation event" occurred when "plants"
harnessed the sun's radiant energy by photosynthesis.  They stored the
radiant energy in carbon based organic chemicals - sugars - the carbon being
derived from the atmospheric CO(2) and the oxygen released into the
atmosphere.  The previously dominant bacteria like methane producing
organisms were largely replaced.  Photosynthetic activity replaced the
super-heating carbon gas-based blanket, substituting oxygen.  The climate
reversed and a deep ice age, extending as far as the equator, became
established.  The resulting high levels of oxygen, an active chemical which
allows a rapid release of energy by "burning", permitted the evolution of
intensive energy consuming life forms such as animals.  Subsequent
evolutionary progress led to the development of land plants that used
photosynthesis both for the storage of energy rich carbon for use
physiologically but also photosynthetically produced carbon based supporting
structural elements such as lignin, a type of polymerised sugar (wood!).
Earlier examples included giant club mosses, cycads and tree ferns,
culminating in evolution of the flowering plants, including trees.  As these
"ligneous" elements were resistant to digestion by herbivores, they remained
unconsumed and, under certain conditions, undecomposed.  But these undigested
plant remains stored vast amounts of carbon, so great that the benign carbon
warming gases (as they were then - how things changed) were reduced and
temperatures fell.  Now, another life activity is releasing those vast stores
of carbon energy reserves by oxidising them; the latest change in more than
2.5 billion years of fluctuations in atmosphere and temperature.

 

The preliminary costs of green policies are just an "amuse-bouche" - a gross
tasting menu follows.  The climate change committee estimate the cost of the
UK's policy as £1.3 trillion spent mostly over the next 20 years, peaking in
2027, with meaningful savings (e.g. lower heating bills) starting in the 2040s
with a net cost after future, but undiscounted to present value, savings of
£991 billion.  The method of, the timing of, and the responsibility for
achievement of environmental gain is in danger of becoming a shibboleth like
"mom and apple pie", unquestionable, universally held and supported because
"they", the Government, someone else, is going to deliver its benefits, but is
free for "them", the proponents.  Like many virtues it is more observed in
aspiration than in execution.  For example, the taxable cost of vehicles
going "green" is about £30 billion per year but in a survey only 37% of even
those with "green" credentials support road taxes to replace that lost tax
revenue.  On this survey the Economist comments: "Treasury insiders fear
that, along the path to net zero, public enthusiasm will evaporate".  That
the rise in fuel duty, due to be increased yearly unless countermanded, has
been frozen at 57.95p since 2011 illustrates the scale of the political cost
of increasing carbon taxes.

 

The political hurdle of paying for "Green" will prove very high.  The current
estimate of "greening" is surely suspect as it is produced by an organisation
with an inherent interest in its fulfilment.  Even more importantly, it
embraces obscure technical aspirations, assumes complex technological advance
and is vast.  What Government programme embracing any one of these complex
variables ever delivered on time and on budget!?  Certainly not HS2, the
Channel Tunnel, the NHS IT system, Test and Trace, the Edinburgh tram system
or the Scottish Parliament whose £40 million budget ballooned to £414
million.  The Scots have an appropriate expression: "Nae chance".  But what
will be the actual cost - at least three to five times more - so, why is it
mainstream policy?  Possibly, because it is "good", particularly as "someone
else" is to pay for it.  Deleterious atmospheric changes are undeniably
occurring but how, when, by whom and to what extent they should be countered,
appear taboo questions, heresies in a settled faith.  Unfortunately, for
faith, as for intuition, the nobel laureate, Daniel Kahneman comments,
"intuition [and faith] feels just the same when its wrong as when its right,
that's the problem".  The proper concern for climate change is causing a
reflex action, which, while honourably intended, will not necessarily achieve
the optimal balance of advantage or the optimum method of the achievement.

 

Intuitively, it is "right" to mitigate conditions that damage the world, but
the UK's moral leadership has a disproportionate economic cost.  Fossil fuels
account for 83.1% of all energy consumption.  The UK's consumption of all
fossil fuels in 2020 was 1.12% of world fossil fuel energy consumption.  The
UK's total elimination of fossil fuel use in 2019 would have reduced world
consumption of fossil fuels then by 1.24%.

 

The insignificance of the UK's expensive mitigation of fossil fuel use is
highlighted as the UK's actual fossil fuel savings in 2019 compared to 2018
(2020 is distorted by the recession) of 0.26 exajoules (an exajoule equals 1
joule x 10(18)) is wholly insignificant compared to China's increase from
116.60 exajoules in 2018 to 120.64 exajoules in 2019, a 4.04 exajoules
increase in one year.

 

The UK's economy is also damaged by ill-considered policy measures, presumably
based on the importance of "green" at whatever costs - whatever it takes!  An
exceptionally ill-considered "green" policy has been applied to electric power
generation.  All UK coal using power stations have been closed, wind sources
greatly expanded and the storage of gas reduced to 2% of annual requirement
from 30%, making the UK depend on gas bought on the spot market to meet
fluctuations in demand.

 

This year the UK experienced the longest period of calm weather in 30 years
and wind supplies fell 15% on average, increasing the need for gas
generation.  The recovery of the world economy has greatly increased the
demand for gas and without reserves gas prices have soared from 30p to 130p
per therm.  Consequently, unnecessary economic costs fall on consumers,
Government by subsidy, and on business, resulting in plant closures and
consequent shortages of essential supplies (e.g. CO(2)) stoking inflation.
Continuation of the "full frontal" approach to climate change will be much
more damaging than one aimed to achieve the maximum return or lowest cost per
degree of saving.  Keynes put this proposition more succinctly: "It is not
sufficient that the state of affairs which we seek to promote should be better
than the state which preceded it; it must be sufficiently better to make up
for the evils of transition".

 

There are many energy saving policies that are either simple or achieve high
returns without far-reaching deleterious effects.  For instance, energy
wastage in US industry is estimated to be up to 50% in spite of often being
self-financing in areas including heat recycling, insulation, lighting,
product development and building and machinery design.  Similarly, obvious
self-financing consumer savings, universally applicable, include lighting,
insulation and design.  In addition to such carrots the stick of increased
prices is an immediate and effective method of reducing consumption.  The
freezing of fuel duty since 2012 continues to create the reverse incentive.
The use of such short-term, high return measures could produce cheaper results
while other technologies are developed, such as cheaper nuclear power, fusion
or fission, sky radiation reflections, CO(2) storage and the emission
reduction or oxidation of methane, the most damaging of all the radiation
reflecting gases.  Most importantly, time might allow resolution of the most
important limit to global warming: others don't share our concern or they
rather would not bear the cost.  In spite of great cost, the UK will achieve
little benefit while China's and Russia's policies add to the problem more
quickly than others solve it, or share the Secretary General of OPEC, René
Ortiz's, view of the Gulf state oil companies " who  don't care about the
political pressure to reduce emissions".

 

Unfortunately, "green" abhorrence of OPEC's apparent indifference flies in the
face of reality.  Oil and gas currently provides 55.9% of all world energy
needs and 76.9% of energy needs, if coal, the most damaging of fossil fuels,
is excluded.  Moreover, even given the present "green" policy, the continuing
world economic expansion will result in global oil demand continuing to
increase each year for the next five years, if only by small amounts, or about
5% cumulatively (BP Annual Report 2021).  Without an economic paralysis,
reliance on energy supply of those magnitudes can only be changed slowly.
But even on a smaller scale it would be counter- productive to burden the UK's
economy by reducing UK's fossil fuel outputs while those outputs are replaced
elsewhere.

 

The UK's current focus on its moral role in world climate control could be
expensive and inflationary.  Green policies will certainly raise energy
prices and inflation to an uncertain degree on a continuing basis as more
expensive energy sources replace cheaper ones.  Such discretionary
self-imposed policies are likely to be complemented by the exogenous factors
of worldwide supply and demand.  Demand for energy is directly related to
economic growth and is forecast to continue to increase the demand for oil and
gas, independent of "green" savings.  However, arbitrary supply restrictions
will increase the OPEC+ share and seem likely to increase prices.  Thus, I do
not share the Bank's view that, while energy prices contributed 1¼% inflation
in 2021 out of an estimated total 4¼%, they will reduce to nil in 2023.
Rising energy prices are one of many macrotrends pointing to higher inflation
and include, particularly, the diminution of the overhang of China's cheap
labour, the increasing world trade barriers, especially due to the US / China
decoupling, and changing demographics, reducing the labour force as a
percentage of the whole population in Western economies.  However, past
inflationary forces have largely been exorcised by increased labour
flexibility and the changed balance of power and inflationary expectations are
lower.  These changes limiting inflation are being constantly reinforced by
new technologies, including the yet unfulfilled promise of the digital age,
and by some public and political improvement in economic understanding.  Such
factors will contain inflation below the maximum safe "Goldilocks" level and
above the currently held 2% target.

 

I consider real interest rates will be negative with the consequent benefits
for investors and debtors, especially the Government, and asset prices,
including house prices, are likely to be supported.  It would be economically
beneficial if inflation rates were covertly allowed to rise to, say, 3.5%,
while Bank Rate was maintained at a lower level and, while such an overt
policy change seems too removed from current conventional thinking to be
likely, a covert move which allowed higher inflation rates without affecting
Bank Rate, as seems to be US practice, could be implemented and would be
beneficial.  Encouragingly, the Bank forecast Bank Rate to remain at 1% for
the next three years except briefly in 2023.

 

The Scottish economy is very largely dependent on the UK economy and will
benefit similarly from the relatively benign economic prospects forecast.
However, two shadows fall on the Scottish economy.  The oil and gas industry
represents a disproportionately large percentage of the Scottish economy and
its likely further contraction as evidenced by the probable denial of the
licence at Cambo off Shetland, would be most unfavourable.  In Scotland the
pivotal influence of the Green Party on economic policy extends damagingly
into so many areas of productive investment, including, particularly,
transport:  is it just too simple to observe that its current opposition to
road improvements will be rendered entirely redundant as soon as electrically
powered vehicles predominate?

 

The Scottish economy has continued to deteriorate in relation to the UK's.
Lack of growth has resulted in Scotland's tax revenue falling £190m below the
level it would have received through the previous block grant, a shortfall
estimated by the Scottish Fiscal Commission to rise to £417m in five
years.( ) The threat of independence continues to damage the Scottish
economy, relocating or diverting resources, investment and personnel.  It is
a masterpiece of political skill that the party that bemoans the trade tragedy
of Brexit should ardently seek to embrace a much greater trade tragedy through
Scexit!  If the Irish border is difficult to surmount, then Hadrian's Wall,
even dilapidated, is unscalable.  It is entirely proper for Scotland to
choose political preference over economic advantage, provided the costs are
not hidden.  But such a trade has a very long, very expensive and very
unfruitful tradition.

 

 

Property Prospects

 

In the previous investment cycle the CBRE All Property Yield peaked at 7.4% in
November 2001, fell to 4.1% in May 2007 before rising to 7.8% in February
2009, a yield surpassed only very briefly since 1970, when the Bank Rate was
over 10%.  Subsequently, yields fell to a low of 5.3% in August 2017 then
rose again over three years to an estimated 5.9% in September 2020, and have
now fallen slightly to 5.8%.

 

This year Savill's prime yields have risen in four of their 14 identified
sectors and are unchanged only for South East Offices and Foodstores at 5.50%
and 4.50%, but last year's rise in yields for High Street Retail and Shopping
Centres and both Leisure categories, Parks and Pubs, has been extended with
rises of up to 0.5% points.  Significant falls in yield of 0.75% points have
occurred in Retail Warehouses and in both Industrial Distribution and
Industrial Multi-lets, all probably reflecting the continued move away from
the High Street Retail to Warehouses and Online delivery services.

 

The All Property yield peaked at 7.8% in February 2009, during the Great
Recession, 4.6 percentage points higher than the 10-year Gilt, the widest
"yield gap" since the series began in 1972 and 1.4 percentage points above the
previous record in February 1999.  The 2012 yield of 6.3% marked a new record
yield gap of 4.8 percentage points, due largely to the then exceptionally low
1.5% Gilt yield.  The yield gap fell to a low of 3.3 percentage points in
2014, but rose steadily to 4.1 percentage points in 2018, due largely to a
fall in the 10-year Gilt yield, and rose further to 4.8 percentage points in
2019 and again in 2020 to 5.6 percentage points.  This year, due to a 0.6%
rise in the 10-year Gilt yield to 0.7%, the yield gap has fallen back to 5.0
percentage points.  The inconsistency in the yield gap is reflected in the
absence of an obvious connection between inflation and yields.  Since 2009,
Savill's prime property yields have varied very little within the range of
about 4.75% to 5.75% while inflation (CPI), falling from a peak of just over
5% in 2008, has moved since then between plus 3.00% and slightly negative.
Over the same period the spread in yields between secondary and prime
properties has narrowed consistently by almost 1.0 percentage points.

 

The All Property Rent Index, except in 2003, rose consistently from 1994 to
2009 when it fell by 12.3%. Immediately following the Great Recession there
were three small annual increases totalling 1.6%, but subsequently rental
growth averaged, 3.6% in the five years to 2017, reducing to 0.8% in 2018, but
have fallen subsequently.  In 2019 a fall of 0.1% was caused by falls of 3.8%
for Retail Warehouses and 4.9% for Shopping Centres, these last two sectors
having had the worst performance in the previous year.  The pattern was
repeated in 2020 as a fall of 2.1% in All Property Rental values resulted from
Retail falls of: Standard Retail 6.0%; Retail Warehouses 4.2%; and Shopping
Centres 10.8%, followed in 2021 by 0.7% as a result of further retail falls
of: Standard Retail 7.0%; Retail Warehouses 3.1%; and Shopping Centres 9.1%.
These losses were only partially offset by a 3.9% rise in industrial rents.

 

In the 12 months to October 2021 capital values have risen slightly by 2.3%,
but have fallen 15% for Shopping Centres, and 7% for Standard Retail, and are
virtually unchanged for Retail Warehouses, but Industrials have risen again
this year by 12%.  However, a more insidious continuing fall has been the
erosion of real value by inflation, as since the market peak in 1990/1991 the
extended CBRE rent indices, as adjusted by RPI inflation, have fallen by:
All Property 40%; Offices 41%; Shops 40%; and Industrials 29%.

 

It is no consolation for the current falls in capital values that in the 24
months following the beginning of the Great Recession All Property capital
values fell by an astonishing 44%.

 

Fortunately, forecasts for 2022 and for the years up to 2025 are better.  The
Investment  Property Forum ("IPF") averaging the results of 23 surveys which
vary significantly among them.  For example, the All Property return for 2022
showed a difference among individual forecasts of 3.25% to 18.50%! Forecasting
is hazardous. However, more distant forecasts are consistent as differences
vary only by ±2 percentage points.  The IPF forecasts All Property returns
of 6.7% for 2022 and an average of 6.4% for 2022 - 2025, due to slightly lower
rental and capital growth.  Retail rental and capital values are forecast to
fall again in 2022, but to be positive from 2023, resulting in a total return
of 3.4% in 2022 and of 4.0% annually from 2023 to 2025.  Office rental and
capital values each increase by 1% to 2% each year, giving a total return of
about 6.3% in each of the years 2022 to 2025.  IPF Industrial forecasts are
surprisingly low, given other information, averaging 6.9% in each of 2022 to
2025 following only about 1.0% annual increases in both Retail and Capital
Value.  In contrast, Colliers have much higher forecasts for "Logistics and
Industrial" which may arise from their emphasis on "Logistics", the
distribution systems necessary for online shopping, in which very rapid rises
in value are forecast with returns averaging 10.6% per year from 2021 to 2025,
including a spectacular increase of 31.3% in 2021, when investment yields fell
sharply, in places to under 3.0%.

 

IPF distinguish "Retail" between Standard, Shopping Centre and Retail
Warehouse formats, where forecasts distinctly differ.  While Standard rental
values and capital values are forecast to continue to fall in 2022, they are
expected to stabilise over the three years to 2025.   Shopping Centres are
estimated to return -9.5% in 2021 and are forecast to continue to fall
consistently in both Rental and Capital Value in both 2022 and 2023, before
recovering significantly in 2024 and 2025 to give a Total Return of about 2.0%
in each of the four years to 2025, due to the now high yields.  Retail
Warehouses are by far the best performing sub-sector of the Retail Market as
Rental Value and Capital Value are forecast to recover in 2022 to give a total
return of over 7.0% in each of the years to 2025.

 

The poor investment performance of most "traditional" asset classes, typically
as analysed above, has attracted attention to "niche" or other smaller asset
classes, that have delivered or are expected to deliver higher returns of
which one asset class, "land"; has had both the lowest and the highest
return.  While agricultural land, has given nil returns over the last five
years and is expected to return only a meagre 0.1% over the next five years -
too small to measure really - forestry land has returned 15.3% per year and is
expected to return a further 11.4% per year over the next five years!  In the
residential market London "buy to let" is forecast to return only 5.2% per
year, but North West "buy to let" a 9.0% return per year, and ranks second to
Forestry.  Two other "residential" asset classes rank third and fourth in
return: Student Housing 8.6% and Build to Rent 7.7%.  In general, Savills'
forecast "Beds and Sheds" (distribution warehouses) to perform well above
"traditional" investments.

 

Savills consider Edinburgh as a niche investment class that will continue to
attract attention, noting international investment buyers bought 78.3% by
value of office investments in 2020, an increase from the high level of 73.2%
in 2019.  In spite of the prospect of a second Scottish referendum, a
prospect considered of less concern than other geopolitical risks because of
the UK's traditional long leases and its stable legal system, and because of
higher Edinburgh prime office yields of 4.75% compared with London's West End
of 3.25% and City of 3.75%.  Edinburgh commands a premium in two respects: as
a capital city internationally recognised for its architectural quality,
cultural life and intellectual heritage, coupled with its renowned educational
institutions and consequently highly qualified workforce and, as, outside
London, having the fourth highest GDP per head of the UK's 179 International
Territorial Levels (ITL).  Market results attest to Edinburgh's attraction as
Edinburgh was the only regional office market where 2020 office take up was
higher than in 2019 and where rents have increased consistently, rising to
£35.50/ft(2) for Grade A space and seem likely to continue to do so as
development is tightly limited by space and planning considerations.  In
contrast, comparable yields in Glasgow are 5.25% and in Aberdeen are reported
as 6.75%, a yield almost certain to rise given the continuing contraction in
investment in the oil industry, now further threatened by political
opposition.

 

The retail sector's resilience had been severely tested long before the
restrictions to reduce the spread of Covid-19 were introduced in March 2020.
For several years household income has changed little, retail competition has
increased, especially from discounters, and retail costs, notably labour costs
and rates, have risen rapidly while online competition has been taking an
increasing share of retail sales: a toxic combination that has had a most
damaging effect.  Retail units have been declining starting in 2015 when only
a net 338 units closed in Great Britain, but rising to 5,493 in 2017 and,
after peaking in 2020 at 11,319, is expected in 2022 still to be as many as
9,145, or one unit per 7,000 people - say, a shop closing in a small town.
Since 2017 vacancy rates have risen by 45% to 11.1% of all premises in the
"leisure" sub-sector, (bars, cafes, restaurants, etc.) and by a lesser 30% in
the "retail" sub-sector.  But by far the most insidious of the adverse
factors has been the increase in online sales.  In the UK these had already
risen from 3% of total retail sales in 2006 to 19% in 2019, representing the
world's highest percentage of internet retail sales.   This strong base in
online sales expanded rapidly following the Covid-19 restrictions and reached
a maximum of 37% in June 2021, falling recently to 26%.

 

The forecast property returns to retailing indicate that the retail sector as
a whole is expected to stabilise next year.  Pre-Covid-19 online sales gained
about 1.5 percentage points of the market each year.  However, in most
markets initial high growth rates attenuate.  As online retailing expanded it
captured the easiest share first - the low hanging fruit - and those retailers
remaining are likely to be less susceptible to online marketing or have become
more competitive, some embracing online techniques.  In mirror image some
online retailers moved into "bricks and mortar" to reinforce and to widen
their appeal.  In contrast to continuing expansion, some online sales appear
to be "loss leaders" as return rates on many fashion items and shoes are so
high that repacking and wastage costs may make some sales uneconomic.  The
net effect is that, while I expect online sales to continue to grow, I
estimate growth will fall to say, 1.5 percentage points more of retail sales
per year.  In such a situation if retail sales of, say, £100, 26% of which
are online, increase 4% per year, then after five years, retail sales will
total £121.70 and, if the online sales percentage rises 1.5 percentage points
each year, the online share will be 33.5% or £40.77 of the total £121.70
sales and non-online sales will be £80.93, which is a rise, albeit a small
one, from the current £74.00.  Surely, all is not lost.

 

"Retail" encompasses both traditional goods and goods that include a major
"convenience" service attraction, for which demand has been increasing and
which, by definition, is typically unavailable online.  For instance, in H1
2021 "convenience" service shops comprised nine out of the 10 largest growing
type of retail stores, opening the following net new stores: fast food 333;
convenience stores 332; groceries 208; pizza 129; and takeaway food shops 103
followed by personal services shops - barbers 318; beauty salons 107; and nail
salons 60.  Such demands seem likely to continue to increase with population
growth coupled with an increased frequency of visiting and by extension of the
customers' age groups - older grannies and younger teenagers, all demand
further assisted by increasing disposable income.  Exceptionally, Charity
Shops had the largest closures, 446, but, as such closures were often due to
Covid induced staff shortages, a large number are likely to re-open.
Fashion Shops 349, clothes "women" 411; and clothes "men" 271 were the largest
group of closures followed by various services, replaced online, such as
bookmakers 342; banks 188; and estate agents 166.  Such analysis of the
retail market neglects the important functions the opening of "brick and
mortar" premises provides for online retailers.  Such premises facilitate
online fulfilment and returns, are key in their brand positioning and
promotion, and provide customers with a physical and psychological "contact"
with the brand.

 

The offline retail crisis contains the seeds of its own revival, as it is
resulting in lower rents and lower valuations which will reduce rents and
lower rates.  Such lower costs will allow a wider range of occupiers to trade
profitably.  Separately, the political implications of a failing high street
will result in some assistance to the retail sector by changing planning
restrictions, upgrading town centre infrastructure and effecting
environmental, especially "green", improvements.  Thus, the present offline
decline will not continue inexorably.

 

The ugly industrial duckling has been transformed into a beautiful logistics
swan with excellent genes and long-life expectancy.  The industrial sector,
previously often associated with grimy premises and multi-let conversions is
now focused on huge modern high tech "Logistics" distribution and warehouse
units.  Yields that were typically 7% to 9% now emulate the best West End
offices with investments sold for less at 2.8% at Park Royal, Deptford and at
less than 3% in 13 other locations this year.  Occupier demand is reported as
"buoyant" by Colliers because of "a sustained occupier focus on
future-proofing supply chains".  Patently, any previous apprehension of the
consequences of Brexit on the industrial market has proved unimportant.

 

Similarly, the apprehension of the Brexit effect on the office market has
proved unfounded.  Initially City figures "predicted an exodus", 200,000 in
one case.  Such exaggerated claims have proved to be just that, as the total
number of Brexit jobs lost until August 2021 was estimated by the EY Tracker
to be "almost 7,600", and EY adds "the days of significant swathes of asset
and job relocation appear to have passed".  The City's distaste for Brexit
allowed them to convince themselves that the effect would be much larger than
it is proving to be.  Instead of a torrent it is likely to be a continuous
dribble of loss to the EU capitals, it would appear primarily because of
obstructive political decisions by the EU, unless that loss is outweighed by
an inflow of other international but non-EU business into the City.

 

The long-term effect of office occupation from Covid is likely to be
significant.  Initially, any contraction in space used was caused by the
lockdown measures necessary to contain the rampant spread of the plague.
This changed dramatically early this year as outstanding scientific
achievements allowed the rapid development and deployment of a range of very
effective vaccines.  Unfortunately, the spread of the disease throughout the
community appears inevitable unless and until it reaches a level of natural
attrition or immunity, as has occurred with some other viruses.  More likely
it will persist in specific segregated areas, breaking out occasionally or
when variants emerge that are less controllable and then another epidemic
occurs.  It will become like influenza, a virus recurring in various forms
capable of being attenuated by designed vaccines, but deadly for some,
especially those unvaccinated or not vaccinated sufficiently against the
specific variants.  It will be a disease with which we must live, or not!
In 2021 it is estimated 150,000 will have died from Covid-19.  In 2019 29,516
deaths were attributed to influenza or pneumonia.

 

No doubt the much greater understanding of Covid disease will result in
measures by the public, by health boards, by law, and by employers which will
reduce the spread of this and all such viruses - vaccines obviously - but also
ventilation, filtration of circulating air, early warning systems, distancing,
testing, and strict hygiene disciplines.  In time the "health" effect of the
virus on office attendance will become less significant.  It will become more
like flu which, until now, has not affected working practices or office
attendance and nor will Covid, but with very significant exceptions.  The
perceptions and culture of the population have been modified by better
understanding of virus diseases and by bitter experience and, consequently,
both employees and employers will be anxious to avoid working conditions that
facilitate the spread of such diseases.  These concerns will modify the
environmental conditions in which the employees choose to work and,
consequently, the office conditions required to be provided by employers.

 

The second more significant effect of the awareness of viral infections on
office accommodation lies in the perception and demands of office workers who
have become accustomed to working at home part or full time.  The
significance of the effect will depend on the type of work - routine, capable
of external supervision at one extreme, group collaborative work or managerial
at the other.  Such reticence will be offset by measures likely to be taken
by employers to provide safer more attractive, more socially rewarding
environments and by the need to provide more space for the occupiers.  There
is no clear trend: JP Morgan and Goldman Sachs, for instance, require office
attendance, but Apple employees voted against office working.  The outcome
will vary between those functions where overall cost is no more remotely than
in the office and those functions where the cost of remote working is
higher.  For those functions that can be performed online cheaper there are
potentially huge savings by transferring work to lower cost remote locations
such as India or even the Isles of Scotland.  These economic factors will be
skewed by individuals' choice of hubbub over suburb or rural tranquillity and
other personal preferences.  For some working at home is home at work -
complete with "domestic" overheads.

 

In summary, there will be a reduction in office use, primarily because of
part-time home work, especially for routine and clerical work.  This will be
offset by better, bigger space per person or a move to smaller local or
compact offices, probably technologically interconnected.  The "value"
between up to date "premises" and those not up to date will widen dramatically
and rent rates will rise for the former and fall for the latter.
Unfortunately, the demand for office space is highly inelastic and unused
supply which is not or cannot economically be upgraded will give rise to high
vacancy rates and result in significantly lower values.

 

This time last year forecasts for UK house prices were universally gloomy.
OBR, the most pessimistic, forecast prices to "fall back" 8% in fiscal
2021/2022 and HMT's Average of Forecasts was for a fall of 2.1% in 2021
followed by falls of 0.9%, 3.0% and 3.9% in the three years to 2024.  In
September 2020 Savills revised their 2021 forecast down to 0% growth.  These
forecasts have been wholly confounded as the expected outturn for 2021 is for
one of unprecedented growth.  For the 12 months to end November 2021 Halifax
reports growth of 8.2%; Nationwide 10.0%; and Acadata 4.1% (England and Wales
to October) and 13.2% (Scotland to September).

 

The reports almost always emphasise the same common factors causing the large
rise in prices, but with separate considerations for the apparently anomalous
Acadata's (England and Wales) lower reported price rises.  The common factors
are: low interest rates; shortage of available properties; low unemployment;
and high economic growth, coupled with high savings.  Acadata point to "life
style" changes as buyers looked to move to larger premises, often linked to
the need to work from home, and Nationwide to "ongoing shifts in house
preferences, as a result of the pandemic".

 

The anomalously low rise in England and Wales, recorded by Acadata, has many
causes.  First, Acadata's figures include all sales, not just sales based on
mortgages, which are skewed both by a higher than average percentage of new
houses, and by a higher percentage of first-time buyers where prices have
probably risen more than average.  Additionally, they are skewed
geographically away from London and the South East where prices have risen
relatively slowly and they are not based on actual sales but are based on
"model" houses, seasonally adjusted raising estimated prices.  Also, the
mortgage lenders portfolio includes a much higher proportion than average than
Acadata of semi-detached houses whose prices have risen most.  In contrast
Acadata's survey includes a much larger proportion of expensive but slow price
rising London houses, many of which are purchased with cash or through
specialist mortgages.  But, in accordance with the mortgage lenders, Acadata
report an above average rise in non-central regions such as: Wales 10.8%;
North West 6.9%; and West Midlands 5.7% and consider these regions benefited
from both a higher percentage of semi-detached homes that offer more space and
garden space than terraces and flats and from falling in the extended
temporary reduction in SDLT tax "holiday" category from £500,000 to £250,000
which ended in late September.  Lastly, Acadata excludes Scotland where it
reports price rises of 13.2%, above the average rise of the UK wide survey of
the mortgage lenders.  A general finding is that the increase in Covid led
demand for property outside London and the East and South East England has
been reinforced by "value".  Acadata give as a classic sample the sale of a
250m(2) stone-built, detached house overlooking the River Clyde for £850,000,
the price of a three-bedroom 120m(2) Victorian terrace in Ealing!

 

Scotland has enjoyed an unprecedented boom with house prices rising 13.2%, a
higher rate of increase than in any of the other United Kingdom regions, to
£212,832, a new record.  Apart from a maverick change of -0.5% in the Outer
Isles, the lowest price increases were 7.5% in North Lanarkshire and around 9%
in West Dunbartonshire and Stirling.  Even in Aberdeen City, which has
recently suffered price falls, prices rose 9.4%.  Price rises for larger
premises have been proportionately higher due to increased demand from those
relocating and the supply of such houses, primarily existing substantially
built houses, has been low.

 

In general, city centre properties, especially flats, have had modest
increases.  However, a recovery in demand for a specialist sector of such
properties may be taking place as exemplified by the reported sale by Acadata
of a "flat" in Edinburgh's Heriot Row for £1.3m.  It may be that, with the
Covid threat reduced, relocators from London still prefer spacious elegant
central period flats to "country living", which for some relocators suffering
"rural buyers" remorse, the new pandemic property trend is proving an
evanescent ideal rather than idyll.  Certainly, the ESPC's House Price
Report, covering the south east of Scotland, confirm an 8% rise in value of
Edinburgh's New Town/West End flats.  This rise is distinguished from the
overall City of Edinburgh price rise of only 0.2% in the year to November.
This anomaly was caused because, excluding the New Town's 8.2% and the
prestigious Morningside/Merchiston flats 10.9% rises, all other flatted
property only rose 1.2% and six inlying Edinburgh suburbs suffered falls of
between 10.2% and 20.6%.  However, Suburban areas, outside the City, mostly
had larger rises: East Lothian 8.7%; West Fife and Kinross 6.2%; and West
Lothian 5.2%.  Thus, Edinburgh's rises were concentrated in the highest
quality central properties and its suburban peripheries.

 

House price forecasts are less varied than the extreme of the forecasts made
in 2020, notably the OBR's - 8%.  This year the OBR forecasts steady
increases of 2.2%, 1.0%, 2.2%, 3.1% and 3.6% over the next five fiscal years
(i.e. to 31 March) or 21.5% overall.  The HMT's average of forecasts is also
cautious forecasting rises of 1.3%, 1.1%, 2.4% and 3.2% over the next four
calendar years.  Savills provide the most comprehensive and the most frequent
forecasts, and a comparison of recent forecasts demonstrates the perceived
volatility of the market.  In June 2020 UK mainstream house prices were
forecast to decline 7.5% in 2020 and in the five years to 2024 to rise by
15.1%, but in September they revised the 2020 mainstream forecast to a rise of
4.0%, an 11.5 percentage point swing, and correspondingly improved their
forecast for the five-year period to 2024 to 20.4%.

 

Savills Winter 2021 UK forecasts this year, lower than OBR's, are for small
increases of 3.5%, 3.0%, 2.5%, 2.0% and 1.5% or 13.1% over the five years.
This UK average includes a forecast of the continuing lead in price rise of
the "north" with the North West (the highest), and of Yorkshire/Humber Wales
all above 18.6% over five years.  The 15.9% forecast for Scotland is lower
than for the "North" and the lowest price rises of 5.6% are forecast for
London.  Many of these forecasts fall below any reasonable expectation of
inflation, which, if over the next five years averages only 2.5%, will be
13.1%, exactly the forecast average house price increase over the next five
years.  Such low levels of real price increases are forecast because of an
expected rise in interest costs which will increase the overall mortgage cost
(capital and interest) to an "average" household from about the current 7% of
income to about 12% over the next five years.  The corresponding stress
testing hurdle for mortgage approval purposes corresponding to about 27% of
income, presenting a considerable barrier to mortgage availability and
servicing.

 

Prime UK Residential forecasts are for increases well above inflation,
totalling 19.3% over the next five years, including 2026, and are higher for
Scotland at 22.8%.  Savills's forecast is partly based on the large rise of
8.5% in Scotland's prime properties in 2021, a rise dominated by Edinburgh
(251 transactions above £1m), but supported by Glasgow (34 transactions above
£1m) and spreading also to Perthshire and Elie, Strathtay and Comrie as well
as Gleneagles and some such sales in Glasgow's "countryside" at Bridge of
Allan, Dunblane and Strathblane.

 

The Halifax index previously peaked at the £199,000 recorded in August
2007.  The equivalent RPI inflation-adjusted price in October 2021 would have
been 50.5% higher or £299,500, and the current Halifax price in October 2021
is £272,992.  In spite of this year's rapid rises, the current price is
still 9.0% lower in real terms.  If house prices rise at 3.5% per annum and
inflation is 2.0% per annum, then just less than eight more years will elapse
before the August 2007 peak is regained in real terms.

 

House prices are difficult to forecast and historically and, notably last
year, errors have been large, especially around the timing of reversals or
unusual events such as we have just experienced.  While, without hesitation,
I repeat my previous forecasts, "… the key determinant of the long-term
housing market will be a shortage in supply, resulting in higher prices", for
the year I add a caveat: provided inflationary led interest rate increases do
not reduce demand: supply and demand may be much more finely balanced than in
previous years.

 

 

Future Progress

 

The Group's strategy continues to be the development of its sites in the
Edinburgh housing market areas and the geographical extension north and east
that is occurring, while maximising the value of its investment portfolio.

 

The strategy is unchanged from last year, but its implementation has been
delayed largely by the direct and indirect effect of the Covid-19 virus
pandemic.  In March 2020 work was halted on our development at Brunstane,
just before the tarmac and other finishing items were undertaken and work was
not restarted until mid-summer.  When marketing eventually took place in July
2020, all the five properties went "under offer" within two months at prices
above the Home Report and all "offers" were higher than our budget prices.
Two Brunstane sales were completed in quarters 3 and 4 of 2020, while the
other three were delayed by sales of the purchasers' existing properties and
only completed in quarter 1 of 2021.  This delayed the next phase at
Brunstane, due both to site conditions and to funding restrictions.

 

Covid has also been largely responsible for a further delay in the sale of St
Margaret's House.  The initial delay resulted from difficulties the developer
experienced in gaining the full planning consent necessary coupled with a
change in the prospective occupiers' accommodation policy.  Once the policy
became clear the option to the developer was extended, unfortunately, just
before the Covid crisis resulted in the restrictions which caused a disruption
to demand for student accommodation and great uncertainty and instability in
the student market.  Such conditions have persisted until recently and,
paradoxically, the market now appears stronger than before the first 2020
lockdown.  Thus, we plan to re-market St Margaret's House into this now
buoyant market in the New Year.

 

The sale of Ardpatrick for £2.7m was agreed in December 2020 and was
completed on 27 April 2021, a delay caused by the logistical problem of
location, the weather and Covid, which prevented normal transport and removal
arrangements.  This sale has permitted the release of working capital to fund
our developments which have been greatly hindered by both the cost and
availability of credit.  For example, a 60% loan to cost at Brunstane
together with ancillary expenses cost £160,000, over £31,000 per house and
over 10% per annum.  We will now fund developments using this available
capital.  Moreover, if funding is deemed advantageous, then for those low
base cost properties acquired without planning, we will be able to provide
equity sufficient to meet the 40% cost to value required by the lenders.

 

Since the sale of Brunstane and Ardpatrick we have been delayed in bringing
forward new developments by unusually severe delays in the planning process,
often caused by the inefficiencies of the current Covid working practices.
In addition to these delays, personnel changes have resulted in additional
requirements, reviews and changing interpretations.  We continue to strive to
circumvent these constraints.

 

The working capital now available has also allowed us to instruct the updating
of our existing consents at Belford Road with improvements within the existing
consent, so providing a modern 20 high amenity flat development in keeping
with the high quality and varied style of the location.

 

Our developments require a stable and liquid housing market, but we do not
depend on any increase in prices for the successful development of most of our
sites, as most of these sites were purchased unconditionally for prices not
far above their existing use value.  A major component of the Group's
enhancement of value lies in securing planning permission, and to the extent
of that permission, and it is relatively independent of changes in house
values.  For development or trading properties, unlike investment properties,
no change is made to the Group's balance sheet even when improved development
values have been obtained.  Naturally, however, the balance sheet will
reflect such enhanced value as the properties are sold or developed.

 

The strategy of the Group continues to be conservative, but responsive to
market conditions, so continuing a philosophy that underlay the change from
primarily investment property to include our now extensive development
programme.  This change in strategy allowed us to escape the devastation
caused by the 2008 Great Recession from which most sections of the property
sector either never recovered or had to be recapitalised and to avoid the
extensive loss in value associated with the Covid-19 pandemic and the changes
continuing to affect adversely most retail and many office investments.

 

On behalf of the members of the Group I pay tribute to all our employees who
have worked for a second year unstintingly and well under the difficult
conditions persisting throughout the long and continuing Covid-19 pandemic.

 

The closing mid-market share price on 21 December 2021 was 112p, a discount to
the NAV of 208.4p as at 30 June 2021.  The Board does not recommend a final
dividend, but intends to restore dividends when profitability and
consideration for other opportunities and obligations permit.

 

 

Conclusion

 

The recovery from the effects of the Covid virus is occurring more quickly and
with less economic scarring than appeared likely.  The rapidity of the
recovery is causing short term supply cost and inflation concerns, which are
unlikely to bear on the economy in the long-term.  Inflation, while trending
higher, may be tacitly accepted, as the selection of the precise target rate
between certain limits is arbitrary.  Higher inflation rates facilitate the
redeployment of both labour and capital to more productive activity and reduce
the real capital burden of debt.  A higher tolerance of inflation permits
lower interest rates, reducing the interest cost of Government debt.

 

The main aim of economic management should be to increase the productivity and
hence living standards, and tolerance of higher inflation would remove an
impediment to more rapid growth.  Recent improvements to productivity have
been very limited in spite of the availability of electronic and digital
technology.  The realisation of this potential may require an
all-encompassing network together with more widespread use.  The significance
of a network, or a quantum change in working practice is that an output
greater than the sum of the parts is achievable.  For example, while the
value of each of the first few rail connections was significant to each of the
connected parties, the sum of the value to them of the interconnected network
was much greater.  Similarly, while self-evidently containerisation is a more
productive method of moving goods, its potential value was only achieved when
several incompatible systems were standardised.  When such quantum changes
are achieved their full potential is usually reached over a long period as
experience with steam, electricity, internal combustion engines,
microbiological and advanced genetic engineering demonstrate:  Kaizen, the
Japanese doctrine of constant reappraisal and analysis is consciously embraced
in Japan.

 

In the UK there is a bias against continuous reappraisal including rational
analysis of investment and entrenched social structures exist, restricting the
implementation of change and of investment inimical to their groups.  That
neglect of an appropriate rational analysis of investment is a major cause of
poor productivity growth.  A clear example is the unqualified acceptance of
certain green investment policies by groups who support such policies almost
as if an article of faith.

 

A consequence of such faith is the absence of formal assessment of the
societal benefit of investing immense capital in unproved green ventures, a
criticism especially true of trophy investment.   There appears to be no
definitive analysis of which projects bring the highest returns now, which
projects may be delayed as they are likely to be replaced by better technology
later and why or whether the UK's economic welfare should be sacrificed to
attempt to attain aims that are wholly frustrated by actions being undertaken
elsewhere.  Importantly, the value of green investment is not even considered
in the cohort of whether a greater good would be served by such investment in
other enterprises.  For example, whether more lives would be saved or
enhanced by investing in attainable simple measures that will produce
immediate but tangible enduring results such as "clean" water, working
technologies, wider education, and the reduction of the misappropriation of
aid and of political corruption.  The most honourable intentions of green
philanthropists require careful analysis of the achievable good, at what cost
to other good that is foregone, and whether or not that good they seek would
be achievable later more cheaply, so avoiding the current opportunity cost.

 

Scottish Independence also evidences the triumph of faith over analysis, as
its achievement would cause a distinct reduction in economic welfare.
Understandably, while this may be recognised by a minority as an acceptable or
desirable trade-off for entirely proper and justifiable political objectives,
such recognition may be tainted by a self-deception that any such disadvantage
will fall "elsewhere" or "go away".  Belief supplants reason.

 

The absence of objective analyses originates from our existing culture and its
accepted practices which unquestionably permits orthodoxies to persist: it is
not "Kaizen".  Examples of such orthodoxies are manifest in many cultures and
over many centuries and are features of many religious doctrines, the medieval
guild system, caste categorisation and, germanely, the current highly
cartelised professions.  They provide, what the prize winning economist,
Mancur Olson terms, "distribution coalitions" - collusive, collaborative and
lobbying networks to gain and maintain economic advantage to those few
controlling them, but to the disadvantage of all others.  All such structures
abhor change and rigorous analysis, as self-preservation and advancement are
their objective.  A great gift to Scotland was the Enlightenment, the gift of
reason, a gift foresworn in a society that prefers preferences and the
preferred to objectivity.  The corollary, unfortunately, is lower
productivity and poorer living standards.

 

 

I D Lowe

Chairman

22 December 2021

 

 

Strategic report for the year ended 30 June 2021

 

Operating and Financial Review

 

Principal Activities

 

The principal activities of the Group are the holding of property for both
investment and development purposes.

 

Results and proposed dividends

 

The Group profit for the year after taxation amounted to £460,000 (2020
profit: £95,000).  The directors do not propose a dividend in respect of the
current financial year (2020: Nil).  The Group net asset value amounts to
£24,555,000 (2020: £24,095,000).

 

Business review

 

A full review of the Group's business results for the year and future
prospects is included in the Chairman's Statement within the Review of
Activities on pages 2 to 4 and Future Progress on pages 17 and 18.  In
accordance with legislation the accounts have been prepared in accordance with
International Accounting Standards.  As permitted by Section 408 of the
Companies Act 2006, the profit and loss account of the parent Company is not
presented as part of these financial statements.

 

Key performance indicators

 

The key performance indicators for the Group are property valuations, planning
progress and the stability of house prices, all of which are discussed in the
Chairman's Statement.  The intention in the coming year is to realise cash
from the sale of assets to provide funding for its development programme,
repay certain existing debt and provide general working capital.

 

Principal risks and uncertainties

 

There are a number of potential risks and uncertainties, which have been
identified within the business and which could have a material impact on the
Group's long-term performance.

 

 

Development risk

Developments are undertaken where appropriate value is judged to be obtainable
after consideration of economic prospects and market assessments based on both
internal analysis and external professional advice.  Committed developments
are monitored regularly.

 

Planning risk

Properties without appropriate planning consent are purchased only after
detailed consideration of the probabilities of obtaining planning within an
appropriate timescale.  The risk that planning consent is not obtained is
mitigated by ensuring purchases are made at near to existing use value.  In
such purchases the Group adopts a portfolio approach seeking an overall return
within which it accepts a small minority will be less successful.

 

Property values

The Group's principal investment properties have either development prospects
or a development angle which should insulate them against the full effect of
any general investment downgrade of commercial property.

 

Availability of funding

The Group has cash resources but it may also use bank funding to undertake its
developments and for future property acquisitions.  Bank facilities will be
negotiated and tailored to each project in terms of quantum and timing.  Any
intended borrowings for future projects will be at conservative levels of
gearing.

 

Funding is readily available, provided the banks' current strict criteria are
met and the relatively high rates of interest are accepted.

 

The low acquisition cost of some of the Group's sites reduces the overall
development cost and hence the level of funding available under current
formulaic lending processes based on loan to cost.

 

Covid-19

While the timing of certain activities, principally the completion and sale of
new homes on one development site and the sale of an investment property, have
been affected by Covid-19, the Group expects that Covid-19 will have less of
an ongoing impact due to the availability of vaccines and that demand will be
maintained from tenants for small commercial properties and for quality
housing sales.

 

Tenant relationships

All property companies have exposure to the covenant of their tenants as
rentals drive capital values as well as providing income.  The Group seeks to
minimise exposure to any single sector or tenant across the portfolio and
continually monitors payment performance.

 

Environmental policy

The Group recognises the importance of its environmental responsibilities,
monitors its impact on the environment and designs and implements policies to
reduce any damage that might be caused by Group activities.

 

Brexit

The Group does not expect Brexit to impact significantly on its operations or
assets as it and its customers are all based in the UK.

 

Corporate Governance

 

The directors recognise the need for sound corporate governance.  As a
company whose shares are traded on AIM, the Board adopted the Quoted Companies
Alliance's Corporate Governance Code ("the QCA Code").  Its corporate
governance statement including any disclosures required pursuant to the QCA
Code is published on the Company's website www.caledoniantrust.com
(http://www.caledoniantrust.com) .

 

Section 172 Compliance

 

Section 172 of the Companies Act 2006 imposes a general duty on every Director
to act in a way they consider, in good faith, would be the most likely to
promote the success of the Group and Company for the benefits of its
shareholders as a whole.  In doing so, Directors should have regard to
several matters including:

 

a)   The likely consequences of any decision in the long term;

b)   The interests of the Company's employees;

c)   The need to foster the Group and Company's business relationships with
suppliers, customers and others;

d)   The impact of the Group and Company's operations on the community and
environment;

e)   The desirability of the Group and Company maintaining a reputation for
high standards of business conduct; and

f)   The need to act fairly as between members of the Company.

 

The Board factors stakeholder interest into its long-term policies and
objectives.  The business of the Group and Company requires engagement with
shareholders, customers and tenants, local planning authorities, employees and
suppliers.

 

When considering stakeholder interest, the Board is responsible for ensuring
that the long-term policies and objectives implemented allow the Group and
Company to provide tenants with properties which meet their needs and to
produce consistently high quality homes on its developments.

 

The Executive Directors are responsible for the operations of the business
while the Non-Executive Director is independent and well positioned to provide
objective judgement and scrutiny over decisions made by the Board.

 

Information about stakeholders and how the Board has discharged its duties are
included on pages 23 and 24.

 

 

M J Baynham

Secretary

22 December 2021

 

 

Corporate Governance

QCA Code Compliance and Section 172 Statement

for the year ended 30 June 2021

 

The corporate governance report is intended to provide shareholders with a
clear understanding of the Group's corporate governance arrangements,
including analysing compliance with the Quoted Companies Alliance 2018
Corporate Governance Code ("the QCA Code") and where the Group does not comply
with the QCA Code, an explanation of why it does not.

 

The QCA Code provides a robust framework which enables the Group to maintain
high standards of corporate governance appropriate for the size of the
Group.  The QCA Code sets out ten principles and each principle and the
Group's actions in relation related thereto are set out below.  Douglas Lowe,
in his capacity as Executive Chairman, is responsible for ensuring the Group
has the necessary corporate governance framework in place and that, except for
Principle Five, the ten principles are followed across the Group.

 

Principle One

Business Model and Strategy

 

The Group's business model is that of a property investment and development
company, which is focused on the Scottish property market.  Further details
regarding application of the Group's business model, its activities and its
properties can be found in the 'Review of Activities' section of the
Chairman's Statement on pages 2 to 4 of the Group's annual report and accounts
for the year ended 30 June 2021.  The 'Future Progress' section of the
Chairman's Statement on pages 17 and 18 of the Group's annual report and
accounts for the year ended 30 June 2021 provides a summary of the Group's
strategy.  The key challenges in the execution of the Group's business model
and strategy and how the Group seeks to address these can be found in the
'Principal risks and uncertainties' section on pages 20 and 21 of the Group's
annual report and accounts for the year ended 30 June 2021.

 

Principle Two

Section 172 Statement and Understanding Shareholder Needs and Expectations

 

As well as compliance with the QCA Code, Directors are required in accordance
with Section 172 of the Companies Act 2006 to include a statement of how they
have taken into account the shareholders in promoting the success of the
Company.  This section and information on pages 21 and 22 set out how the
Board has discharged its duties.

 

The Board is committed to maintaining good communications and having
constructive dialogue with its shareholders in order to understand the needs
and expectations of the Company's Shareholders.  It is important to note that
the executive directors are the two largest shareholders, holding over 85% of
the Company's share capital.

 

Investors have access to current information on the Company through its
website, www.caledoniantrust.com (http://www.caledoniantrust.com) , through
its regulatory announcements, its annual and interim accounts and through the
directors who are available to answer investor related enquiries.

 

Shareholders may contact the Company in writing via email
(webmail@caledoniantrust.com), by telephone on 0131 220 0416 or in writing to
the Company's Head Office, 61A North Castle Street, Edinburgh EH2 3LJ.  Any
information provided in response to any such enquiries will be information
that is freely available in the public domain.

 

All shareholders are encouraged to attend the Company Annual General Meeting
where the Directors listen to the views of the shareholders formally during
the AGM and informally following the AGM.    In the event of a voting
decision not being in line with its expectations the Board would seek to
engage with those shareholders to understand and address any concerns as
appropriate.  The arrangements for the 2022 AGM may again be affected by
Covid-19 precautions and the Directors will encourage shareholders to continue
their engagement with the Directors through any of the channels already
mentioned.

 

The Board seeks to encourage discussion with its shareholders to whom they
make themselves available.  The Board dedicate sufficient time to ensure that
communication is effective with existing and potential shareholders and other
key stakeholders.  The Board believes the Company's mode of engaging with
shareholders is adequate and effective.

 

Principle Three

Wider Stakeholder and Social Responsibilities

 

The Group follows Scottish Government guidance on the Covid-19 pandemic and
implemented socially distanced working within the Group's administrative
office.  Where possible, staff also worked from home.

 

On the basis of the Directors' knowledge and long experience of the operations
of the Group the Board recognises that the long-term success of the Group is
reliant upon the efforts of the employees of the Group, its professional
advisors and its contractors.  The directors engage directly on a regular
basis with all these stakeholders which ensures that there is close Board
oversight and contact with the Group's key resources and relationships.

 

Employees: The Group has a small number of full time and seasonal employees.
The Executive Directors are in regular contact with the Group's employees,
which provides an opportunity for employees to discuss matters they wish to
raise.  The administrative staff are in contact with the Directors on a daily
basis and employees working remotely are in contact with the Chairman
regularly by phone.  No pay review has taken place due to the uncertainties
caused by the Covid-19 pandemic.

 

Customers: The Group aims to deliver quality homes and other developments.
It invests in strong design features and should any snagging work be required,
it ensures rectification is completed quickly.  The Group's interaction with
its tenants is constructive and cordial and any contentious points are quickly
resolved.  The Group recognises the important role of all relevant
Regulations and seeks to conform with both the spirit and the requirement of
the regulations.

 

Suppliers and professional advisors: The Group engages contractors after
appropriate formal and informal vetting, and for larger projects after formal
tendering.  The Executive Directors meet with contractors regularly
throughout large projects to review their recommendations and to review
progress. Advisors are selected on the basis of suitability and experience for
the advice required.  For each firm engaged an agreed nominated partner or
director is responsible for the Group's instructions and advice who reports to
the executive directors as required.

 

Environment: The Board recognises the growing awareness and requirements in
respect of environmental issues and is working with its professional advisors
to promote an environmentally friendly approach to the design of its new
developments.

 

The Group takes into account feedback received from its key stakeholders and
considers making amendments to working arrangements and operational plans
where appropriate and where such amendments are consistent with the Group's
strategy and objectives. However, no material changes to the Group's working
processes were required over the year to 30 June 2021, or more recently, as a
result of stakeholder feedback received by the Company.

 

Principle Four

Risk Management

 

In addition to its other roles and responsibilities, the Audit and Compliance
Committee is responsible to the Board as a key control for ensuring that
procedures are in place, and are being effectively implemented to identify,
assess and manage the significant risks faced by the Group in respect of the
execution and delivery of the Group's strategy.  The Board and executive
management team also consider and monitor risk on an ongoing basis.

 

The principal risks and uncertainties which have been identified within the
business and which could have a material impact on the Group's long-term
performance can be found in the 'Principal risks and uncertainties' section on
pages 20 and 21 of the Company's annual report and accounts for the year ended
30 June 2021.

 

The risks which the Group faces are subject to change and the measures to
counter or to mitigate them are reviewed as required.  The Board considers
that an internal audit function is not necessary, due to the close day to day
control exercised by the executive directors.

 

Principle Five

Maintaining a Well Functioning Board of Directors

 

As at 22 December 2021 the Board comprised the Chairman and Chief Executive
Officer Douglas Lowe, one executive director, Michael Baynham and one
non-executive director, Roderick Pearson.  Of the Board's members, Mr Pearson
is considered to be independent.  A further commentary on this topic is
provided below.

 

Mr Lowe has been both Chairman and Chief Executive Officer of the Company for
many years.  He is the largest shareholder holding over 79% of the issued
share capital and has since the banking crisis of 2007 provided significant
loans to the Group to fund its working capital requirements.  The Board
believes that Mr Lowe's shareholding aligns his interests with the other
members' interests and there is ample evidence to support this.

 

The Board consider that in these circumstances it is in the best interests of
the Group to maintain Mr Lowe's positions as both Chairman and Chief Executive
Officer contrary to recommended best practice in the QCA Code.  The Board has
been assured that, subject to all debt being repaid, a return to normal
remuneration levels and normal investment and trading conditions, further
Board appointments and changes will be made.  Separately, the Board has
received an undertaking from Mr Lowe that if he ceases to work full-time,
appropriate Board changes will be made.

 

The Company presently does not comply with the QCA Code recommendation to have
at least two non-executive directors who are identified as independent.  For
those reasons the Board believes that, given the present size of the Company
and the nature of its business and operations it is well served by the current
composition of the Board which functions effectively and is well balanced.
This position is considered regularly and where appropriate and necessary
further appointments will be made.

 

Mr Pearson has been a non-executive director since March 2007 and the rest of
the Board consider him to continue to be independent.  Mr Pearson brings the
weight of his professional qualification and experience to the valuations of
investment properties but is sufficiently removed from the day to day
operations of the Company to retain a critical and independent view.  As such
he represents the best interests of all the shareholders.

 

Mr Lowe and Mr Baynham work full time and Mr Pearson currently works on
average two days per month.  Biographical details of the current directors
are set out below.  Executive and non-executive directors are not presently
subject to re-election.

 

The Board met formally on ten occasions during the year to 30 June 2021.  Mr
Lowe did not attend one meeting concerned with a topic in which he had an
interest but all directors attended the other nine meetings.  It has
established an Audit and Compliance Committee and a Remuneration Committee,
details of which are set out further below.  The Audit and Compliance
Committee met on three occasions during the year ended 30 June 2021.  As the
Board resolved not to amend the remuneration of the Directors, the
Remuneration Committee was not required to meet during the year ended 30 June
2021.

 

As appointments to the Board are made by the Board as a whole it is not
considered necessary to create a Nominations Committee.

 

Principle Six

Appropriate Skills and Experience of the Directors

 

The Board currently consists of three directors.  Mr Baynham is also the
Group Company Secretary.  The Board recognises that it currently has a
limited diversity and increasing diversity will be considered as and when the
Board concludes that replacement or additional directors are required.

 

The Board is satisfied that with the Directors, it has an effective and
appropriate balance of skills and experience to deliver the strategy of Group
for the benefit of the shareholders over the medium to long-term.  All
directors are able to take independent professional advice in the furtherance
of their duties.

 

During the year ended 30 June 2021, neither the board nor any committee has
sought external advice on a significant matter and no external advisers to the
board or any of its committees have been engaged.

 

I Douglas Lowe

Chairman and Chief Executive Officer

Mr Lowe is a graduate of Clare College Cambridge (MA Hons in Natural Science
and Diploma in Agriculture) and Harvard Graduate School of Business
Administration (MBA and Certificate in Advanced Agricultural Economics).
Until 1977 he was Chief Executive of his family business, David Lowe and Sons
of Musselburgh, property owners, farmers and market growers established in
1860, which farmed intensively 2,000 acres and employed over 200 people.

 

In 1978 and 1979 Mr Lowe was Deputy Managing Director of Bruntons
(Musselburgh), a listed company which manufactured mainly wire and wire rope
and employed approximately 1,000 people.  He was a significant shareholder
and, from 1986 until shortly after joining the Company, Executive Deputy
Chairman of Randsworth Trust PLC, a property company with a dealing facility
on the Unlisted Securities Market.  The market capitalisation of Randsworth
Trust PLC increased from £886,000 to over £250 million between April 1986
and sale of the company in 1989.

 

Mr Lowe purchased shares in Caledonian Trust PLC in August 1987, at which time
he became Chief Executive.  Mr Lowe attends two broadly constituted private
political and economics discussion groups throughout the year.  He maintains
close contact with all of the Group's professional advisers in order to
discuss and identify any new laws, regulations or standards which may affect
the Group.  He studies a wide range of relevant economic, political and
technical publications and undertakes extensive research in preparation of the
Chairman's Statements, which accompany the Annual and Interim Accounts.  Mr
Lowe's experience in many senior executive positions in many organisations
ensures that he has the necessary ability to develop and implement the Group's
strategy.

 

Michael J Baynham

Executive Director and Company Secretary

Mr Baynham graduated in law (LLB (Hons)) from Aberdeen University in 1978.
Prior to joining the Company in 1989, he worked as a solicitor in private
practice specialising in commercial property and corporate law.  He was a
founding partner of Orr MacQueen WS in 1981 and from 1987 to 1989 was an
associate with Dundas & Wilson CS.

 

Mr Baynham maintains his Practising Certificate with the Law Society of
Scotland and attends professional development seminars and other relevant
seminars on a regular basis throughout the year.  He maintains close contact
with all of the Group's professional advisers in order to understand and apply
any new laws, regulations or standards relevant to the business.

 

Mr Baynham's experience of corporate law, commercial property law, commercial
property finance, investment and development ensures that he has the necessary
ability to implement the Group's strategy.

 

Roderick J Pearson

Non-Executive Director

Mr Pearson is a graduate of Queens' College Cambridge (MA Modern Languages and
Land Economy) and is a Fellow of the Royal Institution of Chartered
Surveyors.  He has held senior positions in Ryden

and Colliers International, practising in Edinburgh, Aberdeen and Glasgow, and
now has his own practice, RJ Pearson Property Consultants.

 

Mr Pearson's experience of property as a surveyor in private practice together
with his experience in senior management positions ensures that he has the
ability to support the executive directors and also to challenge strategy, and
decision making and to scrutinise performance.

 

All three members of the Board bring relevant sector experience through their
long and varied careers throughout the property, financial, legal and
consulting sectors.  The Board believes that its members possess the relevant
qualifications and skills necessary to effectively oversee and execute the
Group's strategy.

 

Principle Seven

Evaluation of Board Performance

 

The directors consider that the size of the Company does not justify the use
of third parties to evaluate the performance of the Board on an annual
basis.  The Company does not currently have a formal appraisal process for
Directors but the Chairman assesses the effectiveness of the Board as a whole
and the individual directors to ensure that their contribution is relevant and
effective.  This process is performed over the course of the year.  He also
assesses the effectiveness of the Audit Committee and the Remuneration
Committee.  During the year ended 30 June 2021, the Chairman's assessment did
not find any shortcoming in Board or committee effectiveness and did not lead
to any material recommendations for any changes.

 

The Chairman is the majority shareholder and the above arrangements are
acceptable to him.  The Board has not received any communication from
independent shareholders raising an issue on Board effectiveness.  The Board
will continue to assess this position on at least an annual basis, and if and
when it is deemed appropriate it will establish more prescribed evaluation
processes.

 

The Directors have given consideration to succession planning and have in
place a strategy to address succession as and when it becomes necessary.  The
Board believes the current board and current committee structure and
membership is appropriate, but will consider whether any board and other
senior management appointments are required on at least an annual basis and
will consider the feedback from the Chairman's assessments, as described
above, in this process.

 

Principle Eight

Corporate Culture

 

The Board acknowledges that their decisions on strategy and risk determine the
corporate culture of the Group and its performance.  High standards of
ethical, moral and social behaviour is deemed important in achieving the
Group's corporate objectives and strategy and such standards are actively
promoted.

The Group only has a small number of employees who work closely with the
Executive directors.  Accordingly, the Board is always well placed to assess
its culture which respects all individuals, permits open dialogue and
facilitates the best interest of all of the Group's stakeholders.  The Board
are prepared to take appropriate action against unethical behaviour, violation
of company policies or misconduct.

 

The Company has adopted a policy for directors' and employees' dealings in the
Company's shares which is appropriate for a company whose securities are
traded on AIM, and is in accordance with rule 21 of the AIM Rules and the
Market Abuse Regulation of the European Union.

 

Principle Nine

Maintenance of Governance Structures and Processes

 

Board Roles and Responsibilities

 

Ultimate authority for all aspects of the Group's activities rests with the
Board, with the respective responsibilities of the Directors delegated by the
Board.  Given the size and nature of the Group's business both of the
executive directors engage directly with all key stakeholders on a regular
basis.

 

As noted in the disclosure above in respect of Principle Five, Mr Lowe is both
Chairman and Chief Executive Officer of the Company.  In his role as
Chairman, Mr Lowe has overall responsibility for corporate governance matters
in the Company, leadership of the board and ensuring its effectiveness on all
aspects of its role. In his role as Chief Executive Officer Mr Lowe leads the
Group's staff and is responsible for implementing those actions required to
deliver on the agreed strategy.

 

Matters reserved specific to the Board include formulating, reviewing and
approving the Group's strategy, budget, major items of capital expenditure,
acquisitions and disposals, and reporting to shareholders and approving the
Annual and Interim Statements.  The Board is also responsible for assessing
the risks facing the Group and where possible developing a strategy to
mitigate such risk.

 

The Board complies with the Companies Act 2006 and all other relevant rules
and regulations including their duty to act within their powers; to promote
the success of the Group; to exercise independent judgement; to exercise
reasonable care, skill and diligence; to avoid conflicts of interest; not to
accept benefits from third parties and to declare any interest in any proposed
transaction or arrangement.

 

At present, the Board is satisfied with the Group's corporate governance,
given the Group's size and the nature of its operations, and there are no
specific plans for changes to the Company's corporate governance arrangements
in the shorter term.  As the Group expands and when its programme of
developments increase, future Board appointments and Board changes will be
considered.

 

Audit Committee

During the period under review the Audit Committee was chaired by Mr
Pearson.  It met to review the Interim Report, the Annual Report, to consider
the suitability of and to monitor the internal control processes and to review
the valuations of its investment and stock properties.  The Audit Committee
reviewed the findings of the external auditor and reviews accounting policies
and material accounting judgements.

 

The independence and effectiveness of the external auditor is reviewed
annually and the Audit Committee meets at least once per financial year with
the auditor to discuss their independence and objectivity, the Annual Report,
any audit issues arising, internal control processes, auditor appointment and
fee levels and other appropriate matters.

 

The Audit Committee have reported that they are satisfied that the internal
control processes are robust.  The accounting policies meet regulatory
requirements and any material judgements are stated in Note 3 of the
consolidated accounts for the year ended 30 June 2021.  The Audit Committee
is satisfied that the external auditor is independent and effective.

 

The Audit Committee terms of reference can be found
here http://www.caledoniantrust.com/CR11-AUDIT-COMMITTEE-M0918.pdf
(http://www.caledoniantrust.com/CR11-AUDIT-COMMITTEE-M0918.pdf) .

 

Remuneration Committee

As the Board resolved not to amend the remuneration of the Directors the
Remuneration Committee was not required to meet during the year and as such
there was no report from the Remuneration Committee in respect of the year
ended 30 June 2021.

 

The Remuneration Committee terms of reference can be found here
www.caledoniantrust.com/CR11-REMUNERATION-COMMITTEE-M0918.pdf
(http://www.caledoniantrust.com/CR11-REMUNERATION-COMMITTEE-M0918.pdf) .

 

Nomination Committee

The Board have agreed that appointments to the Board will be made by the Board
as a whole and have not created a Nomination Committee.

 

At present, the Board is satisfied with the Company's corporate governance,
given the Company's size and the nature of its operations, and as such there
are no specific plans for changes to the Company's corporate governance
arrangements in the shorter term.

 

As the Group expands and when its programmes of developments increase, future
Board appointments and Board changes to reflect such changes will be
considered, as appropriate.

 

Principle Ten

Shareholder Communication

 

The work of the Company's Audit Committee and Remuneration Committee during
the year is described above.

 

As the Board resolved not to amend the remuneration of the Directors the
Remuneration Committee was not required to meet during the year, so no report
from this committee is available.

 

Shareholders have access to current information on the Company through its
website, http://www.caledoniantrust.com (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
(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
(http://www.caledoniantrust.com/AGM_Notices.html) .

 

The Board is committed to maintaining good communication and having
constructive dialogue with its shareholders.  The Group engages in full and
open communication with its shareholders and endeavours to reply promptly to
all shareholder queries received.  The Chairman prepares a detailed summary
of the Group's activities in his Statement which accompanies the Annual and
Interim Financial Statements.  Regulatory announcements are distributed in a
timely fashion through appropriate channels to ensure shareholders are able to
access material information on the Group's progress.  A report of the audit
and remuneration committees is included with Principle Nine above.  All
shareholders are encouraged to attend the Company's Annual General Meeting.

 

 

M J Baynham

Secretary

22 December 2021

 

 

Directors' report for the year ended 30 June 2021

 

Directors

 

The directors who held office at the year end and their interests in the
Company's share capital and outstanding loans with the Company at the year-end
are set out below:

 Beneficial interests - Ordinary shares of 20p each

                                       Percentage held    30 June 2021      30 June 2020
                                                          £             £
 I D Lowe                              79.1               9,324,582     9,324,582
 M J Baynham                           6.2                729,236       729,236
 R J Pearson                           -                  -             -

 Beneficial interests - Unsecured loans

 I D Lowe                              100.0              4,380,000     4,380,000

 M J Baynham                           100.0              -             99,999

The interest of I D Lowe in the unsecured loans of £4,380,000 (2020:
£4,380,000) is as controlling shareholder of the lender, Leafrealm Limited.
The interest of M J Baynham in the unsecured loan of £Nil (2020: £99,999)
was in respect of a loan made by his wife, Mrs V Baynham.

 

No rights to subscribe for shares or debentures of Group companies were
granted to any of the directors or their immediate families or exercised by
them during the financial year.

 

Political and charitable donations

 

Neither the Company nor any of its subsidiaries made any charitable or
political donations during the year.

 

Disclosure of information to auditor

 

The directors who held office at the date of approval of the Directors' Report
confirm that, so far as they are each aware, there is no relevant audit
information of which the Group's auditor is unaware; and each director has
taken all the steps that he ought to have taken as a director to make himself
aware of any relevant audit information and to establish that the Group's
auditor is aware of that information. This confirmation is given and should be
interpreted in accordance with the provisions of Section 418 of the Companies
Act 2006.

 

Auditor

 

In accordance with Section 489 of the Companies Act 2006, a resolution for the
re-appointment of Johnston Carmichael LLP will be put to the Annual General
Meeting.

 

By Order of the Board

 

M J Baynham

Secretary

 

22 December 2021

 

 

 

Consolidated statement of comprehensive income for the year ended 30 June 2021

 

 

 

                                                                                     2021                                   2020
                                                                               Note  £000                                   £000
 Revenue
 Revenue from development property sales                                             4,186                                  90
 Gross rental income from investment properties                                      368                                    446

 Total Revenue                                                                 5     4,554                                  536
 Cost of development property sales                                                  (3,930)                                (82)
 Property charges                                                                    (128)                                  (172)

 Cost of Sales                                                                                 (4,058)                                   (254)

 Gross Profit                                                                                       496                                    282
 Administrative expenses                                                             (440)                                  (428)
 Other income                                                                        2                                      20

 Net operating profit/(loss) before investment property
 disposals and valuation movements                                                   58                                     (126)

 Valuation gains on investment properties                                      10    690                                    250

 Loss on disposal of investment property                                             (151)                                  -
 Net gains on investment properties                                                  539                                    250

 Operating profit                                                              5     597                                    124

 Financial expenses                                                            7     (137)                                  (29)
 Net financing costs                                                                 (137)                                  (29)

 Profit before taxation                                                              460                                    95
 Income tax                                                                    8     -                                      -

 Profit and total comprehensive income for the financial year attributable to
 equity holders of the parent Company

                                                                                     460                                    95

 Earnings per share
 Basic and diluted earnings per share (pence)                                  9     3.90p                                                0.81p

 

 

The notes on pages 47 - 67 form an integral part of these financial
statements.

 

 

Consolidated balance sheet as at 30 June 2021

 

 

                                                                              2021          2020
                                                                    Note      £000          £000

 Non-current assets
 Investment property                                                10        17,110        17,720
 Plant and equipment                                                11        3             10
 Investments                                                        12        1             1
 Total non-current assets                                                     17,114        17,731

 Current assets
 Trading properties                                                 13        9,313         13,006
 Trade and other receivables                                        14        135           122
 Cash and cash equivalents                                          15        3,020         72
 Total current assets                                                         12,468        13,200

 Total assets                                                                 29,582        30,931

 Current liabilities
 Trade and other payables                                           16        (647)         (1,213)
 Interest bearing loans and borrowings                              17        (360)         (1,503)

 Total current liabilities                                                    (1,007)       (2,716)

 Non-current liabilities

 Interest bearing loans and borrowings                              17        (4,020)       (4,120)
 Total liabilities                                                            (5,027)       (6,836)
 Net assets                                                                   24,555        24,095

 Equity
 Issued share capital                                               21        2,357         2,357
 Capital redemption reserve                                         22        175           175
 Share premium account                                              22        2,745         2,745
 Retained earnings                                                            19,278        18,818

 Total equity attributable to equity holders of the parent Company

                                                                              24,555        24,095

 

NET ASSET VALUE PER SHARE
          208.4p                            204.5p

 

The financial statements were approved by the board of directors on 22
December 2021 and signed on its behalf by:

 

 

 
 

I D Lowe

Director
 

The notes on pages 47 - 67 form an integral part of these financial
statements.

 

 

Consolidated statement of changes in equity as at 30 June 2021

 

 

 

                                                     Issued   Capital     Share    Retained
                                                     share    redemption  premium  earnings  Total
                                                     capital  reserve     account
                                                     £000     £000        £000     £000      £000

 At 1 July 2019                                      2,357    175         2,745    18,723    24,000

 Profit and total comprehensive income for the year

                                                     -        -           -        95        95
                                                     ______   ______      ______   ______    ______
 At 30 June 2020                                     2,357    175         2,745    18,818    24,095

 Profit and total comprehensive income for the year

                                                     -        -           -        460       460
                                                     ______   ______      ______   ______    ______
 At 30 June 2021                                     2,357    175         2,745    19,278    24,555
                                                     ======   ======      ======   ======    ======

 

 

Consolidated statement of cash flows for the year ended 30 June 2021

 

 

 

                                                                                            2021                            2020
                                                               Note                         £000                            £000
 Cash flows from operating activities

 Profit for the year                                                                        460                             95
 Adjustments for:
 Net loss on sale of investment property                                                    151                             -

 Net gains on revaluation of investment properties                                          (690)                           (250)
 Depreciation                                                                               1                               5

 Loss on sale of fixed assets                                                               1                               -
 Net finance expense                                                                        137                             29
                                                                                            _______                         _______
 Net operating cash flows before movements
 in working capital                                                                         60                              (121)

 Decrease/(Increase) in trading properties                                                  3,693                           (608)
 (Increase)/decrease in trade and other receivables                                         (13)                            29
 (Decrease)/increase in trade and other payables                                            (370)                            (22)
                                                                                            _______                         _______
 Cash generated from/(absorbed by) operations                                               3,370                           (722)

 Interest paid                                                                              (333)                           -
                                                                                            _______                         _______
 Net cash inflow/(outflow) from operating activities

                                                                                            3,037                           (722)
                                                                                            _______                         _______
 Investing activities

 Proceeds from sale of investment properties                                                1,149                           -

 Proceeds from sale of fixed assets                                                         5                               -

 Acquisition of property, plant and equipment                                               -                               (9)
                                                                                            _______                         _______
 Cash flows generated from/(absorbed by) investing activities

                                                                                            1,154                           (9)
                                                                                            _______                         _______

 Financing activities

 (Decrease)/increase in borrowings                                                                     (1,243)                        672

                                                                                            _______                         _______
 Cash flows (used)/generated from financing activities                                      (1,243)                         672
                                                                                            _______                         _______

 Net increase/(decrease) in cash and cash equivalents                                       2,948                           (59)
 Cash and cash equivalents at beginning of year                                             72                              131
                                                                                            _______                         _______
 Cash and cash equivalents at end of year                                                   3,020                           72

 

 

 

Notes to the consolidated financial statements as at 30 June 2021

 

1          Reporting entity

            Caledonian Trust PLC is a public company incorporated
in England and domiciled in the United Kingdom.  The consolidated financial
statements of the company for the year ended 30 June 2021 comprise the Company
and its subsidiaries as listed in note 7 in the parent Company's financial
statements (together referred to as "the Group").  The Group's principal
activities are the holding of property for both investment and development
purposes.  The registered office is St Ann's Wharf, 112 Quayside, Newcastle
upon Tyne, NE99 1SB and the principal place of business is 61a North Castle
Street, Edinburgh EH2 3LJ.

2          Statement of Compliance

            The Group financial statements have been prepared and
approved by the directors in accordance with International Accounting
Standards in conformity with the requirements of the Companies Act 2006.  The
company has elected to prepare its parent Company financial statements in
accordance with International Accounting Standards; these are presented on
pages 68 to 87.

3          Basis of preparation

The financial statements are prepared on the historical cost basis except for
investments and investment properties which are measured at their fair value.

The preparation of the financial statements in conformity with International
Accounting Standards requires the directors to make judgements, estimates and
assumptions that affect the application of policies and reported amounts of
assets and liabilities, income and expenses.  The estimates and associated
assumptions are based on historical experience and various other factors that
are believed to be reasonable under the circumstances, the results of which
form the basis of making the judgements about carrying values of assets and
liabilities that are not readily apparent from other sources.  Actual results
may differ from these estimates.

These financial statements have been presented in pounds sterling which is the
functional currency of all companies within the group. All financial
information has been rounded to the nearest thousand pounds.

Going concern

The Group's business activities, together with the factors likely to affect
its future development, performance and position are set out in the Chairman's
Statement on pages 2 to 19.  The financial position of the Group, its cash
flows, liquidity position and borrowing facilities are described in note 18 to
the consolidated financial statements.

In addition, note 18 to the financial statements includes the Group's
objectives, policies and processes for managing its capital; its financial
risk management objectives; details of its financial instruments; and its
exposures to credit risk and liquidity risk.

The Group and parent Company finance their day to day working capital
requirements through related party loans and bank funding for specific
development projects.  A related party lender has indicated its willingness
to continue to provide financial support and not to demand repayment of its
principal loan during 2022.

The directors have prepared projected cash flow information for the period
ending eighteen months from the date of their approval of these financial
statements. These forecasts include the directors' assessment of the impact of
the Covid-19 pandemic and  assume the Group will make property sales in the
normal course of business to provide sufficient cash inflows to allow the
Group to continue to trade.

Should these sales not complete as planned, the directors are confident that
they would be able to sell sufficient other properties within a short
timescale to generate the income necessary to meet the Group's liabilities to
third party creditors as they fall due.

For these reasons they continue to adopt the going concern basis in preparing
the financial statements.

Areas of estimation uncertainty and critical judgements

Information about significant areas of estimation uncertainty and critical
judgements in applying accounting policies that have the most significant
effect on the amount recognised in the financial statements is contained in
the following notes:

Estimates

·    Valuation of investment properties (note 10)

The fair value has been assessed by the directors at 30 June 2021.  The
valuations take account of rental streams and comparable transactions.  The
valuations take cognisance of valuations provided by an external independent
valuer at 30 June 2019.  The non-executive director holds an appropriate
profession qualification with current experience of the relevant markets.
Valuations take account of the impact of Covid-19 which has not had a
significant impact on them due to the nature of the properties and demand
being maintained for small commercial properties and for quality housing.

 

·    Valuation of trading properties (note 13)

Trading properties are carried at the lower of cost and net realisable
value.  The net realisable value of such properties is based on the amount
the Group is likely to achieve in a sale to a third party. This is then
dependent on availability of planning consent and demand for sites which is
influenced by the housing and property markets.

 

Judgements

·    Deferred Tax (note 20)

The Group's unrecognised deferred tax asset relates to tax losses being
carried forward and to differences between the carrying value of investment
properties and their original tax base. A decision has been taken not to
recognise the asset on the basis of the uncertainty of the timing of future
taxable profits.

 

4        Accounting policies

 

          The accounting policies below have been applied
consistently to all periods presented in these consolidated financial
statements.

 

Basis of consolidation

         The financial statements incorporate the financial statements
of the parent Company and all its subsidiaries all of which have the same
accounting date.  Subsidiaries are entities controlled by the Group.
Control exists when the Group has the power to determine the financial and
operating policies of an entity so as to obtain benefits from its
activities.  The financial statements of subsidiaries are included in the
consolidated financial statements from the date that control commences until
the date it ceases.  Inter-company balances are eliminated on consolidation.

 

         Revenue

Turnover is the amount derived from ordinary activities, stated after any
discounts, other sales taxes and net of VAT.

 

Revenue from the sale of investment and trading properties is recognised in
the income statement on legal completion, being the date on which control
passes to the buyer.

 

Rental income from properties leased out under operating leases is recognised
in the income statement on a straight-line basis over the term of the lease.
Costs of obtaining a lease and lease incentives granted are recognised as an
integral part of total rental income and spread over the period from
commencement of the lease to the earliest termination date on a straight-line
basis.

 

         Other income

Other income comprises income from agricultural land and other miscellaneous
income recognised on receipt.

         Finance income and expenses

         Finance income and expenses comprise interest payable on bank
loans and other borrowings.  All borrowing costs are recognised in the income
statement using the effective interest rate method.  Interest income
represents income on bank deposits using the effective interest rate method.

 

         Taxation

         Income tax on the profit or loss for the year comprises
current and deferred tax.  Income tax is recognised in the income statement
except to the extent that it relates to items recognised directly in equity,
in which case the charge / credit is recognised in equity.  Current tax is
the expected tax payable on taxable income for the current year, using tax
rates enacted or substantively enacted at the reporting date, adjusted for
prior years under and over provisions.

 

         Deferred tax is calculated using the balance sheet liability
method in respect of all temporary differences between the values at which
assets and liabilities are recorded in the financial statements and their cost
base for taxation purposes.  Deferred tax includes current tax losses which
can be offset against future capital gains.  As the carrying value of the
Group's investment properties is expected to be recovered through eventual
sale rather than rentals, the tax base is calculated as the cost of the asset
plus indexation.  Indexation is taken into account to reduce any liability
but does not create a deferred tax asset. A deferred tax asset is recognised
only to the extent that it is probable that future taxable profits will be
available against which the asset can be utilised.

Investment properties

         Investment properties are properties owned by the Group which
are held either for long term rental growth or for capital appreciation or
both.  Properties transferred from trading properties to investment
properties are revalued to fair value at the date on which the properties are
transferred. When the Group begins to redevelop an existing investment
property for continued future use as investment property, the property remains
an investment property, which is measured based on the fair value model, and
is not reclassified.

The cost of investment property is recognised on legal completion and includes
the initial purchase price plus associated professional fees and historically
also includes borrowing costs directly attributable to the acquisition.
Subsequent expenditure on investment properties is only capitalised to the
extent that future economic benefits will be realised.

Investment property is measured at fair value at each balance sheet date.
The directors assess market value at each balance sheet date and external
independent professional valuations are prepared at least once every three
years.  The fair values are based on market values, being the estimated
amount for which a property could be exchanged on the date of valuation
between a willing buyer and a willing seller in an arms-length transaction
after proper marketing wherein the parties had each acted knowledgeably,
prudently and without compulsion.

         Any gain or loss arising from a change in fair value is
recognised in the income statement.

         Tangible assets

         Tangible assets are stated at cost, less accumulated
depreciation and any provision for impairment.  Depreciation is provided on
all tangible assets at varying rates calculated to write off cost to the
expected current residual value by equal annual instalments over their
estimated useful economic lives.  The periods used are:

 

         Fixtures and fittings
-           3 years

         Motor
vehicles
-           3 years

Other equipment
-           5 years

 

Trading properties

Trading properties held for short term sale or with a view to subsequent
disposal are stated at the lower of cost or net realisable value.  Cost is
calculated by reference to invoice price plus directly attributable
professional fees.  Interest and other finance costs on borrowings specific
to a development are capitalised through stock and work in progress and
transferred to cost of sales on disposal.  Net realisable value is based on
estimated selling price less estimated cost of disposal.

 

Financial instruments

The Group had no hedge relationships at 1 July 2019, 30 June 2020 or 30 June
2021.

Financial assets

   Investments

The Group's investments in equity instruments are measured initially at fair
value which is normally transaction price.  Subsequent to initial recognition
investments which can be measured reliably are measured at fair value with
changes recognised in the profit or loss.  Other investments are measured at
cost less impairment in profit or loss.  Dividend income is recognised when
the Group has the right to receive dividends either when the share becomes ex
dividend or the dividend has received shareholder approval.

Current receivables

 

Trade and other receivables with no stated interest rate and receivable within
one year are recorded at transaction price including transaction costs.
Assessments for impairment are performed at each reporting date and any losses
are recognised in the statement of comprehensive income.  Impairment reviews
take into account changes in behaviours and the patterns of receipts from
tenants on a case by case basis.

 

Cash and cash equivalents

Cash includes cash in hand, deposits held at call (or with a maturity of less
than 3 months) with banks, and bank overdrafts.  Bank overdrafts that are
repayable on demand and which form an integral part of the Group's cash
management are shown within current liabilities on the balance sheet and
included with cash and cash equivalents for the purpose of the statement of
cash flows.

          Financial liabilities

          Current payables

Trade payables are non-interest-bearing and are initially measured at fair
value and thereafter at amortised cost.

          Interest bearing loans and borrowings

Interest-bearing loans and bank overdrafts are initially carried at fair value
less allowable transactions costs and then at amortised cost.

Changes in accounting policies

 

There are no new standards or amendments to existing standards which are
effective for annual periods beginning on or after 1 July 2020 which are
relevant to the Group.  There are no new standards or amendments to existing
standards or interpretations that are effective as at 30 June 2021 and
relevant to the Group.  After Brexit, the Group will continue to apply
International Accounting Standards in conformity with the requirements of the
Companies Act 2006.

 

Operating segments

 

The Group determines and presents operating segments based on the information
that is internally provided to the Board of Directors ("The Board"), which is
the Group's chief operating decision maker. The directors review information
in relation to the Group's entire property portfolio, regardless of its type
or location, and as such are of the opinion that there is only one reportable
segment which is represented by the consolidated position presented in the
primary statements.

 

 

 5   Operating profit

                                                                              2021        2020
                                                                             £000         £000
     Revenue comprises: -

     Rental income                                                           368          446
     Sale of properties                                                      4,186        90
                                                                             4,554        536

     All revenue is derived from the United Kingdom

                                                                             2021         2020
                                                                             £000         £000
     The operating profit is stated after charging: -

     Depreciation                                                            1            5
      Amounts received by auditors and their associates in respect of:
     - Audit of these financial statements (Group and Company)               17           15
     - Audit of financial statements of subsidiaries pursuant to             9            8
        legislation

 

 

 6   Employees and employee benefits                       2021                       2020
                                                           £000                       £000
     Employee remuneration

     Wages and salaries                                    177                        174
     Social security costs                                 12                         13
     Other pension costs                                   28                         29
                                                           _______                    _______
                                                           217                        216
                                                               ======                     ======
     Other pension costs represent contributions to defined contribution plans.

 

         The average number of employees including executive directors during the year
         was as follows:
                                                                                                                     No.                                       No.
         Management                                                                                                  2                                         2
         Administration                                                                                              3                                         3
         Other                                                                                                       1                                         2
                                                                                                                     _______                                   _______
                                                                                                                     6                                          7
                                                                                                                     ======                                    =======

                                                                                                                     2021                                      2020
         Remuneration of directors                                                                                   £000                                      £000

         Directors' emoluments                                                                                       69                                        52
         Company contributions to money purchase pension schemes                                                     25                                        25
                                                                                                                     ======                                    ======

                                     Salary and                                           Pension                    2021                       2020

         Director                    Fees                      Benefits                   Contributions              Total                      Total
                                     £000                      £000                       £000                       £000                       £000

         I D Lowe                    -                         6                          -                          6                          6
         M J Baynham                 50                        -                          25                         75                         63
         R J Pearson                 8                         -                          -                                      8              8
                                     ______                    ______                     ______                     ______                     ______

                                     58                        6                          25                         89                         77

 

The Company does not operate a share option scheme or other long-term
incentive plan.

 

Key management personnel are the directors, as listed above.  The total
remuneration of key management personnel, including social security cost, in
the year was £94,067 (2020: £85,010).

 

                                                              2021    2020
 Retirement benefits are accruing to the following number of

 directors under:

 Money purchase schemes                                       1       1
                                                              ======  ======

 

 

 7   Finance expenses
                            2021   2020
                            £000   £000
     Finance expenses
     Interest payable:
     - Other loan interest  137    29
                            ====   ====

 

 8   Income tax

 There was no current nor deferred tax charge in the current or preceding
year.

     Reconciliation of effective tax rate
                                                            2021    2020
                                                            £000    £000

     Profit before tax                                      460     95
                                                            =====   =====

     Current tax at 19% (2020: 19%)                         87      18

     Effects of:
     Expenses not deductible for tax purposes               (10)    (6)
     Excess depreciation over capital allowances

                                                            (6)     (3)
     Losses carried forward                                 6       38

     Effect of indexation                                   (57)    -

     Loss on sale of revalued investment property

                                                            111     -
     Revaluation of property not taxable                    (131)   (47)
                                                            ______  ______
     Total tax charge                                       -       -
                                                            =====   =====

An increase in the UK corporation tax rate from 19% to 25% (effective from 1
April 2023) was substantively enacted on 24 May 2021.  This will increase the
Group's tax charge accordingly.

In the case of deferred tax in relation to investment property revaluation
surpluses, the base cost used is historical book cost and includes allowances
or deductions which may be available to reduce the actual tax liability which
would crystallise in the event of a disposal of the asset (see note 20).

 

 

9       Earnings per share

         Basic earnings per share is calculated by dividing the
(loss)/profit attributable to ordinary shareholders by the weighted average
number of ordinary shares outstanding during the period as follows:

                                               2021        2020
                                               £000        £000
 Profit for financial period                   460         95
                                               ======      ======
                                               No.         No.
 Weighted average no. of shares:
 for basic earnings per share and for diluted
 earnings per share                            11,783,577  11,783,577
                                               ========    ========
 Basic earnings per share                      3.90 p       0.81 p
 Diluted earnings per share                    3.90 p         0.81 p

 The diluted figure per share is the same as the basic figure per share as
 there are no dilutive shares.

 

 

 10  Investment properties
                             2021      2020
                             £000      £000
     Valuation
     At 1 July               17,720    17,470
     Disposed in year        (1,300)   -
     Revaluation in year     690       250
                             ________  ________
     Valuation at 30 June    17,110    17,720
                             ========  ========

The fair value of investment property at 30 June 2021 was determined by the
directors based on changes in leases for one property and changes in market
conditions for others.  The non-executive director holds an appropriate
professional qualification and has recent experience in the location and
category of property being valued.  Cognisance was also taken of the
independent valuation by Montagu Evans, Chartered Surveyors as at 30 June
2019.

 

The valuation methodology applied by the directors and the external valuers
was in accordance with the RICS Valuation Global Standards July 2017 which is
consistent with the required IFRS 13 methodology.  IFRS 13 defines fair value
as the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market sector participants at the
measurement date.  The properties were valued individually and not as part of
a portfolio.

 

The 'review of activities' and 'property prospects' within the Chairman's
statement provides commentary on the Group's properties.

 

The historical cost of investment properties held at 30 June 2021 is
£8,805,509 (2020: £9,521,406).  The cumulative amount of interest
capitalised and included within historical cost in respect of the Group's
investment properties is £451,000 (2020: £451,000).

 

Valuations were based on vacant possession, rental yields or residual
(development) appraisal rather than investment income in order to achieve the
highest and best use value.   To obtain the residual valuation the end
development value is discounted by profit for a developer and cost to build to
reach the base estimated market value of the investment.  Only two properties
were valued using an appropriate yield with allowance for letting voids, rent
free periods and letting/holding costs for vacant accommodation and early
lease expiries/break options, together with a deduction for purchaser's
acquisition costs in accordance with market practice.  The resulting net
yields have also been assessed as a useful benchmark.  Yields of 8.25% and
9.25% were applied respectively.

 

Assuming all else stayed the same, a decrease in net rental income or
estimated future rent will result in a decrease in the fair value whereas a
decrease in the yields will result in an increase in fair value. A decrease of
1% in the yields would result in an increase in valuation of £224,000 (2020:
£160,000).  An increase of 1% in the yields would result in a decrease in
the fair value of £171,000 (2020: £160,000).

 

All the investment properties have been categorised as Level 2 in both years
as defined by IFRS 13 Fair Value Measurement.  Level 2 means that the
valuation is based on inputs other than quoted prices that are observable for
the asset, either directly (i.e. as prices) or indirectly (i.e. derived from
prices).

 

The amount of unrealised gains or losses on investment properties is charged
to the statement of comprehensive income as the movement in fair value of
investment property.  For the year to 30 June 2021 this was a fair value
profit of £690,000 (2020: profit £250,000).  During the year ended 30 June
2021, an investment property was sold along with several stock properties,
together comprising Ardpatrick Estate, in a single transaction.  The price
allocated to the investment property realised a net loss on sale of
£151,000.  There were no realised gains or losses on the disposal of
investment properties in the year ended 30 June 2020.

 

The valuations take account of the impact of Covid-19 which has not had a
significant impact on the value of the Group's investment properties due to
the nature of the properties and demand being maintained for small commercial
properties and for quality housing.

 

 11  Plant and equipment

 

                         Motor      Fixtures and fittings  Other

                         Vehicles                          equipment   Total
                         £000       £000                   £000        £000
     Cost
     At 30 June 2019     20         16                     72          108

Disposals in year

                         (8)        -                      -           (8)
     Additions in year   9          -                      -           9

     At 30 June 2020     21         16                     72          109

     Depreciation
     At 30 June 2019     19         16                     67          102

Disposals in year

                         (8)        -                      -           (8)
     Charge for year     3          -                      2           5

     At 30 June 2020     14         16                     69          99

     Net book value

     At 30 June 2020     7          -                      3           10

 

 

                         Motor      Fixtures and fittings  Other

                         Vehicles                          equipment   Total
                         £000       £000                   £000        £000
     Cost
     At 30 June 2020     21         16                     72          109

Disposals in year

                         (20)       (1)                    (3)         (24)
     At 30 June 2021     1          15                     69          85

     Depreciation
     At 30 June 2020     14         16                     69          99
     Disposals in year   (13)       (1)                    (4)         (18)
     Charge for year     -          -                      1           1

     At 30 June 2021     1          15                     66          82

     Net book value

     At 30 June 2021     -          -                      3           3

 

 

 12  Investments
                         2021       2020
                         £000       £000
     Listed investments  1          1
                         ======     ======
 13  Trading properties
                         2021       2020
                         £000       £000

     At start of year    13,006     12,398
     Additions           237        690

     Sold in year        (3,930)    (82)
                         _________  _________
     At end of year      9,313      13,006
                         ========   ========

 

Finance costs related to borrowings specifically for a development are
included in the cost of developments.  At 30 June 2021 the total finance
costs included in stock and work in progress was £Nil (2020: £117,000).

 

 14  Trade and other receivables          2021                        2020
                                          £000                        £000
     Amounts falling due within one year
     Other debtors                        108                         89
     Prepayments and accrued income       27                          33
                                          _______                     _______
                                          135                         122
                                          ======                      ======

     The Group's exposure to credit risks and impairment losses relating to trade
     receivables is given in note 18.

 

 15  Cash and cash equivalents    2021                         2020
                                  £000                         £000

     Cash                         3,020                        72
                                  ======                       ======

     Cash and cash equivalents comprise cash at bank and in hand.  Cash deposits
     are held with UK banks. The carrying amount of cash equivalents approximates
     to their fair values.  The Company's exposure to credit risk on cash and cash
     equivalents is regularly monitored (note 18).

 

 

 16      Trade and other payables
                                                                 2021                            2020
                                                                 £000                            £000

                         Trade creditors                         54                              133
                         Other creditors including taxation      13                              100
                         Accruals and deferred income            580                             980
                                                                 _______                         _______

                                                                 647                             1,213
                                                                 ======                          ======

         The Group's exposure to currency and liquidity risk relating to trade payables
         is disclosed in note 18.

 

 17                   Other interest bearing loans and borrowings

                      The Group's interest bearing loans and borrowings are measured at amortised
                      cost.  More information about the Group's exposure to interest rate risk and
                      liquidity risk is given in note 18.

                      Current liabilities
                                                                             2021                                   2020
                                                                             £000                                   £000

                      Unsecured loan                                         360                                    360
                      Secured development loan                               -                                      1,143
                                                                             _______                                _______

                                                                             360                                    1,503
                                                                             ======                                 ======
                      Non-current liabilities

                      Unsecured loans                                        4,020                                  4,120
                                                                             =======                                =======

 Net debt reconciliation
                                                            2021                            2020
                                                            £000                            £000

 Cash and cash equivalents                                  3,020                           72
 Liquid investments                                         1                               1
 Borrowings - repayable with one year                       (360)                           (1,503)
 Borrowings - repayable after one year                      (4,020)                         (4,120)

 Net debt                                                   (1,359)                         (5,550)

 

 Cash and liquid investments               3,021                     73
 Gross debt - variable interest rates      (4,380)                   (5,623)

 Net debt                                  (1,359)                     (5,550)

 

 

 

                           Cash/bank overdraft  Liquid investments  Borrowing due within  Borrowing due after  Total

                                                                    1 year                1 year
                           £000                 £000                £000                  £000                 £000
 Net debt at 30 June 2019  131                  1                   (881)                 (4,070)              (4,819)
 Cashflows                 (59)                 -                   (622)                 (50)                 (731)

 Net debt at 30 June 2020  72                   1                   (1,503)               (4,120)              (5,550)
 Cashflows                 2,948                -                   1,143                 100                  4,191

 Net debt at 30 June 2021  3,020                1                   (360)                 (4,020)              (1,359)

 

 

 

     Terms and debt repayment schedule
     Terms and conditions of outstanding loans were as follows:

 

                                                              2021                                                2020
                             Currency  Nominal interest rate  Fair                      Carrying amount           Fair                      Carrying amount

                                                              value                                                value
                                                              £000                      £000                      £000                      £000

 Unsecured loan              GBP       Base +3%               4,020                     4,020                     4,020                     4,020

 Unsecured development loan

                             GBP       Base +0.5%             360                       360                       360                       360

 Unsecured loan

                             GBP       Base +3%               -                         -                         100                       100

 Secured bank loan           GBP       Base +5.1%             -                         -                         1,143                     1,143

                                                              4,380                     4,380                     5,623                     5,623

 

The unsecured loan of £4,020,000 is from Leafrealm Limited and is repayable
in 12 months and one day after the giving of notice by the lender.  Interest
is charged at 3% over Bank of Scotland base rate but the lender waived its
right to the margin over base rate until 30 June 2020.  The margin applied
with effect from 1 July 2020 in line with the terms of the loan.

 

The short-term unsecured development loan of £360,000 is from Leafrealm
Limited and is repayable after the disposal of Phase 3 of the Brunstane
development.  Interest is charged at a margin of 0.5% over Bank of Scotland
base rate.

 

The unsecured loan of £99,999 was repaid during the year in line with its
terms.  Interest was charged at a margin of 3% over Bank of Scotland base
rate.

 

The bank loan was secured by a standard security over one of a subsidiary's
developments, by a floating charge over the assets of that subsidiary and by a
limited guarantee by Caledonian Trust PLC.  The loan was repaid during the
year.  Interest was charged at 5.1% over Bank of Scotland base rate.

 

The weighted average interest rate of the floating rate borrowings was 3.3%
(2020: 3.9%).  As set out above, a lender varied its right to the margin of
interest above base rate until 30 June 2020 and so the rate of interest
charged in that year was 1.64%.

 18  Financial instruments

     Fair values

     Fair values versus carrying amounts

     The fair values of financial assets and liabilities, together with the
     carrying amounts shown in the balance sheet, are as follows:
                                                    2021                                      2020
                                  Fair value            Carrying              Fair value       Carrying
                                                        amount                                 amount
                                  £000                  £000                  £000             £000

     Trade and other receivables  108                   108                   89               89
     Cash and cash equivalents    3,020                 3,020                 72               72
                                  3,128                 3,128                 161              161

     Loans from related parties   4,380                 4,380                 4,480            4,480
     Bank loan                    -                     -                     1,143            1,143
     Trade and other payables     639                   639                   1,196            1,196
                                  5,019                 5,019                 6,819            6,819

 

     Estimation of fair values

     The following methods and assumptions were used to estimate the fair values
     shown above:

     Trade and other receivables/payables - the fair value of receivables and
     payables with a remaining life of less than one year is deemed to be the same
     as the book value.

     Cash and cash equivalents - the fair value is deemed to be the same as the
     carrying amount due to the short maturity of these instruments.

     Other loans - the fair value is calculated by discounting the expected future
     cashflows at prevailing interest rates.

 

     Overview of risks from its use of financial instruments

     The Group has exposure to the following risks from its use of financial
     instruments:

     ·    credit risk

     ·    liquidity risk

     ·    market risk

The Board of Directors has overall responsibility for the establishment and
oversight of the Group's risk management framework and oversees compliance
with the Group's risk management policies and procedures and reviews the
adequacy of the risk management framework in relation to the risks faced by
the Group.

The Board's policy is to maintain a strong capital base so as to cover all
liabilities and to maintain the business and to sustain its development.

The Board of Directors also monitors the level of dividends to ordinary
shareholders.

For the purposes of the Group's capital management, capital includes issued
share capital and share premium account and all other equity reserves
attributable to the equity holders.  There were no changes in the Group's
approach to capital management during the year.

Neither the Company nor any of its subsidiaries are subject to externally
imposed capital requirements.

The Group's principal financial instruments comprise cash and short term
deposits.  The main purpose of these financial instruments is to finance the
Group's operations.

As the Group operates wholly within the United Kingdom, there is currently no
exposure to currency risk.

The main risks arising from the Group's financial instruments are interest
rate risks and liquidity risks. The board reviews and agrees policies for
managing each of these risks, which are summarised below:

 

                                                   Credit risk

                                                   Credit risk is the risk of financial loss to the Group if a customer or
                                                   counterparty to a financial instrument fails to meet its contractual
                                                   obligations and arises principally from the Group's receivables from
                                                   customers, cash held at banks and its investments.

                                                   Trade receivables

                                                   The Group's exposure to credit risk is influenced mainly by the individual
                                                   characteristics of each tenant.  The majority of rental payments are received
                                                   in advance which reduces the Group's exposure to credit risk on trade
                                                   receivables.

                                                   Other receivables

                                                   Other receivables consist of amounts due from tenants and purchasers of
                                                   investment property along with a balance due from a company in which the Group
                                                   holds a minority investment.
                                                   Credit risk (continued)

                                                   Investments

                                                   The Group does not actively trade in equity investments.

                                                   Bank facilities

                                                   One subsidiary had a bank facility to fund a specific development. The
                                                   facility amounted to £1,415,000 of which £1,143,000 had been drawn down at
                                                   30 June 2020 and it was repaid during the year ended 30 June 2021.

                                                   Exposure to credit risk

                                                   The carrying amount of financial assets represents the maximum credit
                                                   exposure.  The maximum exposure to credit risk at the reporting date was:
                                              Carrying value
                                2021                   2020
                                £000                   £000
     Investments                1                      1
     Other receivables          108                    89
     Cash and cash equivalents  3,020                  72
                                ________               ________
                                3,129                  162
                                =======                =======

 

 

 

 
 
 
 

 

     The Group made an allowance for impairment on trade receivables of £Nil
     (2020: £11,000).  As at 30 June 2021, trade receivables of £74,000 (2020:
     £52,000) were past due but not impaired.  These are long standing tenants of
     the Group and the indications are that they will meet their payment
     obligations for trade receivables which are recognised in the balance sheet
     that are past due and unprovided.  The ageing analysis of these trade
     receivables is as follows:

                              2021      2020
     Number of days past due date  £000      £000

     Less than 30 days             25        18
     Between 30 and 60 days        8         17
     Between 60 and 90 days        7         2
     Over 90 days                  34        15
                                   ________  ________
                                   74        52
                                   =======   =======

Credit risk for trade receivables at the reporting date was all in relation to
     property tenants in United Kingdom.  The Group's exposure is spread across a
     number of customers and sums past due relate to 11 tenants (2020: 9
     tenants).  One tenant accounts for 36% (2020: 54%) of the trade receivables
     past due by more than 90 days.

                                               Liquidity risk

                                               Liquidity risk is the risk that the Group will not be able to meet its
                                               financial obligations as they fall due.  The Group's approach to managing
                                               liquidity is to ensure, as far as possible, that it will always have
                                               sufficient liquidity to meet its liabilities when due without incurring
                                               unacceptable losses or risking damage to the Group's reputation. Whilst the
                                               directors cannot envisage all possible circumstances, the directors believe
                                               that, taking account of reasonably foreseeable adverse movements in rental
                                               income, interest or property values, the Group has sufficient resources
                                               available to enable it to do so.

Credit risk for trade receivables at the reporting date was all in relation to
property tenants in United Kingdom.  The Group's exposure is spread across a
number of customers and sums past due relate to 11 tenants (2020: 9
tenants).  One tenant accounts for 36% (2020: 54%) of the trade receivables
past due by more than 90 days.

 

 

Liquidity risk

Liquidity risk is the risk that the Group will not be able to meet its
financial obligations as they fall due.  The Group's approach to managing
liquidity is to ensure, as far as possible, that it will always have
sufficient liquidity to meet its liabilities when due without incurring
unacceptable losses or risking damage to the Group's reputation. Whilst the
directors cannot envisage all possible circumstances, the directors believe
that, taking account of reasonably foreseeable adverse movements in rental
income, interest or property values, the Group has sufficient resources
available to enable it to do so.

 
 
 

 

        The Group's exposure to liquidity risk is given below

 

 30 June 2021     £'000       Carrying amount  Contractual cash flows  6 months or less  6-12 months  2-5

                                                                                                           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                 -             -

 

 

 30 June 2020     £'000       Carrying amount  Contractual cash flows  6 months or less  6-12 months          2-5

                                                                                                               years

 Unsecured loan               4,020               4,177                    95                     62          4,020

 Unsecured development loan     360                 375                    -                     375               -

 Unsecured loan                 100                124                     20                     2             102

 Secured bank loan            1,143              1,295                    934                361                   -

 Trade and other payables          1,196       1,196                   1,196                      -               -

 

 

Market risk

Market risk is the risk that changes in market prices, such as interest rates,
will affect the Company's income or the value of its holdings of financial
instruments.  The objective of market risk management is to manage and
control market risk exposures within acceptable parameters, while optimising
the return.

 

     Interest rate risk

     The Group borrowings are at floating rates of interest based on Bank of
     Scotland base rate.

     The interest rate profile of the Group's borrowings as at the year-end was as
     follows:
                                   2021                         2020
                                   £000                         £000

     Unsecured loan - Base +3%     4,020                        4,020

     Unsecured loan - Base +0.5%   360                          360
     Unsecured loan - Base +3%     -                            100
     Secured loan - Base +5.1%     -                            1,143
                                   =====                        =====

     A 1% movement in interest rates would be expected to change the Group's annual
     net interest charge by £43,800 (2020: £56,230).

 

 19  Operating leases

     Leases as lessors

     The Group leases out its investment properties under operating leases.
     Operating leases are those in which substantially all the risks and rewards of
     ownership are retained by the lessor.  Payments, including prepayments made
     under operating leases (net of any incentives such as rent free periods) are
     charged to the income statement on a straight line basis over the period of
     the lease. The future minimum receipts under non-cancellable operating leases
     are as follows:

                                  2021                         2020
                                  £000                         £000

     Less than one year           179                          204
     Between one and five years   407                          199
     Greater than five years      316                          137
                                  _____                        _____

                                  902                          540
                                  =====                        =====

 

The amounts recognised in income and costs for operating leases are shown on
the face of the income statement.

 

 

 20  Deferred tax

At 30 June 2021, the Group has a potential deferred tax asset of £1,488,000
(2020: £1,174,000) of which £79,000 (2020: £84,000) 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 £1,409,000 (2020: £1,090,000). This has not been recognised due to the
uncertainty over the timing of future taxable profits.

 

Movement in unrecognised deferred tax asset

 

                        Balance     Additions/                      Balance      Additions/     Balance

                        1 July 19   (reductions)                    30 June 20   (reductions)   30 June 21

                        at 17%                                      at 19%                      at 25%
                        £000                 £000                   £000         £000           £000

 Investment properties  75                         9                84           (5)            79
 Tax losses             942         148                             1,090        319            1,409
                        _____       ______                          _____        ______         _____

 Total                  1,017                  157                  1,174        314            1,488
                        _____       ______                          _____        ______         _____

 

 21  Issued share capital

                                   30 June 2021          30 June 2020
                                   No           £000     No.          £000

     Authorised share capital

     Ordinary shares of 20p each   20,000,000   4,000    20,000,000   4,000
                                   ========     =======  ========     =======

     Issued and
     fully paid
     Ordinary shares of 20p each   11,783,577   2,357    11,783,577   2,357
                                   ========     =======  ========     =======

 

Holders of ordinary shares are entitled to dividends declared from time to
time, to one vote per ordinary share and a share of any distribution of the
Company's assets.

 

 22  Capital and reserves

     The capital redemption reserve arose in prior years on redemption of share
     capital.  The reserve is not distributable.

     The share premium account is used to record the issue of share capital above
     par value.  This reserve is not distributable.

23       Ultimate controlling party

 

  The ultimate controlling party is Mr I D Lowe.

 

24       Related parties

Transactions with key management personnel

Transactions with key management personnel consist of compensation for
services provided to the Company.  Details are given in note 6.

Lowe Dalkeith Farm, a business wholly owned by I D Lowe, used land at one of
the Group's investment properties as grazings for its farming operation.
Rent was agreed and paid at £1,575 per annum (2020 : £1,575).

Other related party transactions

The parent company has a related party relationship with its subsidiaries.

The Group and Company has an unsecured loan due to Leafrealm Limited, a
company of which I D Lowe is the controlling shareholder.  The balance due to
this party at 30 June 2021 was £4,020,000 (2020: £4,020,000) with interest
payable at 3% over Bank of Scotland base rate per annum.  Leafrealm Limited
varied its right to the margin of interest over base rate until 30 June
2020.  The margin applies with effect from 1 July 2020 in line with the terms
of the loan.  Interest charged in the year amounted to £124,620 (2020:
£22,069).

 

The Company also has an unsecured development loan due to Leafrealm Limited, a
company of which I D Lowe is the controlling shareholder.  The balance due to
this party at 30 June 2021 was £360,000 (2020: £360,000) with interest
payable at a margin of 0.5% over base rate.  Interest charged in the year
amounted to £2,160 (2020: £3,806).

The Company also had an unsecured facility during the year due to Leafrealm
Limited, a company of which I D Lowe is the controlling shareholder.  The
maximum balance drawn down during the year was £115,000 with interest payable
at 8% per annum.  Interest charged in the year amounted to £5,508 (2020:
£Nil) and the facility was repaid in full in line with its terms during the
year.

The Company had an unsecured loan on normal commercial terms from Mrs V
Baynham, the wife of a director.  The balance due to this party at 30 June
2020 was £99,999 with interest payable at 3% over Bank of Scotland base rate
per annum.  Interest charged in the year amounted to £2,421 (2020:
£3,564).  The loan was repaid in line with its terms during the year ended
30 June 2021.

Contracting work on certain development and investment property sites has been
undertaken by Leafrealm Land Limited, a company under the control of I D
Lowe.  The value of the work done by Leafrealm Land Limited charged in the
accounts for the year to 30 June 2021 amounts to £2,311 (2020: £2,333) at
rates which do not exceed normal commercial rates.  The balance payable to
Leafrealm Land Limited in respect of invoices for this work at 30 June 2021
was £Nil (2020: £91,638).

Lowe Dalkeith Farms, a business wholly owned by I D Lowe, provided equipment
used in the maintenance of the Group's investment or development sites. The
value of the equipment hire from Lowe Dalkeith Farms charged in the accounts
for the year to 30 June 2021 amounts to £2,068 (2020: £Nil) at rates which
do not exceed normal commercial rates.  The balance payable to Lowe Dalkeith
Farms in respect of invoices for this work at 30 June 2021 was £Nil (2020:
£Nil).

For a full listing of investments and subsidiary undertakings please see note
7 of the parent Company financial statements.

 

 

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