REG - Caledonian Trust PLC - Audited Results for the year ended 30 June 2022
21/12/2022 15:30
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RNS Number : 5223K Caledonian Trust PLC 21 December 2022
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(EU) No. 596/2014 ("MAR") which forms part of Domestic UK Law pursuant to the
European Union (Withdrawal) Act 2018.
21 December 2022
Caledonian Trust plc
(the "Company" or the "Group")
Audited Results for the year ended 30 June 2022
Caledonian Trust plc, the Edinburgh-based property investment holding and
development company, announces its audited results for the year ended 30 June
2022.
Enquiries:
Caledonian Trust plc
Douglas Lowe, Chairman and Chief Executive Officer Tel: 0131 220 0416
Mike Baynham, Finance Director Tel: 0131 220 0416
Allenby Capital Limited
(Nominated Adviser and Broker)
Nick Athanas Tel: 0203 328 5656
Alex Brearley
CHAIRMAN'S STATEMENT
Introduction
The Group made a pre-tax loss of £1,302,000 in the year to 30 June 2022
compared with a profit before tax of £460,000 last year. The loss per share
was 11.05p and the NAV per share at 30 June 2022 was 197.3p compared with
earnings per share of 3.90p and NAV per share of 208.4p last year. The net
valuation loss in the year was £500,000 compared to a net valuation gain in
the previous year of £690,000.
Income from rent and service charges fell to £306,000 from £368,000 in
2021. The Directors consider that this is a non-recurring dip in income.
There were no property sales during the year compared with sales of
£4,186,000 last year. Administrative expenses were £887,000 (2021:
£440,000), the increase being substantially attributable to a non-recurring
purchase of intellectual property to enhance the value of the potential
development of St. Margaret's House for £363,000. Interest payable was
£139,000 (2021: £137,000).
Review of Activities
In the Group's property investment business, the principal change has been the
completion of the lease to Deliveroo of the largest unit in our high yielding
retail / industrial property at Scotland Street, Glasgow. Deliveroo have
completed their extensive fit out of nine "dark kitchens" within the unit
which are all occupied and trading. We continue to hold our other high
yielding retail properties in Berwick, our North Castle Street offices, four
Edinburgh garages, a public house / restaurant in Alloa, our site at Belford
Road / Bell's Brae, Edinburgh and St. Margaret's House.
St Margaret's continues to be fully let at a nominal rent, presently just over
£1.50/ft(2) of occupied space, to a charity, Edinburgh Palette, which has
reconfigured and sub-let all the space to over 200 artists, artisans and
galleries. St Margaret's continues to have its traditionally high occupancy
level.
We have appointed Montagu Evans to market St Margaret's House for which we
hold detailed planning permission for a development of 377 student bedrooms
and 107 residential flats. We plan to launch the marketing campaign in
Spring 2023 provided market conditions are propitious. We continue to
receive unsolicited interest from a broad spectrum of parties in advance of
the formal market launch. Further details in relation to St. Margaret's
House can be found in the Future Progress section.
At Brunstane we commenced construction of the third phase of development,
comprising five new houses over 8,650ft(2) forming the Steading Courtyard, at
the beginning of July 2021 and this development was completed in September
2022. We completed the sale of three of the houses in October and November
2022 for an aggregate £2m, and Knight Frank are marketing the remaining two
houses at offers over £675,000 and £695,000. The application for 11 new
houses (c.20,000ft(2)) "Upper Brunstane", in the Stackyard field to the east
of the steading was granted in November 2022. We intend to prepare the site
for development, take up the planning consent and secure the requisite
building warrant with a view to undertaking the development once market
conditions stabilise. We have made an application to modify the consent for
"Plot 10", lying between Phase 3 and Upper Brunstane, by replacing the single
large (3,500ft(2)) house with two smaller houses of similar combined size
which will complete the small courtyard leading into Upper Brunstane.
At Wallyford we are currently finalising several minor but important
variations to the planning consent for six detached houses and four
semi-detached houses over 13,350ft(2) and we have received detailed tender
prices, but are reviewing when to start construction in light of current
market uncertainty. The site lies within 400m of the East Coast mainline
station, is near the A1/A720 City Bypass junction and is contiguous with a
completed development of houses. To the south of Wallyford a very large
development of new houses is being built at St Clement's Wells on ground
rising to the south, affording extensive views over the Forth estuary to
Fife. Towards the eastern edge, Persimmon completed a development of 131
houses last year. On an adjacent site Taylor Wimpey completed a development
of 80 houses earlier this year and have started development of a second site
comprising 148 houses which are selling at prices of £340/ft(2) for small
three-bedroom semi-detached houses and £275/ft(2) for larger four-bedroom
detached houses. On the western side of St Clement's Wells, Barratts are
building almost 500 three and four-bedroom houses of which more than half are
completed with prices currently at £327/ft(2) for small three-bedroom
semi-detached and terraced houses and £280/ft(2) for larger four-bedroom
detached houses. The Master Plan for the St Clement's Wells development
includes a primary school, separate nursery and community facilities, which
opened in 2021, and a Learning Campus, including a new secondary school, on an
adjacent site which is scheduled to open in August 2023. Planning consent in
principle has been granted for a further 750-800 new houses on the adjacent
Dolphingstone site to the South-East. The environment at Wallyford, no
longer a mining village, is rapidly becoming another leafy commuting Edinburgh
suburb on the fertile East Lothian coastal strip.
The third of our Edinburgh sites is in Belford Road, a quiet cul-de-sac less
than 500m from Charlotte Square and the west end of Princes Street, where we
have taken up both an office consent for 22,500ft(2) and fourteen car parking
spaces and a separate residential consent for twenty flats over 21,000ft(2)
and twenty car parking spaces. This site has been considered "difficult".
To dispel this myth, we have created a workable access to the site; cleared
rubble and spoil; exposed the retaining south wall and the friable but strong
bedrock in parts of the site; and completed an extensive archaeological
survey. In consequence, the extent of the enabling construction works is
much reduced compared to earlier estimates. We have now instructed
architects to adjust the plans to meet current statutory requirements to
remodel the Belford Road façade and to reconfigure the internal layout with a
more contemporary open-plan design to reflect current market requirements.
Discussions continue with City of Edinburgh Council Planning Department.
The Group has three large development sites in the Edinburgh and Glasgow
catchments of which two are at Cockburnspath, on the A1 just east of Dunbar.
We have implemented the planning consent on both the 48-house plot northerly
Dunglass site and on the 28-house plot, including four affordable houses,
southerly Hazeldean site. The Dunglass site is fifteen acres of which four
acres is woodland, and a non-woodland area could allow up to a further thirty
houses to be built if the ground conditions, which currently preclude
development, could be remediated.
The Group's development site at Gartshore is within ten miles of central
Glasgow, near Kirkintilloch (on the Union Canal), East Dunbartonshire, and
comprises the nucleus of the large estate, previously owned by the Whitelaw
family, including 130 acres of farmland, 80 acres of policies and tree-lined
parks, a designed landscape with a magnificent Georgian pigeonnier, an ornate
15,000ft(2) Victorian stable block, three cottages and other buildings and a
huge walled garden. Glasgow is easily accessible as Gartshore is two miles
from the M73/M80 junction, seven miles from the M8 (via the M73) and three
miles from two separate Glasgow/Edinburgh mainline stations and from
Greenfaulds, a Glasgow commuter station. Gartshore's central location,
historic setting and inherent amenity forms a natural development site.
Accordingly, proposals have been prepared for a village within the existing
landscape setting of several hundred cottages and houses together with local
amenities. This would complement our separate proposals for a high-quality
business park, including a hotel and a destination leisure centre within
mature parkland.
The Company owns thirteen rural development opportunities, nine in Perthshire,
three in Fife and one in Argyll and Bute, all of which are set in areas of
high amenity where development is more controversial and therefore subject to
wider objection, especially as such small developments, outwith major housing
allocations, may not merit high priority. Thus, gaining such consents is
tortuous, although such restrictions add value and for most of these rural
opportunities, we have endured planning consents. Until very recently, the
rural housing market had not been experiencing the rapid growth taking place
in Edinburgh and Glasgow and in their catchment areas. However, values in
regions such as Perth and Kinross and Fife having risen over 8% in the past
year, but, with even more attractive immediate opportunities elsewhere, no
investment is proposed during the current year in the rural portfolio except
to maintain existing consents or to endure them. The improvements being made
to the A9, notably the completion of the dualling as far north as Birnam,
continue to benefit most of our properties north of the Forth estuary as
Ardonachie is now only 15 minutes from Perth; Balnaguard, Strathtay and Comrie
all 30 minutes; and Camghouran, a site for holiday houses, 90 minutes.
Economic Prospects
Economics, "just one 'dashed' thing after another…", Rudge replied, to
paraphrase Alan Bennett's "History Boys", on being asked to define
"history". So, indeed, is it proving as the UK economy, having contracted
0.2% in Q3 2022 (the Bank of England's forecast was 0.5%) is forecast by the
MPC to contract a further 0.3% in Q4 and to fall by 0.75% in H2 2022, so
starting a recession which, using the Bank's normal conditioning, based on
market implied interest rates, is forecast to last until the middle of 2024,
before regaining the pre-recession level in five years.
Over the last seven centuries there have been almost 200 business cycles of
varying severity, only a few of which were deep and about 15 lasting five
years or more. The worst of these cycles combined both such injurious
features.
Tolstoy's Anna Karenina portrays changes in fortune: "Happy families are all
alike; each unhappy family is unhappy in its own way". Similarly, economic
distress has many different causes, but they fall into four general headings.
Disease is the most virulent of the four separate, but at times overlapping
causes. The "plague": the Black Death, causing an economic contraction of
30% between c.1346 - 1353 (there were subsequent sporadic but lesser
outbreaks), resulted in England's most severe recession. There was a macabre
twist, causing it to fall outside the normal classification of recessions: GDP
per person rose during the economic contraction, as the appalling high death
rate of nearly 50% reduced the population, and simultaneously, real wages rose
as labour scarcities transferred resources from capital to labour.
The scale of the recession caused by the "plague" was not repeated in the two
subsequent disease induced recessions. The "Spanish" flu epidemic induced a
recession which started in 1918 which was compounded by the sharp change from
wartime production whose deflationary effects were reinforced by strikes in
the coal industry and widespread unemployment. The economy contracted by
about 7% and, before recovering, succumbed to the post WWI recession of 1920 -
1924, giving a combined reduction estimated at 22% of GDP.
Covid-19 caused the third of the "plague" induced recessions in which the
economy contracted 9.4% in 2020, including a spectacular 19.4% fall in Q2
during the initial "lockdown". This disease led recession is exceptionable
in that, due to the extensive Government financial support, businesses were
largely maintained intact so that, as the disease became controlled through
the extraordinarily successful vaccination programme, the economy recovered
rapidly, returning to the pre-Covid-19 level in December 2021. Recessions
are a curse on economies, and plagues are the curse of the first horseman of
the apocalypse, "galloping while bending his bow… with his brass quiver
filled with poisoned arrows, containing the germs of all diseases".
Famine, manifests as a black horse, ridden by the third and the most stealthy
of the four horsemen, was a frequent curse of the economy, but caused fewer
direct fatalities. England was predominantly an agricultural economy until
the industrial revolution in the late 18(th) century and, consequently,
"normal" season to season variations in agricultural output were by far the
major influence on economic output, giving rise to short-term business cycles
whose amplitude is not accurately quantifiable - but they occurred frequently
with roughly 30 such cycles every hundred years from 1272 to 1772. However,
one seasonal variation did produce one of the greatest recessions in England's
economy (Scotland was less affected), termed the "Great Frost". The winter
of 1708-09 was extremely cold and a severe frost gripped the countryside for
several months, lasting into the late spring. The thaw was then followed by
extensive flooding from the snow melt, factors resulting in a greatly reduced
cropped area, almost all of which was late sown, and so yielded a very poor
harvest. Simultaneously, the extreme cold winter and late spring caused many
livestock to perish.
There is a colourful contemporary account:-
The economic disaster followed the delay to the spring planting season.
"Pray for an early Spring", I was advised when commencing farming!
The second horseman, emerging when the second seal of the Apocalypse was
broken, rode a red horse and carried a sword vertically - the symbol of war,
the principal cause of many deep recessions. Just prior to the "Great Frost"
The War of the Spanish Succession, (principally 1701 - 1708) was the first of
many European great power conflicts, a predecessor to the Napoleonic and both
World Wars, was fought beyond Europe in Florida, Canada and the West Indies,
and in South America, India and West Africa, between armies each numbering,
for the first time, over 100,000, to whose number Britain contributed less
than 20%, but provided disproportionate financial support and caused over 1
million casualties. The consequent economic cost to the UK resulted in a
deep 15% recession in 1706 whose cost, having led to a review of the war
objectives, initiated the lengthy negotiation of the subsequent peace Treaty.
The second Great Power conflict, which concluded with the victory over
Napoleon's France at Waterloo in 1815, caused a recession of 5.3%, lasting
until 1819 in England and 1822 in Scotland. The recession was exacerbated by
a sharp decline in the textile industry where workers' pay was cut from 15
shillings a week to 5 shillings or less. The economy was also greatly
damaged by the reallocation of resources to agriculture and the resultant
transfer of income away from the high consuming lower income groups to the
high saving wealthy landowners caused by the passage of the first of the Corn
Laws in 1815 which boosted domestic grain prices by prohibiting cheaper grain
imports for less than the present equivalent of about £1,800 per tonne.
(The current, post Ukraine war, price is about £250 per tonne).
The third European Great Power conflict, WWI, induced an even deeper
recession, as GDP fell to 21% in 1921 and output did not recover to the 1918
peak until 1929, as the adverse effects of the war were reinforced by the even
more contractionary consequences of the Spanish flu pandemic.
The long-term cost of WW1 to the UK economy was significantly greater than its
costs while it was waged. The war consumed 10% of the UK's domestic capital
and 24% of its overseas assets and 25% of its GDP. The UK lost 3.6% of its
human capital from 715,000 military deaths and more than 1,500,000 injuries.
In addition to the direct domestic economic damage, the long duration of the
war caused far reaching changes to its trading partners throughout the world,
making them less dependent on UK trade, even when the UK had recovered the
necessary capacity. At the outbreak of WWI Britain was "the" leading member
of a worldwide liberal economic order with 54% of its GDP representing world
trade, accounting for 27% of the world exports, and had a net property income
equivalent to 9% of GDP from overseas investments. This all changed:
protectionism was rife, trade fell, and import substitution was widespread as
protectionism gave rise to domestic manufacture, and industries developed as
the UK was unable to supply them. The economic damage was exacerbated by the
post war decision to return to the gold standard (a fixed exchange rate),
particularly one based on the pre-war parity of $4.86 rather than $4.20, a
lower level deemed necessary for unemployment to fall to previous levels.
This move was controversial and was condemned by Keynes at the time whose
views, subsequently, were proved correct. The role of finance, monetary and
fiscal policy and financial regulation in causing recessions is the major
recurring theme in centuries of recurring recessions, a topic to be summarised
following a brief analysis of the recession caused by WWII, the most recent of
the Great Power wars.
The WWII victory resulted in another severe recession, as GDP fell 12.2% from
1943 to 1947, but unlike post WW1 the recovery took place quickly due to two
main factors. First, and most importantly, there was no "flu" pandemic.
Second, because after WWI several significant economy policy corrective
measures were recognised and largely embraced post WWII, remedial action was
both available and largely taken to mitigate the consequences of the war
devastation.
The most significant change was the reversal of the post WWI policy of
imposing harsh conditions on the debtors, and reparations from the losers.
Significantly, post WWII, Britain had loans equivalent to 25% of GNP and was
the major world debtor, owing the US £3.75bn in "war loans". To assist the
UK's and the world's recovery, these debts were rolled over into a 50-year
loan at 2%. At the same time, the US' European Recovery Programme "The
Marshall Plan" made over $11bn available to European recovery of which 90% was
as grants and of which Britain received £3.19bn. Thus, post WWII western
economies were not crippled as they had been after WWI. However, one
financial policy error was repeated, as subsequent to the Bretton Woods
agreement made in 1944, Britain again agreed to a fixed exchange, on this
occasion against the dollar, which, given the UK's inflation rate, proved to
be far too high and in 1959 Sir Stafford Cripps modified this policy by
devaluing Sterling by 30% from $4.03(23) to $2.80.
The last, the fourth horseman of the Apocalypse was revealed astride a sickly
green grey coloured horse, the pallor of some slowly spreading affliction.
Such a condition aptly describes the symptoms of recessions inherent in or
caused by the economic "systems" or their operation. These recessions occur
only in monetised systems - not, for instance, in purely subsistence
agricultural economies. One of the longest English recessions occurred
between 1420 and 1490 whose primary cause was a "credit" crisis, causing
silver bullion to be rationed. Imports from the Far East had greatly
expanded, resulting in a trade deficit, exacerbated by the collapse of
England's leading cloth export and wool, falling by 50% in the four years to
1445, and the deficit was financed by the export of bullion, notably silver.
The shortage of bullion was reinforced by hoarding of bullion, especially in
the East where, in the late 14(th) century, China's Ming dynasty reverted to
the silver standard, abandoning the Mongol Yuan dynasty's fiat currency. The
credit shortage became so great that by the 1420s only 13 pence per head was
available in England compared to 56 pence in the previous century. The Great
Slump finally ended about 1490 as bullion supply increased with higher prices
and improved mining methods, together with new supplies from Portuguese
exploitation of African gold supplies and later Spanish exploitation of South
American treasures and mines.
The Long Depression of 1873 to 1879 also originated mainly from changes in
bullion supply, but for different reasons. The US Coinage Act of 1873 ended
the bimetallic standard of both gold and silver and moved to a purely gold
standard. The elimination of silver abruptly contracted the money supply,
drove down the silver price and closed many mines, particularly those in the
extensive new mining area in Nevada. A worldwide recession followed,
particularly severe in Central Europe, then recovering from the 1870
Franco-Prussian War, but extending to the UK, which, although enjoying an
industrial boom, was suffering a long recession in the domestic Agricultural
Sector, having become exposed to cheaper international competition. The
United States economy, having experienced a long boom after the 1861-1865
Civil War, then experienced a deep recession.
The "Great Depression" lasting from 1929 to 1939 in the USA, primarily a
finance-based downturn, is worthy of its reputation as the world's most
notable economic downturn, as between 1929 and 1932 world GDP fell by 15%,
peak to trough, and remained depressed below its previous level for a
considerably longer time. The Great Depression was most severe in the USA
where GDP per head dropped from $7,100 to $4,950 or 30% by 1933 and GDP did
not recover to its 1929 level until 1939. In the US between 1929 and 1932
industrial production fell 46%, wholesale prices 32%, trade by 70%, and the
unemployment level increased seven times. The reduced severity of the
recession in the UK facilitated its economy's recovery to its pre-recession
level by 1934.
The causes of the Great Depression, originating in the USA, have competing
interpretations of its primary and ancillary causes, but all of them are
fundamentally "financial". A colourful popular interpretation is that the
stock market crash was a primary cause of the Great Depression, rather than a
reflection of the cause. However, stock market valuations do not reliably
reflect the reality, as promulgated by proponents of the "efficient market
hypothesis", but are greatly influenced by the perceptions of the
preconceptions of others, iteratively: they are guided, to varying extents, by
human behavioural traits as well as by analytical assessments, or even,
anecdotally, by New York cabbies who then became self-styled stock market
gurus. The American economy grew rapidly in the late 1920s, facilitated by a
major expansion of the credit base, widely extending consumers' credit in
various formats, including the establishment of a "never, never" or Hire
Purchase ("HP") purchase culture which reinforced the boom in business
profitability, where stock price rises were reinforced by the extension of 90%
broker credit, attracting even more speculative demand. In 1929 the market
was "spooked": consumer sales were considered to be falling. Almost
overnight there were margin calls on stock, their sales causing further drops,
bank withdrawals and asset sales to fund credit requirements, leading to
falling asset valuations and then to loan defaults undermining confidence in
banks, bank runs and then to bank failures, all in a vicious self-reinforcing
spiral.
The causes of the scale, the depth and the extent of the Great Depression are
disputed. The current preferred explanation of why a possibly "normal"
business cycle recession cycle so escalated is provided by the monetary
explanations of Milton Friedman and Anna J Schwartz who held that the US
Federal Bank did not intervene, but permitted both the collapse of the banks
and maintained high interest rates, and allowed the money supply to contract
by 35%. In short, the US Federal Bank attempted to control the economy by
following a contractionary policy which had the directly opposite result.
Unfortunately, the damage resulting from the failure of the US policy was a
contagion that spread across the world.
Following recovery from WWII the UK, together with most of the Western World,
enjoyed growth with minor deviations of up to 5% pa until mid-1973. The
economy benefited from various relaxations, particularly the deregulation of
the house mortgage market which permitted Banks, as well as Building
Societies, to lend for house purchases. Increased credit increased house
prices and the increased house wealth boosted demand throughout the economy, a
demand which was intensified by the mass distribution of credit cards,
(reminiscent of the HP credit expansion in the US in 1920s). Demand was
further increased by "Barber's Boom", the then Chancellor, Tony Barber's(32),
"dash for growth", designed to raise productivity and growth, a policy similar
to that espoused, all so briefly, by Prime Minister Truss.
A major factor contributing to "Barber's Boom" contained the seeds of its
destruction. From the late 1950s cheapening oil prices had stimulated the
economy as it substituted for coal, but was systematically destroying the coal
industry. In 1956 an output of 207 million tonnes was produced by 700,000
men, but by 1971 fewer than 290,000 men produced 133 million tonnes from many
fewer collieries. Falling demand reduced the bargaining power of the miners
who, in 1957, enjoyed a wage premium of 22% above their male counterparts in
manufacturing, but by 1967 their wage was 2% below that of a manufacturing
employee. Such resentments resulted in the miners' strike, 9 January - 28
February 1972, with severe effects on electricity supply and the economy.
It is indeed ironic that the strike demonstrated the continuing importance of
the coal industry only months before an unexpected event made it even more
important. In October 1973 the brief Yom Kippur War caused the Saudi led
OPEC countries to ban all exports to the USA and to use their cartel position
to increase its price from about $3 to $14 by 1976. Oil supplies to the UK
were interrupted and power generation became increasingly dependent on coal.
Against a background of rapidly rising prices and a looming oil shortage, the
miners called a strike in December 1973, reducing also this primary fuel
source for power stations with the consequent emergency regulations, including
rationing of electricity and the three-day working week, all together causing
a severe contraction in the economy.
The 1973 Barber Boom had led to an inflationary spiral, which was fuelled by
the Oil Price surge and reinforced by wage rises, gained by commercial
advantage, all combined to cause high inflation, peaking at 25% in 1975 whose
high prices reduced export volumes, so resulting in the sterling crisis of
1976, a crisis from which the economy was rescued by the record IMF loan of
$39bn. Ominously, while the economy did recover, peaking in late 1979,
inflation was still high, rising to 16.4% in 1980, the underlying problems of
the 1970s remained unresolved.
The Thatcher government's inheritance on replacing Labour in 1979 was an
economy with high inflation, expectations of high inflation, a disaffected
labour force, many of whose traditional industries, having become
uncompetitive, were closing. The underlying cause of this inheritance was
the poor competitiveness of the UK economy, permeated by lax fiscal and
monetary policies to which the continuing rapid rise in the prices by 1980
proved to be the "last straw". Temporising economic policies had exacted
their reckoning. The Thatcher government embraced monetarist policies and
instigated far reaching financial management reforms, principally, tightening
monetary policy, but including fiscal tightening, and widespread measures to
improve competition and, hence, productivity. In consequence, a deep
recession followed, employment peaked at 11.9%, GDP fell by 4.5% at its nadir,
company earnings declined 3.5%, and a recovery took three and a quarter years.
The stringencies of the early 1980s gave way to an economic boom, the "Lawson
Boom" - with echoes of the "Barber Boom" - partly due to the deregulation of
many financial controls and restrictions which greatly improved the supply
side of the economy, allowing higher growth without inflation. However, the
stimulation of demand again proved even greater than the supply capacity,
leading once more to an extensive inflation, reduced international
competitiveness and a major balance of payments deficit. Unfortunately,
possibly for political reasons rather than sound financial ones, the UK had
entered into a fixed exchange rate, the Exchange Rate Mechanism ("ERM"), and,
being unable to devalue, was forced to defend the fixed exchange rate by
raising interest rates, a peak of 15% being momentarily reached (3½% today
seems high!). These measures had caused the economy to fall into recession
early in 1990, reducing economic output for 3½ years by a maximum of 2.5% and
climaxing dramatically on 16 September 1992 when the UK left the ERM and
devalued the £ by 20%. Again, failed financial policies had prejudiced the
economy.
The next financially induced recession, starting in 2008, was different, very
different, from the "classic" inflation induced recessions of the 1980s and
1990s, the "Barber" and "Lawson" booms, where demand had been fostered beyond
the supply capacity of the economy, a barrier the revolutionary policies of
the Thatcher administration (Times 30.11.22) had only mitigated.
Following the 1990s recession, Gordon Brown, the then Chancellor, recognising
that Fiscal and Monetary Policy were both politically controlled and both used
financially unwisely by incumbent governments for political reasons announced
(on 6 May 1997) the setting up of an independent Monetary Policy Committee
("MPC") chaired by the Governor of the Bank of England to determine the
interest rate necessary to deliver the Government's target inflation rate,
thus removing monetary policy from direct political control. Such
independence, likely coincident with benign inflationary conditions, appeared
to deliver stable growth and inflation. Accordingly, Gordon Brown, in his
pre-budget speech of 6 December 2006 said,
"tenth consecutive year of growth … the longest period of sustained growth
in our history, but of all the major economies - America, France, Germany,
Japan - Britain has enjoyed the longest post war period of continuous growth
… sustained under this government for a record 38 quarters and will
continue into its 39(th) and 40(th) and beyond …".
Such pride did come before a fall, a spectacular one, heralded within nine
months when in early September 2007 a Scottish paper published a photograph
resembling an old-fashioned bank run - depositors outside the Northern Rock
("NR") offices in Edinburgh waiting to withdraw their money. Next day the
Bank announced an emergency liquidity supply.
There appeared, initially, to be a classic "bank run", the first in the UK
since Overend, Gurney & Company in 1866, but the "run" on NR had a
different and more subtle and other underlying cause. Unusually, NR relied
not primarily on retail depositors who constituted only 23% of its
liabilities, but on a combination of short-term borrowing and other and
building society long-term funding, such as Preferred Stock, but not on
Collateralised Debt Obligations ("CDOs") or other "structured" assets. NR's
total assets had grown from £17.4bn on flotation in 1998 to £113.5bn in
January 2007, an asset growth financed largely by substantial debt and reserve
notes, such that total assets divided by common equity, which in June 1998 was
22.8, (high even by US investment bank's high standards of c.25.0 at that
time) became 60.0 in June 2007 and 86.3 in October 2007. With such very high
borrowing, or "leverage", an even very small discounting of the value of
non-equity liabilities would wipe out the miniscule common equity. Leverage
determines the degree of risk taken by unsecured creditors, especially those
lending at a discount to the face value of the security which in 2007 was
normally 2% to 5%, the quaintly termed "haircut". It implies, if the haircut
is 2%, that the borrower needs £2 equity per £98 security or a ratio of
50. If the haircut rate is 4%, then the borrower can only borrow £46
security: thus, if the "haircut" increases, either even more equity is
required for a given amount or less security can be borrowed. Highly
leveraged entities such as NR were, therefore, very "exposed" to changes in
the perceived creditors' risk or "haircut" level, as determined by the credit
"market".
On 9 August 2007 a key event occurred when the French Bank Paribas closed
three investment vehicles using short-term money such as was used by NR, a
very public illustration of a widespread credit funding difficulty then
affecting more and more institutions. Critically, while NR had almost no
exposure to the subprime market in which Paribas lent, it was "fishing" -
borrowing - in the same financial pool, which abruptly shrank and many
institutions and investment vehicles fishing there were experiencing
difficulties in renewing their loans. For NR its high leverage resulted in
that financing market closing to them and the management was forced to turn to
the Bank of England for support, which granted loans for £28.4bn in December
2007.
That support of the Bank was given before the "run" on NR - it was not the
"run" that caused NR's difficulties, but the earlier withdrawal of credit
facilities by wholesale markets, sophisticated institutional investors, due to
a sudden change of or reappraisal of international and individual credit
risk. NR's liquidity crisis was different to a normal "bank run". In
normal "runs" when assets are impaired each individual depositor runs for fear
that the others will run, leaving no assets left for those that do not run,
deemed "co-ordination failure". NR assets were secure at that time. NR was
a prime mortgage lender to UK households when house prices were rising and
employment was stable, and at that point there was no sign of any
deterioration in the loan quality.
Thus, NR did not represent a normal bank failure: it was the change in risk in
credit, or the perceived change in its risk that required higher returns and,
therefore, a higher equity cover that undermined NR. Such a risk is separate
from the security of banks' loans and their related regulation and lies with
the extent of capital market risk, and as such banking and capital market
conditions should have been considered jointly and so regulated.
Consideration of the credit market was a lesson, self-evidently, lost on the
Royal Bank of Scotland ("RBS") when in October 2007 RBS took over ABN Amro in
the largest deal in financial history. The FCA - FSA Board Report found
that, subsequent to the takeover, RBS had, on present criteria, Tier 1 capital
of less than 2%, echoing the capital structure of NR. The changed credit
risk environment was a time bomb which was primed when the Wall Street
investment bank, Bear Stearns, was rescued by JP Morgan Chase in March 2008
and exploded dramatically when Lehman Brothers collapsed precipitously in
September 2008. Neither the prospect nor the extent of this credit bomb
were, presumably, foreseen by financial regulators, as presumably they had not
been seen by the RBS, who pressed forward with the ABN Amro takeover
regardless. (Or was it one or more of: momentum; hubris; incompetence;
autocracy; or "ostrich"?). One wag declared it represented the ultimate
triumph of Marxism: the capital owners were denuded and the banks' workers
enriched. As the late Queen Elizabeth said to Professor Luis Garicano,
Director of Research at the London School of Economics Management Department:
"If these things were so large, how (come) everybody missed them?"
Certainly, the Bank of England were oblivious of the burning fuse as it
increased interest rates from 5½% to 5¾%(42) in July 2007 on the eve of one
of the largest and longest recent recessions.
The recession starting in Q2 2008 was qualitatively different from all recent
financially induced recessions. These have generally occurred following
restrictive monetary policies imposed by the Bank to reduce inflation
following booms due to excess demand over supply and not by recessions
directly delivered by external creditors: this was a financial balance sheet,
or credit crisis, the first since the 1930s Great Depression. It is
pertinent to enquire, given the scale of the bailout to financial
institutions, and the cost to the economy of what has proved to be a long
period of exceptionally poor economic performance with a continuing lasting
heritage, if it would not have been very much cheaper to have scotched the
problem earlier. For example, if, importantly, Lehman had been saved, or on
a much smaller scale NR, and credit or credit assurances flooded the market,
as was undertaken with the rescue of the clearing banks, would not then the
subsequent cost of the recession proved so very much smaller? The Fed's and
the Bank of England's early decisions may just have more than a slight
resemblance to the policy failures causing the Great Depression - doing the
wrong thing! In striking contrast was Mario Draghi's epic undertaking
"Whatever it takes…".
The Great Recession caused the economy to contract by 6.25% and it did not
recover to its former level for 5 years in the UK, longer even than the Great
Depression in the 1930s. More significantly, during recovery there was no
higher rate "catch-up" growth, such that usually restores real GDP to that
level implied by the previous growth rate, but rather growth stalled and
experienced a double dip recession in 2011, partly caused by the misjudged
fiscal austerity measures of the Cameron / Osborne administration. In the
Eurozone, the even greater austerity measures, caused a longer depression in
contrast to the US' laxer policy, led by Bernanke's effective endorsement of
the monetary interpretation of the causes of the Great Depression, which
restored their economy more rapidly.
Further damage to the economy has been caused by an apparent widespread
lasting effect on productivity, particularly in the UK where productivity,
adjusted for inflation and the exchange rate, grew only 0.27% p.a. between
2008 and 2019 in contrast to 0.70% p.a. in France and Germany and 1.00% p.a.
in the US. Until 2007 UK output per hour was the second highest in the G7,
but by 2019 it was second lowest, 18% lower than France. The degree of
uncertainty is often cited as a deterrent to investment, especially its
timing. Investment only is made when a favourable outturn is expected, but,
as in all investments, there is a probability of an unfavourable outcome. If
the possible cost of the unfavourable outcome can be reduced by waiting by
more than the opportunity cost of delaying that investment, it is logically
correct to delay. Furthermore, in practice, as the "behavioural" cost of a
loss is greater than the "economic" cost - and behaviour tends to shun losses
more than it embraces profit - then investment is even more likely to be
delayed. In practice few Boards will sanction big investments when by
waiting, even at net overall cost, the prospect of big losses can be
avoided. Interestingly, I consider that to be a precise interpretation of
many present decisions, as described colloquially as "uncertainty": forgetting
everything is "uncertain", taxes and death excepted!
There is a separate constraint on investment: just as success breeds success
so investment is both a cause and a consequence of a healthy economy - it
results from robust demand and delivers stronger supply. Such an
understanding may have been implicit in the abandoned economic policy that
Prime Minister Truss sought to introduce - a stimulus to the economy producing
a self-perpetuating investment boom. Unfortunately, that policy, possibly
enlightened under some circumstances, quickly proved unworkable as the policy
raised investment costs, particularly interest costs in credit markets, and
the exchange rate of the pound fell. The New Deal in the US was introduced
when markets accepted such a policy. Perhaps, as is averred, the bond
markets really do determine the fate of advanced economies.
The economy has made the most remarkable recovery from the Covid induced
recession and by Q2 2022 had just regained the pre-Covid level of Q4 2019, a
slightly worse outcome than Germany, and considerably worse than the US which
has grown 2.5%, while the two other major European countries, Italy and
France, grew about 1.0%. The war in Ukraine has inevitably reversed the
recovery and in the UK the economy has started to contract, falling 0.2% in Q3
2022, taking it 0.4% below its pre-Covid level in Q2 2019 and is expected by
the Bank to contract a further 0.5% in Q4, before continuing to contract
throughout all 2023 and H1 2024.
The long recession now forecast has multiple coincident causes, including
shortcomings in financial management. The singular most obvious cause of the
recession are the soaring prices of fuel, mineral oil and gas, and food
commodities, grains and vegetable oils, caused by the war in Ukraine and the
response of the Western powers to that war. If Ukraine had been allowed to
fall, the economic consequences would have been relatively insignificant.
Much blood and treasure is being, and will continue to be, spent on principle
and perceived strategic protection. Fortunately, for the EU and the whole of
the Western "alliance", the majority of that price is being and will be paid
by Ukraine and the US. The bitter irony is that amongst those countries in
receipt of most benefit, lies the greatest aversion. It is primarily the US
shield that safeguards Europe, not any European nation nor any combination of
European nations, and it is European security that is primarily threatened.
Perversely, the war poured "oil" on a burgeoning fire. Covid, a cataclysm
saved by the brilliance of research and of its application, together with
exceptionally gifted administrative decisions, notably in the UK, and rescued
by very generous fiscal reliefs and the injection of unprecedented
accommodative monetary measures, caused spending to surge rapidly in the
recovery. That surge in demand encountered an array of constraining supply
restrictions: restarting production chains; crowded ports; shipping shortages;
and manifold other supply problems caused by this outbreak of Covid, weather
and restrictions in labour, capital and facilities, causing inflation. The
war started before these restrictions had been removed, greatly compounding
them. Unfortunately, monetary responses, especially in the UK lagged this
reality. Bank rate was 0.1% until December 2021 and rose in May 2022 after
the start of the war to only 1.0% when the Bank said:
"After the peak in 2022 Q4, the upward pressure on CPI inflation is expected
to dissipate rapidly, as global commodity prices are assumed to rise no
further, global bottlenecks ease, and domestic inflationary pressures subside
in response to weaker growth of demand and a rising degree of excess supply.
CPI inflation is projected to fall to just above the 2% target in two years'
time, largely reflecting the waning influence of external factors, and to 1.3%
in three years, well below the target, reflecting weaker domestic pressures".
And in August 2022(46), when it raised interest rates to 1.75%, the MPC said:
"We expect inflation to begin to fall next year.
It is unlikely that the prices of energy and imported goods will continue to
rise so rapidly.
We expect that some of the production difficulties businesses are facing will
ease.
The slowdown in demand for goods and services should also put downward
pressure on prices.
We expect inflation will be close to our 2% target in around two years…".
In November the MPC raised the interest rate to 3%, saying:
"There has been a material tightening on financial conditions… As a result,
the UK economy is expected to be in recession throughout 2023 and 2024 H1 and
GDP is expected to recover only gradually thereafter".
The Bank is set at catching up with events: rates had been too low for too
long. Strikingly, this has been the inverse of the MPC's decision in
response to the onset of the Great Recession in 2008 when it held interest
rates too high for too long: having raised interest rates in the teeth of the
threatening storm in July 2007 to 5.75% the MPC only cut the rate by 0.5
percentage points in December 2007 while the main cuts were delayed until
October 2008 and March 2009 when rates were reduced to 0.5%. Then, as now,
they were behind the curve.
The depth and the extent of the recession into which the economy is entering
is varyingly forecast. The Bank of England have a forecast based on Bank
Rate, implied by recent financial markets peaking at 5.25%, and an alternative
one based on interest rates at 3%. Using the higher interest rates a 0.75%
fall in output in 2022 Q3 and Q4 reduces 2022 growth to 0.1% with a fall of
1.9% in 2023 and another fall of 0.1% in 2024. Judged quarterly, the economy
is expected to have a maximum contraction of 3% enduring from the 8(th) to
12(th) quarters from Q3 2022 and then to recover to the previous level of Q2
2022 in just over 5 years' time, an almost similar length of recovery time to
the Great Depression. Less pessimistically, if peak 3% interest rates are
assumed, - an unlikely forecast - the recession is less than 2% in the worst
quarters and the economy recovers to the pre-recession level in about four
years. Patently, while the alternative forecast represents a far less
unfavourable outcome, the basis of its assumption is improbable, although the
peak rate of 5.25% used in the Bank's forecast has already been shown to be
most improbable, any revised forecast would be more favourable than their core
forecast.
The OBR's forecast corresponds relatively closely with the Bank's alternative
forecast with a peak to trough fall of 2%, but the economy is forecast to
regain its pre-recession level more quickly in about 2¼ years time. The
Bank's survey of independent forecasters' reported their forecasts were on
average in line with the Bank's alternative and less severe forecast, and
after a small fall in 2023 expected growth to return to 1.8% in 2024 and in
2025.
A recession, possibly not deep, but probably long, seems almost certain, given
the relatively benign Economists' consensus. However, of certainties Keynes
said: "the inevitable never happens and the unexpected constantly occurs", a
dictum unfortunately true of consensus economic forecasts, as demonstrated by
the failure of the consensus view in forecasting the US recessions since 1970
- not one of them had been forecast! The unexpected is a constant in
markets, sometimes flying in as a "black swan", but on another "wing" there is
always the possibility of a "bluebird" event bringing unexpected joy - a warm
winter or peace…!
The betting odds, as those of us habitually backing outsiders know to our
cost, are usually good forecasters as are the markets, unlike consensus
economists. In this case, most regrettably they agree with the economists:
we may have to wait a while for that bluebird. Much may depend, as Larry
Summers asks, whether the Bank considers interest rates to be as antibiotics
or to be as steroids: with antibiotics it is better to take the full course of
medicine whether the affliction appears to have passed or not; with steroids
it is better to stop as soon as possible to avert possible serious harm. In
the past they have prescribed antibiotics, missing the inflexion point.
I forecast that, provided there is no serious escalation of the Ukraine war,
interest rates will not rise above 4.25% and that inflation will fall back
quickly as commodity prices become at or below the comparison level and as
supply restrictions ease further and demand is reduced by high interest
rates. Thus, interest rates should fall from the peak quickly and return
gradually to "normal" levels of about 2.5%, rather than the abnormal levels
obtaining past the 2008 Great Recession.
Property Prospects
Economic prospects do not portend well for property as the economy falls into
recession which, according to the OBR, is likely to last until late 2023 with
a peak to trough fall of GDP of 2.1 percentage points or according to the Bank
of England's central projection until H2 2024 with a peak to trough fall of
3.0 percentage points, and returning to the pre-recession level in 2027.
The Bank of England's central projection is based on the interest rates path
then implied by financial markets which (in the UK) rose to a peak of 5.25% in
Q3 2023, before falling back.( ) This path is around 2.25 percentage points
higher on average than in the Bank's August projection. The Bank's
alternative November projection, not conditioned by the interest rate path
implied by the financial markets, is based on interest rates being constant at
3%. In this alternative projection the peak to trough fall is only 1.75
percentage points, as the economy comes out of recession slightly earlier and
returns to the pre-recession level in 2026.
The dramatic and continuing tightening of the money supply is rapidly raising
interest rates, reducing credit availability and the solvency ratio of loans,
and reducing the margin between the return on property and other investment
classes, and more secure investments. In consequence the demand for both
investment and residential property is falling, and, with the expected further
monetary tightening, will fall faster and further.
Interest rate rises will increase financial distress in both business and
residential property owners and increase the supply of property.
Simultaneously, lower business profitability margins and lower consumer
incomes will reduce demand for both business premises and residential
premises, reducing property rents for business premises, and values for all
property types. These deleterious influences on the property sector are
being reinforced by the economic disruption caused by strikes which will
reduce output and result in a greater supply of property and, a lesser demand
for it: a vicious circle.
From next year these adverse effects will be reinforced by the tightening of
fiscal policy, mostly resulting from the fiscal drag implied by not indexing
most tax allowances. Currently the EPC provides a fiscal transfer,
principally to consumers, by rescheduling fiscal costs.
Comment on financial and political causes of the recession are not germane to
analysis of the effects on property of the impending recession. However,
there are three main factors that assist interpretation. First, low interest
rates were maintained post Covid for longer than required to support the
economy, resulting in an inflationary surge. Second, low interest rates
resulted in capital appreciation of all asset classes and increased incomes of
the minority benefiting from all aspects of asset handling, managing and
transferring, while productivity increases and output gains were very low.
The small growth in the economy achieved was disproportionately allocated.
Third, the military war in Eastern Europe has, unsurprisingly, increasingly
embraced an economic war whose consequences include a disruption of fuel
supplies both by sanction and by renewed exploitation of the oligopoly enjoyed
by the OPEC+ cartel of oil and gas suppliers. These mechanisms have allowed
an immediate transfer of economic wealth from the consuming economies to the
supplying economies.
These seeds of distress which have been sown, unfortunately, are now
germinating. Early indications of distress in the property sector are given
in the IPD Index, which over 10 years has given a return of 8.1% p.a., and
4.1% last year, has declined a record 6.5% in October 2022 alone, faster even
than in any month during the 2008 financial crisis.
The November 2022 CBRE reports on the investment yields of 39 separate classes
and sub-classes of commercial property and 24 separate classes and sub-classes
of "bed" residential property and described all 63 categories as "trending"
weaker, or falling in value, a similar trend to that previously shown in
October 2022. Since December 2021, commercial property yields have increased
generally about 0.5 percentage points except for secondary investments which
remain unchanged at high levels. Offices and Industrials have become
considerably weaker with all yields rising about 0.75 percentage points except
for "secondary" sub-classes all rising about 1.25 percentage points. The
four other commercial classes, Healthcare, Leisure, Pubs and "Car" mostly
rising between 0.3 and 0.5 percentage points. In the "bed" sector, Build to
Rent ("BTR"), Purpose Built Student Accommodation ("PBSA") and London hotel
yields are little changed since last year in spite of "trending" weaker.
Within the retail sector since June 2022 only the yield of Prime Supermarkets
has changed appreciably, rising from 3.50% to 5.0%, with the capital value
falling 30%. Office yields have risen by a minimum of 0.25 percentage points
in the West End, but by 1.0 percentage point in regional cities and up to 2.0
percentage points in secondary locations. Industrials have suffered similar
large rises in yield, a maximum of 1.50 percentage points from 3.25% to 4.75%
for the Prime Distribution sub-class, their capital value falling 32%.
The leisure and pub class has generally increased yields since January by 0.75
percentage points, but the healthcare yield has risen between 0.25 percentage
points and 0.5 percentage points. In the "Bed" group Residential yields
since January have not changed in London and rose only by up to 0.25
percentage points elsewhere. Hotel yields rose only 0.25 percentage points
in London but up to 0.90 percentage points in Prime Regions. Prime Student
accommodation yields have risen only 0.25 percentage points in London and by
0.5 percentage points, elsewhere, with higher rises for other sectors.
The yield figures quoted in November for student accommodation are consistent
with CBRE's earlier analysis.
"Yields - There continues to be demand for good quality assets in cities with
favourable supply and demand characteristics. Yields are now starting to
come under pressure from the wider economic headwinds but there is a lack of
direct evidence to support any movement in Q3 2022. As such the sector is
currently in a period of pricing discovery."
"Outlook - Demand for higher education is the highest it has ever been, and
this is translating into strong occupational demand for operational PBSA,
which is likely to translate into a period of sustained rental growth. The
wider economic headwinds are placing some pressure on the sector. However,
with several portfolio deals currently in the market, and the Student Roost
portfolio transaction proceeding investment volumes in 2022 could still mark a
new record".
The downturn in Capital values reported by CBRE is consistent with recent
Investment Property Forum ("IPF") surveys of commercial property. In the May
2022 survey "All Property" capital growth was estimated to be 5.9%, but by
September 2022 this had been downgraded to 2.3% and the most recent November
forecast for 2022 is a contraction of 6.4%. The values of all categories of
investment property fell by between 6.1% and 8.1% except Retail Warehouse
whose fall is restricted to 1.0%. In Winter 2021 the Capital Value growth
for 2022 was forecast as 1.8%, a forecast rising in Spring 2022 to 5.9% before
falling to the current -6.4%, a turn round of 8.2 percentage points.
Forecast of capital value returns in 2023 have been similarly downgraded and
are currently estimated at -7.1% compared to 1.9% in Spring of 2022, with all
sectors, losing value of from 6.8%, Industrial, to 8.0%, Shopping Centres.
The rental growth in the industrial sector has continued to be high, gaining
an estimated 10.1% in 2022, which, together with a small rise in office rental
values, offset continuing falls amongst the retail sector to give an
All-Property rental rise of 3.7%. However, in 2023 a further small growth in
industrial rental value is outweighed by falls in all other sectors and the
rental value increase is forecast to be 0.6%. Rents are estimated to
contribute only 4.5% p.a. to the All-Property Total return in the years to
2026. Changes in that return are almost wholly due to changing capital
values.
Capital values are estimated to increase from 2024, but by only 1.9%, 6% and
3.4% in the years to 2026 while stable rents add 4.5% to the total return,
resulting in the total returns, negative in 2022 and 2023, rising to 6.8% in
2024, and a peak 9.0% in 2025 as capital values recover, presumably in line
with projected future interest rate reductions, post-recession, but reducing
to 8.0% in 2026. The estimated total return over the five years to end 2026
is 3.6% p.a., almost 2.00 percentage points lower than was forecast as
recently as September 2022.
Thus, the estimated prospects for property returns are very poor, although
there is an estimated medium term recovery dependent, presumably, on interest
rates falling and economic growth returning before 2025.
The poor returns to commercial property over the next few years have three
separate but distinct strands. First in a "normal" business, or inflationary
"Minsky" cycle, there is a pattern of a fall and then a recovery to the
pre-cycle level. The recession is expected to develop into a recovery with
continuing economic growth. However, a second separate strand influencing
this cycle is non-recurring. Since the start of the Great Recession in 2008,
interest rates have been held at abnormally low levels by aggressive monetary
policies. Capital asset values, including all commercial property, have
correspondingly reflected the low cost of capital which has boosted asset
values by increasing their value, or, when falling for other reasons,
moderating their fall. However, the recent atypical period of unnaturally
low interest rates has ended abruptly, and will result in a significant change
to property values and to the value of entities investing in them.
The third strand affecting property capital values is that of secular change,
whose nature is specific to each sector. Unfortunately, there are
deleterious secular changes in all the three main commercial sectors: office;
retail; and industrial.
The demand for office space is being spectacularly reduced by "hybrid"
working, or working from home. The extent of this change is substantial but
not yet quantifiable, although in certain main office areas office occupancy
rates, while recovering, continue below 50%. A recent survey concluded that
the long-term reduction in space needed would be between 20% and 40%.
The demand for even "modern", but not "state of the art", offices will be
further reduced by the increased demand for office environments that are
"greener", less energy intensive and more sociologically attractive. The
effect of such changes are not yet reflected in the market where the industry
shelters behind a façade of "prime will be fine"!! The same mantra was
repeated in the retail sector, when the retail downturn started, but the prime
sector, initially appearing immune to value falls, ultimately succumbed, as
the downturn persisted. The same is forecast to happen to office values: the
commercial property industry, like most industries responds reasonably rapidly
to general economic change, such as interest rate change and recession but to
changes in the industry - secular changes - the response, while slow at first
will finish fast - as "Mike" replied in Hemingway's, The Sun Also Rises, when
asked "How did you go bankrupt?". "Two ways" he said "Gradually
and then suddenly". Disruptive changes in industry are sometimes,
surprisingly quick: think Kodak!
In Retail a similar secular change continues to have deleterious effects.
Online shopping before the pandemic accounted for about 18% of retail sales
and, unsurprisingly, peaked during "lockdown" at 37.8% but is still at 26.4%,
and although considerable adjustments have been made, the process of
adjustment to the value of retail assets is incomplete, as retailers were
traditionally tied into longer term upward only leases, delaying all the
required adjustment.
The industrial sector, specifically its logistics sub-sector, servicing online
businesses, has just completed a large transformation in adjusting to the
booming online revolution. The sudden growth in demand resulted in yields
dropping from their traditional high levels, usually 8% to 10%, to a record
3.0% in Prime London and 4.5% in good secondary locations, and in rents rising
by as much as 10% in early 2022. However, quite suddenly, this has changed,
as this rapidly rising sector consolidates. Colliers note that in H2 2022
yields are shifting out rapidly and capital values are falling by 10.2% and
they expect yields to continue to soften by 1.50 percentage points, and rental
growth to slow from the current high of 10.3% to 2.9% in 2023. Thus, all
sectors of the commercial market, excluding the bed sector - considered below
- are unlikely to prosper in the coming years, a long-term trend that has
persisted with exceptions such as the logistics sector since 2007, the peak of
the market.
The residential market is not undergoing the secular and structural changes
being experienced in the commercial sector. A cyclical change is occurring,
possibly a moderately severe one, but the factors underlying the strength of
the residential market are unlikely to change in the medium term. Indeed,
part of the residential market is and will continue to be very strong. In
July rental growth was 12.3% in the UK, 14.0% in London and 14.7% (Q3) in
Edinburgh, where agents report they have "never operated in a more competitive
market". Current and even forecast lower house prices together with
difficulties in mortgage availability and the Financial Policy Committee's
stress test restrictions will support rental demand. The supply of property
to let is being progressively reduced by the reduction of individual mortgage
interest relief to 20%, tighter credit controls, higher buy to let mortgage
interest costs, and increasingly severe and unpredictable regulatory
impositions - especially in Scotland where currently, evictions, even for the
non-payment of rent, are unlawful until at least April 2023. Historically,
rents do not fall in line with house prices and, even in the Great Financial
Crisis in 2008, English rents fell only 2.2% from which they recovered in just
over a year. Unsurprisingly, Savills forecast that rents (of second-hand
properties) will continue to rise at 6.5% in 2023 and 4.0% in 2024 before
reducing to 2.5% p.a. thereafter.
Savills reduction in rental growth from 2025 is based, in my view
questionably, on a much increased supply of property from house owners either
gaining vacant possession in forced circumstances such as repossession,
divorce, or care or being unwilling to sell into a perceived poor market.
Doubtless this will occur, but the "difficulties" of owning property to let
have now become so onerous that I forecast that there will continue to be a
reduction in the supply of privately owned rental property. Certainly, in an
even more recent report on UK "Prime Residential", Savills conclude that in
spite of such "accidental landlords, supply shortages are predicted to remain
a lasting feature…".
For PBSA there are no such "accidental" landlords and supply, while
increasing, is insufficient to meet the growing demand and rents are expected
to continue to rise after a pause due to uncertain demand during the Covid
pandemic. Unite, the leading student housing provider expects rents to have
increased 3.5% this year and to increase a further 4.5% to 5% next year. The
FT's summary is: -
the "student housing is the bubble that won't burst…" it has "the sort of
market that private equity dreams are made of: a sector with a structural
supply imbalance, supported by resilient demand from wealthy foreign students
and well-off middle-class parents who prioritise spending on their offspring's
education".
House prices do not have the same benign short-term expectation. Prices have
risen dramatically since Covid peaking in the year to September 2022 at 9.9%
Halifax and 7.5% Nationwide; and in Scotland in June 2022 at 9.1% Acadata,
since when prices have fallen further each month and by 2.3% in November, the
largest monthly fall since 2008. The causes of house price falls are
increasing mortgage rates, increasing deposits, stricter terms, lower
disposable incomes and a higher degree than usual of economic uncertainty,
being reinforced by a "wait and see" if prices fall even more.
The Bank report that house prices are expected to continue to fall, and the
OBR optimistically records falls of 1.2% in 2023, 5.7% in 2024, but a recovery
in 2025 of 1.2%. Other forecasters are more sanguine: peak to trough falls
of 10% are forecast by Knight Frank and 12% by Capital Economics.
Savills predicate their forecast on two important assumptions: that
unemployment a critical determinant in earlier recessions will rise less than
is usual to "only" 4.8% and that interest rates "only" to 4% and fall in
2024. On these assumptions they forecast that UK prices will fall 10.0% in
2023, recover to a 1% rise in 2024 and will then rise rapidly to increase by
6.2% over the five (1.2% / year) years to 2027. These 5-year averages
include considerably poorer figures for London of 2%, for the South-East and
East of England 3.0% and over 11.0% for North of England, Yorkshire and Wales
with an intermediate 9.5% for Scotland.
Savills differentiates the "Prime Market" from the "Mainstream". The Prime
Market is less influenced by the price or the availability of credit and is
not expected to be so adversely affected in the forthcoming downturn as the
mainstream market. In 2023 Regional "Prime" houses will fall by 6.5% in
value, rather than the 10.0% fall for mainstream and then recover similarly in
2024 and achieve a 9.9% growth over 5 years to, and including, 2027, a
slightly higher increase than mainstream prices. In Scotland the pattern is
expected to be similar with a lower fall of 5.0% in 2023 and an overall rise
of 12.7% by end 2027 - a modest increase!
How far will prices fall in this recession? In the Great Recession, a much
deeper and slightly longer one than forecast generally, Nationwide recorded
peak to trough falls of All Houses 18.6%, New Houses 12.9%, Modern 18.8% and
Older Houses 19.6%. The current recession, while significantly a finance
induced recession, is unlikely to impact house prices as much as the Great
Recession. Credit levels are lower, equity is higher, many more mortgages
are fixed, and the lending criteria for mortgages has been significantly
tightened since then. Most importantly, unemployment is forecast by the Bank
to peak at 6.4% in the MPC's central projections but only at 4.9% by the OBR,
significantly lower than the unemployment in the Great Recession which rose to
8.04% in 2011.
Indeed, most forecasts are for price reduction of about 10%, but for a
reasonably quick recovery. I forecast that the rates will rise less than the
Bank expected and that inflation will fall quickly as the one-off fuel prices
drop off comparisons and there is a contraction of the supply, adjusting to
lowering prices, already so evident in many commodities such as oil and other
commodities. Indeed, disasters foreseen often fade: one unlikely risk to
this forecast is external: a serious escalation of the war; and the other but
equally unlikely risk is internal: political difficulties emanating from a
reduction in living standards in some sectors of society.
The Halifax index previously peaked at the £199,000 recorded in August
2007. The equivalent RPI inflation-adjusted price in October 2022 would have
been 71.8% higher or £341,938, and the current Halifax price in October 2022
is £292,406. In spite of this year's rapid rises, the current price is
still 14.5% lower in real terms. If house prices rise at 4.0% per annum and
inflation is 2.0% per annum, then just less than 12 more years must elapse
before the August 2007 peak is regained in real terms.
House prices are difficult to forecast and historically, notably, recently,
errors have been large, especially around the timing of reversals or unusual
events such as we have just experienced. For the long-term, I repeat my
previous forecasts, "… the key determinant of the long-term housing market
will be a shortage in supply, resulting in higher prices".
Future Progress
The Group's strategy continues to be the development of its sites in the
Edinburgh housing market areas and the geographical extension north and east
that is occurring, while maximising the value of its investment portfolio.
The Horsemill phase of our Brunstane development sold out very successfully in
Q1 2021, allowing a start to the adjacent Steading phase of five stone faced
dwellings in a courtyard, whose construction was completed in the Autumn of
2022. Three houses have been sold since 1 July 2022 at above the Home Report
Valuation and the remaining two houses, while still attracting considerable
market interest, remain unsold.
The current pause in the housing market and the very considerably increased
construction costs have delayed the start to our 10 house development near the
station in the centre of Wallyford, a very rapidly expanding commuter suburb
adjoining Musselburgh. Currently, we are redesigning the project to reduce
costs and intend to commence development at a time when the planned completion
will coincide with an upturn in sales, expected in 2024. We intend to follow
this, having gained planning consent last month, with the penultimate phase of
our Brunstane development of 10 houses, which, unlike the previous two phases,
is of simpler construction.
We continue to work with our architects to update our existing consents at
Belford Road with improvements within the existing consent, so providing 20
modern high amenity flats in keeping with the high quality and varied style of
the location. The improved design incorporates changes necessary for new
insulation standards and other environmental improvements. The design
improves fenestration and the internal layout, and the external and internal
finishes. The planning process has been subject to even greater delays than
usual and this updated design, while originally deemed suitable, is now having
to be further refined to meet the planners' revised requirements.
Whenever market conditions are more favourable, we intend to market St.
Margaret's House for which we hold detailed planning consent. We are
currently taking steps to undertake a limited amount of work on site
sufficient to safeguard the planning consent. Last year we delayed bringing
the property to market in November as at that time the market was considered
likely to be further improved by the Spring of 2022. We had continuing
unsolicited offers to purchase the property and in January 2022 we entered
into an exclusivity agreement with an attractive indicative non-binding offer,
albeit one arguably reflecting the market price at that point in time rather
than those special conditions pertaining to the failed higher Drum offer.
The proposal made earlier this year required the use of the existing
Intellectual Property ("IP") and the finalisation of all the agreements
necessary with the neighbours, Network Rail and the Scottish Ministers, as
well as road access approvals from the City of Edinburgh Council. These were
obtained after very considerable delays and cost in August 2022, but by this
time the interests of the prospective purchaser had changed in view of greatly
increased construction costs, higher interest costs and lower investment
value, and a rise in uncertainty and they ultimately declined to proceed.
Now, a year later, we are proposing to market the property in Spring 2023,
having all the necessary consents, providing conditions are propitious. We
are currently receiving further unsolicited proposals which are being
considered. Simultaneously, being now responsible for the planning process,
we are investigating the possibility of considerable construction cost savings
and an enhanced planning consent.
Our developments require a stable and liquid housing market but, in spite of
the current cost inflation, we do not depend on any increase in prices for the
successful development of most of our sites, as most of these sites were
purchased unconditionally for prices not far above their existing use value.
A major component of the Group's enhancement of value lies in securing
planning permission, and in the extent of that permission, and it is
relatively independent of changes in house values. For development or
trading properties, unlike investment properties, no change is made to the
Group's balance sheet even when improved development values have been
obtained. Naturally, however, the balance sheet will reflect such enhanced
value as the properties are sold.
The strategy of the Group continues to be conservative, but responsive to
market conditions, so continuing a philosophy that underlay the change from
primarily investment property to include our now extensive development
programme. This change in strategy allowed us to escape the devastation
caused by the 2008 Great Recession from which most sections of the property
sector either never fully recovered or had to be recapitalised, and to avoid
the extensive loss in value associated with the Covid-19 pandemic and the
changes that are currently very seriously affecting most of the property
investment sector.
On behalf of the members of the Group, I pay tribute to all our employees who
have worked for a third year unstintingly and well under the difficult
conditions persisting throughout the long Covid-19 pandemic for which the
final restrictions were lifted on 18 April 2022.
The closing mid-market share price on 20 December 2022 was 145p, a discount of
26% per share to the NAV as at 30 June 2022. The Board does not recommend a
final dividend, but intends to restore dividends when profitability and
consideration for other opportunities and obligations permit.
Conclusion
The economy is entering a very difficult period. A contraction will take
place due to an immediate adjustment to a short-term inflationary spike and to
two longer term, very unfavourable, underlying circumstances. These
adjustments will be difficult because of inherent cultural and sociological
factors and of economic performance since the Great Recession, which will
cause the adjustment to the underlying circumstances to be longer and more
difficult. Fortunately, these adjustments will impinge on an economy that
recovered more quickly from the Covid induced recession and with less economic
scarring that was originally feared.
The economy is undergoing a classic Minsky cycle of high inflation resulting
from an excess of demand over supply, a principal cause of which is the long,
and inflationary, period of very loose monetary policy - inflation has been
allowed to fester rather than being "nipped in the bud": this has been caused
by the Bank's recent mistiming: ironically, it mirrors exactly the mistiming
made by the Bank when it raised interest rates in July 2007 just as the
economic crisis unfolded.
The first of the two long-term economic problems is directly due to the cost
of the response to the Covid pandemic which allowed so rapid an economic
recovery. The scientific innovations that led to the creation of vaccines,
and the implementation and management of the vaccination and lockdown
programmes were triumphs of research, management and of Government decision
making. The democratic processes that sanctioned and implemented the
programmes were resounding endorsements of UK democracy and, to a notably
lesser extent than that of the EU and USA democracies, that stand in distinct
contrast to the failed Covid policy of Chinese autocracy.
A gross subsidy which was provided as a key part of this response prevented
the Covid crisis from undermining the economy was effectively a capital
investment which provided huge benefits. However, these benefits were
achieved at very great cost, financed by very great borrowing from the UK
Treasury and, like all borrowing, it imposes interest and principal payments
on the recipients, the UK taxpayer.
The second underlying unfavourable economic circumstance has been the sudden
rise in fuel costs. Russia's invasion of Ukraine, together with its
restriction of gas supplies, and its acting, together with the OPEC+ oil
cartel to reduce oil supplies, have caused all fuel prices to rise far above
free market prices. This effects a transfer of wealth from the consumers,
such as the UK, to the producers.
Thus, for two quite separate reasons, the UK economy is poorer, although much
of this diminution in wealth comprises the increased borrowing of the
Government, a financial concept synonym for the UK economy and which is not an
independent entity, contrary to apparent popular belief. Some sections of
society expect some non-existent party to pay these debts, some materialised
ghost, but, certainly not "me" - but someone, anyone - else. Unfortunately,
obligations will continue to burden the economy, the non-acceptance of which,
in some increasingly dependent sectors of society, will hinder the adjustments
appropriate in the economy to ensure an optimal growth rate.
The impact of the two burdens posed by increased borrowing and the transfer of
wealth to energy producers falls on an already economically stressed
society. Like most societies, such increases in financial burdens appear
less burdensome when they constitute a reduction in an increase in income
rather than an actual decrease in income, even although the same quantum of
reduction is applied. A lesser gain in income is more bearable than an
equivalent loss. Unfortunately, UK increases in output since 2007 have been
both small and unevenly distributed. Thus, in certain sectors of society the
financial burden of the necessary adjustments will reduce income rather than
diminish the extent of its increase, a psychologically more difficult
burden. In the slow economic growth the distribution of increased wealth
changed, increasingly in favour of services, and of capital, partly due to the
rapid increase in asset values accompanying artificially low interest rates at
the cost of labour, which distinction, when there is little growth in the
economy, becomes stark. Moreover, increased income and capital appreciations
have been seen, notably in the case of financial services, to be unrelated to
performance or merit, as so spectacularly amplified by the banking scandals,
and more generally in those protected by professional cartels. The malign
influence of such "Distributional Coalitions", as so well analysed by the
American economist, Mancur Olson, is widespread.
These and many other factors all contribute to the inhibition of increased
productivity which has proved so limited since the Great Recession and have
not provided the necessary, and even expected, better and continuously
improving living standards that would have facilitated the economic
adjustments now necessary. Paul Krugman said "Productivity isn't everything,
but in the long run it's almost everything".
Only by improving productivity will economic progress be made, but there are
many different requirements. The first, and generally accepted requirement,
is for progressive technical change; appropriate education and improved
skills; and adaptiveness. The second is for sociological changes, including
greater freedoms, less dependency, the advancement by application and
achievement rather than by affiliation and association. The third is for
attitudinal changes, including less dependency, greater freedoms, requiring an
understanding and then acceptance that all improvements to public goods and
services, including amenity greening, and energy substitution require
resources which can only be met without diminution elsewhere by increased
output, not miraculously conjured up "out of thin air" or from a mythical
Government. The fourth is an institutional change that rewards
entrepreneurship and that encourages competition and destroys oligopolies,
including professional ones. Lastly, a political change is required to
encourage trade and the interchange of ideas, the independence of
universities, and research and its development and to support growth and not
failing industries or areas.
These barriers to economic growth can be lifted but it is politically and
economically unrealistic to introduce major changes until the present economic
crises are resolved, which, fortunately, present policies will achieve, but
not without cost. Thus, things will get worse before they can get better.
I D Lowe
Chairman
21 December 2022
Strategic report for the year ended 30 June 2022
_______________________________________________________________
Operating and Financial Review
Principal Activities
The principal activities of the Group are the holding of property for both
investment and development purposes.
Results and proposed dividends
The Group loss for the year after taxation amounted to £1,302,000 (2021
profit: £460,000). The directors do not propose a dividend in respect of
the current financial year (2021: Nil). The Group net asset value amounts to
£23,253,000 (2021: £24,555,000).
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 and 3 and Future Progress on pages 17 to 19. In
accordance with legislation the accounts have been prepared in accordance with
UK-adopted International Accounting Standards. As permitted by Section 408
of the Companies Act 2006, the profit and loss account of the parent Company
is not presented as part of these financial statements.
Key performance indicators
The key performance indicators for the Group are property valuations, planning
progress and property market, all of which are discussed in the Chairman's
Statement. No substantial cash outlays are expected on investment properties
in the coming year and sales of development properties are expected to realise
cash to reinvest in the Group's development programme and provide general
working capital.
Principal risks and uncertainties
There are a number of potential risks and uncertainties, which have been
identified within the business and which could have a material impact on the
Group's long-term performance.
Development risk
Developments are undertaken where appropriate value is judged to be obtainable
after consideration of economic prospects and market assessments based on both
internal analysis and external professional advice. Committed developments
are monitored regularly.
Planning risk
Properties without appropriate planning consent are purchased only after
detailed consideration of the probabilities of obtaining planning within an
appropriate timescale. The risk that planning consent is not obtained is
mitigated by ensuring purchases are made at near to existing use value. In
such purchases the Group adopts a portfolio approach seeking an overall return
within which it accepts a small minority will be less successful.
Property values
The Group's highest value investment properties have either development
prospects or a development angle which should insulate them against the full
effect of any general investment downgrade of commercial property.
Availability of funding
The Group has cash resources but it may also use bank or other funding to
undertake its developments and for future property acquisitions. Where
appropriate, bank facilities will be negotiated and tailored to each project
in terms of quantum and timing.
The directors believe that funding should be readily available, provided the
banks' current strict criteria are met and the relatively high rates of
interest are accepted.
The low acquisition cost of some of the Group's sites reduces the overall
development cost and hence the level of funding available under current
formulaic lending processes based on loan to cost.
Tenant relationships
All property companies have exposure to the covenant of their tenants as
rentals drive capital values as well as providing income. The Group seeks to
minimise exposure to any single sector or tenant across the portfolio and
continually monitors payment performance.
Environmental policy
The Group recognises the importance of its environmental responsibilities,
monitors its impact on the environment and designs and implements policies to
reduce any damage that might be caused by Group activities.
Corporate Governance
The directors recognise the need for sound corporate governance. As a
company whose shares are traded on AIM, the Board adopted the Quoted Companies
Alliance's Corporate Governance Code ("the QCA Code"). Its corporate
governance statement including any disclosures required pursuant to the QCA
Code is published on the Company's website www.caledoniantrust.com
(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 24 and 25.
M J Baynham
Secretary
21 December 2022
Corporate Governance
QCA Code Compliance and Section 172 Statement
for the year ended 30 June 2022
_______________________________________________________________
The corporate governance report is intended to provide shareholders with a
clear understanding of the Group's corporate governance arrangements,
including analysing compliance with the Quoted Companies Alliance 2018
Corporate Governance Code ("the QCA Code") and where the Group does not comply
with the QCA Code, an explanation of why it does not.
The QCA Code provides a robust framework which enables the Group to maintain
high standards of corporate governance appropriate for the size of the
Group. The QCA Code sets out ten principles and each principle and the
Group's actions in relation related thereto are set out below. Douglas Lowe,
in his capacity as Executive Chairman, is responsible for ensuring the Group
has the necessary corporate governance framework in place and that, except for
Principle Five, the ten principles are followed across the Group.
Principle One
Business Model and Strategy
The Group's business model is that of a property investment and development
company, which is focused on the Scottish property market. Further details
regarding application of the Group's business model, its activities and its
properties can be found in the 'Review of Activities' section of the
Chairman's Statement on pages 2 and 3 of the Group's annual report and
accounts for the year ended 30 June 2022. The 'Future Progress' section of
the Chairman's Statement on pages 17 to 19 of the Group's annual report and
accounts for the year ended 30 June 2022 provides a summary of the Group's
strategy. The key challenges in the execution of the Group's business model
and strategy and how the Group seeks to address these can be found in the
'Principal risks and uncertainties' section on pages 21 and 22 of the Group's
annual report and accounts for the year ended 30 June 2022.
Principle Two
Section 172 Statement and Understanding Shareholder Needs and Expectations
As well as compliance with the QCA Code, Directors are required in accordance
with Section 172 of the Companies Act 2006 to include a statement of how they
have taken into account the shareholders in promoting the success of the
Company. This section and information on pages 22 and 23 set out how the
Board has discharged its duties.
It is important to note that the executive directors are the two largest
shareholders, together holding over 85% of the Company's share capital.
Investors have access to current information on the Company through its
website, www.caledoniantrust.com (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. Shareholders can continue their engagement with the Directors
through any of the channels already mentioned.
The Board dedicates sufficient time to ensure that communication is effective
with existing and potential shareholders and other key stakeholders. The
Board believes the Company's mode of engaging with shareholders is adequate
and effective.
Principle Three
Wider Stakeholder and Social Responsibilities
On the basis of the Directors' knowledge and long experience of the operations
of the Group the Board recognises that the long-term success of the Group is
reliant upon the efforts of the employees of the Group, its professional
advisors and its contractors. The directors engage directly on a regular
basis with all these stakeholders which ensures that there is close Board
oversight and contact with the Group's key resources and relationships.
Employees: The Group has a small number of full and part-time employees. The
Executive Directors are in regular contact with the Group's employees, which
provides an opportunity for employees to discuss matters they wish to raise.
The administrative staff are in contact with the Directors on a daily basis.
A pay review took effect from 1 November 2022.
Customers: The Group aims to deliver quality homes and other developments.
It invests in strong design features and should any snagging work be required,
it ensures rectification is completed quickly. The Group's interaction with
its tenants is constructive and cordial and any contentious points are quickly
resolved. The Group recognises the important role of all relevant
Regulations and seeks to conform with both the spirit and the requirement of
the regulations.
Suppliers and professional advisors: The Group engages contractors after
appropriate formal and informal vetting, and for larger projects after formal
tendering. The Executive Directors meet with contractors regularly
throughout large projects to review their recommendations and to review
progress. Advisors are selected on the basis of suitability and experience for
the advice required. For each firm engaged an agreed nominated partner or
director is responsible for the Group's instructions and advice who reports to
the executive directors as required.
Environment: The Board recognises the growing awareness and requirements in
respect of environmental issues and is working with its professional advisors
to promote an environmentally friendly approach to the design of its new
developments.
The Group takes into account feedback received from its key stakeholders and
considers making amendments to working arrangements and operational plans
where appropriate and where such amendments are consistent with the Group's
strategy and objectives. However, no material changes to the Group's working
processes were required over the year to 30 June 2022, or more recently, as a
result of stakeholder feedback received by the Company.
Principle Four
Risk Management
In addition to its other roles and responsibilities, the Audit and Compliance
Committee is responsible to the Board as a key control for ensuring that
procedures are in place, and are being effectively implemented to identify,
assess and manage the significant risks faced by the Group in respect of the
execution and delivery of the Group's strategy. The Board and executive
management team also consider and monitor risk on an ongoing basis.
The principal risks and uncertainties which have been identified within the
business and which could have a material impact on the Group's long-term
performance can be found in the 'Principal risks and uncertainties' section on
pages 21 and 22 of the Company's annual report and accounts for the year ended
30 June 2022.
The risks which the Group faces are subject to change and the measures to
counter or to mitigate them are reviewed regularly. The Board considers that
an internal audit function is not necessary, due to the close day to day
control exercised by the Executive directors.
Principle Five
Maintaining a Well Functioning Board of Directors
As at 21 December 2022 the Board comprised the Chairman and Chief Executive
Officer Douglas Lowe, one executive director, Michael Baynham and one
non-executive director, Roderick Pearson. Of the Board's members, Mr Pearson
is considered to be independent. A further commentary on this topic is
provided below.
Mr Lowe has been both Chairman and Chief Executive Officer of the Company for
many years. He is the largest shareholder holding over 79% of the issued
share capital and since the banking crisis of 2007 a private company under his
control, Leafrealm Limited, has provided significant loans to the Group to
fund its working capital requirements. The Board believes that Mr Lowe's
shareholding aligns his interests with the other members' interests and there
is ample evidence to support this.
The Board consider that in these circumstances it is in the best interests of
the Group to maintain Mr Lowe's positions as both Chairman and Chief Executive
Officer contrary to recommended best practice in the QCA Code. The Board has
been assured that, subject to all debt owed to Leafrealm Limited being repaid,
a return to normal remuneration levels and normal investment and trading
conditions, further Board appointments and changes will be made. Separately,
the Board has received an undertaking from Mr Lowe that if he ceases to work
full-time, appropriate Board changes will be made.
The Company presently does not comply with the QCA Code recommendation to have
at least two non-executive directors who are identified as independent. For
those reasons the Board believes that, given the present size of the Company
and the nature of its business and operations it is well served by the current
composition of the Board which functions effectively and is well balanced.
This position is considered regularly and where appropriate and necessary
further appointments will be made.
Mr Pearson has been a non-executive director since March 2007 and the rest of
the Board consider him to continue to be independent. Mr Pearson brings the
weight of his professional qualification and experience to the valuations of
investment properties but is sufficiently removed from the day to day
operations of the Company to retain a critical and independent view. As such
he represents the best interests of all the shareholders.
Mr Lowe and Mr Baynham work full time and Mr Pearson currently works on
average two days per month. Biographical details of the current directors
are set out below. Executive and non-executive directors are not presently
subject to re-election.
The Board met formally on seven occasions during the year to 30 June 2022 and
all directors attended all meetings. It has established an Audit and
Compliance Committee and a Remuneration Committee, details of which are set
out further below. The Audit and Compliance Committee met on three occasions
during the year ended 30 June 2022 with all members of the committee
attending. The Remuneration Committee met once during the year with all
committee members attending.
As appointments to the Board are made by the Board as a whole it is not
considered necessary to create a Nominations Committee.
Principle Six
Appropriate Skills and Experience of the Directors
The Board currently consists of three directors. Mr Baynham is also the
Group Company Secretary. The Board recognises that it currently has limited
diversity and increasing diversity will be considered as and when the Board
concludes that replacement or additional directors are required.
The Board is satisfied that with the Directors, it has an effective and
appropriate balance of skills and experience to deliver the strategy of Group
for the benefit of the shareholders over the medium to long-term. All
directors are able to take independent professional advice in the furtherance
of their duties.
During the year ended 30 June 2022, neither the board nor any committee has
sought external advice on a significant matter and no external advisers to the
board or any of its committees have been engaged.
I Douglas Lowe
Chairman and Chief Executive Officer
Mr Lowe is a graduate of Clare College Cambridge (MA Hons in Natural Science
and Diploma in Agriculture) and Harvard Graduate School of Business
Administration (MBA and Certificate in Advanced Agricultural Economics).
Until 1977 he was Chief Executive of his family business, David Lowe and Sons
of Musselburgh, property owners, farmers and market growers established in
1860, which farmed intensively 2,000 acres and employed over 200 people.
In 1978 and 1979 Mr Lowe was Deputy Managing Director of Bruntons
(Musselburgh), a listed company which manufactured mainly wire and wire rope
and employed approximately 1,000 people. He was a significant shareholder
and, from 1986 until shortly after joining the Company, Executive Deputy
Chairman of Randsworth Trust PLC, a property company with a dealing facility
on the Unlisted Securities Market. The market capitalisation of Randsworth
Trust PLC increased from £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 Limited.
Mr Pearson's experience of property as a surveyor in private practice together
with his experience in senior management positions ensures that he has the
ability to support the executive directors and also to challenge strategy, and
decision making and to scrutinise performance.
All three members of the Board bring relevant sector experience through their
long and varied careers throughout the property, financial, legal and
consulting sectors. The Board believes that its members possess the relevant
qualifications and skills necessary to effectively oversee and execute the
Group's strategy.
Principle Seven
Evaluation of Board Performance
The directors consider that the size of the Company does not justify the use
of third parties to evaluate the performance of the Board on an annual
basis. The Company does not currently have a formal appraisal process for
Directors but the Chairman assesses the effectiveness of the Board as a whole
and the individual directors to ensure that their contribution is relevant and
effective. This process is performed over the course of the year. He also
assesses the effectiveness of the Audit Committee and the Remuneration
Committee. During the year ended 30 June 2022, the Chairman's assessment did
not find any shortcoming in Board or committee effectiveness and did not lead
to any material recommendations for any changes.
The Chairman is the majority shareholder and the above arrangements are
acceptable to him. The Board will continue to assess this position on at
least an annual basis, and if and when it is deemed appropriate it will
establish more prescribed evaluation processes.
The Directors have given consideration to succession planning and have in
place a strategy to address succession as and when it becomes necessary. The
Board believes the current board and current committee structure and
membership is appropriate, but will consider whether any board and other
senior management appointments are required on at least an annual basis and
will consider the feedback from the Chairman's assessments, as described
above, in this process.
Principle Eight
Corporate Culture
The Board acknowledges that their decisions on strategy and risk determine the
corporate culture of the Group and its performance. High standards of
ethical, moral and social behaviour is deemed important in achieving the
Group's corporate objectives and strategy and such standards are actively
promoted.
The Group only has a small number of employees who work closely with the
Executive directors. Accordingly, the Board is always well placed to assess
its culture which respects all individuals, permits open dialogue and
facilitates the best interest of all of the Group's stakeholders. The Board
are prepared to take appropriate action against unethical behaviour, violation
of company policies or misconduct.
The Company has adopted a policy for directors' and employees' dealings in the
Company's shares which is appropriate for a company whose securities are
traded on AIM, and is in accordance with rule 21 of the AIM Rules and the
Market Abuse Regulation of the European Union.
Principle Nine
Maintenance of Governance Structures and Processes
Board Roles and Responsibilities
Ultimate authority for all aspects of the Group's activities rests with the
Board, with the respective responsibilities of the Directors delegated by the
Board. Given the size and nature of the Group's business both of the
executive directors engage directly with all key stakeholders on a regular
basis.
As noted in the disclosure above in respect of Principle Five, Mr Lowe is both
Chairman and Chief Executive Officer of the Company and the Company therefore
does not comply with the QCA Code in this respect. In his role as Chairman,
Mr Lowe has overall responsibility for corporate governance matters in the
Company, leadership of the board and ensuring its effectiveness on all aspects
of its role. In his role as Chief Executive Officer Mr Lowe leads the Group's
staff and is responsible for implementing those actions required to deliver on
the agreed strategy.
Matters reserved specific to the Board include formulating, reviewing and
approving the Group's strategy, budget, major items of capital expenditure,
acquisitions and disposals, and reporting to shareholders and approving the
Annual and Interim Statements. The Board is also responsible for assessing
the risks facing the Group and where possible developing a strategy to
mitigate such risk.
The Board complies with the Companies Act 2006 and all other relevant rules
and regulations including their duty to act within their powers; to promote
the success of the Group; to exercise independent judgement; to exercise
reasonable care, skill and diligence; to avoid conflicts of interest; not to
accept benefits from third parties and to declare any interest in any proposed
transaction or arrangement.
At present, the Board is satisfied with the Group's corporate governance,
given the Group's size and the nature of its operations, and there are no
specific plans for changes to the Company's corporate governance arrangements
in the shorter term. As the Group expands and when its programme of
developments increase, future Board appointments and Board changes will be
considered.
Audit Committee
During the period under review the Audit Committee was chaired by Mr
Pearson. It met to review the Interim Report, the Annual Report, to consider
the suitability of and to monitor the internal control processes and to review
the valuations of its investment and stock properties. The Audit Committee
reviewed the findings of the external auditor and reviews accounting policies
and material accounting judgements.
The independence and effectiveness of the external auditor is reviewed
annually and the Audit Committee meets at least once per financial year with
the auditor to discuss their independence and objectivity, the Annual Report,
any audit issues arising, internal control processes, auditor appointment and
fee levels and other appropriate matters.
The Audit Committee have reported that they are satisfied that the internal
control processes are robust. The accounting policies meet regulatory
requirements and any material judgements are stated in Note 3 of the
consolidated accounts for the year ended 30 June 2022. The Audit Committee
is satisfied that the external auditor is independent and effective.
The Audit Committee terms of reference can be found here
http://www.caledoniantrust.com/CR11-AUDIT-COMMITTEE-M0918.pdf
(http://www.caledoniantrust.com/CR11-AUDIT-COMMITTEE-M0918.pdf) .
Remuneration Committee
The Executive Directors had previously agreed to waive some or all of their
remuneration, given the financial constraints created by Covid lockdowns and
restrictions. The Board resolved to reinstate the salary of one of the
Executive Directors to its previous level and to pay a modest salary to the
Chair and Chief Executive with effect from 1 December 2021 and 1 November 2021
respectively.
The Remuneration Committee terms of reference can be found here
www.caledoniantrust.com/CR11-REMUNERATION-COMMITTEE-M0918.pdf
(http://www.caledoniantrust.com/CR11-REMUNERATION-COMMITTEE-M0918.pdf) .
As ID Lowe is a member of the remuneration Committee, the Remuneration
Committee is not made up of independent directors as envisaged by the QCA Code
and the Company therefore does not comply with the QCA Code in this respect.
No director who sits on the Remuneration Committee takes part in discussions
or votes on matters pertaining to their individual performance or
remuneration.
Details of the directors' remuneration can be found in Note 6 of the
consolidated accounts for the year ended 30 June 2022.
Nomination Committee
The Board have agreed that appointments to the Board will be made by the Board
as a whole and have not created a Nomination Committee.
At present, the Board is satisfied with the Company's corporate governance,
given the Company's size and the nature of its operations, and as such there
are no specific plans for changes to the Company's corporate governance
arrangements in the shorter term.
As the Group expands and when its programmes of developments increase, future
Board appointments and Board changes to reflect such changes will be
considered, as appropriate.
Principle Ten
Shareholder Communication
The work of the Company's Audit Committee and Remuneration Committee during
the year is described above and in the reports of the Audit Committee and
Remuneration Committee.
Shareholders have access to current information on the Company through its
website, http://www.caledoniantrust.com (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 Group engages in open communication with its shareholders and endeavours
to reply to all shareholder queries received. The Chairman prepares a
detailed summary of the Group's activities in his Statement which accompanies
the Annual and Interim Financial Statements. Regulatory announcements are
distributed in a timely fashion through appropriate channels to ensure
shareholders are able to access material information on the Group's
progress. A report of the audit and remuneration committees is included in
respect of Principle Nine above. All shareholders are encouraged to attend
the Company's Annual General Meeting.
M J Baynham
Secretary
21 December 2022
Corporate Governance
Audit Committee report for the year ended 30 June 2022
_______________________________________________________________
Statement from the Chairman of the Audit Committee
On behalf of the Board, I am pleased to present the Audit Committee Report for
the year to 30 June 2022. This report provides shareholders with an overview
of the activities carried out by the Audit Committee during the year. The
Audit Committee ensures the financial performance of the Group is properly
measured and reported.
Committee Members
The Audit Committee comprises R J Pearson (Chairman) and I D Lowe. R J
Pearson is the independent non-executive Director.
Other members of the Board occasionally attend Audit Committee meetings when
requested by invitation. In the year to 30 June 2022 the Audit Committee met
three times with both members being present, and the other member of the Board
attended all of those meetings.
Responsibilities
The Audit Committee, inter alia, determines and examines matters relating to
the financial affairs of the Group including the terms of engagement of the
Company's auditor and, in consultation with the auditor, the scope of the
annual audit. It receives and reviews reports from management and the
Company's auditor relating to the half yearly and annual accounts and the
accounting and internal control and risk management systems in use throughout
the Group; reviews the Group's overall risk appetite and strategy; and
monitors, on behalf of the Board, the Group's current risk exposures. The
Audit Committee monitors the integrity of the financial statements produced by
the Group and makes recommendations to the Board on accounting policies and
their application. The Audit Committee receives reports from compliance
functions within the Group and is responsible for reviewing and approving the
means by which the Group seeks to comply with its regulatory obligations.
The Committee also ensures that the arrangements for employees and contractors
to raise concerns confidentially about possible wrongdoing in financial
reporting (or other matters) are proportionate and allow for independent
investigation. The duties of the Audit Committee are set out in its terms of
reference, which are available from the Company's website. These are regularly
reviewed to ensure they remain applicable and up-to-date with legislation,
regulation and best practice.
The Audit Committee meets at least twice a year. For the year ended 30 June
2022, the Audit Committee has met three times to consider the planning of the
statutory audit and to review the Group's draft half year and full year
results prior to Board approval and to consider the external auditor's
detailed reports.
Internal Audit
The Group does not currently have an internal audit function. The Audit
Committee considered the size and nature of the Group and believes that
existing management within the Group is able to derive assurance as to the
adequacy of internal control and risk management systems without the
introduction of an internal audit function.
Risk Management and Internal Controls
The Group has a range of internal controls, policies and procedures in
place. The Audit Committee works alongside the Board to review, and where
necessary suggest changes to, the current systems in place.
The Audit Committee is satisfied that the current systems in place are
operating effectively.
External Audit
Johnston Carmichael LLP were re-appointed for the year to 30 June 2022. The
Audit Committee monitors the relationship with the external auditor to ensure
independence and objectivity at all times. The Audit Committee also reports
to the Board on the independence, objectivity and effectiveness of the
external auditor. Johnston Carmichael have been the external auditor for the
Group since 2017 with David Holmes as the Partner for three years and Grant
Roger taking responsibility as Partner in 2020. The Audit Committee has
recommended that Johnston Carmichael LLP are appointed for the next financial
year. Johnston Carmichael LLP do not carry out any non-audit work for the
Group.
External Audit Process
Johnston Carmichael LLP prepare an audit plan. This plan sets out the scope
and timetable of the audit as well as the areas to be specifically targeted.
The plan is provided to the Audit Committee for approval in advance of the
audit. On completion of the audit, the findings are presented to the Audit
Committee by the auditor for discussion. There were no significant areas of
concern highlighted by the auditor this year.
The Group accountant has regular contact and communication with the auditor
during the year. This allows for any areas of concern or of significance to
be raised with the auditor throughout the year.
Main Issues Discussed and Conclusions
The table below highlights the issues at the audit close meeting: -
Issue How it was addressed by the Audit Committee
Revenue recognition
Revenue from sales of investment and trading properties is recognised on legal No property disposals were completed during the year and the committee is
completion which is when the buyer takes control of the property whether it is satisfied that no sales fell to be recognised as revenues in the year ended 30
commercial property, private houses or plots of land. Using legal completion June 2022.
minimises the management judgements required to determine when ownership is
transferred.
Revenue from rents are spread over the life of the lease and for service
charges over the period to which the service relates.
One rent free period arose during the year and was spread over the life of the
lease concerned.
Fair value
The approach to assessing fair value of investment properties is The Committee discusses each of the valuations with its external valuer. The
conservative. Montagu Evans, Chartered Surveyors, were engaged by the external valuation process and the values ascribed to specific assets are also
Group to provide it with independent external valuations of all investment considered and commented upon in the audit report by our auditor, Johnston
properties at 30 June 2022. Carmichael LLP.
Valuations were prepared in accordance with relevant industry standards using
transactional evidence and an established methodology.
Development properties held as stock
Trading properties are carried at the lower of cost and net realisable value. The Committee monitors progress and intentions for each location and the
The net realisable value is an area of judgement based on demand, future costs timing of work to ensure that planning consents already given endure.
and the availability of planning consent.
R J Pearson
Chairman of the Audit Committee
21 December 2022
Corporate Governance
Remuneration Committee report for the year ended 30 June 2022
_______________________________________________________________
The Remuneration Committee comprises, R J Pearson (Chairman), the independent,
non-executive director and I D Lowe.
The Committee met once during the year, with both members being present, to
review the remuneration of the Executive Directors. During the financial
constraints of Covid lockdowns and restrictions, the Executive Directors had
waived their entitlement to some or all of their remuneration. No director
who sits on the Remuneration Committee takes part in discussions or votes on
matters pertaining to their individual performance or remuneration. It was
resolved that following the easing of the constraints of Covid-19, the
remuneration of the Executive Directors be reinstated to previous levels with
effect from 1 November and 1 December 2021 but the Chair and Chief Executive
immediately waived the majority of his remuneration for the time being.
There was no change to the remuneration of the Non-Executive Director.
Details of the directors' remuneration can be found in Note 6 of the
consolidated accounts for the year ended 30 June 2022.
R J Pearson
Chairman of the Remuneration Committee
21 December 2022
Directors' report for the year ended 30 June 2022
Directors
The directors who held office at the year end and their interests in the
Company's share capital and outstanding loans with the Company at the year-end
are set out below:
Beneficial interests - Ordinary shares of 20p each
Percentage held 30 June 2022 30 June 2021
£ £
I D Lowe 79.1 9,324,582 9,324,582
M J Baynham 6.2 729,236 729,236
R J Pearson - - -
Beneficial interests - Unsecured loans
I D Lowe 100.0 4,380,000 4,380,000
The interest of I D Lowe in the unsecured loans of £4,380,000 (2021:
£4,380,000) is as controlling shareholder of the lender, Leafrealm Limited.
No rights to subscribe for shares or debentures of Group companies were
granted to any of the directors or their immediate families or exercised by
them during the financial year.
Rule 9 of the UK City Code on Takeovers and Mergers (the "Takeover Code")
provides, among other things, that where any person who, together with persons
acting in concert with him, holds over 50 per cent. of the voting rights of a
company, acquires any further shares carrying voting rights, then they will
not generally be required to make a general offer to the other shareholders to
acquire the balance of their shares.
Douglas Lowe is part of a concert party pursuant to the Takeover Code, which
includes the interests in the Company's Ordinary Shares of his Close Relatives
(as defined in the Takeover Code) and Leafrealm Limited and Sheriffhall
Business Park Limited, companies where Douglas Lowe is the controlling
shareholder (the "Douglas Lowe Concert Party"), which holds in aggregate over
50% of the voting rights of the Company. The Douglas Lowe Concert Party is
interested in a total of 9,527,582 Ordinary Shares which carry 80.9% of the
voting rights of the Company. Douglas Lowe or entities controlled by Douglas
Lowe may accordingly increase their aggregate interests in shares without
incurring any obligation to make an offer under Rule 9.
Political and charitable donations
Neither the Company nor any of its subsidiaries made any charitable or
political donations during the year.
Disclosure of information to auditor
The directors who held office at the date of approval of the Directors' Report
confirm that, so far as they are each aware, there is no relevant audit
information of which the Group's auditor is unaware; and each director has
taken all the steps that he ought to have taken as a director to make himself
aware of any relevant audit information and to establish that the Group's
auditor is aware of that information. This confirmation is given and should be
interpreted in accordance with the provisions of Section 418 of the Companies
Act 2006.
Auditor
In accordance with Section 489 of the Companies Act 2006, a resolution for the
re-appointment of Johnston Carmichael LLP will be put to the Annual General
Meeting.
By Order of the Board
M J Baynham
Secretary
21 December 2022
Directors' Responsibilities Statement in respect of the annual report and
financial statements
The directors are responsible for preparing the Annual Report and the Group
and parent Company financial statements in accordance with applicable law and
regulations.
Company law requires the directors to prepare Group and parent Company
financial statements for each financial year. As required by the AIM Rules of
the London Stock Exchange they are required to prepare the group financial
statements in accordance with UK-adopted International Accounting Standards
and applicable law and the directors have elected to prepare the parent
company financial statements on the same basis.
Under company law the directors must not approve the financial statements
unless they are satisfied that they give a true and fair view of the state of
affairs of the Group and parent Company and of the profit or loss of the Group
for that period. In preparing each of the Group and parent Company financial
statements, the directors are required to:
• select suitable accounting policies and then apply them consistently;
• make judgements and estimates that are reasonable and prudent;
• state whether they have been prepared in accordance with International
Accounting Standards in conformity with the requirements of the Companies Act
2006; and
• prepare the financial statements on the going concern basis unless it
is inappropriate to presume that the Group and the parent Company will
continue in business.
The directors are responsible for keeping adequate accounting records that are
sufficient to show and explain the Group's and the parent Company's
transactions and disclose with reasonable accuracy at any time the financial
position of the Group and the parent Company and enable them to ensure that
its financial statements comply with the Companies Act 2006. They have general
responsibility for taking such steps as are reasonably open to them to
safeguard the assets of the Group and parent Company and to prevent and detect
fraud and other irregularities.
The directors are responsible for the maintenance and integrity of the
corporate and financial information included on the parent Company's website.
Legislation in the UK governing the preparation and dissemination of financial
statements may differ from legislation in other jurisdictions.
Consolidated statement of comprehensive income for the year ended 30 June 2022
2022 2021
Note £000 £000
Revenue
Revenue from development property sales - 4,186
Gross rental income from investment properties 306 368
Total Revenue 5 306 4,554
Cost of development property sales - (3,930)
Property charges (90) (128)
Cost of Sales (90) (4,058)
Gross Profit 216 496
Administrative expenses (887) (440)
Other income 8 2
Net operating (loss)/profit before investment property
disposals and valuation movements (663) 58
Valuation gains on investment properties 10 190 690
Valuation losses on investment properties 10 (690) -
Loss on disposal of investment property - (151)
Net (loss)/gains on investment properties (500) 539
Operating (loss)/profit 5 (1,163) 597
Financial expenses 7 (139) (137)
Net financing costs (139) (137)
(Loss)/profit before taxation (1,302) 460
Income tax 8 - -
(Loss)/profit and total comprehensive income for the financial year
attributable to equity holders of the parent Company
(1,302) 460
(Loss)/earnings per share
Basic and diluted (loss)/profit per share (pence) 9 (11.05)p 3.90p
The notes on pages 51 - 71 form an integral part of these financial
statements.
Consolidated balance sheet as at 30 June 2022
2022 2021
Note £000 £000
Non-current assets
Investment property 10 16,610 17,110
Plant and equipment 11 8 3
Investments 12 1 1
Total non-current assets 16,619 17,114
Current assets
Trading properties 13 10,672 9,313
Trade and other receivables 14 134 135
Cash and cash equivalents 15 1,317 3,020
Total current assets 12,123 12,468
Total assets 28,742 29,582
Current liabilities
Trade and other payables 16 (1,109) (647)
Interest bearing loans and borrowings 17 (360) (360)
Total current liabilities (1,469) (1,007)
Non-current liabilities
Interest bearing loans and borrowings 17 (4,020) (4,020)
Total liabilities (5,489) (5,027)
Net assets 23,253 24,555
Equity
Issued share capital 21 2,357 2,357
Capital redemption reserve 22 175 175
Share premium account 22 2,745 2,745
Retained earnings 17,976 19,278
Total equity attributable to equity holders of the parent Company
23,253 24,555
NET ASSET VALUE PER
SHARE
197.3p 208.4p
The financial statements were approved by the board of directors on 21
December 2022 and signed on its behalf by:
I D Lowe
Director
The notes on pages 51 - 71 form an integral part of these financial
statements.
Consolidated statement of changes in equity as at 30 June 2022
Issued Capital Share Retained
share redemption premium earnings Total
capital reserve account
£000 £000 £000 £000 £000
At 1 July 2020 2,357 175 2,745 18,818 24,095
Profit and total comprehensive income for the year
- - - 460 460
______ ______ ______ ______ ______
At 30 June 2021 2,357 175 2,745 19,278 24,555
(Loss) and total comprehensive expenditure for the year
- - - (1,302) (1,302)
______ ______ ______ ______ ______
At 30 June 2022 2,357 175 2,745 17,976 23,253
====== ====== ====== ====== ======
Consolidated statement of cash flows for the year ended 30 June 2022
2022 2021
Note £000 £000
Cash flows from operating activities
(Loss)/profit for the year (1,302) 460
Adjustments for:
Net loss on sale of investment property - 151
Net loss/(gains) on revaluation of investment properties 500 (690)
Depreciation 5 1
Loss on sale of fixed assets - 1
Net finance expense 139 137
_______ _______
Net operating cash flows before movements
in working capital (658) 60
(Increase)/decrease in trading properties (1,359) 3,693
Decrease/(increase) in trade and other receivables 1 (13)
Increase/(decrease) in trade and other payables 574 (370)
_______ _______
Cash (absorbed by)/generated from operations (1,442) 3,370
Interest paid (251) (333)
_______ _______
Net cash (outflow)/inflow from operating activities
(1,693) 3,037
_______ _______
Investing activities
Proceeds from sale of investment properties - 1,149
Proceeds from sale of fixed assets - 5
Acquisition of property, plant and equipment (10) -
_______ _______
Cash flows (absorbed by)/generated from investing activities
(10) 1,154
_______ _______
Financing activities
(Decrease) in borrowings - (1,243)
_______ _______
Cash flows (used) from financing activities - (1,243)
_______ _______
Net (decrease)/increase in cash and cash equivalents (1,703) 2,948
Cash and cash equivalents at beginning of year 3,020 72
_______ _______
Cash and cash equivalents at end of year 1,317 3,020
Notes to the consolidated financial statements as at 30 June 2022
1 Reporting entity
Caledonian Trust PLC is a public company incorporated in
England and domiciled in the United Kingdom. The consolidated financial
statements of the company for the year ended 30 June 2022 comprise the Company
and its subsidiaries as listed in note 7 in the parent Company's financial
statements (together referred to as "the Group"). The Group's principal
activities are the holding of property for both investment and development
purposes. The registered office is c/o Womble Bond Dickinson, The Spark,
Draymans Way, Newcastle Helix, Newcastle upon Tyne, NE4 5DE and the principal
place of business is 61a North Castle Street, Edinburgh EH2 3LJ.
2 Statement of Compliance
The Group financial statements have been prepared and
approved by the directors in accordance with UK-adopted International
Accounting Standards. The company has elected to prepare its parent Company
financial statements in accordance with International Accounting Standards;
these are presented on pages 72 to 91.
3 Basis of preparation
The financial statements are prepared on the historical cost basis except for
investments and investment properties which are measured at their fair value.
The preparation of the financial statements in conformity with UK-adopted
International Accounting Standards requires the directors to make judgements,
estimates and assumptions that affect the application of policies and reported
amounts of assets and liabilities, income and expenses. The estimates and
associated assumptions are based on historical experience and various other
factors that are believed to be reasonable under the circumstances, the
results of which form the basis of making the judgements about carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates.
These financial statements have been presented in pounds sterling which is the
functional currency of all companies within the group. All financial
information has been rounded to the nearest thousand pounds.
Going concern
The Group's business activities, together with the factors likely to affect
its future development, performance and position are set out in the Chairman's
Statement on pages 2 to 20. The financial position of the Group, its cash
flows, liquidity position and borrowing facilities are described in note 18 to
the consolidated financial statements.
In addition, note 18 to the financial statements includes the Group's
objectives, policies and processes for managing its capital; its financial
risk management objectives; details of its financial instruments; and its
exposures to credit risk and liquidity risk.
The directors have prepared projected cash flow information for the period
ending eighteen months from the date of their approval of these financial
statements. These forecasts assume the Group will make property sales in the
normal course of business to provide sufficient cash inflows to finance the
Group's activities.
The Group and parent Company finance their day to day working capital
requirements through related party loans and bank funding is considered for
specific development projects. The related party lender has indicated its
willingness to continue to provide financial support and not to demand
repayment of its principal loan during 2023.
For these reasons they continue to adopt the going concern basis in preparing
the financial statements.
Areas of estimation uncertainty and critical judgements
Information about significant areas of estimation uncertainty and critical
judgements in applying accounting policies that have the most significant
effect on the amount recognised in the financial statements is contained in
the following notes:
Estimates
· Valuation of investment properties (note 10)
The fair value has been based on a third party valuation provided by an
external independent valuer as at 30 June 2022. The independent valuation
is based upon assumptions including future rental income, anticipated letting
void cost and the appropriate discount rate or yield or, if appropriate, the
development value. The independent valuer also takes into consideration
market evidence for comparable properties in respect of both transaction
prices and rental agreements.
· Valuation of trading properties (note 13)
Trading properties are carried at the lower of cost and net realisable
value. The net realisable value of such properties is based on the amount
the Group is likely to achieve in a sale to a third party after taking account
of the construction cost to complete the properties. This is then dependent on
availability of planning consent and demand for sites which is influenced by
the housing and property markets.
Judgements
· Deferred Tax (note 20)
The Group's unrecognised deferred tax asset relates to tax losses being
carried forward and to differences between the carrying value of investment
properties and their original tax base. A decision has been taken not to
recognise the asset on the basis of uncertainty regarding the availability and
timing of future taxable profits.
4 Accounting policies
The accounting policies below have been applied
consistently to all periods presented in these consolidated financial
statements.
Basis of consolidation
The financial statements incorporate the financial statements
of the parent Company and all its subsidiaries all of which have the same
accounting date. Subsidiaries are entities controlled by the Group.
Control exists when the Group has the power to determine the financial and
operating policies of an entity so as to obtain benefits from its
activities. The financial statements of subsidiaries are included in the
consolidated financial statements from the date that control commences until
the date it ceases. Inter-company balances are eliminated on consolidation.
Revenue
Turnover is the amount derived from ordinary activities, stated after any
discounts, other sales taxes and net of VAT.
Revenue from the sale of investment and trading properties is recognised in
the income statement on legal completion, being the date on which control
passes to the buyer.
Rental income from properties leased out under operating leases is recognised
in the income statement on a straight-line basis over the term of the lease.
Costs of obtaining a lease and lease incentives granted are recognised as an
integral part of total rental income and spread over the period from
commencement of the lease to the earliest termination date on a straight-line
basis.
Other income
Other income comprises income from agricultural land and other miscellaneous
income recognised on receipt.
Finance income and expenses
Finance income and expenses comprise interest payable on bank
loans and other borrowings. All borrowing costs are recognised in the income
statement using the effective interest rate method. Interest income
represents income on bank deposits using the effective interest rate method.
Taxation
Income tax on the profit or loss for the year comprises
current and deferred tax. Income tax is recognised in the income statement
except to the extent that it relates to items recognised directly in equity,
in which case the charge / credit is recognised in equity. Current tax is
the expected tax payable on taxable income for the current year, using tax
rates enacted or substantively enacted at the reporting date, adjusted for
prior years under and over provisions.
Deferred tax is calculated using the balance sheet liability
method in respect of all temporary differences between the values at which
assets and liabilities are recorded in the financial statements and their cost
base for taxation purposes. Deferred tax includes current tax losses which
can be offset against future capital gains. As the carrying value of the
Group's investment properties is expected to be recovered through eventual
sale rather than rentals, the tax base is calculated as the cost of the asset
plus indexation. Indexation is taken into account to reduce any liability
but does not create a deferred tax asset. A deferred tax asset is recognised
only to the extent that it is probable that future taxable profits will be
available against which the asset can be utilised.
Investment properties
Investment properties are properties owned by the Group which
are held either for long term rental growth or for capital appreciation or
both. Properties transferred from trading properties to investment
properties are revalued to fair value at the date on which the properties are
transferred. When the Group begins to redevelop an existing investment
property for continued future use as investment property, the property remains
an investment property, which is measured based on the fair value model, and
is not reclassified.
The cost of investment property is recognised on legal completion and includes
the initial purchase price plus associated professional fees and historically
also includes borrowing costs directly attributable to the acquisition.
Subsequent expenditure on investment properties is only capitalised to the
extent that future economic benefits will be realised.
Investment property is measured at fair value at each balance sheet date.
The directors assess market value at each balance sheet date and external
independent professional valuations are prepared at least once every three
years. The fair values are based on market values, being the estimated
amount for which a property could be exchanged on the date of valuation
between a willing buyer and a willing seller in an arms-length transaction
after proper marketing wherein the parties had each acted knowledgeably,
prudently and without compulsion.
Any gain or loss arising from a change in fair value is
recognised in the income statement.
Tangible assets
Tangible assets are stated at cost, less accumulated depreciation and any
provision for impairment. Depreciation is provided on all tangible assets at
varying rates calculated to write off cost to the expected current residual
value by equal annual instalments over their estimated useful economic
lives. The periods used are:
Fixtures and fittings
- 3 years
Motor
vehicles
- 3 years
Other equipment
- 5 years
Trading properties
Trading properties held for short term sale or with a view to subsequent
disposal are stated at the lower of cost or net realisable value. Cost is
calculated by reference to invoice price plus directly attributable
professional fees. Interest and other finance costs on borrowings specific
to a development are capitalised through stock and work in progress and
transferred to cost of sales on disposal. Net realisable value is based on
estimated selling price less estimated cost of disposal.
Financial instruments
The Group had no hedge relationships at 1 July 2020, 30 June 2021 or 30 June
2022.
Financial assets
Investments
The Group's investments in equity instruments are measured initially at fair
value which is normally transaction price. Subsequent to initial recognition
investments which can be measured reliably are measured at fair value with
changes recognised in the profit or loss. Other investments are measured at
cost less impairment in profit or loss. Dividend income is recognised when
the Group has the right to receive dividends either when the share becomes ex
dividend or the dividend has received shareholder approval.
Current receivables
Trade and other receivables with no stated interest rate and receivable within
one year are recorded at transaction price including transaction costs.
Assessments for impairment are performed at each reporting date and any losses
are recognised in the statement of comprehensive income. Impairment reviews
take into account changes in behaviours and the patterns of receipts from
tenants on a case by case basis.
Cash and cash equivalents
Cash includes cash in hand, deposits held at call (or with a maturity of less
than 3 months) with banks, and bank overdrafts. Bank overdrafts that are
repayable on demand and which form an integral part of the Group's cash
management are shown within current liabilities on the balance sheet and
included with cash and cash equivalents for the purpose of the statement of
cash flows.
Financial liabilities
Current payables
Trade payables are non-interest-bearing and are initially measured at fair
value and thereafter at amortised cost.
Interest bearing loans and borrowings
Interest-bearing loans and bank overdrafts are initially carried at fair value
less allowable transactions costs and then at amortised cost.
Changes in accounting policies
There are no new standards or amendments to existing standards which are
effective for annual periods beginning on or after 1 July 2021 which are
relevant to the Group. There are no new standards or amendments to existing
standards or interpretations that are effective as at 30 June 2022 and
relevant to the Group. The directors have considered standards which are
issued but are not yet effective and do not expect them to have any
significant impact on financial measurement and disclosures.
Operating segments
The Group determines and presents operating segments based on the information
that is internally provided to the Board of Directors ("The Board"), which is
the Group's chief operating decision maker. The directors review information
in relation to the Group's entire property portfolio, regardless of its type
or location, and as such are of the opinion that there is only one reportable
segment which is represented by the consolidated position presented in the
primary statements.
5 Operating (loss)/profit
2022 2021
£000 £000
Revenue comprises: -
Rental income 306 368
Sale of properties - 4,186
306 4,554
All revenue is derived from the United Kingdom
2022 2021
£000 £000
The operating profit is stated after charging: -
Depreciation 5 1
Amounts received by auditors and their associates in respect of:
- Audit of these financial statements (Group and Company) 19 17
- Audit of financial statements of subsidiaries pursuant to 10 9
legislation
6 Employees and employee benefits 2022 2021
£000 £000
Employee remuneration
Wages and salaries 232 177
Social security costs 17 12
Other pension costs 28 28
_______ _______
277 217
====== ======
Other pension costs represent contributions to defined contribution plans.
The average number of employees including executive directors during the year
was as follows:
No. No.
Management 2 2
Administration 3 3
Other - 1
_______ _______
5 6
====== =======
2022 2021
Remuneration of directors £000 £000
Directors' emoluments 135 64
Company contributions to money purchase pension schemes 25 25
====== ======
Salary and Pension 2022 2021
Director Fees Benefits Contributions Total Total
£000 £000 £000 £000 £000
I D Lowe 28 5 - 33 6
M J Baynham 94 - 25 119 75
R J Pearson 8 - - 8 8
______ ______ ______ ______ ______
130 5 25 160 89
The Company does not operate a share option scheme or other long-term
incentive plan.
Key management personnel are the directors, as listed above. The total
remuneration of key management personnel, including social security cost, in
the year was £173,491 (2021: £94,067).
2022 2021
Retirement benefits are accruing to the following number of
directors under:
Money purchase schemes 1 1
====== ======
7 Finance expenses
2022 2021
£000 £000
Finance expenses
Interest payable:
- Other loan interest 139 137
==== ====
8 Income tax
There was no current nor deferred tax charge in the current or preceding
year.
Reconciliation of effective tax rate
2022 2021
£000 £000
(Loss)/profit before tax (1,302) 460
===== =====
Current tax at 19% (2021: 19%) (247) 87
Effects of:
Expenses not deductible for tax purposes 72 (10)
Excess depreciation over capital allowances
(6) (6)
Losses carried forward 86 6
Effect of indexation - (57)
Loss on sale of revalued investment property
- 111
Revaluation of property not taxable 95 (131)
______ ______
Total tax charge - -
===== =====
An increase in the UK corporation tax rate from 19% to 25% (effective from 1
April 2023) was substantively enacted on 24 May 2021. This will increase the
Group's tax charge accordingly.
In the case of deferred tax in relation to investment property revaluation
surpluses, the base cost used is historical book cost and includes allowances
or deductions which may be available to reduce the actual tax liability which
would crystallise in the event of a disposal of the asset (see note 20).
9 Earnings per share
Basic earnings per share is calculated by dividing the
(loss)/profit attributable to ordinary shareholders by the weighted average
number of ordinary shares outstanding during the period as follows:
2022 2021
£000 £000
(Loss)/profit for financial period (1,302) 460
====== ======
No. No.
Weighted average no. of shares:
for basic earnings per share and for diluted
earnings per share 11,783,577 11,783,577
======== ========
Basic (loss)/earnings per share (11.05) p 3.90 p
Diluted (loss)/earnings per share (11.05) p 3.90 p
The diluted figure per share is the same as the basic figure per share as
there are no dilutive shares.
10 Investment properties
2022 2021
£000 £000
Valuation
At 1 July 17,110 17,720
Disposed in year - (1,300)
Revaluation in year (500) 690
________ ________
Valuation at 30 June 16,610 17,110
======== ========
The carrying value of investment property is the fair value at the balance
sheet date based on valuations by Montagu Evans, Chartered Surveyors, as at 30
June 2022. The external valuer is not connected with the Group.
The valuation methodology applied by the external valuer was in accordance
with the RICS Valuation - Global Standards effective from 31 January 2020
("the Red Book") published by the Royal Institution of Chartered Surveyors
("RICS"). The definition of Fair Value, as adopted by the International
Accounting Standards Board (IASB) in International Financial Reporting
Standard (IFRS) 13 and as stated in paragraph 7 of VPS4 of the Red Book is as
follows:
"The price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market sector participants at the
measurement date." The properties were valued individually and not as part
of a portfolio.
The 'review of activities' and 'property prospects' within the Chairman's
statement provides commentary on the Group's properties.
The historical cost of investment properties held at 30 June 2022 is
£8,805,509 (2021: £8,805,509). The cumulative amount of interest
capitalised and included within historical cost in respect of the Group's
investment properties is £451,000 (2021: £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 7.5% and 11%
were applied respectively.
Assuming all else stayed the same, a decrease in net rental income or
estimated future rent will result in a decrease in the fair value whereas a
decrease in the yields will result in an increase in fair value. A decrease of
1% in the yields would result in an increase in valuation of £221,000 (2021:
£224,000). An increase of 1% in the yields would result in a decrease in
the fair value of £181,000 (2021: £171,000).
All the investment properties have been categorised as Level 2 in both years
as defined by IFRS 13 Fair Value Measurement. Level 2 means that the
valuation is based on inputs other than quoted prices that are observable for
the asset, either directly (i.e. as prices) or indirectly (i.e. derived from
prices).
The amount of unrealised gains or losses on investment properties is charged
to the statement of comprehensive income as the movement in fair value of
investment property. For the year to 30 June 2022 this was a fair value loss
of £500,000 (2021: profit £690,000). During the year ended 30 June 2021,
an investment property was sold along with several stock properties, together
comprising Ardpatrick Estate, in a single transaction. There were no
realised gains or losses on the disposal of investment properties in the year
ended 30 June 2022.
11 Plant and equipment
Motor Fixtures 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
Motor Fixtures and fittings Other
Vehicles equipment Total
£000 £000 £000 £000
Cost
At 30 June 2021 1 15 69 85
Additions in year
- 10 - 10
At 30 June 2022 1 25 69 95
Depreciation
At 30 June 2021 1 15 66 82
Charge for year - 3 2 5
At 30 June 2022 1 18 68 87
Net book value
At 30 June 2022 - 7 1 8
12 Investments
2022 2021
£000 £000
Listed investments 1 1
====== ======
13 Trading properties
2022 2021
£000 £000
At start of year 9,313 13,006
Additions 1,359 237
Sold in year - (3,930)
_________ _________
At end of year 10,672 9,313
======== ========
Finance costs related to borrowings specifically for a development are
included in the cost of developments. At 30 June 2022 the total finance
costs included in stock and work in progress was £53,055 (2021: £Nil).
14 Trade and other receivables 2022 2021
£000 £000
Amounts falling due within one year
Other debtors 103 108
Prepayments and accrued income 31 27
_______ _______
134 135
====== ======
The Group's exposure to credit risks and impairment losses relating to trade
receivables is given in note 18.
15 Cash and cash equivalents 2022 2021
£000 £000
Cash 1,317 3,020
====== ======
Cash and cash equivalents comprise cash at bank and in hand. Cash deposits
are held with UK banks. The carrying amount of cash equivalents approximates
to their fair values. The Company's exposure to credit risk on cash and cash
equivalents is regularly monitored (note 18).
16 Trade and other payables
2022 2021
£000 £000
Trade creditors 59 54
Other creditors including taxation 14 13
Accruals and deferred income 1,036 580
_______ _______
1,109 647
====== ======
The Group's exposure to currency and liquidity risk relating to trade payables
is disclosed in note 18.
17 Other interest bearing loans and borrowings
The Group's interest bearing loans and borrowings are measured at amortised
cost. More information about the Group's exposure to interest rate risk and
liquidity risk is given in note 18.
Current liabilities
2022 2021
£000 £000
Unsecured loan 360 360
====== ======
Non-current liabilities
Unsecured loans 4,020 4,020
======= =======
Net debt reconciliation
2022 2021
£000 £000
Cash and cash equivalents 1,317 3,020
Liquid investments 1 1
Borrowings - repayable with one year (360) (360)
Borrowings - repayable after one year (4,020) (4,020)
Net debt (3,062) (1,359)
Cash and liquid investments 1,318 3,021
Gross debt - variable interest rates (4,380) (4,380)
Net debt (3,062) (1,359)
17 Other interest bearing loans and borrowings (continued)
Cash/bank overdraft Liquid investments Borrowing due within Borrowing due after Total
1 year 1 year
£000 £000 £000 £000 £000
Net debt at 30 June 2020 72 1 (1,503) (4,120) (5,550)
Cashflows 2,948 - 1,143 100 4,191
Net debt at 30 June 2021 3,020 1 (360) (4,020) (1,359)
Cashflows (1,703) - - - (1,703)
Net debt at 30 June 2022 1,317 1 (360) (4,020) (3,062)
Terms and debt repayment schedule
Terms and conditions of outstanding loans were as follows:
2022 2021
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
4,380 4,380 4,380 4,380
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 the Bank of Scotland base rate. The margin applied
with effect from 1 July 2020 in line with the terms of the loan.
The short-term unsecured development loan of £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 the Bank of
Scotland base rate.
The weighted average interest rate of the floating rate borrowings was 3.2%
(2021: 3.3%).
18 Financial instruments
Fair values
Fair values versus carrying amounts
The fair values of financial assets and liabilities, together with the
carrying amounts shown in the balance sheet, are as follows:
2022 2021
Fair value Carrying Fair value Carrying
amount amount
£000 £000 £000 £000
Trade and other receivables 103 103 108 108
Cash and cash equivalents 1,317 1,317 3,020 3,020
1,420 1,420 3,128 3,128
Loans from related parties 4,380 4,380 4,380 4,380
Trade and other payables 1,100 1,100 639 639
5,480 5,480 5,019 5,019
Estimation of fair values
The following methods and assumptions were used to estimate the fair values
shown above:
Trade and other receivables/payables - the fair value of receivables and
payables with a remaining life of less than one year is deemed to be the same
as the book value.
Cash and cash equivalents - the fair value is deemed to be the same as the
carrying amount due to the short maturity of these instruments.
Other loans - the fair value is calculated by discounting the expected future
cashflows at prevailing interest rates.
Overview of risks from its use of financial instruments
The Group has exposure to the following risks from its use of financial
instruments:
· credit risk
· liquidity risk
· market risk
The Board of Directors has overall responsibility for the establishment and
oversight of the Group's risk management framework and oversees compliance
with the Group's risk management policies and procedures and reviews the
adequacy of the risk management framework in relation to the risks faced by
the Group.
The Board's policy is to maintain a strong capital base so as to cover all
liabilities and to maintain the business and to sustain its development.
The Board of Directors also considers whether or not dividends should be paid
to ordinary shareholders.
For the purposes of the Group's capital management, capital includes issued
share capital and share premium account and all other equity reserves
attributable to the equity holders. There were no changes in the Group's
approach to capital management during the year.
Neither the Company nor any of its subsidiaries are subject to externally
imposed capital requirements.
The Group's principal financial instruments comprise cash and short term
deposits. The main purpose of these financial instruments is to finance the
Group's operations.
As the Group operates wholly within the United Kingdom, there is currently no
exposure to currency risk.
The main risks arising from the Group's financial instruments are interest
rate risks and liquidity risks. The board reviews and agrees policies for
managing each of these risks, which are summarised below:
Credit risk
Credit risk is the risk of financial loss to the Group if a customer or
counterparty to a financial instrument fails to meet its contractual
obligations and arises principally from the Group's receivables from
customers, cash held at banks and its investments.
Trade receivables
The Group's exposure to credit risk is influenced mainly by the individual
characteristics of each tenant. The majority of rental payments are received
in advance which reduces the Group's exposure to credit risk on trade
receivables.
Other receivables
Other receivables consist of amounts due from tenants and purchasers of
investment property along with a balance due from a company in which the Group
holds a minority investment.
Investments
The Group does not actively trade in equity investments.
Exposure to credit risk
The carrying amount of financial assets represents the maximum credit
exposure. The maximum exposure to credit risk at the reporting date was:
Carrying value
2022 2021
£000 £000
Investments 1 1
Other receivables 103 108
Cash and cash equivalents 1,317 3,020
________ ________
1,421 3,129
======= =======
The Group made an allowance for impairment on trade receivables of £31,000
(2021: £Nil). As at 30 June 2022, trade receivables of £37,000 (2021:
£74,000) were past due but not impaired. These are long standing tenants of
the Group and the indications are that they will meet their payment
obligations for trade receivables which are recognised in the balance sheet
that are past due and unprovided. The ageing analysis of these trade
receivables is as follows:
2022 2021
Number of days past due date £000 £000
Less than 30 days 19 25
Between 30 and 60 days 1 8
Between 60 and 90 days 5 7
Over 90 days 12 34
________ ________
37 74
======= =======
Credit risk for trade receivables at the reporting date was all in relation to
property tenants in United Kingdom. The Group's exposure is spread across a
number of customers and sums past due relate to 8 tenants (2021: 11
tenants). One tenant accounts for 34% (2021: 36%) of the trade receivables
past due by more than 90 days.
Credit risk for trade receivables at the reporting date was all in relation to
property tenants in United Kingdom. The Group's exposure is spread across a
number of customers and sums past due relate to 8 tenants (2021: 11
tenants). One tenant accounts for 34% (2021: 36%) of the trade receivables
past due by more than 90 days.
Liquidity risk
Liquidity risk is the risk that the Group will not be able to meet its
financial obligations as they fall due. The Group's approach to managing
liquidity is to ensure, as far as possible, that it will always have
sufficient liquidity to meet its liabilities when due without incurring
unacceptable losses or risking damage to the Group's reputation. Whilst the
directors cannot envisage all possible circumstances, the directors believe
that, taking account of reasonably foreseeable adverse movements in rental
income, interest or property values, the Group has sufficient resources
available to enable it to do so.
The Group's exposure to liquidity risk is given below
30 June 2022 £'000 Carrying amount Contractual cash flows 6 months or less 6-12 months 2-5
years
Unsecured loan 4,020 4,261 136 105 4,020
Unsecured development loan 360 365 365 -
Trade and other payables 1,109 1,109 1,109 - -
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 - -
Market risk
Market risk is the risk that changes in market prices, such as interest rates,
will affect the Company's income or the value of its holdings of financial
instruments. The objective of market risk management is to manage and
control market risk exposures within acceptable parameters, while optimising
the return.
Interest rate risk
The Group borrowings are at floating rates of interest based on the Bank of
Scotland base rate.
The interest rate profile of the Group's borrowings as at the year-end was as
follows:
2022 2021
£000 £000
Unsecured loan - Base +3% 4,020 4,020
Unsecured loan - Base +0.5% 360 360
===== =====
A 1% movement in interest rates would be expected to change the Group's annual
net interest charge by £43,800 (2021: £43,800).
19 Operating leases
Leases as lessors
The Group leases out its investment properties under operating leases.
Operating leases are those in which substantially all the risks and rewards of
ownership are retained by the lessor. Payments, including prepayments made
under operating leases (net of any incentives such as rent free periods) are
charged to the income statement on a straight line basis over the period of
the lease. The future minimum receipts under non-cancellable operating leases
are as follows:
2022 2021
£000 £000
Less than one year 209 179
Between one and five years 352 407
Greater than five years 261 316
_____ _____
822 902
===== =====
The amounts recognised in income and costs for operating leases are shown on
the face of the income statement.
20 Deferred tax
At 30 June 2022, the Group has a potential deferred tax asset of £1,662,000
(2021: £1,488,000) of which £120,000 (2021: £79,000) 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 £1,542,000 (2021: £1,409,000). This has not been recognised due to
uncertainty regarding the availability and timing of future taxable profits.
Movement in unrecognised deferred tax asset
Balance Additions/ Balance Additions/ Balance
1 July 20 (reductions) 30 June 21 (reductions) 30 June 22
at 19% at 25% at 25%
£000 £000 £000 £000 £000
Investment properties 84 (5) 79 41 120
Tax losses 1,090 319 1,409 133 1,542
_____ ______ _____ ______ _____
Total 1,174 314 1,488 174 1,662
_____ ______ _____ ______ _____
21 Issued share capital
30 June 2022 30 June 2021
No £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.
Transactions with key management personnel (continued)
Lowe Dalkeith Farms, a business wholly owned by I D Lowe, used land at one of
the Company's investment properties as grazings for farming until April 2021.
Rent was agreed and paid at £1,575 per annum.
Other related party transactions
The parent company has a related party relationship with its subsidiaries.
The Group and Company has an unsecured loan due to Leafrealm Limited, a
company of which I D Lowe is the controlling shareholder. The balance due to
this party at 30 June 2022 was £4,020,000 (2021: £4,020,000) with interest
payable at 3% over Bank of Scotland base rate per annum. The margin applies
with effect from 1 July 2020 in line with the terms of the loan. Interest
charged in the year amounted to £135,694 (2021: £124,620).
The Company also has an unsecured development loan due to Leafrealm Limited, a
company of which I D Lowe is the controlling shareholder. The balance due to
this party at 30 June 2022 was £360,000 (2021: £360,000) with interest
payable at a margin of 0.5% over base rate. Interest charged in the year
amounted to £3,200 (2021: £2,160).
In the year ended 30 June 2021, the Company also had an unsecured facility due
to Leafrealm Limited, a company of which I D Lowe is the controlling
shareholder. The maximum balance drawn down was £115,000 with interest
payable at 8% per annum. Interest charged in the year amounted to £Nil
(2021: £5,508) and the facility was repaid in full in line with its terms
during the year ended 30 June 2021.
Contracting work on certain development and investment property sites has been
undertaken by Leafrealm Land Limited, a company under the control of I D
Lowe. The value of the work done by Leafrealm Land Limited charged in the
accounts for the year to 30 June 2022 amounts to £8,219 (2021: £2,311) at
rates which do not exceed normal commercial rates. The balance payable to
Leafrealm Land Limited in respect of invoices for this work at 30 June 2022
was £630 (2021: £Nil).
Lowe Dalkeith Farms, a business wholly owned by I D Lowe, provided equipment
used in the maintenance of the Group's investment or development sites. The
value of the equipment hire from Lowe Dalkeith Farms charged in the accounts
for the year to 30 June 2022 amounts to £2,249 (2021: £2,068) at rates which
do not exceed normal commercial rates. The balance payable to Lowe Dalkeith
Farms in respect of invoices for this work at 30 June 2022 was £630 (2021:
£Nil).
Property advisory services on two investment property transactions was
undertaken by RJ Pearson Property Consultants Limited, a company under the
control of R J Pearson. The value of the work done charged in the accounts
for the year to 30 June 2022 amounts to £25,000 (2021: £Nil) at rates which
do not exceed normal commercial rates. The balance payable to RJ Pearson
Property Consultants Limited in respect of invoices for this work at 30 June
2022 was £Nil (2021: £Nil).
For a full listing of investments and subsidiary undertakings please see note
7 of the parent Company financial statements.
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