TIDMCNN
RNS Number : 3378L
Caledonian Trust PLC
21 December 2018
The information contained within this announcement is deemed by
the Company to constitute inside information as stipulated under
the Market Abuse Regulations (EU) No. 596/2014 ("MAR")
21 December 2018
Caledonian Trust PLC
(the "Company" or the "Group")
Audited Results for the year ended 30 June 2018
Caledonian Trust PLC, the Edinburgh-based property investment
holding and development company, announces its audited results for
the year ended 30 June 2018.
Enquiries:
Caledonian Trust plc
Douglas Lowe, Chairman and Chief Executive Officer Tel: 0131 220 0416
Mike Baynham, Finance Director Tel: 0131 220 0416
Allenby Capital Limited
(Nominated Adviser and Broker)
Nick Athanas Tel: 0203 328 5656
Alex Brearley
CHAIRMAN'S STATEMENT
Introduction
The Group made a pre-tax profit of GBP2,886,000 in the year to
30 June 2018 compared with a profit before tax of GBP1,040,000 last
year. The profit per share was 24.49p and the NAV per share was
186.2p compared with a profit of 8.83p and NAV per share of 161.71p
last year.
Income from rent and service charges increased to GBP416,000
from GBP410,000 in 2017. The sale of the first of the two new homes
built at Brunstane resulted in a profit on sale of development
properties of GBP273,000 (2017 GBP37,000). Administrative expenses
were GBP649,000 (2017 GBP611,000) and interest payable was
GBP23,000 (2017 GBP14,000). The increase in the interest charge
reflects the increase in base rate on 2 November 2017 and the
average base rate for the year was 0.41% compared to 0.27% in the
previous year.
Review of Activities
The Group's property investment business is evolving as a result
of a prospective significant change to St Margaret's House, our
investment property held for development, as discussed below. We
continue to hold two high yielding retail parades, and our North
Castle Street office, and four central Edinburgh garage
investments. In September 2017 we recovered GBP266,000, a part of
the purchase price retained on the sale of Baylis Road, London SE1,
in 2012 against potential exceptional costs arising from building
adjacent to the London Underground Northern line.
The Group's management resources are almost wholly engaged in
property development, or development prospects for investment
properties, including development necessary to secure consents, and
on the provision of infrastructure for development plots. Until
recently our developments have been delayed by poor market
conditions, except to a lesser extent for "starter" homes, almost
certainly resulting from the relatively poor performance of the
Scottish economy, which has been affected by the contraction of the
oil industry and by continuing political uncertainty. In 2015 and
2016 Scottish house prices were little unchanged but rose 3.1% in
2017 with Edinburgh prices rising a remarkable 9.0%, largely due to
Edinburgh's continuing economic growth which contrasts with
Scotland's poor performance and where in the last 10 years growth
has only been just over half the UK's where over the three years
from 2015 to 2017 growth has only been about 3.0% compared to 8.0%
in the UK. Thus, Edinburgh is to Scotland as London is to
England.
Given these propitious circumstances, we have concentrated on
Edinburgh where our largest property, St Margaret's House, a
92,000ft(2) 1970s multi-storey building, is located on the A1 about
one-mile east of the Parliament and Princes Street, and adjacent to
Meadowbank Stadium. Fortunately, the attraction of St Margaret's
House has been increased by the prospective redevelopment of
Meadowbank Stadium immediately to the north and west of St
Margaret's House but on the other side of the main east coast rail
line. Whilst finalising our development plans we received several
unsolicited approaches, two of which for exceptional reasons we
were prepared to consider, and in early February 2018 we agreed a
conditional sale for St Margaret's House for a cash consideration
of GBP15 million, a large increase over the June 2017 value.
Details of the proposed sale of St Margaret's House were announced
on 5 February 2018. The long planning process inevitably results in
a lengthy period until completion, which also requires vacant
possession, and the whole process is now expected to complete in
2020. An earlier completion, in accordance with the previously
announced timeline, is possible if the conditions are purified or a
later completion date may be agreed if there is an unavoidable
planning delay. We will continue to update shareholders at the
appropriate time.
Pending redevelopment, since November 2010 St Margaret's House
has been let at a nominal rent, presently just over GBP1 per ft(2)
of occupied space, to a charity, Edinburgh Palette, who have
reconfigured and sub-let all the space to over 200 "artists" and
"artisans" and "galleries". Last year, before the announcement of
the conditional sale, we were negotiating a small rent increase,
but in view of Edinburgh Palette's likely costs of finding and
adapting, if necessary, new premises and of moving existing or of
finding new tenants, we have not pursued this increase.
I am pleased to report that Edinburgh Palette have been
successful in gaining not one but two new and very different
premises. The first are at 525 Ferry Road EH5 2FF in north central
Edinburgh just west of the Fettes College's playing field, and near
the Western General Hospital where a modern 125,000ft(2) Grade A
office building has been secured on favourable terms. This central
site is served by eight bus routes and has 125 car parking spaces,
83 single offices and numerous large open plan spaces.
The second, quite different premise, is the Stanley Street
Container Village lying on an area of ground just north of
Portobello Golf Course and about half a mile from the A1 and
Brunstane Rail Station. Edinburgh Palette expect to provide
"community services" and 50 - 60 single unit studios primarily for
local residents currently leasing space at St Margaret's House and
for other creative groups and individuals. The Container Village is
expected to open in the summer next year.
Both new premises are slightly different to St Margaret's House
and together cover a wider spectrum of the market with Ferry Road
quickly attracting tenants. I expect a gradual movement from St
Margaret's House elsewhere, although at present this movement is
being largely replaced by a continuing influx of new tenants, a
"churn" I expect to continue until the lease at St Margaret's House
is determined following the purification of the conditional sale.
The car parking spaces continue to be let to Registers of Scotland,
but the release of 6 spaces to allow more space for disabled
visitors was agreed. The rent has been increased from GBP1.20 to
GBP2 per space per day, modest by Edinburgh's standards and the
current parking rent is GBP52,000 per year. The many years of
favourable terms have allowed Edinburgh Palette to use their very
considerable skills to establish and develop an exemplary public
service and opportunity for creative artists whose work enhances
Edinburgh's reputation for creativity and facilitated the expansion
of this concept.
Development at Brunstane continues slowly, but now very
satisfactorily. Our original purchase was of five Georgian terraced
houses, open ground to the south of these houses, a large listed
Georgian steading and two adjacent acres of land, all part of
Brunstane Home Farm all of which was in the Green Belt, but is in
east Edinburgh just off the A1 and immediately adjacent to
Brunstane railway station (with services on the Borders Railway
between Tweedbank and Edinburgh (eight minutes from Brunstane) and
on to South Gyle and Fife. We have refurbished and sold four of
these terraced houses over the last few years for about
GBP280/ft(2) and a mid-terraced house re-sold for over GBP350/ft(2)
last year while the end terrace house adjacent to the steading
currently under development re-sold for GBP290,000 (equivalent to
GBP360/ft(2) ) in July 2018.
On the open ground south of these houses we secured consent in
2014 to construct two new semi-detached houses of modern
construction but faced with stone which, together with the wood to
the west, completed a traditional farm courtyard. In 2016 we gained
consent to extend the easterly gable and add a sun room to the west
elevation, increasing the total area to nearly 3,000ft(2) and
development started in August 2016 for completion the following
Spring, but shortly before then the builder, a medium sized
contractor/developer, went into liquidation. A replacement was
engaged quickly, but the funds for utilities paid to the original
contractor had been misappropriated and the inevitable delay in
securing the utilities delayed the completion by several months.
The houses were marketed in November 2017 at over GBP290/ft(2) ,
inviting offers over GBP435,000 and GBP445,000 respectively. They
attracted immediate interest, and, following the first four
viewings, we received four notes of interest, and three offers in
December 2017. We put the houses under offer at above the asking
prices for completion in the spring of 2018. The westerly house
sale completed in April 2018 and is reflected in this year's
accounts, but the offerer for the other house was in an "chain" and
the offer completed post year end in August 2018. The timeous sale
of the western house yielded GBP345/ft(2) .
We have consent to convert the listed stone-built Georgian
steading, to refurbish and extend a house attached to it to form
ten individually designed houses, comprising 15,000ft(2) with a
development value of over GBP4.5 million. The houses have been
extensively redesigned, principally to provide contemporary style
large dining/living spaces, more en-suite bathrooms and better
fenestration, together with lower construction costs. Work on the
stonework for the current phase of five of these ten houses, the
"Horse Mill" phase, which comprises the five stone-arched cart
sheds, the single storey cottage, the main barn and a hexagonal
Horse Mill, a notable feature, was largely completed late last
year, and a contractor was appointed in the late summer who started
on site in early November.
Fortunately, this interval has been put to good use, as further
improvements to the design were incorporated into the
specification, avoiding contract changes. The development has a
Gross Development Value of GBP2.4 million and has very recently
been funded by a construction loan peaking at GBP1.4 million. The
loan with complex covenants and security took several months to
negotiate, and, while very competitive in market terms, is very
expensive compared to loans before the current financial
restrictions. Prior to accepting this loan we had assessed the
outline terms offered by more than 10 prospective lenders, some in
considerable detail. We hope to establish a longer-term
relationship with the funder whose final terms are similar to the
indicative terms.
The five house Horse Mill phase forms a courtyard whose easterly
boundary forms the westerly elevation of the next courtyard of five
houses, the "Steading" phase. To create the necessary uniformity
for marketing this natural stone elevation will be built before the
Horse Mill phase is marketed. We have used the period before
starting the Horse Mill contract to gain consent to demolish and
rebuild the Steading phase barn which allows fenestration and the
internal layout to be improved.
In the Steading phase of five houses, only this west barn will
require to be built using recycled stone and other four houses will
be "new build", giving a similar high-quality product to the Horse
Mill phase, but at a much lower construction cost. The Steading
phase costs will also be reduced as the services already provided
can be extended at marginal cost. The Steading phase is 7,750ft(2)
and the Board expect it to have a Gross Development Value of
GBP2.75m.
East of the "Steading" lies a derelict farmhouse and piggeries
and beyond them an open area, all of which properties were
abstracted from the Green Belt in the Edinburgh Local Development
Plan adopted in November 2016 and now form the "Stackyard" phase.
The appearance, approach and access to this phase will be greatly
improved by the rebuilding of the barn bounding the Horsemill
phase. Proposals for the development of Stackyard phase have been
accepted in principle, and it is suitable for a development of 19
new-build houses over 26,750ft(2) . East of our Stackyard phase the
"New Brunstane" Master Plan has been approved for an extensive
residential development for which ground investigations have been
completed, and part of the site is now under offer.
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 cars and a separate residential consent
for twenty flats over 21,000ft(2) and twenty cars. This site has
long been considered "difficult". To dispel this myth we have
created a workable access to the site; cleared collapsed rubble and
soil, exposed the retaining south wall and the friable but strong
bedrock in parts of the site; and completed an extensive
archaeological survey. In consequence the extent of those works is
much reduced compared to earlier estimates. Work was delayed for
many months in negotiating the agreement to divert a small public
sewer currently running through the site. The neighbouring building
is now vacant, allowing us more easily to demolish certain
structures on our land abutting it, so widening the cleared site
and the access, and this work has now started. We propose to obtain
variations of the existing residential consent to optimise layouts,
features and finishes for the current market.
The value of the town houses and flats that would be developed
has increased considerably over the last few years, especially so
for a city centre site in a cul-de-sac by the Water of Leith. Until
now the low base value of the site was an obstacle to obtaining
funding at the current "normal" rates, but such a scheme now seems
possible in view of the potential development profit.
At Wallyford, Musselburgh, we have implemented a consent for six
detached houses and four semi-detached houses over 12,469ft(2) .
The site lies within 400m of the East Coast mainline station, is
near the A1/A720 City Bypass junction and is contiguous with a
completed development of houses. Taylor Wimpey have nearly
completed the construction of over 500 houses nearby but on the
other side of the mainline railway, which are selling at prices of
that have risen to around GBP250/ft(2) for smaller 3-bedroom
end-terraced houses and GBP230/ft(2) for larger detached houses. On
the southern boundary of Wallyford a very large development of
1,050 houses has commenced at St Clement's Wells. On the eastern
side Persimmon have sold 37 houses and have only four currently
available with starting prices of GBP200,000 or GBP240/ft(2) , for
three-bedroom semi-detached houses. On the western side of St
Clement's Wells Barratts are building 245 three - and four-bedroom
new houses with three-bedroom detached houses selling for
GBP298,000 or GBP240/ft(2) and terraced houses for GBP200,000 or
GBP235/ft(2) . The Master Plan for this development includes a
school, now largely complete, a supermarket and many civic
amenities and is subject to a proposal to expand St Clement's Wells
to 1,450 houses by incorporating land immediately east. The
environment at Wallyford, formerly a mining village, but well
located and on the fertile East Lothian coastal strip, is rapidly
becoming another leafy commuting Edinburgh suburb.
The Company has three large development sites in the Edinburgh
and Glasgow catchments of which two are at Cockburnspath, on the A1
just east of Dunbar. We have implemented the planning consent on
both the 48-house plot northerly Dunglass site and on the 28-house
plot, including four affordable houses, southerly Hazeldean site.
The Dunglass site is fifteen acres of which four acres is woodland,
but the non-woodland area could allow up to a further thirty houses
to be built if the ground conditions, which currently preclude
development, could be remediated.
These two sites are one mile east of the East Lothian/Scottish
Borders boundary. In the year to September 2017 East Lothian prices
rose by 5.3% and by a further 7.2% by September 2018. Avant Homes
are building just east of Dunbar at Newtonlees where three-bedroom
detached houses are priced at GBP235,000 or GBP252/ft(2) and
four-bedroom houses with integral garage at GBP343,000 or
GBP264/ft(2) . Conversely, the market in the Scottish Borders is
currently depressed as prices fell 0.1% in the year to September
2018. However, as Cockburnspath is on the eastern edge of the
Lothian Coastal plain before the Lammermuir Hills dip into the sea
and where the A1 becomes largely single carriageway, and only nine
miles from the Main line rail station at Dunbar, it is much more
closely aligned with East Lothian than with the Scottish Borders.
Any further improvement in market conditions would allow profitable
development of those parts of the sites requiring only minimal
infrastructure.
The third large development site is only seven miles from
central Glasgow at Gartshore, Kirkintilloch (on the Union Canal),
East Dunbartonshire, and comprises the nucleus of the large estate
previously owned by the Whitelaw family. It includes 120 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. Gartshore is near Glasgow, 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, its historic setting and its inherent
amenity identify it as a natural site for development. To make the
best use of these attributes, proposals have been prepared for a
village of several hundred cottages and houses together with local
amenities, all within the existing landscape setting. This
development would complement our separate proposals for a
high-quality business park, including a hotel and a destination
leisure centre, all situated in mature parkland. Representation to,
and discussions with, East Dunbartonshire Council continue from
whom we seek support for a joint promotion of the site and an
allocation for development in the next Local Plan. One of the
stables has been refurbished as an exhibition and visitor centre in
order to provide an on-site nucleus for Gartshore's promotion but
its opening continues to be delayed by necessary external repairs
to the stable block. In the interim we expect to hold an exhibition
in the recently refurbished historic Council's Chambers next year.
The next Local Plan is due to be published in 2022, although such
plans are often delayed, and we will work closely with the East
Dunbartonshire Council to gain suitable allocations.
The company owns fourteen rural development opportunities, nine
in Perthshire, three in Fife and two 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 to which
Councillors, now elected by proportional representation, are
increasingly sensitive 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. Nevertheless, we have successfully promoted many sites
through this difficult planning process. In general, the rural
housing market has not been experiencing the rapid growth taking
place in Edinburgh and Glasgow and in their catchment areas over
the last two years with values in some regions such as Perth and
Kinross, Moray, Angus, Argyll and Bute and Highland declining in
real terms. Accordingly, no immediate investment is proposed in the
rural portfolio, except to maintain existing consents or to endure
them.
In Perthshire, at Tomperran, a 34-acre smallholding in Comrie on
the River Earn, we hold a consent for twelve detached houses
totalling over 19,206ft(2) which has been endured by the demolition
of the farm buildings. West of this site, nearer Comrie, we hold a
consent for a further thirteen houses on our adjoining two-acre
area, previously zoned for industrial use, on which the S75
Agreement has recently been signed. We expect to gain consent to
change the current terrace of four houses into three detached and
two semi-detached houses. In total the twenty-five new houses
covering these two areas will occupy over 33,912ft(2) . The
original farmhouse, currently let, will remain intact within the
development.
At Chance Inn farm steading we hold a consent for ten new houses
over 21,831ft(2) following acceptance of our proposals for the
mandatory environmental improvements. Chance Inn, part of the Loch
Leven catchment area, is subject to very strict regulations
governing the phosphate flows into the loch. New developments are
required to effect a reduction in the total phosphate emissions to
the loch such that, for every 1.00 grams of phosphate that a new
development is deemed to discharge, 1.25 grams of phosphate has to
be eliminated. New developments with suitable treatment discharge
very low levels of phosphate but, patently, do not effect an
overall reduction. In order to allow our developments at Chance Inn
to proceed we have negotiated for five years with four neighbouring
houses to effect the necessary reductions. We have recently made
the final connection, bringing the total cost of emission reduction
to GBP125,000, so purifying this condition. In the summer we
demolished an existing farm building so enduring the consent for
the 10 houses. When we sold the Chance Inn farmhouse we retained
land in the former garden on which we gained consent for two new
houses of 2,038ft(2) and 2,080ft(2) . One of these two plots was
sold in October 2016 for over GBP100,000 together with a small
paddock for GBP34,000. Work on this new house is progressing well
and we intend to market the other farm house plot in 2019. We hold
sufficient land next to the farm steading to allow the sale of
similar paddocks to purchasers of all the new houses.
Also in Perthshire, nearby at Carnbo, on the A91 Kinross to
Stirling road, the Local Plan includes within the village
settlement the paddock which we retained when we sold the former
Carnbo farmhouse. Based on this new Plan consent was issued on 29
July 2015 for the development of four houses over 7,900ft(2) in the
paddock. The planning application was first registered by the
planning authority on 26 June 2008, seven years earlier! Earlier
this year we undertook the archaeological works which are an
essential pre-condition of the planning consent and so endured the
consent.
Work on our other Perthshire sites is restricted to improving
marketing and to maintaining or enduring consents. At Strathtay we
have endured all consents gained in 2011 for two large detached
houses totalling over 6,040ft(2)
and for a mansion house and two ancillary dwellings over
10,811ft(2) in a secluded garden and paddock near the River Tay.
The proposal last year to move services to permit the formation of
entrances on to the public road in order to allow marketing of the
two large house plots was delayed and should now be carried out in
2019. At Myreside Farm, in the Carse of Gowrie between Perth and
Dundee, after five planning attempts and appeals since our first
application in 2007 and, following guidance from the planning
department, we finally gained approval four years ago for five
new-build houses over 8,531ft(2) , adjacent to the existing listed
farmhouse which is let on a short-assured lease. The redevelopment
has been frustrated by the high cost entailed in using reclaimed
natural stone. However, we will renew the existing consent in 2019
when we will seek to redesign it to reduce the use of natural
stone, as almost all the stone, used only for farm buildings and
never of high quality, has delaminated further. At Ardonachie, just
off the A9 at Bankfoot, we have started demolition of the existing
steading, so enduring the consent for ten houses over 16,493ft(2) .
At Balnaguard a 1.77-acre brown field site, eight miles from the A9
at Dunkeld and within Tay valley, we hold a consent for nine houses
over 16,254ft(2) . The existing buildings on the site were
demolished in the spring so enduring this consent. Further north
the small site at Camghouran on Loch Tummel has consent for three
units on 2,742ft(2) for which the consent is endured. When rural
market conditions improve this site will be marketed.
The opening of the Queensferry Crossing and the completion of
the associated roadworks have improved the desirability of all our
development sites north of the Forth estuary. Further north the
existing A9 dual carriage is being extended for about six miles
from Luncarty (four miles north of Perth) to near Birnam ("wood to
Dunsinane hill" of Macbeth fame!), giving an uninterrupted dual
carriageway to our site at Ardonachie where we have planning
permission for ten units totalling over 16,493ft(2) . The extension
of the dual carriageway will also result in our sites at Balnaguard
(16,254ft(2) ) and Strathtay (6,060ft(2) and 10,811ft(2) ) being
only about ten miles from the dual carriageway to Perth.
Work on our three sites near St Andrews, Fife has been suspended
pending an improvement in markets. The large expansion of the
University of St Andrews near the River Eden at Guardbridge marks a
significant move away from the narrow confines of St Andrews which
I expect to improve the local housing market. We have recently
renewed our consent for nine units over 19,329ft(2) at Larennie, by
Peat Inn, only 7 miles from St Andrews.
Ardpatrick is our largest rural development site, a peninsula of
great natural beauty with six miles of sea frontage on West Loch
Tarbert, but less than two hours' drive from Glasgow and the
Central Belt. The long-term prospects for residential property are
excellent, but their realisation continues to require investment,
skill and patience to rectify the cumulative effect of severe
prolonged neglect. Fortunately, the original design and
construction of most of the period property was of a very high
standard and where damaged is recoverable. Repairs to some of
Ardpatrick's buildings, farm sheds and landscape caused by the
exceptional storms in recent years continue to be delayed by even
more urgent work. However, significant repairs continue to be
effected to roads, culverts, ditches, drainage, field accesses,
dykes, and fences and the very late spring in 2018 has validated
the repairs achieved and highlighted those in train or still to be
made. Frustratingly, unlike most repairs, the majority of these
achieved are not obvious and the benefits not readily appreciated,
but comparison of the present conditions of the landscape with
previous photographs reveals the extent of the recovery. An
important consequence of this recovery is that a much higher
percentage of the property is maintained in a higher more valuable
grade of agricultural land, and should retain higher EU or
equivalent UK support, and the stock carrying capacity of the land
is reinstated.
The prospect for forestry is being investigated but significant
areas are handicapped by terrain or by access or by topography.
However with high timber prices earlier this year we have applied
for a felling licence for the 20 hectares of commercial forest.
Unfortunately the necessary maintenance of this forest in its early
years was neglected by the former owners, reducing its value, but
if recent prices are maintained the harvested value would be over
GBP100,000. The considerable mandatory replanting cost may be
mitigated by extending the replanting and this is being
considered.
Ardpatrick development possibilities fall into two groups. Prior
to the 2009 North Kintyre Landscape Study relatively few sites were
deemed suitable for development. Before that study we gained
consent to change the use of "Keepers", a bothy situated amongst
the Achadh-Chaorann group of cottages, and to extend that building
to form a three-bedroom house complete with stone outhouses
conditional on providing a new access and drive. We also obtained
consent to develop Oak Lodge, a two-storey 1,670ft(2) new building
on the Shore Road. In spite of being withdrawn from the market this
continued to attract viewers including one from a special purchaser
to whom it is under offer a little below the asking price of
GBP125,000.
We have gained several consents in areas designated in the
Landscape Capacity Study. In 2011 we secured consent for two
one-and-a half storey houses each of 2,200ft(2) at the north end of
the estate on the B8024 Kilberry Road and a road access has
recently been formed to endure these two consents. Nearby on the
east side of the UC33 Ardpatrick Road, bordering the Cuildrynoch
Burn, we held an outline consent for two houses on the Dunmore
schoolhouse field and on the west side of the UC33, the old Post
office garden, an outline consent for a detached house in a
woodland setting and we will seek to upgrade all three house sites
to full consents.
Since the 2009 study the number of consents had risen markedly
and at least twenty plots are available between Ardpatrick to
nearby Tarbert. Economic realisation of new sites is likely to be
slow in these circumstances, especially with the infrastructural
impositions at Ardpatrick.
The poor market conditions are exacerbated by the cost of
upgrading the inadequate infrastructure. It is not difficult to
envisage that second homes, holiday homes and relocation/retirement
homes would be amongst the last to recover following a depression,
a recovery now slowed by the tax impositions on second homes and on
buy-to-lets. Despite this background it is encouraging to note that
one or more new houses continue to be built each year and others
renovated in the Tarbert to Ardpatrick corridor, further improving
the area and reinforcing it as a centre properly renowned for its
landscapes, seascapes and wildlife. In any recovery Ardpatrick's
pre-eminent position will continue to command a premium, especially
with its extensive coastline. Until then further development will
continue to be limited and the properties put on a care and
maintenance basis, possibly with a view to establishing short-term
lettings where conditions allow.
Economic Prospects
En France en vacances à Sète. The intriguing history of Sète, a
small port transformed by the 17(th) century Canal Royal en
Languedoc provides an early insight to the evolution of political
economy in France, comprising a mingling of dirigiste and
mercantilist policies. The long-standing French philosophy, now
woven into the fabric of the EU, sets it apart from the UK,
creating the political differences that accompany economic
differences. It is the outcome of the interplay of these
differences that is the chief determinant of the economic prospects
of the UK today. In many negotiations the greatest uncertainly
often erupts towards the conclusion - in the Kasbah, traditionally,
one walks away, pursued by the relenting trader - and in this
instance the uncertainty is compounded by the very great diversity
of objectives within the UK, resulting in the current extensive
range of possible outcomes. Any analysis of all the likely outcomes
and their effects is so complex as to have little meaning, except
for a broader and more important analysis of the difference between
short-term and long-term effects. As I conclude, the outcome has
potentially dramatic short-term effects, but the long-term effects
are uncertain, and generally overstated.
The political basis for the Canal Royal en Languedoc represents
a stream of thought that flows through French political history
like the écluses of the long winding Canal. A joint venture between
Louis XIV, the "Sun King", and Pierre-Paul Riquet, Baron de
Bonrepos, a landowner and salt-tax collector in Languedoc,
constructed the canal which joined the river Garonne, near
Toulouse, to the Etang de Thau, a protected partial enclosure of
the Mediterranean sea bordered on the south by Sète. Given its
obvious economic political and military advantages, the canal had
been long in contemplation - by the Roman Emperors, Augustus and
Nero, Charlemagne, and previous French Kings, including Francois I,
who brought Leonardo da Vinci to examine a route in 1516, but both
the scale of the project and the technical problems were immense.
When Riquet had constructed it, completing in 1681, shortly before
his death, it had occupied 12,000 workers for fifteen years.
The overriding technical problem was the need to pass over the
watershed, the 189m Seuil de Naurouze, away from which the water
flowed and to which the canal needed a constant supply of water to
replace the 90 million cubic metres of water necessary each year to
feed both sides of the watershed. Piquet solved the problem by
tapping higher more consistent water sources 25 km away. To provide
a reliable even flow reservoirs were constructed, giving reserves
of eight million cubic metres, principally at the Bassin de
Sant-Ferréol, where a dam 780m wide, 32m high, and 140m thick at
the base was constructed, the largest individual construction item
in the whole Canal project. The Canal Royal, a truly momentous
undertaking, and, apart from Louis XIV's palace at Versailles, the
largest construction project in France, achieved many purposes.
Ricard, seeking royal patronage for the canal, wrote, "the Straits
of Gibraltar will cease to be an absolutely necessary passage so
that income of the King of Spain in Cadiz will be reduced and those
of our King rise especially on farm inputs and outputs of goods ...
the rights received from the said canal will rise to immense sums
... and a thousand new businesses...". It is significant that
Riquet was a "salt tax" collector, or ferme-général for
Lanquedoc-Roussillon, a large region suffering from an agricultural
depression, and experiencing sectarian strife, which opposed the
King's dirigiste policy of centralising his control. The increased
economic activity due to greatly reduced from transport costs of
the canal, together with less political instability were likely to
increase greatly the tax "harvest" to be shared by the collector
and the King. In Languedoc in 1677 it was estimated that 33% of all
such tax collected was paid to the "local notables", and a further
19% spent under their "direction": a rich harvest.
The project was authorised by Jean-Baptiste Colbert, Cardinal
Jules de Mazarin's protégé and successor, to counter foreign trade
advantage, especially Spanish and Dutch, and to foster the
principle of absolutisme, or concentration of power in the
Sovereign and away from the nobility's fiefdom by increasing
prosperity: economic development facilitated political control. The
timing of Riquet's proposal in 1661 was propitious. Since the early
1640s Cardinal Mazarin had conducted an extensive diplomatic
programme designed to end and to benefit from ending the Thirty
Years' War that then engulfed France and virtually all of Western
Europe. The causes of the war, were manifold and, like most wars,
the war itself inflamed those causes and ignited others. However,
Mazarin identified as an important contributing factor to the war
the continuing economic decline of the many "German" sovereign or
near sovereign states, caused by increased trade restrictions. The
river Rhine, flowing from Switzerland through the Empire to the
Netherlands, was a natural communication and development corridor,
but trade had been increasingly stifled by tolls, "rights" and
tariffs imposed by the many regimes, the "river princes", many of
whom were on opposing sides in the 30-year war. Even in peace such
a fragmented system of common ownership - of the river passage -
would naturally give rise to a classic "tragedy of the commons":
the benefit of each of the many individuals in raising tariffs
eventually leads to the disbenefit of all as traffic falls.
Mazarin's analysis of the damage of such fragmentation of their
interests is supported by R M Spaulding's "Central Europe
History".
"Ironically, one unique element of the Rhine's modern commercial
growth preceded and was more important than any of these others,
yet remains almost unrecognised: the creation of a single, unified
commercial regime to regulate the river and all its commerce as
they flowed through several independent sovereign states.
Throughout its history, the fragmentation of state authority along
the river sharply distinguished the Rhine from other important
inland waterways and the international nature of the Rhine
continues to set it apart from the world's two other great
commercial rivers, the Yangtze and the Mississippi."
The unique problems of fragmented authority along the Rhine were
understood by Mazarin who realised that the promotion of and
protection of economic development along the river Rhine would
increase French influence and in 1642 announced that France, the
second most powerful political entity after the Holy Roman Empire,
(HRE) would guarantee security subsequent to any peace treaty on
the following basis "From this day toward, along the two banks of
the Rhine River and from the adjacent provinces, commerce and
transport of goods shall be free of transit (sic) for all the
inhabitants, and it will no longer be permitted to impose on the
Rhine any new toll, open birth right, customs, or taxation of any
denomination and of any sort, whatsoever". The injunction included
"and from adjacent provinces" indicating an intention to include
both principalities on the Rhine and those beyond it, deeper into
Germany.
Mazarin's ambitions extended far beyond the Rhine. He had
detailed studies prepared of the river traffic systems throughout
the HRE: from the Vistula and the Oder in the east, and from the
Elbe and the Weser in the west, together with prospective canals
between them and also to the Rhine running west through Westphalia
to the North Sea. He also had extensive reports on trading
opportunities on the Danube which flowed through southern Europe,
in order to connect with the eastern trade via the Black Sea and,
in support of this grandiose project, identified 28 primary cities
for the establishment of state-aided "Houses of Commerce".
Mazarin's vision was of the establishment of a more unified
Germany under French protection as the guarantor of the Peace of
Westphalia. His wider ambition was for a more influential role for
France to be achieved by dirigiste economic policies, and the
promotion of trade providing economic benefit in the client
political entity, increasing the political dependence on that
economic benefit, so reinforcing the role of France, who underwrote
the economic benefits - the "guarantor".
The expansion of trade and the closer economic and political
integration achieved by the participating states was influential in
the significant geopolitical changes the Treaty of Westphalia
promoted and represented a triumph of diplomacy for Mazarin and his
successor Jean-Baptiste Colbert. In summary the long-term
consequences were a diminution in the powers of Hapsburgs in the
centre, the Venetians in the south and Anglo Dutch influence in the
north and east; and a consolidation of Europe along economic rather
than historic and religious axes. Mazarin's and Colbert's plans for
Danube / Rhine canal, connecting the Black Sea to the North Sea,
had to wait three centuries. The recognition of the immense
economic and hence political significance of facilitating trade by
reducing barriers and gaining political influence from the
subsequent economic improvements achieved was one of the many great
achievements of Mazarin and Colbert: one which Colbert surely
recognised as he commissioned
this second most important state project in France, the Canal
Royal linking the Atlantic at Bordeaux with the Mediterranean at
Sète.
The genius of Mazarin and Colbert was to institutionalise a
changed basis for political alignment. In place of traditional or
feudal loyalty, religious or military compliance, or national
expansionism, the shared interests and benefits of trade from such
economic cooperation would lead states together in mutual
self-interest promoted by Colbert as the "Advantage of the Other".
Economic policy to achieve the aim of mutual advantage between and
within states was vested in state authority, directing policy and
channelling investment. The Schiller Institute's, "The Treaty of
Westphalia", says "For Colbert, the most important asset of the
common good, and the most powerful enemy of war itself, was the
development of infrastructure projects". The Treaty of Westphalia
was a great triumph of French diplomacy, the economic benefits
reinforcing the acceptance of Colbert's policies that used economic
power and "the advantage of the other" to erode and change
political allegiances, shaping western Europe for many centuries.
For France he liberated "the peoples of Europe from the predatory
control of the Austrian Hapsburg Empire and from the central
banking role of the Venetian and Dutch "oligopolies"; and he
facilitated the beautiful "Canal Royal".
Modified in use, the Canal Royal has survived the centuries, as
have policies echoing those of Mazarin and Colbert. "Determined to
lay the foundations of an ever-closer union among the peoples of
Europe," was the first of eight objectives of the Treaty of Rome,
signed on 25 March 1957 by the six states, successors to the ECSC,
who "have decided to create a European Economic Community and to
this end have designated as their Plenipotentiaries ..." . "Ever
closer union", while the first stated of the objectives, was in
conjunction with seven others calling for "economic and social
progress" "constant improvement" "steady expansion, balanced trade
and fair competition", "unity of economies ... reducing
differences" "abolition of restrictions on international trade"
"solidarity ... ensure the development of their prosperity", and
"pooling resources to preserve and strengthen peace".
The UK first attempted to join the EEC in 1961, an application
vetoed by Charles de Gaulle, but did join in 1973 and in a
referendum in 1975, held as Labour, objecting to the terms,
promised a renegotiation and then a referendum, voted 67.2% to stay
in the EEC. The referendum was contested on many points but the
main thrust of the argument was economic - not ever closer union.
The economic arguments for joining were founded on the UK's then
erratic "stop-go" economic performance, the rapid growth of the
EEC's six founder members, Germany and Italy in particular; and the
long-term exclusion from the growing single market. There is little
doubt that of all the arguments economic short-term advantage had
triumphed over limited political consideration for a very large
proportion of the electorate. Indeed, many may not have been aware
of the political implications which indeed had been much more
clearly set out in the explanatory 1955 Brochure of the European
Coal and Steel Community as:-
What? The Community is the first truly European government with
federal institutions. It exercises sovereign powers over the coal
and steel resources of six nations. In the Community the coal and
steel resources of the member nations are pooled in a common market
and are subject to common rules administered by common
institutions, acting in the interests of the Community as a
whole.
Why? to create a single market for the basic commodities of coal
and steel throughout the area of the member states;
to raise the standard of living by encouraging an expanding
economy through competition;
to ensure the continuing expansion of production by smoothing
out maladjustments, notably social ones;
and to take the first step towards a United States of
Europe.
With whom? "Our Community is not closed upon itself, but on the
contrary open to all who wish to join".
It was signed JEAN MONNET.
The key statements are "truly European government with federal
institutions. It exercises sovereign powers"; ... and "to take the
first steps towards a United States of Europe".
In the ECSC Monnet, like Mazarin, offers "the common good" while
the EEC emphasises economic gain with Colbert's "The Advantage of
the Other" as a lure into a political affiliation.
Prominent opponents of the proposal to join the EEC came from
diametrically opposed politicians. Enoch Powell, commenting on the
referendum outcome, which he had expected to be rejected said:-
"No sir, the British people do not mean it because they have
still not been able to credit the implications of being in the
Common Market. They still think they will be a nation. They still
think they will govern and tax and legislate for themselves. They
are mistaken. It's not the fault of many of the pro-marketeers
that they are mistaken, but it is the thing, so incredible to
them, that I am not inclined to blame them overmuch. But they will
learn ... that this did indeed mean that they will become a
province in a new state. Now I do not believe that when that is
realised, that it will be assented to".
Tony Benn, writing to constituents before the referendum took
place, said:
"In Short, the power of the electors of Britain [through their
direct representatives in Parliament to make laws, levy taxes,
change laws which the courts must uphold, and control the conduct
of public affairs] has been substantially ceded to the European
Community whose Council of Ministers and Commission are neither
collectively elected, nor collectively dismissed by the British
people nor even by the peoples in all the Community countries put
together ..." and later "the arguments presented to the British
public that year led them to believe that the common Market was a
matter of trade only".
In essence short-term obvious attractions of greater economic
prosperity proved more attractive than intangible long-term and
obscure disadvantage of a little understood political
structure.
The EEC did deliver considerable economic benefit, primarily
through freer trade, as trade barriers then were generally high but
the centralised Commission, as is the way of all bureaucracies,
introduced amusing "quirks". Curiously, in the fruit trade,
"grading" was required in which cucumbers had to be "straight" -
the EEC permitted no bends, twists or kinks, an absurd example
echoing Colbert's economic doctrine ("Dirigisme") where government
directs rather than only regulates a market economy. Such
regulation echoes back over three centuries: Colbert had the
quality and measure of each article fixed by law, punishing
breaches by public exposure of the delinquent, by destruction of
the goods concerned, and, on the third offense, by the pillory. I
"drilled" my soldier cucumbers, escaping that ignominy. Morrisons
now have a special category: "wonky fruit".
The Treaty of Westphalia was a diplomatic triumph for France and
expanded the sovereign French state, especially on the Rhine, so
concluding the French military and diplomatic initiatives of
Cardinal Richelieu (died 1642), Mazarin's and Colbert's
predecessor. Westphalia marked the apogee of French european
expansion dating from the 12(th) century when most of France was
under English control, and much of the remainder under the
effective control of powerful rulers, such as the Duke of Burgundy:
English domination was only ended in 1453, after the 100 Years'
War, including Joan of Arc's famous campaign in 1429, following
which there was rapid expansion of French power, annexing most of
the feudal and ducal lands. The state of France had consolidated
from a disparate group of interests, culminating in Louis XIV's and
Richelieu's enfeeblement of the nobility, giving rise to the Sun
King and the Palace of Versailles.
Subsequently, French expansionism was contained by "the League
of Augsberg" and "The Grand Alliance", 1688-97, in the "War of the
English Succession", a war whose memory continues to haunt UK
politics by celebrations of the English victory over the
Franco-Irish army at the Boyne in 1690. Louis XIV's last attempt to
extend French power was to unite the crowns of France and Spain
though his eldest son, the grandson of Philip IV of Spain. This
prospect together with French Mercantilism, adversely affecting
English and Dutch trade and the French occupation of fortresses
between the Dutch and Spanish Netherlands, led to an alliance
between the English and the Dutch Netherlands and the Holy Roman
Empire in the "War of the Spanish Succession" against France and
Spain. The French forces were heavily defeated by forces under
Churchill, 1(st) Duke of Marlborough, at Blenheim, and later at
Ramillies and Oudenarde. The Treaty of Utrecht resulted in Spain
and France relinquishing trading rights and ceding territories,
including Gibraltar, and Louis XIV's grandson, Philip V of Spain's,
renunciation of rights to the French throne and Louis XIV's other
relatives' renunciation of rights to the Spanish throne. This
Treaty marked the end of that phase of French ambitions of hegemony
in Europe, and, according to G M Trevelyan, "ushered in the stable
and characteristic period of Eighteenth-Century civilisation,
marked the end of danger to Europe from the old French monarchy,
and it marked a change of no less significance to the world at
large, - the maritime, commercial and financial supremacy of Great
Britain".
The "Napoleonic" war was the last French attempt at military
expansionism, a series of five major conflicts between the French
Empire and its allies against a changing array of coalitions of
European powers largely financed and usually led by the UK. The
first Napoleonic war started in 1803 as a conflict with the First
French Republic, a de facto military dictatorship originating in
Napoleon's seizure of power in 1799. Amongst the many reported
causes of war was the insult suffered by Napoleon's assertion, like
de Gaulle 150 years later, that "England" deserved no voice in
European affairs - undoubtedly an extreme position then as George
III was Elector of Hanover: in truth the meaningful motives were a
toxic cocktail of power, politics and profit. These conflicts were
a different scale to earlier wars and cost over four million lives.
Napoleon, an undoubted military genius, won over 90% of his
battles, but like Hitler in 1941 made a grievous strategic error,
the invasion of Russia, and subsequently lost the last battle,
Waterloo, on the whim of chance. The long battle, advantage and
field constantly shifting, but by evening in French favour, caused
Wellington to exclaim: "Night or the Prussians must come" ...
and they did at 7 pm, appearing on Wellington's left flank, but
behind the French right who, outmanoeuvred, fled the field. At
about 9 pm the two leaders met, Blucher, greeting him with his only
French, "Quelle affaire". Of the battle Wellington said: "It has
been a damned nice thing ... the nearest run thing you ever saw in
your life". The arrival of the Prussians under Blucher had been
determinant in France's defeat, the first of several subsequent
French humiliations by Germany in 1870, 1914 and 1940.
During WWII French diplomats formulated proposals to consolidate
Europe, enunciated by Jean Monnet, an influential member of the
National Liberation Committee of the de Gaulle "government" in
exile on 5 April 1943: "There will be no peace in Europe, if the
states are reconstituted on the basis of national sovereignty ...
The countries of Europe are too small to guarantee their peoples
the necessary prosperity and social development. The European
states must constitute themselves into a federation."
Such a proposal had a long pedigree. In 1919 at the Versailles
Peace Conference, Monnet, then an assistant in the Ministry of
Commerce proposed, but had rejected, "a new economic order", based
on European Cooperation. Earlier, Victor Hugo, shortly after the
Franco - Prussian War, instigated by France in July 1870 but
crushingly defeated in September 1870, entered a plea for unity:
"Let Germany feel happy and proud, with two provinces more and her
liberty less. But we, we pity her; we pity her enlargement which
contains such abasement ... We shall see France arise again, we
shall see her retrieve Lorraine, take back Alsace. But will that be
all? No ... Seize Trier, Mainz, Cologne, Koblenz, the whole of the
left bank of the Rhine. And we shall hear France cry out: It's my
turn, Germany, here I am! Am I your enemy? No! I am your sister. I
have taken back everything and I give you everything, on one
condition, that we shall act as one people, as one family, as one
Republic. I shall demolish my fortresses, you will demolish yours.
My revenge is fraternity! No more frontiers! The Rhine for
everyone! Let us be the same Republic, let us be the United States
of Europe!" An undoubted literary genius and romantic, Victor Hugo
was clearly not pragmatic: However, Colbert would have been proud
of Hugo's attempt to introduce his concept of the "advantage of the
other", and Mazarin of the marrying of political aims with trade
advantage.
A realistic small practical step towards Monnet's goal of a
federation of European states occurred on 9 May 1950. Robert
Schuman, a French Minister, announced the intention to form what
became the European Coal and Steel Community. The "Schuman
Declaration", prepared by Monnet, said "Europe will not be made all
at once, or according to a single plan. It will be built through
concrete achievements which first create a de facto solidarity. The
coming together of the nations of Europe requires the elimination
of the age-old opposition of France and Germany".
The Schuman plan, while a tactic very cleverly designed to
appear only to resolve a dispute between France and Germany over
privileged French access to German coal, advanced the strategic
actions of integration as Monnet's declaration, delivered by
Schuman illustrates: "Through the consolidation of basic production
and the institution of a new High Authority, whose decisions will
bind France, Germany and any other countries that join, this
proposal represents the first concrete step towards a European
federation, imperative for the preservation of peace". France gave
up some contentious war reparation payouts by forming a permanent
European body, incorporating a control over German assets and
advancing its stated ambitions for a more integrated Europe, while
Germany gained recognition as an equal in a European institution.
This coup, control of German economic assets and their dispersion
into a wider organisation fulfilled Monnet's 1945 reparation plan
and, in his words, succeeded:- "in taking control of the Ruhr and
Saar coal producing areas and redirecting the production away from
Germany industry and into French, thus permanently weakening
Germany and raising the French economy above its pre-war levels".
As part of "Europeanism" these assets were moved into the "High
Authority" of ESCA, presided over by Monnet, whose decisions bound
- ie they were supra-national - the sovereign nations in or joining
the Authority. In exchange Germany gained the abolition of the
further dismemberment of its industry and the previously imposed
limit on its industrial production. In 1955 integration policy
advanced further when Monnet founded the Action Committee for the
United States of Europe which provided the initiatives for the
establishment of the EEC by the Treaty of Rome in 1957, whose six
signatories declared that they were: "determined to lay the
foundations of an ever-closer union among the peoples of
Europe".
President de Gaulle sought a closer union under the leadership
of France to be revived by a strong economy and with a monetary
system backed by gold and in 1968 the German Chancellor, Kiesinger,
described his views as:- "General de Gaulle once told me that his
country had become terribly run down in the last 150 years,
'damaged' was the word he used. He saw his task as bringing about a
turnaround, as far as he could. For this, he needed a period of
calm, and he would let no one disturb this... As France went
through a process of renewal, the General would like to see other
European states grouped around it forming a type of confederation
under French leadership. But he could realise this aim only if he
kept Britain out."
Part of de Gaulle's vision was for world monetary reform, to be
achieved by strengthening the role of gold which he said has "no
nationality ... and ... which is eternally and universally
accepted" and eliminating the reserve
currency status of sterling and the dollar. GBP and $ trade
deficits were financed by foreign holders of such currency
liabilities, prompting the French philosopher, Raymond Aron's,
comment ... "they paid their foreign debts with their own currency:
when it was devalued, holders had to take the consequences".
Fortified by de Gaulle's grandeur, France attempted to establish a
gold-based Franc as an international currency by aggressively
selling dollars for gold at a time when the dollar was weakened by
rising US inflation and its deepening involvement in Vietnam. The
UK's high inflation made UK exports increasingly less competitive,
requiring even greater external financing and reinforcing the
attack on Sterling which eventually was devalued by 14.3% against
the $ of which Harold Wilson said ... "the pound in your pocket
..."
The Deutsche Bundesbank's President, Otmar Emminger, said the
14.3% devaluation was caused by "the inability of the British
economy to compete". Sterling's devaluation was highly
destabilising, resulting in further gold purchases and dollar and
sterling sales, as the UK external balances were slow to react to
the devaluation. Consequently, the "Gold Pool", set up in 1961 and
operated by Central Banks in the USA and seven European countries
to stabilise the $35 gold price, but weakened by the French
withdrawal from the "Pool" in 1967, collapsed in March 1968
effectively devaluing the $. The delayed benign effect of the
sterling devaluation, coupled with international support for
sterling, restored confidence in the GBP, which together with the
effective devaluation of the $, exposed the overvaluation of the
Franc, especially compared to the DM. So, ended de Gaulle's dream
of a "Franc fort", leaving only a devaluation of the "Franc faible"
and a DM revaluation - an undisguisable symbol of the DM's economic
strength - as a practical solution. But, faced with so obvious a
sign of French weakness, de Gaulle blocked the currency
realignment, imposing strict exchange controls which quickly proved
ineffective.
The abject failure of de Gaulle's policy to use renewed economic
strength to reinforce France's leadership of the EEC marked a
turning point in French policy, as Germany's innate economic
strength became starkly apparent. Before he resigned soon after the
debacle in early 1969 de Gaulle told Chancellor Kiesinger:- "France
has a certain hesitancy and caution regarding Germany's economic
strength, as it does not wish to be inundated by German industry.
Germany has been a large industrialised country for a long time. As
a result, with its entrepreneurs, its population and its
infrastructure it is best equipped for production, trade and
especially export. That is the nature of Germany, that is the
German reality. France has been an agricultural country for much
longer, with far fewer large cities and large corporations there is
nothing to compare with the enormous complex of the Ruhr or the
former Silesia ... In industry and trade Germany is in the
lead."
The extent to which Germany was "in the lead" became
increasingly apparent. Three devaluations of the Franc occurred in
the next seven years and one revaluation of the D-Mark, resulting
in the 'New' Franc losing 7/8(ths) from its value between its
inauguration in 1960 to its consolidation into the Euro in 1999.
The political consequences for leadership of the EU of the economic
weakness of France, keenly sensed by de Gaulle, was fully exposed
by Michel Debré: "In November 1968 the strength of the Mark
promoted Germany for the first time to speak with a very loud
voice. This strength ensured it of the economic supremacy that made
it the master of Europe for a very long time." Recognising the
essence of the matter, de Gaulle had attempted a full assault on
established international financial powers: playing for the highest
stakes, he had lost.
President Pompidou's response to the loss of the possibility of
direct French pre-eminence was to widen and deepen the EEC by
including the UK, Ireland, Denmark and Norway and by promoting
Economic and Monetary Union (EMU), to dilute the power of Germany
within the EEC, and to shackle German monetary policy by gaining
influence over it through a central bureaucracy. The use of
economic incentives and the resulting political control was the key
by which Mazarin and Colbert had gained so much influence over the
riparian and inland Rhineland states. In this instance such power
was not to be so easily obtained. The acceptance of the EMU
initiated a policy struggle that lasted a quarter of century
between the French desire for currency fixing and reserve pooling
and the German desire for flexible currency with monetary union
happening only when European economies had converged. The EMU
proposals exposed inherent contradictions between France and
Germany, but they also ignited the continuing different
contradictions within the UK. A contemporary Bank of England paper,
released only in 2000 after 30 years, says "the plan for EMU has
revolutionary long-term implications, both economic and political.
It could imply the creation of a European federal state, with a
single currency. All the basic instruments of national economic
management (fiscal, monetary, incomes and regional policies) would
ultimately be handed over to the central federal authorities".
The significance of the Bank paper is not in its content but in
that it was considered significant. The underlying intention of the
ECSC, the EEC and the EMU had been clearly stated, as argued
cogently by Powell and Benn, but in 1974 Lord Denning drew
attention to its inevitability and pervasiveness in the simile.
"The treaty is like an incoming tide. It flows up the estuaries and
up the rivers. It cannot be held back", and later, continuing the
simile, "now in 1979 the tide is advancing. It is no use our trying
to stop it, any more than King Canute did. He got his feet wet; I
expect we shall all get our feet wet". The Bank paper showed the
political inevitability never had the emphasis of all the other
many ancillary and often banal expressions of peace, "goodwill to
all men", equality, the
advancement of society, "freedoms" all of which are so warming,
so immediately understandable and so little requiring of change.
The unswerving background is of the repetitive emphasis on economic
advantage and, as easily understood, higher living standards. The
Bank paper is significant because its content unmasked the promoted
and accepted appearance of the EEC. It was not released for thirty
years.
During the ensuing power struggle over EMU the accommodative
stance of the USSR after Gorbachev took office reduced the apparent
external threats that underlay so high a German commitment to the
West: left wing intellectuals talked of "nationalism and
neutralism"; and Mitterand warned "unless we make progress in the
construction of Europe, we will not escape bargaining over Germany
between East and West." France, rightly, was greatly concerned that
the greater economic powers of Germany, unfettered by EEC
regulations, would act independently, resist the economic
integration that gave power to the proposed political integration
and undermine the whole real political purpose of the project over
which France continued to have the major influence. Like Mazarin he
realised economic co-independence gave political influence. This
French fear was highlighted when, at a meeting nominally discussing
joint decision making on deploying French nuclear weapons,
Mitterrand's advisor, Jacques Attali, interjected, "So that we can
have a balance, let us now talk about the German atom bomb". The
astonished German officials replied 'You know we don't have the
atomic bomb - what do you mean?' Attali replied: 'I mean the
D-Mark'. Such was the importance in which the French held the
Bundesbank's dominance in European monetary policy."
France's opportunity to advance EMU followed the fall of the
Berlin Wall on 9 November 1989. The prospect of a reunified Germany
touched a very deep German political ideal, "The Fatherland". Such
a reunification would entail strong political support to ensure the
greatly enlarged Federal Republic was recognised in NATO and in
other International treaties. The political cost was German
agreement to Monetary Union against the advice of the independent
Bundesbank. The German minutes of Khol's meeting with US Secretary
of State John Baker at Strasburg record: Kohl "took this decision
against the German interests... . For example the president of the
Bundesbank was against the present development. But the step was
politically important, since Germany needed friends", adding "as
one does, when one is trying to unite Germany without blood and
iron". A "wit" quipped "the whole of Deutschland for Kohl, half the
Deutsche Mark for Mitterrand". Opportunistic French diplomacy
secured a further tether on Germany, binding it with France and
tying it into the EU, away from the East, allowing France to hitch
a ride on the pre-eminent economic power in Western Europe, a
tactic of which Mazarin would have been proud.
In the UK those apprehensive of the political purpose of EMU
were but distant voices, Cassandras, crying unheard in the
wilderness. Philip Stephens, writing in the FT, puts it "for all
its decades of membership, Britain has never really joined the EU.
... it has never properly grasped the psychology of European
integration. For France, Germany, Italy and the rest, the union was
a political project with emotional roots deeper than the economic
rationale. For Brits, it was a commercial transaction - a club they
had signed up to by dint of straitened economic circumstance rather
than political choice."
The analogy is often wrongly made between the EU and a Club -
you join the club, sometimes with difficulty, as the UK experienced
with de Gaulle's "black ball", but then you are free to resign, to
leave without penalty. But the EU resembles a Hire Purchase
agreement: you sign up to it, you pay instalments and you get the
use of it, but you cannot trade it, you cannot change it and you
cannot easily abandon it. You can decide to leave the EU agreement,
but you only have two years to agree any settlement. It is alleged
that during the Japanese WWII reconstruction negotiations the
Japanese hosts, having solicitously enquired about their visiting
American guests' return travelling arrangements, would invoke all
manner of cultural guises to delay serious negotiating until it was
almost, but not quite, too late! Time pressure gained negotiating
advantage. Similarly, once the UK invoked Article 50 its position
became ever weaker, as did its "no deal" stance when no
preparations for such a "no deal" were apparent. The UK has made
concessions on the financial "settlement" that are far more removed
from those
that were original promulgated. Indeed, when the UK invited the
EU to "whistle for it", they got it! The technical aspects of the
Treaties are disadvantageous to those leaving the EU by invoking
Article 50.
The "European movement" has always placed emphasis on trade,
peace, social responsibility and economic development. Starting
from the rudimentary conditions of the ESCC successive layers of
economic co-operation have been incorporated, agreed and ratified
by the Treaty. As Jean Monnet says "The fusion of economic
functions would compel nations to fuse their sovereignty into that
of a single state". The epitome of such progressive fusing has been
the creation of the Euro, an economic policy designed for political
ends which now harms some nations, stands in a marked contradiction
to other major social policies and has now almost certainly
imprisoned the countries that embraced it. It is salutary to
reflect that, had the UK joined the Euro, its political future was
sealed as, given the UK's current difficulties in leaving the EU,
it is inconceivable that it would practical to do so if the UK was
in the EZ. It is even more salutary to consider, given the
difficulties in leaving the EZ, if this was a
consideration for some protagonists, including the FT and the
Economist, as distinguished members amongst others, who advocated
joining the Euro, particularly when it has proved such an
unfortunate option. More kindly, perhaps they, the Bank, and many
other eminent forecasters just got it plain wrong! The significance
properly attached to the Euro is immediately evident from the
extraordinary lengths to which the EU was prepared to go to
maintain it during the "Great Recession" when rules were twisted,
special conditions allowed and unprecedented support mechanisms
conjured up to save it.
The adoption of the Euro was accompanied by emphasis on its
economic aspects, an emphasis which overlaid a deeper political
purpose. The drive for the Euro was predominantly led by France in
pursuit of German integration into Europe and the economic "fusion"
forecast by Monnet, leading to political integration, yielding a
political body that affords its government worldwide influence a
vicarious "Franc Fort" so keenly sought by de Gaulle. And, like a
two-compound building resin, once a nation binds to it it is set
irrevocably.
Social policies and EU economic policies are often designed
towards gaining political support for closer economic union. Most
evident are the well documented EU support for the arts and culture
and special support for disadvantaged areas. There is protectionism
in key industries, special protection in particular for
agriculture, state ownership, and a dirigiste Colbert policy
towards industry all of which have nurtured political acquiescence.
In consequence, and like many of the contradictions in the EU,
while the long-term benefits of free trade were widely recognised,
they are not normally implemented, a disparity particularly
apparent in some sectors, notably agriculture. The EU endorses free
trade within the EU, but practises highly protectionist policies
within the EU in very many service areas, and, outwith the EU it is
highly protectionist, despite the long-term economic advantage of
free trade. Indeed, historically, the EU and the predecessor
organisations and nations were more protectionist than the UK with
a long-established international trading history. Thus the
political necessity for the EU to reach a "trade" deal with the UK
is diminished. Protectionism allows the EU to exact large benefits
from nations wishing to enter their trading bloc with its high
tariff and non-tariff barriers, especially services and such
mercantilism, while economically disadvantageous in the long run,
has political advantages so well illustrated in the current UK
withdrawal negotiations.
Trade settlements are much less important in the EU27 than in
the UK because of the asymmetry of size. The EU comprises 27
nations with an economy about 10 times the size of the UK's
economy. If protectionism is equally damaging, then each EU
individual's welfare is reduced by only 1/10 of the UK's! If all
economies grow at 2.25% and the economic contraction caused by any
trade disturbance was 2.5%, then the UK would sink into recession,
but the EU growth would drop from 2.25% to 2.00% - a small change,
statistically insignificant. I quote from last year: "The
economics, the politics, the culture, and the over-riding ambitions
of "ever closer union" will not lead the trade talks, any more than
the financial settlement talks did, to a position that the
promoters or voters for "leave" expected or even now do
expect!"
As I write an extreme outcome of the current withdrawal
negotiations is still unlikely, although recent events have changed
the probabilities of some outcomes from being scarcely worthy of
consideration to "not impossible", as, for example, a withdrawal of
the invocation of Article 50 or of another referendum. In assessing
the many outcomes available two factors are particularly relevant.
First in the current position there is a significant disadvantage
in "no deal" outcome, admittedly a lesser one for the EU, but still
important. The second factor can be derived from observing how the
EU actually acts rather than what it says. The EU often "stops" the
clock: it has enactments widely ignored; it has binding rules for
fiscal deficits, regularly breached by both Germany and France; and
it has controls over the ECB subtly avoided during the Euro crisis:
ultimately it is pragmatic.
All outcomes will have a deleterious effect on the UK economy
both in the short term and probably in the long-term. The outcome
depends on the trading terms eventually agreed with the EU and the
consequent balance between trade destruction and trade creation
caused by leaving the EU, a balance which could, in expected
circumstances ultimately tip in favour of leaving as a result of
much improved wider trading relationships or a fracture of the Euro
leading to disruption in some existing EZ nations.
Most studies forecast how much larger or smaller UK GDP would be
having left the EU than it would be if the UK remained a member.
For example, the leaked government analysis assumes that UK GDP
would grow in real terms by 1.5% a year over the next 15 years if
the UK were to remain a member of the EU, but would grow 0.4
percentage points less quickly (ie at 1.1%) on average each year if
the UK leaves and trades with the EU on WTO terms. As a result, UK
economic output in 15 years' time would be 7.7% smaller under the
'Leave' scenario than under the 'Remain' scenario. However,
economic output would still be 18% larger than it is today. None of
the models predict anything similar to actual year-on-year falls in
output that were experienced during 2008 or even in earlier much
smaller recessions.
In October 2018 the Institute of Government summarised the
forecasts of the long-term impact until 2030 of leaving the EU in
GDP relative to remaining in the EU on a "Free-Trade Agreement".
Ignoring the extreme "worst" and the extreme "best", the relative
"loss" in GDP was 3.8 percentage points. Ignoring the Treasury
forecast, the average loss was 3.2 percentage points.
The Treasury's forecasting, so often highly inaccurate, almost
"wrong" over a long period, plumbed a new depth in its assessment
of the economic consequences that would follow immediately after a
"Leave" vote. The Treasury's summary was: 'The analysis shows that
the economy would fall into recession with four quarters of
negative growth. After two years, GDP would be around 3.6% lower
.... 'The fall in the value of the pound would be around 12%, and
unemployment would increase by around 500,000, with all regions
experiencing a rise in the number of people out of work. The
exchange-rate-driven increase in the price of imports would lead to
a material increase in prices, with the CPI inflation rate higher
by 2.3 percentage points. The Bank of England and the IMF agreed
that recession was possible". The Treasury also forecast real wages
dropping 2.8% - 4.0% and house prices dropping 10% - 18%. Of these
forecasts only one has been clearly realised, the 12% fall in the
value of sterling and a consequential but much more modest rise in
inflation. No recession materialised, employment has risen and
house prices rose. The Bank was less pessimistic but, as the
Institute for Government comments "The Bank would have been more
accurate if it had stuck to its pre-referendum forecasts". The FT's
unashamedly pro EU economics editor Chris Giles wrote: "when the
Treasury last published short-term forecasts predicting a recession
after a Leave vote, the analysis appeared "made-up" to many neutral
advisers." The underlying bias in official and quasi-official
forecasting, questions the perceived integrity of the UK "official"
forecasts and the independence of the Bank.
Forecasts of the long-term impact of leaving the EU are almost
without exception for reductions in real UK GDP. However, for UK
residents the relevant economic parameter is per capita GDP, not UK
GDP. The Institute for Government analysis has summarised the
forecasts for the long-term impact of leaving the EU for a wide
number of forecasters, assuming different bases for continuing
trade. Assuming a Free Trade Agreement, they show, excluding the
most pessimistic forecast HMT 6.0% (as above!) and the most
optimistic Oxford Economics (-0.5%), that by 2030 GDP per capita
will be on average 2.4% lower, say 0.2 percentage points lower per
year, than if the UK remained in the EU. 0.2% change in GDP per
year is a small amount!
Given the complexity, the multiplicity and the inconsistency of
all the forecasts, no defensible position can be taken on the
precise effect of "Leave" by 2030! And even less defensible when
the precise conditions of the EU withdrawal from the EU are still
unknown! Economic forecasting in the short-term is unreliable, and
over 12 years arguments over +/- 0.20 percentage point differences
per year in GDP seem surreal. However, it is self-evident that the
adjustment in the economy from the present EU membership to any new
trading relationship cannot be made without upset and destruction
in some areas, in some industries and to some people. While almost
without exception the long-term "costs" of leaving the EU are
measured in real GDP, the actual effect will be experienced largely
in GDP per head, not total GDP and such a qualification would
significantly reduce the forecast economic "cost" to individual UK
citizens.
This potential loss of GDP from leaving the EU is small compared
to other sources of 'losses' of GDP. In the Great Recession of 2008
real GDP dropped by 5% over two years, in contrast to a lesser
potential relative loss of 2.4% over twelve years. A much greater
thief of actual GDP growth, compared to potential GDP, has been the
significant reduction in productivity. In the eight years before
the 2008 recession productivity rose 19% or about 2.35% per annum,
similar to the previous eight years, but since 2008 productivity
has risen less than 0.2% per annum. Last year the OBR estimated
that output per hour was 21% below an extrapolation of the
pre-crisis trend. By the beginning of 2023 the OBR, assuming an
improvement in productivity to about 1% per annum, estimates that
output per hour in 2023 will be 27% below its pre-crisis trend. The
OBR forecasts an improvement in productivity to 2% by 2030 - a long
way off - and even if it averages 1.35% until 2030, the UK economy
will be losing 1.0% per year in output, very considerably more than
the above annual projection of output loss from leaving
the EU. Productivity is much less tangible than images of queued
ports and extended bonded warehouses and factory closures and so
may seem less important than the loss from the more obvious trading
opportunities, but as Paul Krugman, the Nobel Laureate, says
"productivity isn't everything, but in the long run it is almost
everything". The relative insignificance of the importance attached
to improving productivity being by far the largest economic
variable capable of increasing GDP, highlights the emphasis
attached to the discussion of EU withdrawal: it is surely the topic
of the day and it is a "one off" but it is arguable that such overt
alarm on the possible economic consequences is often used as a
proxy for covert political preference.
Indeed there may be a political dimension to the discussion of
the economic effects of leaving the EU as evidenced by the lack of
similar analysis on many other growth reducing policies, many of
which appear to be accepted, inevitable or unavailable. Obvious
other restrictions to economic growth are the extensive UK
oligopolies, including those in the financial sector, restrictive
practices in the professions, unprofitable vanity projects such as
HS2, the Dome and the Olympics, inefficiencies like the many failed
Government IT projects, subsidised tertiary education producing
graduates with unwanted skills, support for failing industries,
such as agriculture, subsidised green policies, especially in
relation to power generation, regional policies, particularly the
continuing support of declining industry in old industrial areas
and all external tariffs and other trade restrictions. Many changes
could be made that improve economic output but such possible
improvements are implicitly traded for political advantage or
prejudice. It is surely significant that the dog does not bark
about these restrictions to growth, but howls over the cost of
leaving the EU.
Leaving the EU is invested with a special, almost unique,
political aura. Self-evidently, it is a political decision as much
as an economic one. The EU is first and foremost a political
organisation run for political purpose: it is protectionist,
mercantilist and highly centralised with a "democratic deficit". It
has largely been dependent on French initiatives, whose cultural
motivations date back to the founding of the nation under Louis
XIV, in many respects continuing to be guided by French influence.
It was conceived in the Schuman plan as a political "first step
towards a European federation" and its gestation has been nourished
by progressive economic integrations, as predicted by Jean Monnet,
the acknowledged "Father of the EU", saying, "The fusion of
economic functions would compel nations to fuse their sovereignty
into that of a single state"; and, "Via money Europe could become
political in years"; and a generation later by Angela Merkel who
said "if the Euro fails, then Europe will fail". Thus, economic
policy is subject to political policy, most apparent in the Euro
project! The external tariffs and non-tariff barriers are barriers
to "outside" trade but they give a strong advantage to "inside"
trade, as the UK is now discovering, and their integrating purpose
and the transitional costs of breaking them, however attractive the
final position may be, is high, again as the UK is experiencing.
Moreover, the true protectionism of the EU cannot be measured by
the low tariffs on Manufacturing (circa 4.0%), as the quotas,
"hidden" and non-tariff barriers to trade are much more significant
real barriers. These restrictions can be greatly exacerbated by
"friction" at the border: origin, specification, health,
phytosanitary checks and subject to discretionary manipulation such
as by having too few customs staff causing unnecessary delays which
are particularly damaging to perishable trades such as fish, meat
and fruit and vegetables when a day can reduce the shelf life by a
third. In the service sector in the EU little harmonisation has
occurred: classically, in Austria even corset makers have to be
locally licensed and unlicensed Korsettschneideren are verboten.
Such internal EU restrictions serve local political ends, but the
very extensive restrictions on services external to the EU
reinforce the integrity of the EU and its political influence. All
the many protectionist policies have economic advantage to those
protected and can be argued as constituting beneficial economic
policy. Alternatively, it can be argued protectionism fosters
internal political support for the incumbent administration,
facilitating integration and external political influence in the
EU's transactions with third parties. In the last analysis the EU,
successor to the Europe Economic Community, is a political venture,
a wolf in sheep's clothing.
The underlying nature of the EU is less fully understood than
its economic purposes. Thus there is a strong incentive for those
politically aligned with the EU to emphasise its economic
consequences which, while not favourable, at least in the
short-term, are statistically small and in economic performance
less important than other economic variables. Such a hypothesis
would account for some of the exaggerated forecasts made by
political and other organisations that are covertly pro EU.
The fervour that accompanies some analyses is far removed from
considered economic analysis and suggests underlying political
preference: as the FT said such analyses appeared "made up". There
is a further reason for possible bias amongst the "establishment"
who may have many strong incentives to maintain the status quo:
relationships, access, understanding, investment in time and money
to the corridors of power, and, separately, change is always
inconvenient and resisted. The institutions of the EU are as opaque
as they are powerful and access to them is limited, giving existing
users a protective barrier to entry, a cosy relationship at terms
verging towards oligopoly: they can lobby well, work the system
well.
Political argument for the European cause is sometimes veiled
behind economic arguments, as exposing self-interest, prejudice or
ideological preference or anti-UK "establishment" motives would
lose the European cause support: economics is safer, directly
affects more people and is more simply agreed and more easily
accepted. Also, the economic argument is correct - the short-term
consequence of leaving the EU is economically unfavourable, giving
a lower growth rate, and only the degree is in question.
The Bank of England and the Government have published a wide
range of "scenarios" for the long-term change in GDP compared to
the present EU membership. These include a short-term scenario with
GDP falling 10.5% over five years if there was a "no deal" Brexit!
Patently, such an outcome is possible - we might have a huge
volcanic eruption the ash of which would obscure the sun, giving a
catastrophic economic outcome - but how likely is it? The Bank of
England dodges this key question.
The forecasters, making assumptions, usually of "reasonable"
outcomes to the current negotiations - ie an outcome not far from
the present proposals - are remarkably uniform in their forecasts
for the next few years. The OBR forecast growth of 1.6% of 2019 and
1.4% average over the next three years, figures, within 0.2% of the
2019 forecasts reported for the Bank, NIESR and IMF but above the
EC and the OECD forecasts. For 2020 and onwards the OBR is about
0.2% lower than other reported forecasts, although Oxford
Economics, the only private forecast quoted, forecasts subsequent
years at 2.1%. The difference between these forecasts almost
certainly falls within statistical error.
The key determinant of economic prospects is the passage or
otherwise of the existing Bill before Parliament, which if it is
not passed in its present form, or with minor revision, will
certainly result in a significant reduction in short-term economic
activity and has a high probability of impinging very adversely on
the next few years. As to the outcome of the Bill, I have no basis
on which to make a forecast, certainly not an informed one. I do
forecast that for this most important decision, nothing will be
decided until the outcome of that Bill is known: we all must
wait.
Property Prospects
In the previous investment cycle the CBRE All Property Yield
Index peaked at 7.4% in November 2001, then fell steadily to a
trough of 4.8% in May 2007, before rising in this cycle to a peak
of 7.8% in February 2009, a yield surpassed only twice since 1970,
on brief occasions when the Bank Rate was over 10%. Subsequently
yields fell to 6.1% in 2011, rose briefly to 6.3% in 2012 before
falling steadily to 5.4% in 2015, and reaching a low of 5.3% in
August 2017 before rising fractionally again this year to 5.4%.
Yield changes within the individual components of the All
Property Index have been significant. In the year to August 2017
Secondary Shopping Centre yields rose 0.75 percentage points and in
the year to September 2018 have risen another 0.5 percentage points
to 9.00%, and Best Secondary Shopping Centres have risen similarly
to 7.25%, while Prime Shopping Centre rises were slightly less at
0.35 percentage points to 5.00%. High Street Shop yields have also
risen but Prime Shops and Good Secondary by only 0.25 percentage
points to 4.25% and 7.01% respectively. No change occurred in
Offices yields apart from a small 0.25 percentage points fall in
Regional Offices. Industrial yields fell in all sub categories with
Secondary Estates falling by up to 0.75 percentage points to
6.50%.
Some "specialist" sectors have surprisingly low yields, usually
unchanged since 2017. Prime London residential yields are 3.75% in
outer areas but 3.15% in Prime Zone 2; Prime London Corporate Pubs
are 3.50% and central London University Student Accommodation RPI
linked is 3.75% and Direct Let 4.25%, both 0.25 percentage points
lower than in 2017. In "non-specialist" sectors only West End
Offices have equivalent low 3.75% yields.
The peak All Property yield of 7.8% in February 2009 was 4.6
percentage points higher than the 10-year Gilt, then the widest
"yield gap" since the series began in 1972 and 1.4 percentage
points wider than the previous record yield gap in February 1999.
The 2012 yield of 6.3% marked a record yield gap of 4.8 percentage
points, due largely to the then exceptionally low 1.5% Gilt yield.
The yield gap fell to a low of 3.3 percentage points in 2014 but
rose a little each year to 4.1 percentage points in 2017, the
present level, given the current 10-year Gilt yield of circa
1.30%.
The All Property Rent Index, apart from a brief fall in 2003,
had risen consistently from 1994 until 2008 when it fell by 12.3%
in the year to August 2009. Since 2009 there have been three small
increases totalling 1.6% to August 2012, but since then rental
growth improved slightly and averaged 3.6% in the five years to
2017 before reducing to 0.8% growth, in first half of the year with
no subsequent rise and now stands 5.0% above the previous rental
peak attained in 2008, just before the Great Recession.
Rent changes in 2018 in the individual sectors are expected as
Shops -0.6%, Industrials 4.1%, Offices 0.8%, Shopping Centres -1.3%
and Retail Warehouses -1.1%, these two last sectors having the
poorest performance for the last three years. Since the depression
began ten years ago, the All Property Rent Index (as extrapolated)
has risen by 5%; Shops by 6%; Offices by 9% and Industrials by 24%,
but Retail Warehouses have fallen by 14%. Since the market peak of
1990/91 the CBRE rent indices, as adjusted by RPI for inflation,
have all fallen: All Property 29%; Offices 34%; Shops 19%; and
Industrials 28%.
Property returns as measured by IPD were 9.5% in the year to
October 2018, similar to 2017, in spite of a reduced return in
October, possibly influenced by the negotiations to Leave the EU.
In 2016 the return was only 2.9% as capital values dropped
following the "Leave" vote in the referendum, falling by 2.0% in
July 2016 due, primarily, to large falls in London offices. The
last property boom ended in 2007 and by December 2008, a month when
the
index fell a record 5.3%, the index had fallen 26.6%. In the ten
years subsequent the total return has been 135.8% or nearly 9% per
annum. Since just before the boom ended the return has been 73.0%
or only just over 4.5% per annum.
The International Property Forum last year forecast total return
in 2018 as 4.0% but the current expectation for 2018 is 6.2%. The
rise in total return is wholly due to the Industrial sector where
the return is expected to be 15.2% as opposed to the 7.8% forecast.
In contrast Retail returns are expected to be sharply down from
forecast as Shopping Centre returns forecast at 2.8% are expected
as minus 2.2%, Retail Warehouses 1.8% as opposed to 4.3% forecast
and "Standard" Retail 2.1% as opposed to 3.7% forecast. The 2017
forecasts, while forecasting lower returns from "Retail",
underestimated the rapidity of the actual change in "retail".
Offices are expected to return 6.0% in 2018 as opposed to the 1.9%
forecast due to expected capital value growth of 1.8% instead of
the minus 2.3% forecast, a surprising outcome close to yields
falling markedly in the London City and West End offices, possibly
as a result of improved prospects for London offices after leaving
the EU.
The IPF forecasts for 2019 and subsequent years are for moderate
returns. The only negative total return forecast for 2019 is for
Shopping Centres where further falls in capital values of over 10%
are forecast over three years, reducing total returns to 2.0%. The
capital values of Retail Warehouses are forecast to fall 7.8% over
the next four years and as rental values ease slightly, returns
will be positive in 2019 and total returns are expected to be about
30% per year over the next three years. Industrial returns are
expected to be above 5.0%, but a reduction on the expected 2018
total return of 15.2%. All Property total return is forecast at
3.0% in 2019 rising to 3.5% in 2020 and to 5.0% for the following
two years.
Forecasters are notoriously unable to detect pivotal points such
as the unexpected Referendum vote which was largely responsible for
the marked reduction in the IPF forecast property returns for 2017
made between May 2016 and August 2016. In May 2016 IPF forecast All
Property 2016 returns of 7.1% for 2016 which was downgraded in
August 2016 to -0.4%, and the 2017 forecast downgraded to 0.6%.
During 2017 this 0.6% forecast was revised to 4.8% in May, 6.7% in
August and in November 2018 to 8.2%. Similarly, the recent sharp
deterioration in change in retail returns described above was not
forecast in spite of the factors giving rise to the change becoming
increasingly obvious.
But are the forecasters "right" now? Last year I said "Current
forecasts are for a recovery in 2017, a fall in returns in 2018 and
for a small continuing improvement thereafter - a trend analysis
following the reaction to the Referendum". The recovery in 2017
took place, reaching 11.0%, hardly surprising as the forecast was
made in that Autumn, but the extent of the returns in 2018 then
forecast to 4.0%, is now forecast to be 6.2% and the continuing
improvements are not now forecast and in November 2018 the three
years forecast total return was only about 3.0%. The IPF forecast
was made when the economy was expanding at 0.6% per quarter and
there was still a high probability that the UK would agree terms
for leaving the EU that provided minimal interruption to trade in
goods and services. Indeed the OBR assume "that the negotiations
between the UK and the EU lead to an orderly transition to a new
long-term relationship, whatever that relationship might be" and,
given that conditions expect GNP to continue to grow at the current
rate of about 1.4% until 2022: no change, then.
Unfortunately the OBR's assumption, similar to that made by
other forecasters, has become less probable as the Withdrawal
Agreement may not be ratified by Parliament. If it is not so
ratified, a very wide range of possibilities arise which possess
some features in common. In the long-term, including a withdrawal
with "no deal", the reduction in the UK growth rate per annum will
not be large. In the medium term, there will be a cost in effecting
the change, greatest for "no deal" and least, if the EU agrees that
on 29 March 2019 the position reverts to the status quo ante or to
a position with little material change: these options previously
considered so improbable as not even to be worth considering are
daily becoming more probable.
In the short-term there will be a serious downturn, unless a
favourable solution presents itself, a "deus ex machina". In this
short-term there will be a manifest delay in investment (eg "I will
delay buying my house until after Brexit") and saving, hoarding and
despair about the long-term future. This negative appraisal will be
reinforced by those who forecast the future as less unsatisfactory,
but who will reflect that the different views of others will so
damage the economy that they in turn will emulate their behaviour,
thus reinforcing the trend.
The outcome from no ratification will introduce a scenario quite
different from those on which most forecasts are based: almost
unquestionably these forecasts will prove optimistic, as the basic
assumption of a "negotiated deal" - at least in the accepted
timetable - was flawed. In the short-term the investment market
will be disrupted, possibly seriously. In the long-term UK growth
may be impaired, but, as I argued above, the precise trading
relationships of the UK with the EU will only affect the UK economy
to an equivalent extent to other economically disadvantageous
policies but whose political value is deemed to be worth their
economic cost.
This time last year forecasts for house prices in 2018 were
muted. HMT's "Average of Forecasts" was for a rise of 1.4%, and the
OBR forecast 2.9%, forecasts in line with current 2018 estimates of
1.9%, by the HMT survey and 3.4% in the OBR forecast. Increases in
house prices in the twelve months to the end of October 2018 are
reported as: Halifax 1.5%; Nationwide 1.9%; and Acadata 1.0%
(England and Wales only), all showing reduced growth compared to
this time last year. Acadata report the 1% average growth is the
lowest since April 2012 and, as the price rise is considerably
below the 3.3% RPI rate of inflation, house prices have fallen in
real terms. In all English regions house price rises are lower now
than previously reported. Anomalously, year on year price falls
occurred in the most expensive region, South East, and the least
expensive, North East, where the average price is only
GBP157,176.
Scottish prices rose 1.9% in September, the largest increase in
a single month since June 2007, and 5.1% year on year, providing a
strong contrast to the small rise of 1.0% in England and Wales, but
the average price in Scotland is only GBP180,030 with the lowest,
in West Dunbartonshire, GBP119,725. In Scotland there is a
considerable disparity between the regions as, unlike England where
the highest increase was 3.1% (West Midlands) and the largest fall
was 0.2% (North East), in Scotland increases of 10% or more
occurred in Edinburgh, Glasgow, Argyll & Bute, North
Lanarkshire, Inverclyde and the Outer Isles ... to GBP121,469!
while falls of over 3% occurred in Stirling and Scottish
Borders.
In Edinburgh prices have continued to increase rising 9.6% in
the year to September 2018, following a similar rise last year.
Savills report that "Edinburgh has seen higher price value growth
than any other UK city with room for more ..." they say "due in
part to Edinburgh being voted (in the Royal Mail survey) the most
attractive UK city in which to live and work". Over the last few
years overseas migration to Edinburgh has totalled 22,575 and UK
relocation 10,839 giving a 6.9% increase in population. Edinburgh
University is considered by Savills as a leading UK university,
especially in technology, which together with Edinburgh's other
universities make Edinburgh a "University City" and by this
standard Edinburgh has not yet fully recovered from the Great
Recession or the negative influences of LBTT and of "Independence",
as Edinburgh prices are only 1.6% above the pre-recession levels
whereas in Cambridge prices have risen 45%, in Oxford 20%, in Bath
17% and in York 16%. They stress the wide appeal of Edinburgh where
42% of their clients buying come from outside Edinburgh, strong
evidence of national and international "pull" which is also
evidenced by the recent rise of 28% in registered new buyers.
Savills conclude that current market conditions are such that
continuing price rises are likely.
The OBR forecast house prices to rise by 3.1% in 2019 and 14.4%
over the next four years. HMT forecast prices to rise 2.2% in 2019
and 8.5% over the following three years. JLL are more cautious,
forecasting only 0.5% growth in 2019 but 10.9% over the next few
years, but with higher growth in London and the South East but much
lower growth in North East and Wales. Scotland is forecast to be
similar to the UK. Savills provide house price forecasts, carefully
distinguishing them as second-hand, for up to five years for both
Mainstream and Prime markets. For mainstream markets they forecast
a rise of 14.8%, similar to the OBR. Within that overall forecast
they expect considerable variation, London for instance growing
only 4.5%, following a fall of 2.0% in 2019 and no rise in 2020.
Central areas such as the Midlands and "remote" areas such as
Wales, Yorkshire, North West, North East and Scotland are expected
to have price rises of 18% to 22%.
For prime property lower price rises are generally expected,
notably in London suburban, commuting and outer areas, but
peripheral areas in the "south" the Midlands and North England are
expected to gain by about 15%. In contrast, Central London prices
are expected to grow 20% over five years. Scotland's Prime market
is expected to be similar to other regions with prices rising only
14% over five years, four percentage points less than Scotland's
Mainstream market.
The Halifax index peaked at the GBP199,600 recorded in August
2007. The equivalent inflation-adjusted price in October 2018 would
have been 33.4% higher, or GBP273,334* but the current October 2018
Halifax index price is GBP227,869 - some way off! If house prices
rise at about 3.9% and inflation is 2.0%, then ten more years will
elapse before the August 2007 peak is regained in real terms.
House prices are difficult to forecast and historically errors
have been large, especially around the timing of reversals or
shocks. I repeat what I have said previously, "... the key
determinant of the long-term housing market will be a shortage in
supply, resulting in higher prices".
Future Progress
The Group's current strategy is to increase the rate at which it
takes advantage of the Edinburgh housing market in which prices are
increasing rapidly. To implement this policy we made extensive
preparations last year formally to market St Margaret's House.
During this preparation we had several unsolicited approaches to
purchase the property which we declined as premature. However, of
these approaches two were from known reputable developers who
proposed particular developments that had not been previously
identified, which offered high values, and one of which led to the
conditional sale of St Margaret's House. The planning process for
such a major project takes many months and costs over GBP0.5m. The
primary conditions to be purified are the necessary planning, for
which the contracted date is August 2019 and vacant possession
which, given the short-term lease over the property, should follow
within 7-9 months. The site investigation has been completed and is
satisfactory.
In November 2018 a contractor was appointed to our Horsemill
phase at Brunstane and some of the restored buildings are already
re-roofed. The first completions are expected in the summer. There
have been very considerable delays in securing the small additional
funding for the project due to credit restrictions which are as
onerous they are arbitrary and the cost, even of the mainstream
lending secured on low LTVs, is high. A major constraint on
financing is the reluctance of funders to value sites at other than
cost - a severe limitation where, as in our case, most sites were
purchased at low or existing use values. The next phases at
Brunstane, being new build rather than fully restored stone
buildings, should be readily financed. We will commence other
developments as soon as these can be funded with bank debt at
reasonable cost or with equity as it comes available from
sales.
Our developments require a stable and liquid housing market, but
we do not depend on any increase in prices for the successful
development of most of our sites, as almost all of these sites were
purchased unconditionally, for prices not far above their existing
use value and before the 2007 house price peak. A major component
of the Group's site development value lies in securing planning
permission, and in its extent, 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 when the properties are developed or sold.
The strategy of the Group will continue to be conservative, but
responsive to market conditions. The closing mid-market share price
on 21 December 2018 was 195p, a small premium to the NAV of 186.2p
as at 30 June 2018. The Board does not recommend a final dividend,
but intends to restore dividends when profitability and
consideration for other opportunities and obligations permit.
My Chairman's statements have been more discursive than is
typical for the genre. I have sought to entertain, to inform and to
stimulate my readers, being sometimes provocative, sometimes
pedantic and at times, I trust prescient. Over the many years I
have been encouraged by readers' criticisms and corrections: one
"whopper" being "Yon [wee] Kipper" for "Yom Kippur" war! This style
does not accord with that which is market practice for an AIM
company and my statement next year will be suitably prosaic.
Conclusion
The UK's economy continues to operate in the shadow of the Great
Recession of 2008 and the longest depression since 1873-96 as
growth since has been poor, and unusually there has been no rebound
or "catch up" of above average growth following the recession. UK
growth has been restricted by the poor growth in productivity and
by fear of the consequence of leaving the EU. Unfortunately, the
low growth of productivity is either due to a very long cycle or to
a secular trend. For at least the next few months, or perhaps
longer, enhanced fear of and uncertainty as to the outcome of the
EU withdrawal project will cause further damage.
The management of the economy, the inflation target, the fiscal
balance, the previous and varied "golden rules" are derived from
forecasting. Such forecasting has proved fallible, supporting
policies that resulted in the Great Depression, the recent Great
Recession and the EMU. Errors of forecasting are evident in
contributing to the extensive UK lobbying to join the EZ, the now
waning fixation with the inflation target, and, most recently and
quite vividly, in the forecast drastic short-term consequences of
voting to leave the EU. The accuracy of past economic management
does not give confidence in the likely accuracy of current
forecasts of the various outcomes of the various options of the
UK's future relationship with the EU.
The underlying difficulty in assessing consequences of such
outcomes derives from a misunderstanding of the essence of the EU.
The EU is primarily and increasingly a political entity, not as so
misrepresentingly named a Common Market or a European Economic
Community. The wide acceptance of such a portrayal is caused either
by carelessness or imprecision or covert bias or political
motivation. The tenor and style of the recent presentation of
scenarios by the Governor of the Bank provide an extreme example:
what is remotely possible is conveyed as, or at least interpreted
as, worrying likely.
The EU had its evolutionary origin not in post WWII Europe but
in the Middle ages. The thread of economic argument and political
objective spun since the Thirty Years War is unbroken today. The
overt motivation of the almost exclusively French post WW II civil
servants, continuing the tradition of Richelieu, Mazarin and
Colbert, was political, finding its first formal expression in the
ECSC but fully set out in the 1957 Treaty of Rome "Determined to
lay the foundations of an ever-closer union".
The EU's major economic policies reinforce its political
objectives. The formation of the Euro, while subject to the most
detailed technical analysis and careful planning had a popular
promotion which avoided consideration of its inherently
inflexibility. For some Eurozone countries the Euro has proved
highly disadvantageous, both facilitating inappropriate economic
boom and subsequently denying the most appropriate remedial actions
and has bound them forever in a political organisation for better
or for worse, as the cost of breaking free is prohibitive.
The UK's decision not to join the Euro has been unquestionably
vindicated. However, as this was contrary to the advice of the most
respected economic forecasters, either their ability or their
independence must be in question. The EU's resolve to "save" the
Euro in the Great Recession with disregard for the rules and for
avowed social responsibilities to their citizens and to others
underlines its over-riding political importance.
The EU's trade policy is the second economic policy that is
consistent with political aims. All inhibitions of trade reduce
long-term economic growth. The EU is essentially a protectionist,
economy with some very high tariffs, with very restrictive
non-tariff barriers and quotas, but these mechanisms provide
specific political support within the EU and externally they offer
economic incentives to join, to be "in". Protective trading
policies are an important device for fostering political
cohesion.
The foundering of the present negotiation reinforces the
interpretation of the EU as profoundly political. It is
self-evident that "free" trade would be mutually beneficial. It
appears that many still view the EU as an economic entity putting
insufficient stress on its political nature and such views may have
influenced the judgement made over the likely outcome of the talks.
In truth any settlement that jeopardised the political interests or
integrity of the EU was most improbable. The EU have used their
mercantilist policy extremely successfully to maintain and to
further their political aims.
In the present imbroglio any forecast for the UK economy has
only a random chance of being accurate. My forecast is that, if the
UK withdraws from the EU on any agreed terms, the economic penalty
will be measurable but manageable. Far greater damage to economic
growth is being caused by the opportunity cost of lower
productivity growth, a level around 1% per year on a continuing
basis. Productivity growth would be improved by cultural and social
change, by changes in political governance, by improved economic
and capital analysis, by less intrusive social and economic
policies and by more rigorous management. Political choices in
monopoly control, social policies, transport policy, green policy
and most fashionably "correct" areas are often inimical to economic
growth, but may represent democratically acceptable choices.
Nullifying the withdrawal agreement will reduce the immediate
penalty but may jeopardise the very long-term growth of the UK,
especially if it joins the Euro. Within the UK the defeat of a
populist movement by successive waves of establishment initiatives,
the incompetence of Government foresight and planning and the
fractionating of both political parties will lead to considerable
political unrest endangering economic growth. The short-term "fix"
of a revocation of Article 50 will be eclipsed by a long-term
disadvantage compared to a comprehensive mutually beneficial trade
agreement. Fortunately, as Adam Smith said, "There is a great deal
of ruin in a nation".
I D Lowe
Chairman
21 December 2018
Strategic report for the year ended 30 June 2018
Operating and Financial Review
Principal Activities
The principal activities of the Group are the holding of
property for both investment and development purposes.
Results and proposed dividends
The Group profit for the year after taxation amounted to
GBP2,886,000 (2017 profit: GBP1,040,000). The directors do not
propose a dividend in respect of the current financial year (2017:
Nil).
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 2-7 and Future Progress on page 19.
In accordance with legislation the accounts have been prepared in
accordance with IFRS as adopted by the EU ("adopted IFRS"). As
permitted by Section 408 of the Companies Act 2006, the profit and
loss account of the parent Company is not presented as part of
these financial statements.
Key performance indicators
The key performance indicators for the group are property
valuations, planning progress and the stability of house prices,
all of which are discussed in the Chairman's Statement.
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 principal investment properties have either
development prospects or a development angle which will insulate
them against the full effect of any general investment downgrade of
commercial property.
Principal risks and uncertainties (continued)
Availability of funding
The Group is dependent upon bank funding to undertake its
developments and for future property acquisitions. Bank facilities
will be negotiated and tailored to each project in terms of quantum
and timing. Any intended borrowings for future projects will be at
conservative levels of gearing.
Funding is readily available, provided the current strict
criteria are met and the high price is accepted.
The low acquisition cost of some of the Group sites reduces the
overall development cost and hence the level of funding available
on current formulaic lending 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 has
determined that it will apply the Quoted Companies Alliance's
Corporate Governance Code ("the QCA Code"). An updated corporate
governance statement including any disclosures required pursuant to
the QCA Code has been published on the Company's website
www.caledoniantrust.com.
M J Baynham
Secretary
21 December 2018
Directors' report for the year ended 30 June 2018
Directors
The directors who held office at the year end and their
interests in the Company's share capital and outstanding loans with
the Company at the year-end are set out below:
Beneficial interests - Ordinary shares
of 20p each
Percentage 30 June 2018 30 June 2017
held
GBP GBP
I D Lowe 79.1 9,324,582 9,324,582
M J Baynham 6.2 729,236 729,236
R J Pearson - - -
Beneficial interests - Unsecured loans
I D Lowe 100.0 4,330,000 4,185,000
MJ Baynham 100.0 99,999 99,999
The interest of ID Lowe in the unsecured loans of GBP4,330,000
(2017: GBP4,185,000) is as controlling shareholder of the lender,
Leafrealm Limited. The interest of MJ Baynham in the unsecured loan
of GBP99,999 (2017: GBP99,999) is in respect of a loan made by his
wife, Mrs V Baynham.
No rights to subscribe for shares or debentures of Group
companies were granted to any of the directors or their immediate
families or exercised by them during the financial year.
Political and charitable donations
Neither the Company nor any of its subsidiaries made any
charitable or political donations during the year.
Disclosure of information to auditor
The directors who held office at the date of approval of the
Directors' Report confirm that, so far as they are each aware,
there is no relevant audit information of which the Group's auditor
is unaware; and each director has taken all the steps that he ought
to have taken as a director to make himself aware of any relevant
audit information and to establish that the Group's auditor is
aware of that information. This confirmation is given and should be
interpreted in accordance with the provisions of Section 418 of the
Companies Act 2006.
Auditor
In accordance with Section 489 of the Companies Act 2006, a
resolution for the re-appointment of Johnston Carmichael LLP will
be put to the Annual General Meeting.
By Order of the Board
M J Baynham
Secretary
21 December 2018
Consolidated income statement for the year ended 30 June
2018
2018 2017
Note GBP000 GBP000
Revenue
Revenue from development property sales 505 145
Gross rental income from investment properties 416 410
Total Revenue 5 921 555
Cost of development property sales (232) (108)
Property charges (162) (232)
------------------ -------------------
Cost of Sales (394) (340)
------------------ -------------------
Gross Profit 527 215
Administrative expenses (649) (611)
Other income 16 15
------------------ -------------------
Net operating loss before investment
property
disposals and valuation movements 5 (106) (381)
------------------ -------------------
Gain on sale of investment properties 10 - 259
Valuation gains on investment properties 3,040 1,200
Valuation losses on investment properties 10 (25) (25)
------------------ -------------------
Net gains on investment properties 3,015 1,434
------------------ -------------------
Operating profit 2,909 1,053
------------------ -------------------
Financial income 7 - 1
Financial expenses 7 (23) (14)
------------------ -------------------
Net financing costs (23) (13)
------------------ -------------------
Profit before taxation 2,886 1,040
Income tax 8 - -
Profit and total comprehensive income
for the financial year attributable to
equity holders of the parent Company 2,886 1,040
================== ===================
Profit per share
Basic and diluted profit per share (pence) 9 24.49p 8.83p
The notes on pages 37 - 57 form an integral part of these
financial statements.
Consolidated balance sheet as at 30 June 2018
2018 2017
Note GBP000 GBP000
Non-current assets
Investment property 10 15,095 12,080
Plant and equipment 11 7 10
Investments 12 1 1
--------- ---------
Total non-current assets 15,103 12,091
--------- ---------
Current assets
Trading properties 13 11,650 11,633
Trade and other receivables 14 137 396
Cash and cash equivalents 15 451 55
--------- ---------
Total current assets 12,238 12,084
Total assets 27,341 24,175
--------- ---------
Current liabilities
Trade and other payables 16 (970) (835)
Interest bearing loans and
borrowings 17 (360) (360)
--------- ---------
Total current liabilities 17 (1,330) (1,195)
Non-current liabilities (4,070) (3,925)
Interest bearing loans and
borrowings
--------- ---------
Total liabilities (5,400) (5,120)
--------- ---------
Net assets 21,941 19,055
========= =========
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 16,664 13,778
--------- ---------
Total equity attributable
to equity holders of the
parent Company 21,941 19,055
========= =========
NET ASSET VALUE PER SHARE 186.2p 161.71p
The financial statements were approved by the board of directors
on 21 December 2018 and signed on its behalf by:
ID Lowe
Director
Consolidated statement of changes in equity as at 30 June
2018
Share Capital Share Retained
capital redemption premium earnings Total
reserve account
GBP000 GBP000 GBP000 GBP000 GBP000
At 1 July 2016 2,357 175 2,745 12,738 18,015
Profit and total
comprehensive income
for the year - - - 1,040 1,040
______ ______ ______ ______ ______
At 30 June 2017 2,357 175 2,745 13,778 19,055
Profit and total
comprehensive income
for the year - - - 2,886 2,886
______ ______ ______ ______ ______
At 30 June 2018 2,357 175 2,745 16,664 21,941
====== ====== ====== ====== ======
Consolidated statement of cash flows for the year ended 30 June
2018
2018 2017
GBP000 GBP000
Cash flows from operating activities
Profit for the year 2,886 1,040
Adjustments for :
Gain on sale of investment property - (259)
Net gains on revaluation of investment properties (3,015) (1,175)
Depreciation 7 7
Net finance expense 23 13
_______ _______
Operating cash flows before movements
in working capital (99) (374)
(Increase) in trading properties (17) (468)
Decrease/(Increase) in trade
and other receivables 259 (243)
Increase in trade and other payables 111 124
_______ _______
Cash generated from/(absorbed
by) operations 254 (961)
Interest received - 1
_______ _______
Net cash inflow/(outflow) from
operating activities 254 (960)
_______ _______
Investing activities
Proceeds from sale of investment
property - 266
Acquisition of property, plant
and equipment (3) (9)
_______ _______
Cash flows (absorbed by)/generated
from investing activities (3) 257
_______ _______
Increase in borrowings 145 655
_______ _______
Cash flows generated from financing
activities 145 655
_______ _______
Net increase/(decrease) in cash and cash
equivalents 396 (48)
Cash and cash equivalents at
beginning of year 55 103
_______ _______
Cash and cash equivalents at
end of year 451 55
Notes to the consolidated financial statements as at 30 June
2018
1 Reporting entity
Caledonian Trust PLC is a public company incorporated and
domiciled in the United Kingdom. The consolidated financial
statements of the Company for the year ended 30 June 2018 comprise
the Company and its subsidiaries as listed in note 8 in the parent
Company's financial statements (together referred to as "the
Group"). The Group's principal activities are the holding of
property for both investment and development purposes. The
registered office is St Ann's Wharf, 112 Quayside, Newcastle upon
Tyne, NE99 1SB and the principal place of business is 61a North
Castle Street, Edinburgh EH2 3LJ.
2 Statement of Compliance
The Group financial statements have been prepared and approved
by the directors in accordance with International Financial
Reporting Standards and its interpretation as adopted by the EU
("Adopted IFRSs") applied in accordance with the provisions of the
Companies Act 2006. The Company has elected to prepare its parent
Company financial statements in accordance with IFRS; these are
presented on pages 58 to 76.
3 Basis of preparation
The financial statements are prepared on the historical cost
basis except for available for sale financial assets and investment
properties which are measured at their fair value.
The preparation of the financial statements in conformity with
Adopted IFRSs 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 21. 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 hedging activities; and its exposures to
credit risk and liquidity risk.
The Group and parent Company finance their day to day working
capital requirements through related party loans (see note 24), and
as set out in note 25, have bank funding for a specific development
project. The related party lender has indicated its willingness to
continue to provide financial support and not to demand repayment
of its principal loan during 2019.
The Directors have prepared projected cash flow information for
the period ending twelve months from the date of their approval of
these financial statements. These forecasts include agreed bank
funding for a development project and assume the Group will make
property sales in the normal course of business to provide
sufficient cash inflows to allow the Group to continue to trade. A
property sale in August 2018 provided further cash funds of
GBP440,000.
Should these sales not complete as planned, the directors are
confident that they would be able to sell sufficient other
properties within a short timescale to generate the income
necessary to meet the Group's liabilities as they fall due.
For these reasons they continue to adopt the going concern basis
in preparing the financial statements.
Areas of estimation uncertainty and critical judgements
Information about significant areas of estimation uncertainty
and critical judgements in applying accounting policies that have
the most significant effect on the amount recognised in the
financial statements is contained in the following notes:
Estimates
-- Valuation of investment properties (note 10)
The fair value has been calculated by the directors taking
account of third party valuations provided by external independent
valuers as at 30 June 2016 and adjusted for market movements in the
period to 30 June 2018. The independent valuations were based upon
assumptions including future rental income, anticipated void cost
and the appropriate discount rate or yield. The directors and
independent valuers also take 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. 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 deferred tax asset relates to tax losses being
carried forward and to differences between the carrying value of
investment properties and their original tax base. A decision has
been taken not to recognise the asset on the basis of the
uncertainty that surrounds the availability 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. 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.
Turnover
Turnover is the amount derived from ordinary activities, stated
after any discounts, other sales taxes and net of VAT.
Revenue
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.
Revenue from the sale of trading properties is recognised in the
income statement on the date at which the significant risks and
rewards of ownership are transferred to the buyer with proceeds and
costs shown on a gross basis.
Other income
Other income comprises income from agricultural land and other
miscellaneous income.
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 provided 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 as property, plant and equipment
during the redevelopment.
The cost of investment property 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. 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.
Purchases and sales of investment properties
Purchases and sales of investment properties are recognised in
the financial statements at completion which is the date at which
the significant risks and rewards of ownership are transferred to
the buyer.
Plant and other equipment
Plant and other equipment are stated at cost, less accumulated
depreciation and any provision for impairment. Depreciation is
provided on all plant and other equipment 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 principal rates employed are:
Plant and other equipment - 20.0 per cent
Fixtures and fittings - 33.3 per cent
Motor vehicles - 33.3 per cent
Trading properties
Trading properties held for short term sale or with a view to
subsequent disposal in the near future are stated at the lower of
cost or net realisable value. Cost is calculated by reference to
invoice price plus directly attributable professional fees. Net
realisable value is based on estimated selling price less estimated
cost of disposal.
Financial assets
Trade and other receivables
Trade and other receivables are initially recognised at fair
value and then stated at amortised cost.
Financial instruments
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
Trade 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.
Standards and interpretations in issue but not yet effective
IFRS 15 "Revenue from Contracts with Customers" is effective for
annual periods beginning on or after 1 January 2018 and will
therefore be applicable to the next annual set of financial
statements.
The Group intends to apply the modified retrospective method to
adoption, though there is not expected to be any significant
financial impact of the adoption of this standard and no transition
adjustments are expected. The current accounting policies for
revenue recognition will be updated to recognise the change in
requirement to recognise revenue based on the satisfaction of
performance obligations. We will review the accounting policies for
the interim statements to 31 December 2018.
For sales of trading properties revenue will be recognised on
the transfer of control of the property to the buyer rather than on
transfer of the risks and rewards of ownership. We do not
anticipate that this will change the accounting recognition for
property sales.
For rental income from properties there will be no change in
revenue recognition policy or accounting recognition.
IFRS 9 "Financial Instruments" is effective for annual periods
beginning on or after 1 January 2018 and will therefore be
applicable to the next annual set of financial statements.
The main impact of this standard is on the classification of
financial instruments and the related required disclosures. The
Group does not have any complex financial instruments therefore we
do not believe the adoption of this standard will have a
significant financial impact. We will review the accounting
policies and classification of financial instruments for the
interim statements to 31 December 2018.
IFRS 16 "Leases" is effective for annual periods beginning on or
after 1 January 2019. The Group has yet to assess the full impact
of this new standard but initial indications are that it will not
significantly impact the financial statements of the Group as there
are no significant changes for lessors under operating leases.
Operating segments
The Group determines and presents operating segments based on
the information that is internally provided to the Board of
Directors ("The Board"), which is the Group's chief operating
decision maker. The directors review information in relation to the
Group's entire property portfolio, regardless of its type or
location, and as such are of the opinion that there is only one
reportable segment which is represented by the consolidated
position presented in the primary statements.
5 Operating profit 2018 2017
GBP000 GBP000
Revenue comprises:-
Rental income 416 410
Sale of properties 505 145
921 555
======= =======
All revenue is derived from the United Kingdom
2018 2017
GBP000 GBP000
The operating profit is stated after charging:-
Depreciation 6 7
Amounts received by auditors and their associates
in respect of:
- Audit of these financial statements (Group
and Company) 14 13
- Audit of financial statements of subsidiaries
pursuant to 7 7
legislation
======= =======
6 Employees and employee benefits 2018 2017
GBP000 GBP000
Employee remuneration
Wages and salaries 355 338
Social security costs 41 35
Other pension costs 28 27
_______ _______
424 400
====== =======
Other pension costs represent contributions to defined
contribution plans.
The average number of employees during the year was as follows:
No. No.
Management 2 2
Administration 3 4
Other 2 2
_______ _______
7 8
====== =======
2018 2017
Remuneration of directors GBP000 GBP000
Directors' emoluments 250 197
Company contributions to money purchase
pension schemes 25 25
====== ======
Director Salary and Benefits Pension 2018 2017
Fees Contributions Total Total
GBP000 GBP000 GBP000 GBP000 GBP000
ID Lowe 110 4 - 114 67
MJ Baynham 125 3 25 153 147
RJ Pearson 8 - - 8 8
______ ______ ______ ______ ______
243 7 25 275 222
Key management personnel are the directors, as listed above. The
total remuneration of key management personnel in the year was
GBP305,671 (2017: GBP246,135).
2018 2017
Retirement benefits are accruing to the following
number of
directors under:
Money purchase schemes 2 2
====== ======
7 Finance income and finance expenses
2018 2017
GBP000 GBP000
Finance income
Interest receivable:
- on bank balances - 1
=== ===
Finance expenses
Interest payable:
- Other loan interest 23 14
==== ====
8 Income tax
There was no current nor deferred tax charge in the current or
preceding year.
Reconciliation of effective
tax rate
2018 2017
GBP000 GBP000
Profit before tax 2,886 1,040
===== =====
Current tax at 19% (2017:
19.75%) 548 205
Effects of:
Expenses not deductible
for tax purposes 9 15
Indexation on chargeable
gains - (51)
Losses carried forward 16 63
Revaluation of property
not taxable (573) (232)
______ ______
Total tax charge - -
===== =====
A reduction in the UK corporation tax rate from 20% to 19% was
effective from 1 April 2017 and a further reduction to 18%
(effective from 1 April 2020) was substantively enacted on 26
October 2015. This will reduce the company's future current tax
charge accordingly. An additional reduction to 17% (effective 1
April 2020) was substantively enacted on 6 September 2016. This
will reduce the company's future current 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 Profit per share
Basic profit per share is calculated by dividing the profit
attributable to ordinary shareholders by the weighted average
number of ordinary shares outstanding during the period as
follows:
2018 2017
GBP000 GBP000
Profit for financial period 2,886 1,040
====== ======
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 profit per share 24.49 p 8.83 p
Diluted profit per share 24.49 p 8.83 p
The diluted figure per share is the same as the basic figure
per share as there are no dilutive shares.
10 Investment properties
2018 2017
GBP000 GBP000
Valuation
At 1 July 12,080 10,905
Sold in year - -
Revaluation in year 3,015 1,175
________ ________
Valuation at 30 June 15,095 12,080
======== ========
The carrying value of investment property is the fair value
at the balance sheet date at directors' valuation and based
on valuations by Montagu Evans, Chartered Surveyors, and
for one property, by Rettie & Co, a firm of property specialists,
as at 30 June 2016. We critically assess the independence,
competence and objectivity of the directors responsible
for the fair value assessment. Given the qualifications
and experience, we are comfortable that the directors are
suitable and qualified parties to conduct the valuations.
The 2016 fair values were prepared in accordance with the
RICS Valuation - Professional Standards (January 2014, revised
April 2015) published by the Royal Institution of Chartered
Surveyors (RICS). The valuations are arrived at by reference
to market evidence of transaction prices and completed lettings
for similar properties. The properties were valued individually
and not as part of a portfolio and no allowance was made
for expenses of realisation or for any tax which might arise.
They assumed a willing buyer and a willing seller in an
arm's length transaction, after proper marketing and where
the parties had each acted knowledgeably, prudently and
without compulsion. The valuations reflected usual deductions
in respect of purchaser's costs, SDLT and LBTT as applicable
at the valuation date. Local comparable data was also adjusted
to reflect the individual circumstances and unique characteristics
of the valuation subjects. The 2018 directors' valuations
reflect changes in lettings and progress on the potential
for redevelopment of St Margaret's House, Edinburgh, which
is the subject of a conditional agreement for sale for GBP15
million entered into on 2 February 2018.
The 'review of activities' within the Chairman's statement
provides the current status of the Group's property together
with an analysis of the 'property prospects' for 2019 and
beyond.
The historical cost of investment properties held at 30
June 2018 is GBP9,521,406 (2017: GBP9,521,406). The cumulative
amount of interest capitalised and included within historical
cost in respect of the Group's investment properties is
GBP451,000 (2017: GBP451,000).
11 Plant and equipment
Motor Fixtures Other
Vehicles and fittings equipment Total
GBP000 GBP000 GBP000 GBP000
Cost
At 30 June 2016 18 14 67 99
Additions in year - 2 - 2
---------- -------------- ----------- --------
At 30 June 2017 18 16 67 101
---------- -------------- ----------- --------
Depreciation
At 30 June 2016 16 14 54 84
Charge for year 2 1 4 7
At 30 June 2017 18 15 58 91
---------- -------------- ----------- --------
Net book value
At 30 June 2017 - 1 9 10
========== ============== =========== ========
Motor Fixtures Other
Vehicles and fittings equipment Total
GBP000 GBP000 GBP000 GBP000
Cost
At 30 June 2017 18 16 67 101
Additions in year 2 - 1 3
---------- -------------- ----------- --------
At 30 June 2018 20 16 68 104
---------- -------------- ----------- --------
Depreciation
At 30 June 2017 18 15 58 91
Charge for year 1 - 5 6
At 30 June 2018 19 15 63 97
---------- -------------- ----------- --------
Net book value
At 30 June 2018 1 1 5 7
========== ============== =========== ========
12 Investments
2018 2017
GBP000 GBP000
Listed investments 1 1
====== ======
13 Trading properties
2018 2017
GBP000 GBP000
At start of year 11,633 11,166
Additions 249 575
Sold in year (232) (108)
_________ _________
At end of year 11,650 11,633
======== ========
14 Trade and other receivables 2018 2017
GBP000 GBP000
Amounts falling due within one year
Other debtors 106 370
Prepayments and accrued income 31 26
_______ _______
137 396
====== ======
The Group's exposure to credit risks and impairment losses
relating to trade receivables is given in note 18.
15 Cash and cash equivalents 2018 2017
GBP000 GBP000
Cash 451 55
====== ======
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
2018 2017
GBP000 GBP000
Trade creditors 64 33
Other creditors including taxation 19 15
Accruals and deferred income 887 787
_______ _______
970 835
====== ======
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
2018 2017
GBP000 GBP000
Unsecured development loan 360 360
======= ========
Non-current liabilities
Unsecured loans 4,070 3,925
======= =======
Terms and debt repayment schedule
Terms and conditions of outstanding loans were as follows:
2018 2017
Nominal interest Fair Carrying Fair Carrying
Currency rate value amount value amount
GBP000 GBP000 GBP000 GBP000
Unsecured loan GBP Base +3% 3,970 3,970 3,825 3,825
Unsecured development GBP Base +0.5% 360 360 360 360
loan
Unsecured loan GBP Base +3% 100 100 100 100
4,430 4,430 4,285 4,285
The unsecured loan of GBP3,970,000 is repayable in 12 months and
one day after the giving of notice by the lender. Interest is
charged at 3% over Bank of Scotland base rate but the lender varied
its right to the margin over base rate until further notice. No
notice has been received at 30 June 2018.
The short-term unsecured development loan of GBP360,000 is
repayable after the disposal of two properties. Interest is charged
at a margin of 0.5% over Bank of Scotland base rate.
The unsecured loan of GBP99,999 is not repayable before 1 July
2019. Interest is charged at a margin of 3% over Bank of Scotland
base rate.
The weighted average interest rate of the floating rate
borrowings was 3.2% (2017: 3.1%). As set out above, a lender varied
its right to the margin of interest above base rate until further
notice and so the rate of interest charged in the year is 0.53%
(2017: 0.27%).
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:
2018 2017
Fair value Carrying Fair value Carrying
amount amount
GBP000 GBP000 GBP000 GBP000
Trade and other receivables 106 106 370 370
Cash and cash equivalents 451 451 55 55
------------ ---------- -------------------- ---------
557 557 425 425
------------ ---------- -------------------- ---------
Loans from related parties 4,430 4,430 4,285 4,285
Trade and other payables 955 955 835 835
------------ ---------- -------------------- ---------
5,385 5,385 5,120 5,120
------------ ---------- -------------------- ---------
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 Company's risk management
framework and oversees compliance with the Group's risk
management policies and procedures and reviews the adequacy
of the risk management framework in relation to the risks
faced by the Group.
The Board's policy is to maintain a strong capital base so as to
cover all liabilities and to maintain the business and to sustain
its development.
The Board of Directors also monitors the level of dividends to
ordinary shareholders.
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 available for sale financial assets.
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.
Available for sale financial assets
The Group does not actively trade in available for sale
financial assets.
Bank facilities
At the year end the Company had no bank loan facilities
available (2017: Nil).
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
2018 2017
GBP000 GBP000
Available for sale investments 1 1
Other receivables 106 370
Cash and cash equivalents 451 55
________ ________
558 426
======= =======
Credit risk (continued)
The Group made an allowance for impairment on trade receivables
of GBP2,000 (2017: GBP33,000) based on specific experience
with one tenant. As at 30 June 2018, trade receivables
of GBP32,000 (2017: GBP30,000) 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: 2018 2017
Number of days past due date GBP000 GBP000
Less than 30 days 13 1
Between 30 and 60 days 4 5
Between 60 and 90 days - -
Over 90 days 15 24
________ ________
32 30
======= =======
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 (2017: 6 tenants).
One tenant accounts for 51% (2017: 67%) of the trade
receivables past due by more than 90 days.
Liquidity risk
Liquidity risk is the risk that the Group will not be
able to meet its financial obligations as they fall due.
The Group's approach to managing liquidity is to ensure,
as far as possible, that it will always have sufficient
liquidity to meet its liabilities when due without incurring
unacceptable losses or risking damage to the Group's
reputation. Whilst the directors cannot envisage all
possible circumstances, the directors believe that, taking
account of reasonably foreseeable adverse movements in
rental income, interest or property values, the Group
has sufficient resources available to enable it to do
so.
The Group's exposure to liquidity risk is given below
Carrying Contractual 6 months 6-12 months 2-5
30 June 2018 GBP'000 amount cash flows or less years
---------------------------
Unsecured loan 3,970 4,029 44 15 3,970
Unsecured development
loan 360 367 367 - -
100
Unsecured loan 117 13 2 102
Trade and other payables 970 970 970 - -
-------- ----------- -------- ----------- ----------
Carrying Contractual 6 months 6-12 2-5
30 June 2017 GBP'000 amount cash flows or less months years
---------------------------
Unsecured loan
3,825 3,858 28 5 3,825
Unsecured development
loan 360 361 1 360 -
Unsecured loan 100 111 9 - 102
Trade and other payables 835 835 835 - -
-------- ----------- -------- ------------- ----------
Market risk
Market risk is the risk that changes in market prices, such
as interest rates, will affect the company's income or the
value of its holdings of financial instruments. The objective
of market risk management is to manage and control market
risk exposures within acceptable parameters, while optimising
the return.
Interest rate risk
The Group borrowings are at floating rates of interest based
on Bank of Scotland base rate.
The interest rate profile of the Group's borrowings as at
the year-end was as follows:
2018 2017
GBP000 GBP000
Unsecured loan - see note 17 3,970 3,825
Unsecured loan - Base +0.5% 360 360
Unsecured loan - Base +3% 100 100
======= =======
A 1% movement in interest rates would be expected to change
the Group's annual net interest charge by GBP44,300 (2017:
GBP42,850).
19 Operating leases
Leases as lessors
The Group leases out its investment properties under operating
leases. The future minimum receipts under non-cancellable
operating leases are as follows:
2018 2017
GBP000 GBP000
Less than one year 210 201
Between one and five years 171 181
Greater than five years 158 167
_____ _____
539 549
===== =====
The amounts recognised in income and costs for operating leases
are shown on the face of the income statement. Leases are generally
repairing leases.
20 Deferred tax
At 30 June 2018, the Group has a potential deferred tax asset of
GBP943,000 (2017: GBP929,000) of which GBP34,000 (2017: GBP27,000)
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 GBP909,000 (2017:
GBP902,000). This has not been recognised due to the uncertainty
over the availability of future taxable profits.
Movement in unrecognised deferred tax asset
Balance Additions/ Balance Additions/ Balance
1 July (reductions) 30 June (reductions) 30 Jun 18
16 17 at 17%
at 18% at 17%
GBP000 GBP000 GBP000 GBP000 GBP000
Investment
properties 74 (47) 27 7 34
Tax losses 897 5 902 7 909
_____ ______ _____ ______ _____
Total 971 (42) 929 14 943
_____ ______ _____ ______ _____
21 Issued share capital 30 June 2018 30 June 2017
No GBP000 No. GBP000
Authorised share capital
Ordinary shares of 20p
each 20,000,000 4,000 20,000,000 4,000
======== ======= ======== =======
Issued and
fully paid
Ordinary shares of 20p
each 11,783,577 2,357 11,783,577 2,357
======== ======= ======== =======
Holders of ordinary shares are entitled to dividends declared
from time to time, to one vote per ordinary share and a share of
any distribution of the Company's assets.
22 Capital and reserves
The capital redemption reserve arose in prior years on redemption
of share capital. The reserve is not distributable.
The share premium account is used to record the issue of
share capital above par value. This reserve is not distributable.
23 Ultimate controlling party
The ultimate controlling party is Mr ID Lowe.
24 Related parties
Transactions with key management personnel
Transactions with key management personnel consist of
compensation for services provided to the Company. Details are
given in note 6.
Lowe Dalkeith Farm, a business wholly owned by ID Lowe, used
land at one of the Group's investment properties as grazings for
its farming operation. No rent was charged as the cost of
maintaining the land without livestock would exceed the grazing
rent.
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 ID Lowe is the controlling shareholder.
The balance due to this party at 30 June 2018 was GBP3,970,000
(2017: GBP3,825,000) with interest payable at 3% over Bank of
Scotland base rate per annum. Leafrealm Limited varied its right to
the margin of interest over base rate until further notice.
Interest charged in the year amounted to GBP16,153 (2017:
GBP9,967).
The Group and Company also has an unsecured development loan due
to Leafrealm Limited, a company of which ID Lowe is the controlling
shareholder. The balance due to this party at 30 June 2018 was
GBP360,000 (2017: GBP360,000) with interest payable at a margin of
0.5% over base rate. Interest charged in the year amounted to
GBP3,294 (2017: GBP414).
The Group and Company has an unsecured loan from Mrs V Baynham,
the wife of a director. This is on normal commercial terms. The
balance due to this party at 30 June 2018 was GBP99,999 (2017:
GBP99,999) with interest payable at 3% over Bank of Scotland base
rate per annum. Interest charged in the year amounted to GBP3,415
(2017: GBP3,274). The loan is not due to be repaid before 1 July
2019.
Contracting work on certain of the Group's development and
investment property sites has been undertaken by Leafrealm Land
Limited, a company under the control of ID Lowe. The value of the
work done by Leafrealm Land Limited charged in the accounts for the
year to 30 June 2018 amounts to GBPNil (2017: GBP61,897) 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 2018 was GBP106,524 (2017: GBP106,524).
For a full listing of investments and subsidiary undertakings
please see note 8 of the parent Company financial statements.
25 Post balance sheet event
Since the year end, a subsidiary has agreed a loan facility from
Bank of Scotland of GBP1,415,000 to finance the next stage of its
Brunstane Development. The loan will be drawn down as expenditure
is incurred and interest is payable at a margin of 5.1% over Bank
of Scotland base rate. The loan is secured by a floating charge
over the assets of the Company and by a standard security over
Phases 2 and 3 of the development site.
-ENDS-
This information is provided by RNS, the news service of the
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Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
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END
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