TIDMCNN
RNS Number : 6017J
Caledonian Trust PLC
23 December 2020
23 December 2020
Caledonian Trust plc
(the "Company" or the "Group")
Audited Results for the year ended 30 June 2020
Caledonian Trust plc, the Edinburgh-based property investment
holding and development company, announces its audited results for
the year ended 30 June 2020.
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 GBP95,000 in the year to 30
June 2020 compared with a profit before tax of GBP2,059,000 last
year. The earnings per share was 0.81p and the NAV per share was
204.5p compared with earnings per share of 17.47p and NAV per share
of 203.7p last year. The net valuation gain in the year was
GBP250,000 compared to a net valuation gain in the previous year of
GBP2,375,000 which included a valuation gain of GBP3,000,000 on the
Group's investment property, St. Margaret's House, Edinburgh
Income from rent and service charges increased to GBP446,000
from GBP441,000 in 2019. The sale of a house plot adjacent to
Chance Inn Farmhouse resulted in a profit on sale of development
properties of GBP8,000 (2019: GBP197,000). Administrative expenses
were GBP428,000 (2019: GBP755,000) and interest payable was
GBP29,000 (2019: GBP37,000). The reduction in the interest charge
reflects the decreases in base rate during the year with the
average base rate for the year being 0.56% compared to 0.73% in the
previous year.
Review of Activities
The Group's property investment business continues but is
changing because of the contingent sale of St. Margaret's House
("St Margaret's"), our investment property held for development.
However, the rate of change has slowed due to the extended time
taken, partially due to Covid-19 restrictions earlier in the year,
to gain planning consent for the Reserved Matters application
lodged by the contingent purchaser, Drum Property Group ("Drum"),
on 24 September 2019 but which consent was only issued on 14 August
2020. The purchase is now contingent solely on securing a pre-let
of the student housing element of the development. The Directors'
expectations remain that completion of the sale will take place in
the first quarter of 2022. We continue to hold a high yielding
retail parade, a high yielding retail / industrial property, our
North Castle Street offices and four central Edinburgh garage
investments.
The most significant change to our portfolio has just occurred.
As announced on 16 December 2020, and as set out in the Post
Balance Sheet Event at Note 25 of the Consolidated Financial
Statements, we have concluded unconditional missives for the sale
of Ardpatrick Estate for GBP2.7m in cash with completion on 24
March 2021. We received an unsolicited approach from agents acting
for retained clients, who had expressed an interest in acquiring a
rural estate type property in the West of Scotland, requesting
permission to view Ardpatrick during their summer vacation touring
the West coast. We receive similar approaches most years, none of
which have proceeded beyond an initial viewing. Following that
initial viewing in early July a second viewing took place towards
the end of their holiday in mid-August. An interest in acquiring
either part of or the whole of our holding at Ardpatrick was
expressed and after further deliberation a meeting was convened
between ourselves and the agents acting for both parties in North
Castle Street in late October at which broad outlines for the
purchase of either the whole or the western part of Ardpatrick were
discussed. After further consideration, a firm proposal for the
purchase of the whole Estate was made on 14 November 2020. We
issued instructions to our agents on 15 November 2020 setting out
the basis and timetable for an unconditional missive to be
concluded for the sale of Ardpatrick. The due diligence process,
including valuation and building surveys was undertaken over the
next four weeks leading to the issue of a formal offer at GBP2.7m
with a date of entry on 24 March 2021 submitted to our solicitors
on 15 December, with a letter concluding the missives issued by our
solicitors later that day. The purchasers intend to continue to
reinstate and revive Ardpatrick, building on the solid foundations
we have laid following the years of neglect by the former owners.
We understand they intend to make Ardpatrick their principal home
and to undertake the farming of the Estate. At the outset of
negotiations, the purchasers intimated that they would not proceed
if the sale of the Oak Lodge plot was completed.
The timing of this offer proved particularly propitious as the
effects of Covid-19 restrictions had made it more difficult to
manage staff employed at Ardpatrick and we had found it
increasingly difficult to engage reliable and hard-working staff.
The sale will free up capital for the Group whose deployment on the
development of our existing portfolio will generate higher returns.
It will also provide the Group with funds to repay certain existing
debts and provide additional general working capital.
I am pleased to report that progress, albeit slower that we had
hoped, continues with the contingent sale of St Margaret's. The
processing of the Reserved Matters application submitted by Drum
was delayed by the Covid-19 pandemic restrictions, but was approved
by the planning committee on 14 August 2020. Only the securing of a
pre-let of the student accommodation remains to be purified.
However, this too has been impacted by Covid-19. As announced on 20
April 2020, as a consequence of the third party of undoubted
covenant, with whom a pre-let had been anticipated, deciding no
longer to pursue its interest in this location and as a consequence
of anticipated Covid-19 impacts delaying the planning process, we
agreed an amendment to the conditional missives with Drum,
extending the period to satisfy the suspensive conditions, reducing
the consideration for the conditional purchase from GBP15,000,000
to GBP11,500,000 exclusive of VAT, payable to the Company on
completion in cash.
Since November 2010, pending redevelopment, St Margaret's has
been fully let at a nominal rent, presently just over GBP1/ft(2) of
occupied space, to a charity, Edinburgh Palette, who have
reconfigured and sub-let all the space to over 200 artists,
artisans and galleries. Previously I reported that Edinburgh
Palette gained two new and very different premises, the first at
525 Ferry Road in north central Edinburgh, just west of the Fettes
College playing fields and near to the Western General Hospital,
where a modern 125,000ft(2) grade A office building has been
secured on favourable terms. This central site is served by eight
bus routes and has 125 car parking spaces, 83 single offices and
numerous open plan spaces. The second, quite different premise, is
the Stanley Street Container Village where an innovative landscaped
village complete with parks and communal grounds is being
assembled, using highly modified shipping containers, on a site
leased until 2043 just north of Portobello golf course and about
half a mile from the A1 and Brunstane rail station. Edinburgh
Palette expect to provide community services and about 80 single
studio units, primarily for local residents currently leasing
spaces at St. Margaret's and for other creative groups and
individuals. The container village was originally expected to open
in the summer of 2019, but is now not likely to open until 2021.
Following the relocation of a major charity and the temporary upset
from the original sale announcement, St Margaret's continues with
its long-term occupancy level. Occupancy rates at St. Margaret's
have been largely unaffected by the impact of Covid-19.
Registers of Scotland did not renew the short-term lease of the
car parking spaces at St. Margaret's when it expired at the end of
November as their staff have been working predominantly from home
since March and their prospective return in greater numbers
scheduled for March next year now appears likely to be postponed
further as a result of the recent Covid-19 announcements.
As reported in my Interim Statement, work at our site at
Brunstane in east Edinburgh was suspended in March in accordance
with Government guidance. Only the final tarmacking remained
incomplete. When Covid-19 restrictions were eased and the housing
market re-opened in late June, the tarmacking was completed, the
sales brochures and an excellent video of the houses prepared and
the marketing of the five houses commenced in early July. All five
properties were under offer within two months and the sales of two
of them have been completed in excess of their Home Report
valuation, which itself was in excess of our budgeted figures. The
three other houses remain under offer, but dependent on the
completion of sales of the prospective purchasers' existing homes,
all of which are under offer. We expect all three to complete in
the first quarter of 2021.
We recently obtained consent to make several minor but important
variations to the planning consent for the next phase of the
development, the Steading phase, for five new build houses now
extending to 8,700ft(2) . The improvements include the remodelling
of the courtyard elevations and an increase and enhancement of the
internal spaces. We are currently preparing tender documentation
with a view to commencing construction of this next phase in the
Spring, utilising funds freed up from the sale of the Horsemill
phase and Ardpatrick. This phase should be marketed in the Spring
of 2022. The application for consent for 12 new houses, in addition
to the large "farmhouse" on the Stackyard field to the east of the
Steading, continues through the planning process and it is expected
that consent will be granted early next year.
The third of our Edinburgh sites is in Belford Road, a quiet
cul-de-sac less than 500m from Charlotte Square and the west end of
Princes Street, where we have taken up both an office consent for
22,500ft(2) and fourteen car parking spaces and a separate
residential consent for twenty flats over 21,000ft(2) and twenty
car parking spaces. This site has long been considered "difficult".
To dispel this myth, we have created a workable access to the site;
cleared collapsed rubble and soil, exposed the retaining south wall
and the friable but strong bedrock in parts of the site; and
completed an extensive archaeological survey. In consequence the
extent of the enabling construction works is much reduced compared
to earlier estimates. Further investment in the site has been
postponed, but we intend to remodel the Belford Road façade with a
more contemporary design to reflect current market requirements.
The "cost" of the site is well below the value, but bank loans,
even at the very high overall cost of over 10%, can only be
obtained when our cost (not value) to development cost does not
exceed 60%. A site with a cost of GBP1m, total development costs of
GBP4m and a GDV of GBP10m, would only warrant a loan of 60% of
GBP5m, i.e., GBP3m; the same site with a cost of GBP4m would
warrant a loan of 60% of GBP8m, i.e., GBP4.8m. In the first case no
development without further equity is possible, even although the
expected cash return before interest is GBP5m, while in the latter
case development is possible, even although the cash return before
interest is only GBP1.2m. The delay is not currently proving to our
long-term disadvantage as prime locations in Edinburgh such as
Belford Road have continued to increase in value.
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 completed the
construction of over 500 houses nearby but on the other side of the
mainline railway, which laterally sold at prices of around
GBP250/ft(2) for smaller 3-bedroom end-terraced houses and
GBP240/ft for larger detached houses. To the south of Wallyford a
very large development of 1,050 houses has commenced at St
Clement's Wells on ground rising to the south, affording extensive
views over the Forth estuary to Fife and on the eastern edge,
Persimmon have completed 131 houses in the first phase of their
development. On another nearby site Taylor Wimpey have commenced
construction of 80 houses which are being marketed at GBP280/ft(2)
for smaller 3-bedroom semi-detached houses and GBP260/ft(2) for
4-bedroom detached houses. On the western side of St Clement's
Wells, Barratts are building 245 three and four-bedroom new houses
with semi-detached and terraced three-bed houses currently selling
for GBP221,000 or GBP242/ft(2) . The Master Plan for the St
Clement's Wells development includes a school, separate nursery and
community facilities, which opened earlier this year, replacing the
existing school in Wallyford, 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, no longer a mining village, is rapidly
becoming another leafy commuting Edinburgh suburb on the fertile
East Lothian coastal strip.
The Company has three large development sites in the Edinburgh
and Glasgow catchments of which two are at Cockburnspath, on the A1
just east of Dunbar. We have implemented the planning consent on
both the 48-house plot northerly Dunglass site and on the 28-house
plot, including four affordable houses, southerly Hazeldean site.
The Dunglass site is fifteen acres of which four acres is woodland,
but the non-woodland area could allow up to a further thirty houses
to be built if the ground conditions, which currently preclude
development, could be remediated.
Gartshore, the third large development site, is only seven miles
from central Glasgow, near Kirkintilloch (on the Union Canal), East
Dunbartonshire, and comprises the nucleus of the large estate,
previously owned by the Whitelaw family, including 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. Glasgow is easily accessible as
Gartshore is two miles from the M73/M80 junction, seven miles from
the M8 (via the M73) and three miles from two separate
Glasgow/Edinburgh mainline stations and from Greenfaulds, a Glasgow
commuter station. Gartshore's central location, historic setting
and inherent amenity forms a natural development site. Accordingly,
proposals have been prepared for a village within the existing
landscape setting of several hundred cottages and houses together
with local amenities. This would complement our separate proposals
for a high-quality business park, including a hotel and a
destination leisure centre within mature parkland. Discussions with
East Dunbartonshire Council continue from whom we seek support for
a joint promotion of the site. The next Local Plan is due to be
published in 2022, although such plans are often delayed, and we
will continue to work closely with the East Dunbartonshire Council
to gain suitable allocations.
The Company owns thirteen rural development opportunities, nine
in Perthshire, three in Fife and one in Argyll and Bute, all of
which are set in areas of high amenity where development is more
controversial and therefore subject to wider objection, especially
as such small developments, outwith major housing allocations, may
not merit high priority. Thus, gaining such consents is tortuous,
although such restrictions add value and for many of these rural
opportunities, we have endured planning consents. In general, at
least until very recently, the rural housing market has not been
experiencing the rapid growth taking place in Edinburgh and Glasgow
and in their catchment areas with values in regions such as Perth
and Kinross, Fife and Argyll and Bute rising only marginally in
real terms. Accordingly, no immediate investment is proposed in the
rural portfolio, except to maintain existing consents or to endure
them, until the current market improvement is confirmed.
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. We have recently gained
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 Loch Leven. 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. In July 2018 we made the
final connection, so purifying this condition, and bringing the
total cost of emission reduction to GBP125,000. In the Summer of
2018, 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. The second much smaller plot was sold
in September 2019 for GBP90,000. These two plot sales confirm the
attraction of this location, particularly as the market for rural
properties near cities sems so much improved. We hold sufficient
land next to the farm steading to allow the sale of similar
paddocks to purchasers of all the new houses.
Economic Prospects
"The future has changed" as Margaret Thatcher's deputy, Willie
Whitelaw, so famously pronounced in the Commons. The successful
outcome of phase 3 trials of several Covid-19 vaccines presages the
aversion of the possible ruination of the economy, a distinct
possibility if such a treatment were delayed by even as little as a
year, and a higher possibility as any such a delay lengthened. In
June 2020 The Lancet noted vaccine development is typically a long
game. The US Food and Drug Administration only approved a vaccine
against Ebola virus last year, 43 years after that deadly virus was
discovered. Vaccinologists have made little headway with HIV or
respiratory syncytial virus, despite huge investments. On average,
it takes 10 years to develop a vaccine.
Vaccines stimulate a natural resistance against diseases, each
specific to each disease. Unlike bacterial diseases, viral diseases
are not induced by animate creatures, but inanimate virions which
mobilise infected cells to make more virions in an alteration
between non-living virion and living virus phases. Such inanimate
virions were first chemically synthesised by Eckard Wimmer in
2002.
Dauntingly, there are estimated to be ten times as many viruses
as the sum of all living creatures, the vast majority of which are
bacteria and other single celled life forms. One dry kilogram of
soil may contain a trillion viruses. Coronaviruses are the simplest
and the most advanced of seven types of virion, as classified by
the conformation of their nucleic acid. Coronaviruses alone have a
single strand of RNA formulated as MRNA the form of RNA that
instructs cell mechanisms to make complex molecules, in this case
identical copies of itself! Viruses exhibit an outstanding example
of mass production, and the sheer force of numbers can overwhelm
natural defences. Vaccines, effectively "blanks", cause the
defences to be readied and massively reinforced and so able to
overcome the initial virus attack.
With a vaccine "the future has indeed changed" as vaccines offer
protection from a plague of a scale that has ruined economies and
transformed societies. The perception of "plague" as a dark
medieval threat is a dangerous misconception, as the last major
pandemic in 1918, the Spanish Flu, infected an estimated third of
the world population and claimed at least 50m lives. Immunity in
the population together with a progressive attenuation of the virus
reduced the incidence and virulence of the Spanish flu virus which
in a "mutated" form contributes to the current seasonal flu
infections. The common cold, and flu are Coronaviruses like the
virulent, but currently uncommon SARS and MERS viruses. The
frequent mutation of such viruses allows spread between species but
also contributes to their attenuation over time. A virus may
reproduce once a day giving 2(365) mutation possibilities per year,
human reproduction occurring every 25 years provides distinctly
fewer such possibilities
Plagues, ("plangere" to strike) and pestilences have almost
certainly occurred since aggregated social groups, "societies",
without natural resistance formed. The Book of Exodus records those
"natural" plagues inflicted on the Egyptians to induce the Pharaoh
to free the enslaved Israelis: water to blood; frogs; lice; fleas;
livestock pestilence; boils; hail; a plague of locusts; darkness;
and the death of the Egyptian first-born children. Only this last
plague induced the Pharaoh to keep his promise. Such outcomes may
have been the consequences of the immense volcanic eruption in
nearby Santorini in c.1600BC. The volcanic mineral cinnabar would
colour the water red and acidify the Nile, causing the frogs to
leave the water to die in the arid desert. Their carcasses,
together with those of other poisoned animals, would provide food
for "strike" flies and similar insects, whose lice-like larvae
would pupate to adult flies. The volcanic cloud and ash would have
caused many days of darkness, together severely damaging the
grazings, so starving the livestock, while the ash and acid rain
would cause human skin disease, including boils, and the widespread
damage to crops would cause the locust migration, consuming any
remaining vegetation. Under these circumstances infant mortality
would have been high. A weakened state might lose central control
or, given famine, direct the Israeli's expulsion, so determining
that society's future.
The DNA of "Black Death" microbe's (Yersinia pestis) has been
found preserved in teeth in European Neolithic burial sites dating
from 5000BC, when their agricultural territory was taken over by
Yamnaya immigrants from the Eurasian steppe grasslands, tolerant of
the disease infecting the indigenous population and subsequently
supplanting them. Millenia later, in 430BC, Y. pestis is recorded
in Athens where it killed a third of the population, and led to the
overthrow of the long-standing ruling Athenian "coalition" by
Sparta.
The Antonine Plague (165 - 170AD), probably smallpox, migrated
from eastern China, appearing first in Mesopotamia in the Roman
Army who spread it rapidly, reaching Rome where it killed 3,000 a
day, 25% of those infected, and ultimately some 5m people
altogether. Roman trade and military strength were so weakened that
the Antonine Empire lost much of the Western Empire. That smallpox
plague, killing an estimated 10% of the population, was a "mild"
disease unlike its deadly sequel, the Plague of Justinian (541 -
750AD). The cause of the disease, Y. pestis, travelled along routes
from Asia, killed an estimated 55% of the affected population in
Europe, Middle East and North Africa, so weakened Roman power that
it effectively ended the Western Roman Empire.
The extensive Justinian, Y. pestis' plague was even more
destructive than historic Neolithic Y. pestis outbreaks. The
Neolithic spread was probably primarily airborne, but since
Neolithic times this bacterium had gained two different genes,
considerably widening its infectivity. One gene, ymt, present in
many gut bacteria, codes for an enzyme protective of gut digestive
enzymes, so allowing such bacteria to migrate inside its hosts
tissue, including its feeding apparatus, a facility allowing Y.
pestis to become transmittable by biting hosts such as fleas. This
formidable addition to the bacterium's defences and
transmittability was subsequently augmented by a second very
sinister mechanism. The bacterium developed a mutation in a gene
and other characteristics that improved its ability to form an
adhesive extra cellular matrix. This pernicious permutation has a
devastating affect: a gooey agglomeration of cells now takes place,
blocking the mid gut of infected fleas, denying them sustenance.
The starving fleas are driven into an insatiable feeding frenzy,
biting furiously, as unsatisfied hunger engulfs them: consequently,
the free loading bacterium becomes more widely distributed!
The subsequent pandemic caused by Y. pestis, the Black Death,
spread from central Asia, along the silk road from the east,
reaching Florence in 1348 where 80% of the population died, about
90% of those contracting the disease. Over the next 10 years
between one third and one half of the population of Europe
died.
Disease spreading from the East is the recurring feature of most
European and New World pandemics as the disease reaches previously
unexposed populations, lacking natural immunity. In the Bronze age
the incidence of plague and hepatitis B followed well documented
western migration routes and much later tuberculosis was carried
west by merchants, traders and vessels entering Europe at the
western termination of the "Silk Roads". The transmission is
similar today from east to west, but today's "Roads" lack such
illusionary romanticism, being crowded airports, closely packed
planes with recycled atmospheres, bringing the unknowing sick with
them. Apart from very high mortality, a recurring feature of all
the above pandemics, so spread in the Old World, was the economic
damage caused to these societies, usually leading to profound
political or societal changes.
In the New World it was discovery, exploration and settlement
that carried eastern diseases westward. In 1521, soon after the
Spanish conquests in Central America ("Mexico"), 80% of the Aztec
population died from a pandemic known locally as cocoliztli, but
now considered to be a Salmonella(.) bacterium previously
unidentified in mass graves, but common in contaminated European
food and water and in their domestic animals and vermin, all items
trans-shipped across the Atlantic. Following settlements and
conquests all the New World indigenous populations were ravaged by
disease, but unlike the Aztecs who suffered the Salmonella
pandemic, the pandemics elsewhere, extending later into North
America, were caused by the virus Variola major, or smallpox, also
introduced by the settlers. As it spread across the continent from
the early 1500s, it is judged to have killed the majority of the
indigenous population who lacked even the European's partial
immunity. By 1862 smallpox had spread to Western Canada and the
North West of the USA where the mortality rate was a "low" 50%.
Fortunately, subsequent plagues have resulted in proportionately
many fewer deaths, estimated as: "Spanish" flu (1918-19) 50.0
million; HIV/AIDS (1980's global) 1m per year and Covid-19 (2019 to
date, global) 1.5m.
The economic effects of plagues vary with the extent to which
the affected populations are economically specialised. In the least
economically developed civilisations, almost wholly subsistence
agriculture, it seems likely that one primarily subsistence economy
replaced another, adding some more advanced technologies, but
frequently eliminating long standing and developed cultures. Unlike
Europe and Eurasia, the New World comprised many widely dispersed
almost self-contained separated economies, as physical, cultural
and technological barriers limited interchange: there was no silk
road or easily navigable "Mediterranean" sea, facilitating trade.
The influence of the settlers and their diseases spread slowly -
plagues killing millions of the indigenous population in Mexico,
including the 200,000 Aztecs in Mexico City after it fell to Cortes
in 1521.
New World plagues effectively wiped indigenous populations out
replacing them and their societies and civilisations. The 431-404BC
Plague during the Peloponnesian war killed Pericles, the famous
Athenian leader, and many of his army, of which the historian
Thucydides gives a vivid account of the effect on Athenian morale,
reporting that while Athens was so weakened Persian reinforced
Sparta and Athens fell, leading to the realignment of political
power in the region. In the earlier Roman and later Byzantine
empires, the plagues so severely reduced the taxes, the in-specie
supplies, the tributes and the bounty, the income that underpinned
their military power, that the empires were progressively forced
from outlying areas and eventually crumbled.
In England, the economic effect of the "Great Mortality", later
the "Black Death", which spread from Asia in 1368, while deeply
profound, was different. Unlike the farming and hunting gathering
cultures of the Neolithic period or the varied indigenous peoples
and cultures of the New World, in England the existing population
and culture was not supplanted by incomers, inherently tolerant of
the plagues they imparted there. Unlike Rome, England, apart from
limited French interests, had no dominion, empire or colonies to
rise in revolt, invade or subvert, nor was it economically
dependent on their taxes and tributes. England was independent and
the profound economic and social changes due to the plague were
wholly internal.
The immediate consequence of the Great Mortality was a sharp
contraction in the supply of labour, particularly in the country
where high farm rat populations resulted often in higher infection
and death rates than in the towns. Wages rose, and rents and
interest rates fell, reallocating wealth and income from capital
and land owners to artisans, service providers and labourers.
Serfdom was abandoned and society became less stratified, and, with
their living standards falling, landlords sought tenant
co-operation to maximise output to their mutual benefit. Both the
incentive and the requirement to change resulted in a reappraisal
of embedded systems and traditional habits and facilitated the
dismantling of restrictive practices: productivity improved and a
spirit of change was engendered. In a distant adumbration of more
modern times a much larger percentage of women entered the
workforce, increasing household earnings. Increased wealth brought
disposable income to the working and middle classes whose saving
ratio was much lower than the capital owning upper classes and so
demand boomed for finished products, a demand that was a precursor
of England's industrialisation.
Wool production, the primary cash crop of English agriculture,
was concentrated in East Anglia, centred on Norwich, England's
second city. Appropriately, until recently the Lord Chancellor of
England sat on "The Woolsack". This valuable raw material, whose
processing and distribution was the source of considerable wealth
to the neighbouring low countries, became increasingly processed in
England and the finished products trade over the North Sea and
across Europe became reciprocal. The English industries, being
recently established, were more flexible and not subject to the
extensive restrictive practices of the oligopolies formed by
established guilds which were deeply entrenched in the entrepot
states of the European south and to a lesser extent in cities on
the nearby continental seaboard. The plague persisted
intermittently across the centuries, tragically culminating in the
Black Death in London in 1665. The legacy of this terrible
pestilence was profound social change engendering a vast, enduring
and continuing rise in productivity, in universal living standards
and in longevity: albeit at a very high "capital" price.
Covid-19 is the third pandemic in the last 100 years, all having
animal origins, all being worldwide, and all involving "new" virus
infections. The Spanish flu, originating probably from domesticated
wild fowl in the USA, killed c.50m people. The high death rate
occurred because there were no viricides or vaccines or any
antibiotic treatments for the many subsequent infections. HIV/AIDS,
previously endemic in non-human African primates, has killed about
0.37% of the world population, control becoming possible by
cultural practices, antiviral drugs and vastly improved health
care. The HIV virus, unlike most viruses including Covid-19, may
"hide", unexpressed and inactive in healthy cells over many years,
an action bypassing present types of vaccine, and maintaining a
bank of disease. Covid-19, probably made a mammalian transfer to
humans from bats, living in dense societies in caves. In northern
China Covid-19 is highly infectious being spread from asymptomatic
individuals and has a high mortality rate. Less than a year since
Covid-19 first appeared it has killed 0.02% of the world population
according to an FT report.
In January this year, before the spread of Covid-19, the OBR
forecast growth of 1.1% in 2020 and 1.8% for 2021, similar to the
IMF's forecast 1.4% and 1.5%, but slightly higher than the Bank of
England's forecast of 0.8% and 1.4%. In March, based on information
available up until 11 February 2020, as understanding of the extent
and danger of the pandemic started to be appreciated, the OBR
reported "since we closed our premeasures forecast news of the
spread of the Coronavirus has prompted large movements in asset
prices .... the ultimate spread and economic impact of Coronavirus
is at this stage highly uncertain .... most likely to be
concentrated in the near term. For our central forecast, we assumed
that the associated economic disruption would be relatively short
lived and concentrated in China, with some transmission through
supply chains to other parts of Asia and Europe. This implied a
temporary impact on global GDP and trade, weighing modestly on UK
activity in the first part of this year - a mild 'V-shaped' shock
... we were guided by the impact of the 2003 SARS outbreak, which
is estimated to have knocked around 1 percentage point off Chinese
GDP growth that year. The associated impact on world GDP and trade
was, though, quite limited. Bearing this in mind, we lowered our
forecast for Chinese GDP growth in 2020 by 1 percentage point (to 5
per cent), ... and reduced world GDP growth by 0.3. percentage
points ... this was expected to knock 0.1 percentage points off UK
GDP growth this year."
Expectations worsened only slowly at first. On 17 February 2020
the FT considered that the UK economy "will contract in the first
half of this year"; and on 17 March 2020 quoted views of three
previous members of the Monetary Policy Committee (MPC): Andrew
Sentance thought a "recession in the UK ... was likely" in the
first half of the year with a two to five percent contraction in
GDP in the second quarter followed by a rebound ... ; Professor
David Miles thought a recession was quite likely but not the "near
Armageddon scenario implied by the stock market" and Martin Weale
said "the key point is that recovery may be rapid."
Similarly, Megan Green of the Harvard Kennedy School wrote in
the FT on 23 February 2020 that City investors considered the virus
as "temporary", just as mad cow disease and Sars were. She
considered that a recent survey of America's fund managers showing
that cash was only 4% of portfolios, the lowest since 2013, while
global equities hit record highs were hardly signs of concern!
Thus, it was widely considered that the economic consequences of
the virus were minimal.
But complacency turned to concern, as the previously sanguine
views changed and the UK "lockdown" was introduced on 23 March
2020. Capital Economics forecast then that economic activity would
fall 16% in the next few weeks, regain the present level in early
2021, then subsequently grow more rapidly than previously forecast
and return to the previously forecast level in a few years. The MPC
May report continued what has transpired to be an unrealistically
optimistic tone, maintaining that the fall in activity should be
temporary, and that GDP should push up relatively rapidly as such
distancing measures were relaxed. Their "illustrative scenario"
forecast a 14% drop in GDP followed by a 15% rise in 2021 and then
a further rise of 3% in 2022. The MPC report analyses "The economic
effects of Covid-19". The critical assessment was that the impact
on GDP of the then enforced social distancing and policy support
measures "cost" GDP 0.75% a week, but that such interventions with
the Spanish flu outbreak reduced the longer term adverse economic
effects. A report on the effects of a more severe pandemic than the
Spanish flu estimated that with no intervention the UK death rate
would be over 750,000, over ten times the 61,000 deaths already by
December. In general, social distancing increases output loss
initially, but lowers output loss later.
By August the MPC was considerably more optimistic about
short-term prospects, saying: "Higher frequency indicators imply
that spending has recovered significantly since the trough in
activity in April; payments data suggest that household consumption
in July was less than 10% below its level at the start of the year;
housing market activity appears to have returned to close to normal
levels. Consequently, the MPC's August forecast for changes to GDP
was improved from the very pessimistic May forecast to -9% for
2020, +9% for 2021 and +3.5% for 2022.
In November the MPC reported "there has been a rapid rise in
Covid-19 infection" ... and "that developments related to Covid-19
will weigh on near-term spending to a greater extent than projected
in the August 2020 report, leading to a decline in GDP in 2020 Q4",
an estimate that took account of "all restrictions announced up to
and including 31 October 2020" and that the current direct impact
of Covid-19 in the economy is expected to wane in 2021.
The MPC conditioned its forecast on the assumption that
"improved treatments or other health interventions become
available", a condition not previously explicit, but one which
could include the introduction of a vaccine. Less significantly the
estimate also assumed a Free Trade Agreement (FTA) from 1 January
2021 with the EU. Accordingly, the MPC forecasted that GDP would
fall by 11% in 2020, and recover only by 7.25% in 2021, leaving the
economy 4.5% lower at the end of 2021 than in 2019. The May and
August reports had forecast a faster recovery, leaving the economy
only 1.5% lower in 2021.
Other forecasts made before the announcement of the successful
vaccines are more pessimistic than the Bank of England. PWC
forecast that GDP will be only 92.0% of the 2019 level at the end
of 2021 while the Bank forecast 95.5%. EY Item Club forecast "the
economy is not expected to return to Q4 2019 until the second half
of 2023 when the Bank expects GDP to be 3% higher than 2019 at the
end of 2023. Consensus forecasts by HMT in November 2020 for "new"
forecasts were also more pessimistic than the Bank showing a return
to the 2019 position by the end of 2023.
Unlike the MPC the OBR gives three separate forecasts: one the
upside scenario "with a rapid rollout of the vaccines"; one in
which restrictive public health measures are kept in place until
the Spring and vaccines are rolled out more slowly; and one in
which lockdown is extended and vaccines are less effective in
keeping the virus in check.
The delivery of an effective vaccine has a dramatic effect on
the forecast. In the upside scenario output returns to its pre
Covid-19 level in Q4 2021 and, most importantly, returns then to
the output levels previously forecast in March 2020. Without an
effective vaccine, recovery is not forecast to take place before Q4
2024 when the growth rate resumes from a base level 6% lower than
in March, due to permanent scarring to the economy. Significantly
the difference between the upside and the downside scenarios is:
peak unemployment 5.1% and 11.0%; PSNB 2020-21 16.7% and 21.7% and
PSND 90.5 and 123.1.
The OBR's scenario with no effective vaccine would yield an
outcome that would be socially disruptive, as the economic
consequences would be dire: unprecedented public borrowing would be
required, if essential services such as the NHS were to be
maintained, and if social benefits were to be continued; and demand
would collapse, reducing asset prices, leading to widespread
negative equity, and bankruptcies would throttle supply causing
inter-linked businesses to fail. In turn these factors would
further increase Government borrowing. While such a disaster now
seems likely to be avoided, I forecast that in such a scenario, for
which there are ample precedents, a great inflation would follow
relieving debtors, at the cost of savers and other creditors - the
debt would be monetised. The social impact of such an economic
outcome would be considerable.
Fortunately, as Willie Whitelaw said, "The future has changed" a
sentiment with which I concur as I forecast an economic outcome
similar to the OBR upside scenario. Only the OBR has forecast this
upside scenario, based specifically on the early deployment of an
effective vaccine, a course which the UK is undertaking. GDP is
expected to return to its pre-pandemic level in Q4 2019 by Q4 2021
and grow substantially as previously forecast in March 2020 at
1.5%.
OBR, like the Bank and most other forecasters, assume that the
current Brexit negotiations conclude with a "deal". Without such a
deal there would be an initial reduction in output of 2% compared
to its upside scenario, a reduction which would fall to 1.5% by Q1
2026, or a reduction due to a no deal Brexit of about 0.3% per year
for about 20 years.
The economic forecast for Scotland closely resembles that of the
UK, except the recent Scottish growth has been lower than the UK in
every quarter since Q2 2018. EY forecast this underperformance to
continue and over the period 2020 to 2024 to be 0.3% lower per
annum than for the UK. Notwithstanding the Scottish performance,
Edinburgh is expected to grow by 0.3% above the UK average and 0.6%
above the Scottish average.
The Scottish fiscal position is currently of little practical
significance but would be material if Scotland became independent.
However, the new tax raising powers in Scotland matched with
Scottish expenditure give Scotland increasing responsibilities and
these parameters are becoming increasingly relevant. The FAI
reported in September that there were "no indications that the
Scottish economy has been disproportionately affected by Covid-19
compared to the UK". The UK budget deficit for 2020/2021 is
forecast at GBP394bn or 19% of GDP, having been forecast at 2.5%
before the Covid-19 pandemic. However, before the pandemic Scotland
had a budget deficit of 8.6% of GDP which is likely to increase to
26% to 28% of GDP and will remain around 10% long after the crisis
is over. Until 2010 the Scottish budget deficit moved in line with
the UK budget deficit, before widening dramatically and
consistently to the current gap.
The most recent OBR forecast, taking into account a successful
vaccine deployment, forecasts that UK growth will return to the
previous pattern in Q4 2021. This storm will blow out. But Scotland
faces a gathering long-term storm. Taxation brings in less per head
than the UK but public expenditure is more than 12% higher than the
UK average. Unfortunately, the deficit seems likely to increase as
the FAI says "the Scottish Budget will bear the risk that devolved
(i.e. Scottish) revenues decline proportionately more than the
equivalent revenues in the UK" and "the more worrying question for
the Scottish Government is the extent to which slightly weaker
growth in the Scottish income tax base relative to UK might
persist."
Symptomatic of these worries is the report that the Scottish
budget estimated a boost from the five band income taxes it
introduced of GBP428m, but only an extra GBP119m was obtained. FAI
says that the error arose as the Scottish tax base (and
specifically earnings) grew slightly more slowly than the UK's. For
Scotland, the Covid-19 overarching crisis is a distracting flash
flood in the parlour while the constant dreich dripping drizzle
feeds the dry rot in the living room. In Scotland, as in the UK, we
should rejoice that a miracle of science promises to enable us to
return to "normality". Given the most likely outcome without an
effective vaccine, Brexit and Scottish Independence are possible
minor irritations, but both real ones.
In my judgement a deal or at least an arrangement will be made
with the EU, an outcome which will have considerable influence on
the future constitution of the United Kingdom. However, compared to
a possible Scexit, Brexit is, as Andrew Neil said, like "a tea
party".
Property Prospects
In the previous investment cycle the CBRE All Property Yield
Index peaked at 7.4% in November 2001, then fell to 4.1% in May
2007 before peaking in this cycle at 7.8% in February 2009, a yield
surpassed only very briefly since 1970, when the Bank Rate was over
10%. Subsequently, yields fell to 6.3% in 2012 before falling
steadily to a low of 5.3% in August 2017 before rising again over
two years to an estimated 5.5% in August 2019 and to 5.9% in
September 2020.
This year Savills prime yields have risen in nine of the 14
identified sectors and are unchanged only for West End and City
Offices at 3.71% and 4.00% and for distribution units and
Industrial multi-lets at 4.25% and 4.10%. Food stores, being
essential services, have remained open throughout the current
emergencies and have fallen from 4.25% to 4.00%, but High Street
retail, Shopping centres and Leisure Parks have all risen 1
percentage point to 6.75% and both M25 and Provincial offices by
0.25 percentage points to 5.25% and 4.00% respectively.
The All Property yield peaked at 7.8% in February 2009 during
the Great Recession at 4.6 percentage points higher than the
10-year Gilt, the widest "yield gap" since the series began in 1972
and 1.4 percentage points wider than the previous record in
February 1999. The 2012 yield of 6.3% marked a new record yield gap
of 4.8 percentage points, due largely to the then exceptionally low
1.5% Gilt yield. The yield gap fell to a low of 3.3 percentage
points in 2014 but rose steadily to 4.1 percentage points in 2018,
due largely to a drop in the 10-year Gilt yield, and rose further
to 4.8 percentage points in 2019 as the Gilt yield fell to a then
astounding 0.7% in late November. This year, due to a rise in yield
and the further fall in the Gilt yield to 0.3%, the yield gap has
risen to 5.6 percentage points, a new record.
The All Property Rent Index, apart from briefly in 2003, rose
consistently from 1994 to 2009 when it fell by 12.3%. Immediately
following the Great Recession there were three small annual
increases totalling 1.6%, but subsequently rental growth improved
and averaged 3.6% in the five years to 2017. In 2018 there was a
rise of only 0.8% followed by a fall of 0.1% in 2019, due to falls
of 3.1% in Shops, 3.8% for Retail Warehouses and 4.9% for Shopping
Centres, these last two sectors having had the worst performance in
the previous years. The pattern has been repeated this year, as All
Property Rental values have fallen 2.1%, Shops 6.0%, Retail
Warehouses 4.2% and Shopping Centres 10.8%, while Office and
Industrial rents are essentially unchanged. Since the Great
Recession began 12 years ago, the All Property Rent Index (as
extrapolated) has risen by 2.7%, Offices by 11% and Industrials by
28%, but Shops have fallen by 4.6%.
In the 12 months to October 2020 capital values have fallen 8%
overall, but have fallen 30% for Shopping Centres, 17% for Retail
Warehouses and 12% for Standard Shops, while Industrials are the
only sector showing a small rise in value! It is no consolation
that in the 24 months following the beginning of the Great
Recession All Property capital values fell by an astonishing 44%. A
more insidious fall has been the erosion contributed steadily by
inflation. Since the market peak in 1990/1991 the CBRE rent
indices, as adjusted by RPI for inflation, have all fallen: All
Property 35%; Offices 37%; Shops 32%; and Industrials 28%.
The CBRE All Property return in the eight months until October
2020 was -4.0%, but is forecast to be -7.4% for 2020, a sharp
change from their 3.5% forecast in February 2020. This forecast
followed a return of about 1% for 2019 after two years each of 9.5%
returns. The forecast for 2021 is for a return of 3.3%, a 10.0
percentage point change from 2020, but this return masks a
continuing fall in Capital values in 2021 in all sectors except
Industrials with continuing heavy falls of over 5.0% in Standard
Retail, Shopping Centres and Retail Warehouses, sectors where rents
continue to decline. However, in 2022 capital growth of 2% combined
with rental income gives an estimated total All Property return of
7.2% with Industrial and Offices and Retail Warehouses returning 8%
and Retail and Shopping Centres 4% to 5%. In 2023 and 2024 the
forecast is for "stability" with returns of 6% for All Property,
Offices, Industrials and Retail Warehouses, but a lower 4% to 5%
for Standard Retail and Shopping Centres.
The downturn in the retail sector has been dramatic and
initially unexpected. In early 2018 IPF forecast positive returns
for all three sectors of the retail market in line with other
property sectors until 2022. However, by late 2018 IPF forecasts
for all retail sectors showed falls in rental and capital value and
annual returns for them of between +2% and -2%. In November 2019
the forecast returns for the three sectors for 2019 showed falls of
about 5% in rental value, 10% to 15% in capital value and forecast
average returns per year for the five years to 2023 of only 1.4% to
-0.7%. Symptomatic of the distress in the retail sector is the
reduction in the value of Shopping Centres by an average of 30% in
the last 12 months.
The retail sector's resilience had been severely tested before
the restrictions to reduce the spread of Covid-19 were introduced
in the Spring. For several years household income has stagnated or
risen very slowly, retail competition has been increasing,
especially among supermarkets, retail costs, especially labour
costs and rates, have been rising rapidly and online competition
has been taking an increasing share of retail sales. This toxic
combination is having a most damaging effect on the most exposed
retail sectors. But, the most insidious of these adverse factors
has been the increase in online sales. In the UK these had already
risen from 3% of total retail sales in 2006 to 18% in 2018 and 19%
in 2019, resulting in the UK then having the highest percentage of
internet retail sales in the world. This strong base in online
sales expanded rapidly following the Covid-19 restrictions and
online retailing reached a maximum of 33.3% in May 2020, but fell
back to 28.5% in October 2020, presumably because of the then
limited relaxation of the Covid-19 restrictions.
The Covid-19 regulations have occasioned considerable
behavioural change leading to greatly increased use of modern
technology, including internet ordering. The surge in demand for
such services has prompted better service, technical innovation and
cost reduction in deliveries and much wider product availability
online. All these factors combine to increase the use of the
internet compared to its already high use in 2019.
The forecast property returns to retailing indicate that the
retail sector is expected to stabilise. If the recent increase in
use of online shopping persists post Covid-19, then the use of the
internet will stabilise at say 25% of total sales, a rise of five
percentage points. Online sales pre-Covid-19 gained 1.5 percentage
points more of the market each year. However, in most markets such
high growth rates very rarely persist. As the market share of
"bricks and mortar" retailing diminishes, as the non online
retailers adjust to the change in demand, and as the most
vulnerable retailers are replaced by those more competitive, then
the online growth rate is likely to diminish, say, to 1.25
percentage points per annum. If online sales continue to increase
market share by 1.25 percentage points per year then after five
years, they will occupy another 6.25 percentage points or 31.25% of
sales altogether. If retail sales rose 3.33% per year, then after
five years total retail sales will be 18% higher or 118 "units". If
internet sales take 31.25% of the 118 units, then internet sales
will be 36.9 units and bricks and mortar sales will be 81.1 units,
or 6.1 units higher than the existing 75% level. Thus, if the
internet penetration reduced to an increase of 1.25 percentage
points per year, then with a retail sales growth of 3.33%, bricks
and mortar's total sales would increase each year.
Two additional factors will contribute to the future increase of
non-online sales. "Retail" encompasses both goods and services and
most services for almost all of which demand has been increasing
are unavailable online. In the five years prior to the "lockdown"
service shop numbers rose by over 20%, an extraordinary mix
including increasing of takeaways 23%; casinos 24%; amusement
arcades 27%; hair and beauty 31%; café and snack bars 36%; personal
beauty 44%; markets 52%; and function rooms 114%. "Property" -
letting, letting management, sales and commercial - have opened 8%
to 18% more premises. In the current crisis, of the 45 categories
of retail shops reducing numbers, only four categories provided
services of which two, restaurants and internet cafes, were food
related, a section severely effected by the Covid-19
"restrictions".
There is an elegant symmetry between the increase in high street
service shops and online ordering: they are a common manifestation
of an increased demand for service, the shops providing a service
which usually requires personal attendance - getting one's hair
done! - and online providing a physical service by reducing time
and effort - window shopping and delivery to one's door!
In recent years service costs have risen with increasing labour
costs, greater product specialisation and higher quality, while
non-service costs have fallen - food and grocery prices in
competing supermarkets and clothes and goods sourced in lower cost
overseas areas. Thus, the turnover, or sales, of the growing
service sector will rise compared to the non-service sector, so
increasing the share of total sales secured by bricks and mortar.
One of the main influences of demand for services is that as
disposable incomes increase an increased proportion of any such
increased income is spent on services. Higher living standards will
add to the "recovery" of the traditional, but more service
orientated high street.
The industrial sector is benefitting greatly from the Covid-19
restrictions, due to increased demand for warehousing and
distribution to service online sales, and, post Covid-19, online
sales are expected to continue to expand. A Brexit conclusion that
does not provide free trade would have a most deleterious short
term economic affect and produce a peak demand for these premises.
After the immediate crisis there would be an increased demand for
storage and handling facilities, partly to provide buffer stocks
against custom clearing and transport delays. Overall, I consider
any closure of manufacturing premises will be largely offset by
premises required for import substitution. In reality, whatever the
outcome, the Brexit impact on the overall industrial market will be
small.
The Sunday Times reports that, whereas senior City figures
"predicted an exodus", 200,000 in one case, the number of personnel
being replaced from London or being moved abroad to meet EU
regulations is estimated by The "EY" tracker to be 7,500 since
2016. The immediate effect on the office sector resulting from the
Brexit outcome will also be small, at least compared to the
Covid-19 effect. However, there will be a small continuing
attrition, but the prospective future service growth in the City
associated with the EU is almost certain to be reduced as
continental centres, especially Paris, whose interests may have
featured large in the protracted negotiations, vie to supplant the
City. The current Brexit negotiations, although very wide ranging
do not include detailed arrangements for services, particularly
regarding banking and financial regulations, and how the current
"understandings" are determined will be determinative on the level
of the City's EU business. I suspect the longer-term effect of
Covid-19 on office demand, especially for large city offices is
potentially much more serious. Certainly, the continuation of the
current protocols for minimising Covid-19 would induce a
significant reduction in office values.
Fortunately, an effective vaccine or vaccines are expected to be
available shortly, permitting a large-scale return to work
premises, a change crucial for all but the very smallest offices,
the extent of such a return will vary according to the size and
layout of the business premises, the adoption of "working from
home" and the type and lengths of commuting required, all three
being interlinked. Most affected will be large businesses,
especially those businesses in high rise buildings, requiring lifts
to distant floors, and all businesses with staff commuting into or
within city centres using public transport, notably in Central
London. RICS report that 93% of respondents to their survey expect
to "scale back their office footprint". Of these 93% one third
expect to reduce space by between 5% and 10% and a further third by
between 10% and 20%. Unsurprisingly, in the RICS Survey in Q2 of
rental expectations 75% of respondents expected rents to fall. In
the Great Recession rental values were 5.5% lower nine months after
a similar survey result.
Virus pandemics have either 'faded' like Spanish flu, been
contained like Ebola, been attenuated by behavioural change and
palliative drugs like AIDS or are tolerated at a low level by
vaccination like "influenza". Once the initial fears have subsided,
the most likely outcome from Covid-19 will be, given most workers
will not be Covid-19 "vulnerable" and that effective vaccines
become widely used and updated, like the current flu vaccine, that
the reduction in city centre working, even allowing for part time
or full-time home working, primarily by the elderly or vulnerable,
will be less than is currently feared.
The supply of offices is highly inelastic and its space normally
unsuited for other uses. Thus, even a small reduction in demand as
a result of Covid-19 or Brexit, will lead to high vacancy rates and
lower investment values. Consequently, City centre office
investments are likely to be the most vulnerable commercial asset
in the coming years, given that most of the falls in the retail
sector, particularly in Shopping Centres and Retail Warehouses,
have already taken place or are largely discounted.
This time last year only very small rises in house prices were
forecast. OBR forecast a rise of 1.3% and HMT's "Average of
Forecasts" 2.0%. Such forecasts were made before the onset of the
Covid-19 pandemic reduced prices by about 1% in the Spring. Thus,
quite unexpectedly, increases in house prices in the 12 months to
October 2020 are reported as: Halifax 7.5%; Nationwide 6.5%; and
Acadata 4.4% (England and Wales only). Halifax reports that in four
summer months alone prices rose by 5.3%, the largest rise since
2009, due to "a fundamental shift in demand brought about by the
structural effects of increased home working and a desire for more
space ... the stamp duty "holiday" is incentivising vendors and
buyers to close deals" and that the average price is above
GBP250,000 for the first time. Nationwide noted that the price rise
was accompanied by a rise in mortgage approvals in October to
105,600, the highest monthly number since 2016.
The lower 4.4% rate of price increase reported by Acadata may be
due to their compilation of completed sales whose date lags the
mortgage approval dates used by Halifax and Nationwide by about two
months. All the commentators note that "garden space", the desire
to "get away from the hustle and bustle of urban life" and "larger"
houses were newly important considerations for those considering
house purchases. Acadata illustrate the regional differences within
England and Wales as in Greater London prices rose 7.3% but, in the
Midlands, and the North East by only 2.0%.
Increased prices seem anomalous in the current severe economic
downturn, as most commentators link house prices with long-term
growth in GDP or earnings, but this year other factors have
supervened. The uncertainty over the Brexit decision delayed house
moves in 2019; measures to counteract Covid-19 increased demand for
gardens, larger houses for home working and more "space"; more
credit became available at low rates for low LTV buyers, normally
"second steppers" and in England the time limited stamp duty
concession instigated on 8 July 2020, lasting until 31 March 2021,
increased demand disproportionately for more expensive houses, the
main beneficiaries of the concession, and consequently, the more
expensive areas. Per contra, high LTV borrowers, especially "first
homes", faced a greatly reduced supply of credit and benefited
little from the stamp duty concessions. Thus, within sales there is
a higher proportion of more expensive houses which increased the
unweighted average price reported by more than if there had been a
"standard" proportion of house types. Consequently, the UK average
price of detached houses in the year to September rose by 6.2% but
by only 2.0% for a flat.
The Acadata Scottish HPI lags its England and Wales index by a
month. In the year to September house prices rose by 3.0% compared
to 3.4% in England and Wales. The LBTT concession in Scotland is
far less valuable than the SDLT concession in England and Wales. In
England and Wales until 8 July 2020 a GBP500,000 house would be
taxed at GBP15,000, but nil currently. In Scotland the respective
payments would be GBP23,350 and GBP21,250, a small saving of
GBP2,100!
The average price in Scotland was GBP189,452 a new record. The
range of price changes within Scotland has been remarkable, between
28.4% in Shetland and -8.3% in Aberdeen City: Shetland's figure
results from statistically few sales and Aberdeen's from the
continuing contraction of the oil sector. Among the higher priced
areas, Stirling and East Lothian recorded rises of 14.1% and 11.2%
respectively, but East Dunbartonshire fell 7.5%. No pattern is
discernible for such changes.
In contrast, the ESPC's report for east central Scotland shows a
distinct pattern. Areas near Edinburgh have shown large price
rises: 8.0% in the Lothians; about 13% just north of the Forth; and
20% in the Borders but overall Edinburgh City Centre prices have
declined 7% to GBP347,000. In general, throughout Edinburgh
one-bedroom flat prices are unchanged, but two-bedroom flats have
risen, more particularly in the "better" or improving areas such as
Morningside, Stockbridge and Portobello. This survey covers only
sales by solicitors omitting those by Estate Agents whose market is
skewed to the more expensive properties. Thus, higher priced
properties are less fully represented, although comparisons between
periods in the ESPC data are not so invalidated.
House price forecasts are unusually varied. The OBR expects
prices to "fall back" by 8% in 2021, driven by the end of the stamp
duty holiday and the "hit" on household incomes following the end
of Coronavirus Job Retention Scheme, but recovering by about 4% in
2022 and to continue to rise, but by the end of 2025 to be 17%
below their March 2020 forecast. HMT "new" forecasts reported in
November 2020 are also despondent with forecasts of 1.5% in 2020
followed by -2.1%, -0.9%, -3.0% and -3.9% in the successive years
2021 to 2024.
Agents are generally less despondent. Hamptons expect no growth
in 2021, but 6% over the next two years. For Scotland they forecast
no rise in 2021 but 8.5% over 2022 and 2023. Savills provide the
most comprehensive and the most frequent forecasts, and a
comparison of recent forecasts demonstrates the perceived
volatility of the market. In June 2020 UK mainstream house prices
were forecast to decline 7.5% in 2020 and in the five years to 2024
to rise by 15.1%, but in September they revised the 2020 forecast
to a rise of 4.0%, an 11.5 percentage point swing, and
correspondingly improved their forecast to 20.4% for the five-year
period to 2024.
The Savills September forecasts no change in 2021 in any of the
GB regions, but growth is forecast to resume in 2022 by 4% and to
be 15.7% over the three years to 2025. The three-year growth for
London is forecast as only 7.5%, higher in the South East and South
West, but highest in outlying areas, including the North West 21.9%
and Scotland 20.7%. The separate Savills Prime market forecasts a
price fall in 2020, but growth to resume in all regions in 2021
and, in the four years to end 2024, Outer London has the lowest
growth forecast of 10.3% and the London commuting and suburban
regions have below average rises. The highest rises of 18.5% are
forecast for the Midlands and the North followed by 17.3% for
Scotland.
Savills have consistently highlighted the prosperity of the
Edinburgh region due to its inherent attraction and to its high
economic output. In the December 2018 NUTS analysis - the current
one is delayed - of the NUTS 3 category Edinburgh has the eighth
highest output of the 174 NUTS units in category 3 and has an
annual growth rate of "real" GDP of 2.7%, the fourth highest among
the 174 group following Richmond on Thames 5.4%, Solihull 5.0% and
Kensington and Chelsea 3.3%. Edinburgh house price rises are
forecast to continue to exceed those in most other areas.
The Halifax index previously peaked at the GBP199,000 recorded
in August 2007. The equivalent inflation-adjusted price in October
2020 would have been GBP283,252 or 42.3% higher, but the current
Halifax price in October 2020 is GBP250,457 - some way off! If
house prices rise at 3.5% per annum and inflation is 2.0% per
annum, then just less than nine 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 my previous forecasts, "... the key determinant of
the long-term housing market will be a shortage in supply,
resulting in higher prices".
Future Progress
The Group's strategy is unchanged, but its implementation has
been delayed by a year by the direct and indirect effect of the
Covid-19 virus pandemic. Work stopped on our development at
Brunstane; the processing of the planning permission at St.
Margaret's was extended by the working restrictions at City of
Edinburgh Council; the commercial realisation of the redevelopment
was delayed by the uncertainty of the future demand for student
housing; and the demand for development plots was severely
restricted. The dislocation of services caused by "furloughing" and
changing methods of working has caused considerable delay to most
normal business activity and subsequent commercial success. During
this interruption virtually all normal overhead costs were payable
while incomes were reduced or delayed.
The recent announcement of the commencement of vaccine
treatments will allow the recovery from the current poor market
conditions that persist in some market sectors. Fortunately, the
successful prosecution of the Group's business does not depend on a
full recovery, as a partial economic recovery, together with a
lowering of restrictions will, when combined with an expected
accompanying change in sentiment, ensure the strength of our
markets.
Under such circumstances the Group's immediate strategy is to
develop its sites in the immediate Edinburgh housing market and the
geographical extension to that market that is developing.
Crucial to our strategy is the development of St Margaret's
House, Edinburgh, into 377 student bedrooms and 101 residential
flats of which 26 will be affordable. This conditional sale was due
to have the primary conditions purified by August 2019, but market
conditions and planning delays resulted in an extension until 31
August 2020. Continuing market uncertainty and further planning
delays forced a continuation of the conditional sale until 30 June
2021. A major step in the completion of the sale took place on 14
August 2020 when planning permission was issued. The Company's
application on 8 November 2019 for an amendment of the existing PPP
was issued on 4 December 2020, ensuring that the PPP endures, as
recently amended, until December 2023. After these long delays we
now expect that the remaining suspensive condition will be purified
by 30 June 2021 and that completion of the disposal will take place
in the first quarter of 2022. These further delays have postponed
work on other developments. The sales proceeds from Brunstane and
the recent sale of Ardpatrick, once complete in March 2021, will
allow us to expand our development programme.
We have explored "alternative financing" possibilities for our
Belford Road development site, and will continue to do so, seeking
an acceptable arrangement. However, in view of the long-lead times,
we commissioned architects who have remodelled the Belford Road
facade to reflect current demand and modern design. Further work
will be undertaken early next year.
In November 2018 a contractor was appointed to our Horsemill
phase at Brunstane after the site start was further delayed by
credit formalities to complete even the small additional funding
for the project. The uniquely complex nature of the restoration and
the construction, together with a prolonged archaeological
investigation, has hindered the project whose progress was then
interrupted by the last-minute requirement of a monopoly service
supplier to reroute an existing main cable. Then the contractor was
due to undertake the final "tarmacking" on the day on which the
Covid-19 lockdown regulations came into effect. When marketing
eventually took place in July 2020, all five properties went "under
offer" within two months at prices at or above the Home Report, all
higher than our budget prices, and of which two have completed and
the other three await offerors' sales of existing properties. All
three completions are now expected in the first quarter of
2021.
Our developments require a stable and liquid housing market, but
we do not depend on any increase in prices for the successful
development of most of our sites, as most of these sites were
purchased unconditionally, for prices not far above their existing
use value and before the 2007 house price peak. A major component
of the Group's enhancement of 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, so continuing a philosophy that
underlay the change from primarily investment property to include
an extensive development programme. This strategy change allowed us
to escape the devastation caused by the 2008 Great Recession from
which sections of the property sector never recovered and to avoid
the extensive loss in value associated with Covid-19 pandemic and
the changes adversely affecting most retail and many office
investments.
On behalf of the members of the Group I pay tribute to all our
employees who have worked well and unstintingly under difficult
conditions throughout the long Covid-19 period.
The closing mid-market share price on 21 December 2020 was 145p,
a discount to the NAV of 204.5p as at 30 June 2020. The Board does
not recommend a final dividend, but intends to restore dividends
when profitability and consideration for other opportunities and
obligations permit.
Conclusion
Covid-19's effects will be less extreme, but more extensive than
originally expected. Catastrophe on an historic scale, and even the
lesser consequences of the Spanish flu, will be avoided due to the
unprecedently rapid development of apparently successful novel
vaccines. Unsurprisingly, very adverse possible long-term economic
effects of the Covid-19 pandemic were widely considered likely.
Fortunately, such forecasts made during or in the immediate
aftermath of an unusual event are subject to a "salience bias,"
disproportionately weighting a recent or prominent event: one
recently crashed car greatly increases the subjective assessment of
the probability of traffic accidents.
There are many precedents for "expected" calamities becoming no
more than "corrections". For instance, no forecast economic storm
occurred following the widely held concerns about Y2K, leaving the
ERM, or remaining outside the Eurozone, the latter two decisions
actually proving very beneficial. Leaving the EU, considered by
many to have far reaching economic consequences, has now been
reappraised by the FT as: "Contrary to initial fears, Brexit no
longer holds concerns for the global economy or financial
stability", although "hard years of putting up with great trade
frictions still lie ahead". Similarly, the OBR reassessed the
potential economic damage to the UK economy as a 0.21% reduction
per year until 2035 in the growth of the economy. For many the
prospect of leaving the EU threatened the very future of the City.
Axel Weber, ex-President of the Bundesbank, recently said "no other
city had emerged as a viable challenger to London", noting his
bank, UBS Group AG, had relocated only 4% of staff, a fraction of
the initial estimate. Similarly, dire estimates of the economic
effects of the Covid-19 pandemic have had to be re-appraised. In
June the OECD forecast that the US economy would decline by 8.5%,
but in November revised that forecast to only 3.7%, and that in
China an expected contraction of 3.0% was revised to growth of
1.8%. The OBR now expect the UK's economy, assuming rapid
deployment of the vaccine and a Brexit deal, to recover to the pre
virus peak from the current -11% in Q4 2021.
We have been extraordinarily lucky, as in spite of inadequate
contingent planning for new virus diseases, vaccines have been made
available at unprecedented speed. We are also very lucky we are now
able to discern that the orthodox assessment of such risks and that
the pre-emptive planning for them was inadequate. Errors in one
orthodoxy prompt questions of others.
Prior to the pandemic, orthodoxy considered such plagues were
historic, even romanticised by Silk Road origins. The orthodox view
had merit: smallpox, bubonic plague, polio, Sars, typhoid,
bacterial diseases and even TB, malaria and HIV/AIDS have been
controlled. The pandemic threats of virus diseases from distant
places was considered as remote in spite of sporadic contrary
warnings given by outbreaks of Ebola or Zika. Covid-19 shattered
that orthodoxy of security.
The overall economic response to the crisis, while wholly
correct, is contrary to current economic orthodoxy. While raising
debt levels to counter a recession is a normal contracyclical
policy, what is unorthodox, as the FT comments, is "the funeral of
austerity as fiscal orthodoxy practised over decades since the debt
crisis .. has been replaced with fiscal activism". Martin Wolf, the
FT's Chief Economic Commentator is more pungent: "The old fiscal
rules were a mistake. Now they are grotesque."
The economic benefit of sustaining capital investment in and
following a downturn was dismissed as inappropriate by Germany and
the ECB during the Euro crisis, as it was by Cameron and Osborne
sometime later in the UK. Such enforced fiscal rectitude - Margaret
Thatcher's "kitchen sink economics" - delayed the recovery and
hindered the growth in all these economies and was consistently and
correctly criticised by informed economists such as Martin Wolf in
the UK and Larry Summers in the USA. With the experience of recent
events such fiscally constrained policies are now considered, and
correctly so, as I have argued here consistently, to have been
wrong. The summary abandonment of this mistaken orthodoxy coincides
with undermining of another acquired orthodoxy: the reliance on
monetary control via the MPC as the overriding method of economic
management. These reversals follow a long tradition of failed
economic orthodoxies with a lineage stretching back to the defence
of Sterling, the ERM, the Gold Standard, and include of course, the
Euro project, in reality a political Trojan horse. The motivation
for these economic policy orthodoxies is diverse: political
preference disguised as economics in some cases; in others,
ulterior group loyalties, as so clearly demonstrated in the popular
TV series - "Yes, Minister"; and at times, deference of individual
opinion to group norms, "group think", or to "authority".
Orthodoxies are widely spread and provide the attitudinal
structure for very widely encompassing and diverse networks,
doctrines, cultures and organisations as Divine right of Kings;
infallibility; medieval Guild systems; caste categorisation; WW1
strategy; persistence of medical phlebotomy; geocentrism; and
cartelised professions. Many of these orthodoxies, private networks
of collusive, collaborative and lobbying organisations, technically
"distributional coalitions", give economic advantage to those few
participants controlling them, but at the cost of much greater
economic disadvantage to the whole economy. Such orthodoxies lack
intellectual integrity which renders them susceptible to the sudden
failure that has occurred with many economic orthodoxies.
The challenge to orthodoxy by the discovery of effective
vaccines, but particularly of their rapid approvals, illuminates
how, when the need arises, results are achievable, and illustrates
the failure of the established orthodox procedure. Logically, it
would be functional to examine all economically significant
orthodoxies to determine their underlying control and motivation.
Those dependent on "authority" should be assessed on authenticity,
accuracy and appropriateness and their relevance reviewed, while
other distributional coalitions should be analysed on the extent to
which they operate against the public interest and should
beneficially be reformed. A glorious memorial to the suffering
caused by Covid-19 would be an appropriate dissolution of these
orthodoxies.
I D Lowe
Chairman
22 December 2020
Strategic report for the year ended 30 June 2020
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
GBP95,000 (2019 profit: GBP2,059,000). The directors do not propose
a dividend in respect of the current financial year (2019: Nil).
The Group net asset value amounts to GBP24,095,000 (2019:
GBP24,000,000).
Business review
A full review of the Group's business results for the year and
future prospects is included in the Chairman's Statement within the
Review of Activities on pages 2 to 5 and Future Progress on page
16. 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. The
intention in the coming year is to realise cash from the sale of
assets to provide funding for its existing development programme,
repay certain existing debt and provide general working
capital.
Principal risks and uncertainties
There are a number of potential risks and uncertainties, which
have been identified within the business and which could have a
material impact on the Group's long-term performance.
Development risk
Developments are undertaken where appropriate value is judged to
be obtainable after consideration of economic prospects and market
assessments based on both internal analysis and external
professional advice. Committed developments are monitored
regularly.
Planning risk
Properties without appropriate planning consent are purchased
only after detailed consideration of the probabilities of obtaining
planning within an appropriate timescale. The risk that planning
consent is not obtained is mitigated by ensuring purchases are made
at near to existing use value. In such purchases the Group adopts a
portfolio approach seeking an overall return within which it
accepts a small minority will be less successful.
Property values
The Group's principal investment properties have either
development prospects or a development angle which should insulate
them against the full effect of any general investment downgrade of
commercial property.
Availability of funding
The Group 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 banks' current strict
criteria are met and the relatively high rates of interest are
accepted.
The low acquisition cost of some of the Group's sites reduces
the overall development cost and hence the level of funding
available under current formulaic lending processes based on loan
to cost.
Covid-19
While the timing of certain activities, principally the
completion and sale of new homes on one development site and the
completion of a conditional sale of an investment property, have
been affected by Covid-19, the Group expects that Covid-19 will
have less of an ongoing impact due to the availability of vaccines
and that demand will be maintained from tenants for small
commercial properties and for quality housing sales.
Tenant relationships
All property companies have exposure to the covenant of their
tenants as rentals drive capital values as well as providing
income. The Group seeks to minimise exposure to any single sector
or tenant across the portfolio and continually monitors payment
performance.
Environmental policy
The Group recognises the importance of its environmental
responsibilities, monitors its impact on the environment and
designs and implements policies to reduce any damage that might be
caused by Group activities.
Brexit
The Group does not expect Brexit to impact significantly on its
operations or assets as it and its customers are UK based although
there could be an impact on certain building material and component
supplies.
Corporate Governance
The directors recognise the need for sound corporate governance.
As a company whose shares are traded on AIM, the Board adopted the
Quoted Companies Alliance's Corporate Governance Code ("the QCA
Code"). Its corporate governance statement including any
disclosures required pursuant to the QCA Code is published on the
Company's website www.caledoniantrust.com.
Section 172 Compliance
Section 172 of the Companies Act 2006 imposes a general duty on
every Director to act in a away they consider, in good faith, would
be the most likely to promote the success of the Company for the
benefits of its shareholders as a whole. In doing so, Directors
should have regard to several maters including:
a) The likely consequences of any decision in the long term;
b) The interests of the Company's employees;
c) The need to foster the Company's business relationships with suppliers, customers and others;
d) The impact of the Company's operations on the community and environment;
e) The desirability of the Company maintaining a reputation of
high standards of business conduct; and
f) The need to act fairly as between members of the Company.
The Board factors stakeholder interest into its long-term
policies and objectives. The business of the Company requires
engagement with shareholders, customers and tenants, local planning
authorities, employees and suppliers.
When considering stakeholder interest, the Board is responsible
for ensuring that the long-term policies and objectives implemented
allow the Group to provide tenants with properties which meet their
needs and to produce consistently high quality homes on its
developments.
The Executive Directors are responsible for the operations of
the business while the Non-Executive Director is independent and
well positioned to provide objective judgement and scrutiny over
decisions made by the Board.
Information about stakeholders and how the Board has discharged
its duties are included on pages 22 and 23 of the financial
statements.
M J Baynham
Secretary
22 December 2020
Corporate Governance
QCA Code Compliance and Section 172 Statement
for the year ended 30 June 2020
The corporate governance report is intended to provide
shareholders with a clear understanding of the Group's corporate
governance arrangements, including analysing compliance with the
Quoted Companies Alliance 2018 Corporate Governance Code ("the QCA
Code") and where the Group does not comply with the QCA Code, an
explanation of why it does not.
The QCA Code provides a robust framework which enables the Group
to maintain high standards of corporate governance appropriate for
the size of the Group. The QCA Code sets out ten principles and
each principle and the Group's actions in relation related thereto
are set out below. Douglas Lowe, in his capacity as Executive
Chairman, is responsible for ensuring the Group has the necessary
corporate governance framework in place and that, except for
Principle Five, the ten principles are followed across the
Group.
Principle One
Business Model and Strategy
The Group's business model is that of a property investment and
development company, which is focused on the Scottish property
market. Further details regarding application of the Group's
business model, its activities and its properties can be found in
the 'Review of Activities' section of the Chairman's Statement on
pages 2 to 5 of the Group's annual report and accounts for the year
ended 30 June 2020. The 'Future Progress' section of the Chairman's
Statement on page 16 of the Group's annual report and accounts for
the year ended 30 June 2020 provides a summary of the Group's
strategy. The key challenges in the execution of the Group's
business model and strategy and how the Group seeks to address
these can be found in the 'Principal risks and uncertainties'
section on pages 19 and 20 of the Group's annual report and
accounts for the year ended 30 June 2020.
Principle Two
Section 172 Statement and Understanding Shareholder Needs and
Expectations
As well as compliance with the QCA Code, Directors are required
in accordance with Section 172 of the Companies Act 2006 to include
a statement of how they have taken into account the shareholders in
promoting the success of the Company. This section and information
on pages 20 and 21 set out how the Board has discharged its
duties.
The Board is committed to maintaining good communications and
having constructive dialogue with its shareholders in order to
understand the needs and expectations of the Company's
Shareholders. It is important to note that the executive directors
are the two largest shareholders, holding over 85% of the Company's
share capital.
Investors have access to current information on the Company
through its website, www.caledoniantrust.com, through its
regulatory announcements, its annual and interim accounts and
through the directors who are available to answer investor related
enquiries.
Shareholders may contact the Company in writing via email
(webmail@caledoniantrust.com), via telephone on 0131 220 0416 or in
writing to the Company's Head Office, 61A North Castle Street,
Edinburgh EH2 3LJ. Any information provided in response to any such
enquiries will be information that is freely available in the
public domain.
All shareholders are encouraged to attend the Company Annual
General Meeting where the Directors listen to the views of the
shareholders formally during the AGM and informally following the
AGM. In the event of a voting decision not being in line with its
expectations the Board would seek to engage with those shareholders
to understand and address any concerns as appropriate. The
arrangements for the 2021 AGM will be affected by Covid-19
restrictions and the Directors will encourage shareholders to
continue their engagement with the Directors through any of the
channels already mentioned.
The Board seeks to encourage discussion with its shareholders to
whom they make themselves available. The Board dedicate sufficient
time to ensure that communication is effective with existing and
potential shareholders and other key stakeholders. The Board
believes the Company's mode of engaging with shareholders is
adequate and effective.
Principle Three
Wider Stakeholder and Social Responsibilities
Following Scottish Government guidance on the Covid-19 pandemic,
the Group's only development site was closed temporarily on 24
March 2020 and socially distanced work space was implemented within
the Group's administrative office. Where possible, staff also
worked from home.
On the basis of the Directors' knowledge and long experience of
the operations of the Group the Board recognises that the long-term
success of the Group is reliant upon the efforts of the employees
of the Group, its professional advisors and its contractors. The
directors engage directly on a regular basis with all these
stakeholders which ensures that there is close Board oversight and
contact with the Group's key resources and relationships.
Employees: The Group has a small number of full time and
seasonal employees. The Executive Directors are in regular contact
with the Group's employees, which provides an opportunity for
employees to discuss matters they wish to raise. The administrative
staff are in contact with the Directors on a daily basis and
employees working remotely at other sites are in contact with the
Chairman regularly by phone. No pay review has taken place due to
the uncertainties caused by the Covid-19 pandemic.
Customers: The Group aims to deliver quality homes and other
developments. It invests in good design features and should any
snagging work be required, it ensures rectification is completed
quickly. The Group's interaction with its tenants is constructive
and cordial and any contentious points are quickly resolved. The
Group recognises the important role of all relevant Regulations and
seeks to conform with both the spirit and the requirement of the
regulations.
Suppliers and professional advisors: The Group engages
contractors after appropriate formal and informal vetting, and for
larger projects after formal tendering. The Executive Directors
meet with contractors regularly throughout large projects to review
their recommendations and to review progress. Advisors are selected
on the basis of suitability and experience for the advice required.
For each firm engaged an agreed nominated partner or director is
responsible for the Group's instructions and advice who reports to
the executive directors as required.
Environment: The Board recognises the growing awareness and
requirements in respect of environmental issues and is working with
its professional advisors to promote an environmentally friendly
approach to the design of its new developments.
The Group takes into account feedback received from its key
stakeholders and considers making amendments to working
arrangements and operational plans where appropriate and where such
amendments are consistent with the Group's strategy and objectives.
However, no material changes to the Group's working processes were
required over the year to 30 June 2020, or more recently, as a
result of stakeholder feedback received by the Company.
Principle Four
Risk Management
In addition to its other roles and responsibilities, the Audit
and Compliance Committee is responsible to the Board as a key
control for ensuring that procedures are in place, and are being
effectively implemented to identify, assess and manage the
significant risks faced by the Group in respect of the execution
and delivery of the Group's strategy. The Board and executive
management team also consider and monitor risk on an ongoing
basis.
The principal risks and uncertainties which have been identified
within the business and which could have a material impact on the
Group's long-term performance can be found in the 'Principal risks
and uncertainties' section on pages 19 and 20 of the Company's
annual report and accounts for the year ended 30 June 2020.
The risks which the Group faces are subject to change and the
measures to counter or to mitigate them are reviewed as required.
The Board considers that an internal audit function is not
necessary, due to the close day to day control exercised by the
executive directors.
Principle Five
Maintaining a Well Functioning Board of Directors
As at 22 December 2020 the Board comprised the Chairman and
Chief Executive Officer Douglas Lowe, one executive director,
Michael Baynham and one non-executive director, Roderick Pearson.
Of the Board's members, Mr Pearson is considered to be independent.
A further commentary on this topic is provided below.
Mr Lowe has been both Chairman and Chief Executive Officer of
the Company for many years. He is the largest shareholder holding
over 79% of the issued share capital and has since the banking
crisis of 2007 provided significant loans to the Group to fund its
working capital requirements. The Board believes that Mr Lowe's
shareholding aligns his interests with the other members' interests
and there is ample evidence to support this.
The Board consider that in these circumstances it is in the best
interests of the Group to maintain Mr Lowe's positions as both
Chairman and Chief Executive Officer contrary to recommended best
practice in the QCA Code. The Board has been assured that, subject
to all debt being repaid, a return to normal remuneration levels
and normal investment and trading conditions, further Board
appointments and changes will be made. Separately, the Board has
received an undertaking from Mr Lowe that if he ceases to work
full-time, appropriate Board changes will be made.
The Company presently does not comply with the QCA Code
recommendation to have at least two non-executive directors who are
identified as independent. For those reasons the Board believes
that, given the present size of the Company and the nature of its
business and operations it is well served by the current
composition of the Board which functions effectively and is well
balanced. This position is considered regularly and where
appropriate and necessary further appointments will be made.
Mr Pearson has been a non-executive director since March 2007
and the rest of the Board consider him to continue to be
independent. Mr Pearson is sufficiently removed from the day to day
operations of the Company to retain a critical and independent view
and as such he represents the best interests of all the
shareholders.
Mr Lowe and Mr Baynham work full time and Mr Pearson currently
works on average two days per month. Biographical details of the
current directors are set out below. Executive and non-executive
directors are not presently subject to re-election.
The Board met formally on seven occasions during the year to 30
June 2020. All of the directors attended all of the meetings. It
has established an Audit and Compliance Committee and a
Remuneration Committee, details of which are set out further below.
The Audit and Compliance Committee met on three occasions during
the year ended 30 June 2020. As the Board resolved not to amend the
remuneration of the Directors, the Remuneration Committee was not
required to meet during the year ended 30 June 2020.
As appointments to the Board are made by the Board as a whole it
is not considered necessary to create a Nominations Committee.
Principle Six
Appropriate Skills and Experience of the Directors
The Board currently consists of three directors. Mr Baynham is
also the Group Company Secretary. The Board recognises that it
currently has a limited diversity and increasing diversity will be
considered as and when the Board concludes that replacement or
additional directors are required.
The Board is satisfied that with the Directors, it has an
effective and appropriate balance of skills and experience to
deliver the strategy of Group for the benefit of the shareholders
over the medium to long-term. All directors are able to take
independent professional advice in the furtherance of their
duties.
During the year ended 30 June 2020, neither the board nor any
committee has sought external advice on a significant matter and no
external advisers to the board or any of its committees have been
engaged.
I Douglas Lowe
Chairman and Chief Executive Officer
Mr Lowe is a graduate of Clare College Cambridge (MA Hons in
Natural Science and Diploma in Agriculture) and Harvard Graduate
School of Business Administration (MBA and Certificate in Advanced
Agricultural Economics). Until 1977 he was Chief Executive of his
family business, David Lowe and Sons of Musselburgh, property
owners, farmers and market growers established in 1860, which
farmed intensively 2,000 acres and employed over 200 people.
In 1978 and 1979 Mr Lowe was Deputy Managing Director of
Bruntons (Musselburgh), a listed company which manufactured mainly
wire and wire rope and employed approximately 1,000 people. He was
a significant shareholder and, from 1986 until shortly after
joining the Company, Executive Deputy Chairman of Randsworth Trust
PLC, a property company with a dealing facility on the Unlisted
Securities Market. The market capitalisation of Randsworth Trust
PLC increased from GBP886,000 to over GBP250 million between April
1986 and sale of the company in 1989.
Mr Lowe purchased shares in Caledonian Trust PLC in August 1987,
at which time he became Chief Executive. Mr Lowe attends two
broadly constituted private political and economics discussion
groups throughout the year. He maintains close contact with all of
the Group's professional advisers in order to discuss and identify
any new laws, regulations or standards which may affect the Group.
He studies a wide range of relevant economic, political and
technical publications and undertakes extensive research in
preparation of the Chairman's Statements, which accompany the
Annual and Interim Accounts. Mr Lowe's experience in many senior
executive positions in many organisations ensures that he has the
necessary ability to develop and implement the Group's
strategy.
Michael J Baynham
Executive Director and Company Secretary
Mr Baynham graduated in law (LLB (Hons)) from Aberdeen
University in 1978. Prior to joining the Company in 1989, he worked
as a solicitor in private practice specialising in commercial
property and corporate law. He was a founding partner of Orr
MacQueen WS in 1981 and from 1987 to 1989 was an associate with
Dundas & Wilson CS.
Mr Baynham maintains his Practising Certificate with the Law
Society of Scotland and attends professional development seminars
and other relevant seminars on a regular basis throughout the year.
He maintains close contact with all of the Group's professional
advisers in order to understand and apply any new laws, regulations
or standards relevant to the business.
Mr Baynham's experience of corporate law, commercial property
law, commercial property finance, investment and development
ensures that he has the necessary ability to implement the Group's
strategy.
Roderick J Pearson
Non-Executive Director
Mr Pearson is a graduate of Queens' College Cambridge (MA Modern
Languages and Land Economy) and is a Fellow of the Royal
Institution of Chartered Surveyors. He has held senior positions in
Ryden
and Colliers International, practising in Edinburgh, Aberdeen
and Glasgow, and now has his own practice, RJ Pearson Property
Consultants.
Mr Pearson's experience of property as a surveyor in private
practice together with his experience in senior management
positions ensures that he has the ability to support the executive
directors and also to challenge strategy, and decision making and
to scrutinise performance.
All three members of the Board bring relevant sector experience
through their long and varied careers throughout the property,
financial, legal and consulting sectors. The Board believes that
its members possess the relevant qualifications and skills
necessary to effectively oversee and execute the Group's
strategy.
Principle Seven
Evaluation of Board Performance
The directors consider that the size of the Company does not
justify the use of third parties to evaluate the performance of the
Board on an annual basis. The Company does not currently have a
formal appraisal process for Directors but the Chairman assesses
the effectiveness of the Board as a whole and the individual
directors to ensure that their contribution is relevant and
effective. This process is performed over the course of the year.
He also assesses the effectiveness of the Audit Committee and the
Remuneration Committee. During the year ended 30 June 2020, the
Chairman's assessment did not find any shortcoming in Board or
committee effectiveness and did not lead to any material
recommendations for any changes.
The Chairman is the majority shareholder and the above
arrangements are acceptable to him. The Board has not received any
communication from independent shareholders raising an issue on
Board effectiveness. The Board will continue to assess this
position on at least an annual basis, and if and when it is deemed
appropriate it will establish more prescribed evaluation
processes.
The Directors have given consideration to succession planning
and have in place a strategy to address succession as and when it
becomes necessary. The Board believes the current board and current
committee structure and membership is appropriate, but will
consider whether any board and other senior management appointments
are required on at least an annual basis and will consider the
feedback from the Chairman's assessments, as described above, in
this process.
Principle Eight
Corporate Culture
The Board acknowledges that their decisions on strategy and risk
determine the corporate culture of the Group and its performance.
High standards of ethical, moral and social behaviour is deemed
important in achieving the Group's corporate objectives and
strategy and such standards are actively promoted.
The Group only has a small number of employees who work closely
with the Executive directors. Accordingly, the Board is always well
placed to assess its culture which respects all individuals,
permits open dialogue and facilitates the best interest of all of
the Group's stakeholders. The Board are prepared to take
appropriate action against unethical behaviour, violation of
company policies or misconduct.
The Company has adopted a policy for directors' and employees'
dealings in the Company's shares which is appropriate for a company
whose securities are traded on AIM, and is in accordance with rule
21 of the AIM Rules and the Market Abuse Regulation of the European
Union.
Principle Nine
Maintenance of Governance Structures and Processes
Board Roles and Responsibilities
Ultimate authority for all aspects of the Group's activities
rests with the Board, with the respective responsibilities of the
Directors delegated by the Board. Given the size and nature of the
Group's business both of the executive directors engage directly
with all key stakeholders on a regular basis.
As noted in the disclosure above in respect of Principle Five,
Mr Lowe is both Chairman and Chief Executive Officer of the
Company. In his role as Chairman, Mr Lowe has overall
responsibility for corporate governance matters in the Company,
leadership of the board and ensuring its effectiveness on all
aspects of its role. In his role as Chief Executive Officer Mr Lowe
leads the Group's staff and is responsible for implementing those
actions required to deliver on the agreed strategy.
Matters reserved specific to the Board include formulating,
reviewing and approving the Group's strategy, budget, major items
of capital expenditure, acquisitions and disposals, and reporting
to shareholders and approving the Annual and Interim Statements.
The Board is also responsible for assessing the risks facing the
Group and where possible developing a strategy to mitigate such
risk.
The Board complies with the Companies Act 2006 and all other
relevant rules and regulations including their duty to act within
their powers; to promote the success of the Group; to exercise
independent judgement; to exercise reasonable care, skill and
diligence; to avoid conflicts of interest; not to accept benefits
from third parties and to declare any interest in any proposed
transaction or arrangement.
At present, the Board is satisfied with the Group's corporate
governance, given the Group's size and the nature of its
operations, and as such there are no specific plans for changes to
the Company's corporate governance arrangements in the shorter
term. As the Group expands and when its programmes of developments
increase, future Board appointments and Board changes to reflect
such changes will be considered.
Audit Committee
During the period under review the Audit Committee was chaired
by Mr Pearson. It met to review the Interim Report, the Annual
Report, to consider the suitability of and to monitor the internal
control processes and to review the valuations of its investment
and stock properties. The Audit Committee reviewed the findings of
the external auditor and reviews accounting policies and material
accounting judgements.
The independence and effectiveness of the external auditor is
reviewed annually and the Audit Committee meets at least once per
financial year with the auditor to discuss their independence and
objectivity, the Annual Report, any audit issues arising, internal
control processes, auditor appointment and fee levels and other
appropriate matters.
The Audit Committee have reported that they are satisfied that
the internal control processes are robust. The accounting policies
meet regulatory requirements and any material judgements are stated
in Note 3 of the consolidated accounts for the year ended 30 June
2020. The Audit Committee is satisfied that the external auditor is
independent and effective.
The Audit Committee terms of reference can be found here
http://www.caledoniantrust.com/CR11-AUDIT-COMMITTEE-M0918.pdf .
Remuneration Committee
The Remuneration Committee was chaired by Mr Pearson and met
once during the year as set out in its report for the year ended 30
June 2020.
The Remuneration Committee terms of reference can be found here
www.caledoniantrust.com/CR11-REMUNERATION-COMMITTEE-M0918.pdf .
Nomination Committee
The Board have agreed that appointments to the Board will be
made by the Board as a whole and have not created a Nomination
Committee.
At present, the Board is satisfied with the Company's corporate
governance, given the Company's size and the nature of its
operations, and as such there are no specific plans for changes to
the Company's corporate governance arrangements in the shorter
term.
As the Group expands and when its programmes of developments
increase, future Board appointments and Board changes to reflect
such changes will be considered, as appropriate.
Principle Ten
Shareholder Communication
The work of the Company's Audit Committee and Remuneration
Committee during the year is described above.
As the Board resolved not to amend the remuneration of the
Directors the Remuneration Committee was not required to meet
during the year, so no report from this committee is available.
Shareholders have access to current information on the Company
through its website, http://www.caledoniantrust.com, though its
regulatory announcements, its annual and interim financial reports
and via Mr Lowe, Chairman, who is available to answer investor
relations enquiries. Shareholders may contact the company in
writing, via email (webmail@caledoniantrust.com) or via telephone
on 0131 220 0416. Enquiries that are received will be directed to
the Chairman, who will consider an appropriate response.
The results of voting on all resolutions in future general
meetings will be posted to the Group's website and announced via
RNS. Where a significant proportion of votes (e.g. 20% of
independent votes) have been cast against a resolution at any
general meeting, the Board will post this on the Group's website
and will include, on a timely basis, an explanation of what actions
it intends to take to understand the reasons behind that vote
result, and, where appropriate, any different action it has taken,
or will take, as a result of the vote.
The Company's financial reports since 2002 can be found here
http://www.caledoniantrust.com/accounts_details.html . Notices of
General Meetings of the Company for the last five years can be
found here http://www.caledoniantrust.com/AGM_Notices.html .
The Board is committed to maintaining good communication and
having constructive dialogue with its shareholders. The Group
engages in full and open communication with its shareholders and
endeavours to reply promptly to all shareholder queries received.
The Chairman prepares a detailed summary of the Group's activities
in his Statement which accompanies the Annual and Interim Financial
Statements. Regulatory announcements are distributed in a timely
fashion through appropriate channels to ensure shareholders are
able to access material information on the Group's progress. A
report of the audit and remuneration committees is included with
Principle Nine above. All shareholders are encouraged to attend the
Company's Annual General Meeting.
M J Baynham
Secretary
22 December 2020
Directors' report for the year ended 30 June 2020
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 2020 30 June 2019
held
GBP GBP
I D Lowe 79.1 9,324,582 9,324,582
M J Baynham 6.2 729,236 729,236
R J Pearson - - -
Beneficial interests - Unsecured loans
I D Lowe 100.0 4,380,000 4,330,000
M J Baynham 100.0 99,999 99,999
The interest of I D Lowe in the unsecured loans of GBP4,380,000
(2019: GBP4,330,000) is as controlling shareholder of the lender,
Leafrealm Limited. The interest of M J Baynham in the unsecured
loan of GBP99,999 (2019: 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
22 December 2020
Consolidated income statement for the year ended 30 June
2020
2020 2019
Note GBP000 GBP000
Revenue
Revenue from development property sales 90 440
Gross rental income from investment properties 446 441
Total Revenue 5 536 881
Cost of development property sales (82) (243)
Property charges (172) (173)
------------------ -------------------
Cost of Sales (254) (416)
------------------ -------------------
Gross Profit 282 465
Administrative expenses (428) (755)
Other income 20 11
------------------ -------------------
Net operating loss before investment
property
disposals and valuation movements (126) (279)
------------------ -------------------
Valuation gains on investment properties 10 250 3,025
Valuation losses on investment properties 10 - (650)
------------------ -------------------
Net gains on investment properties 250 2,375
------------------ -------------------
Operating profit 5 124 2,096
------------------ -------------------
Financial expenses 7 (29) (37)
------------------ -------------------
Net financing costs (29) (37)
------------------ -------------------
Profit before taxation 95 2,059
Income tax 8 - -
Profit and total comprehensive income
for the financial year attributable to
equity holders of the parent Company 95 2,059
================== ===================
Earnings per share
Basic and diluted earnings per share
(pence) 9 0.81p 17.47p
The notes on pages 46 - 66 form an integral part of these
financial statements.
Consolidated balance sheet as at 30 June 2020
2020 2019
Note GBP000 GBP000
Non-current assets
Investment property 10 17,720 17,470
Plant and equipment 11 10 6
Investments 12 1 1
--------- ---------
Total non-current assets 17,731 17,477
--------- ---------
Current assets
Trading properties 13 13,006 12,398
Trade and other receivables 14 122 151
Cash and cash equivalents 15 72 131
--------- ---------
Total current assets 13,200 12,680
Total assets 30,931 30,157
--------- ---------
Current liabilities
Trade and other payables 16 (1,213) (1,206)
Interest bearing loans and
borrowings 17 (1,503) (881)
--------- ---------
Total current liabilities 17 (2,716) (2,087)
Non-current liabilities (4,120) (4,070)
Interest bearing loans and
borrowings
--------- ---------
Total liabilities (6,836) (6,157)
--------- ---------
Net assets 24,095 24,000
========= =========
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 18,818 18,723
--------- ---------
Total equity attributable
to equity holders of the
parent Company 24,095 24,000
========= =========
NET ASSET VALUE PER SHARE 204.5p 203.7p
The financial statements were approved by the board of directors
on 22 December 2020 and signed on its behalf by:
I D Lowe
Director
The notes on pages 46 - 66 form an integral part of these
financial statements.
Consolidated statement of changes in equity as at 30 June
2020
Issued Capital Share Retained
share redemption premium earnings Total
capital reserve account
GBP000 GBP000 GBP000 GBP000 GBP000
At 1 July 2018 2,357 175 2,745 16,664 21,941
Profit and total
comprehensive income
for the year - - - 2,059 2,059
______ ______ ______ ______ ______
At 30 June 2019 2,357 175 2,745 18,723 24,000
Profit and total
comprehensive income
for the year - - - 95 95
______ ______ ______ ______ ______
At 30 June 2020 2,357 175 2,745 18,818 24,095
====== ====== ====== ====== ======
Consolidated statement of cash flows for the year ended 30 June
2020
2020 2019
Note GBP000 GBP000
Cash flows from operating activities
Profit for the year 95 2,059
Adjustments for:
Net gains on revaluation of investment properties (250) (2,375)
Depreciation 5 5
Net finance expense 29 37
_______ _______
Net operating cash flows before
movements
in working capital (121) (274)
(Increase) in trading properties (608) (748)
Decrease/(increase) in trade
and other receivables 29 (14)
(Decrease)/increase in trade
and other payables (22) 199
_______ _______
Cash (absorbed by) operations (722) (837)
Interest received - -
_______ _______
Net cash (outflow) from operating
activities (722) (837)
_______ _______
Investing activities
Acquisition of property, plant
and equipment (9) (4)
_______ _______
Cash flows absorbed by investing
activities (9) (4)
_______ _______
Financing activities
Increase in borrowings 17 672 521
_______ _______
Cash flows generated from financing
activities 672 521
_______ _______
Net (decrease) in cash and cash equivalents (59) (320)
Cash and cash equivalents at
beginning of year 131 451
_______ _______
Cash and cash equivalents at
end of year 72 131
Notes to the consolidated financial statements as at 30 June
2020
1 Reporting entity
Caledonian Trust PLC is a public company incorporated in England
and domiciled in the United Kingdom. The consolidated financial
statements of the company for the year ended 30 June 2020 comprise
the Company and its subsidiaries as listed in note 7 in the parent
Company's financial statements (together referred to as "the
Group"). The Group's principal activities are the holding of
property for both investment and development purposes. The
registered office is St Ann's Wharf, 112 Quayside, Newcastle upon
Tyne, NE99 1SB and the principal place of business is 61a North
Castle Street, Edinburgh EH2 3LJ.
2 Statement of Compliance
The Group financial statements have been prepared and approved
by the directors in accordance with International 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 Adopted IFRSs;
these are presented on pages 67 to 86.
3 Basis of preparation
The financial statements are prepared on the historical cost
basis except for investments and investment properties which are
measured at their fair value.
The preparation of the financial statements in conformity with
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 18. The
financial position of the Group, its cash flows, liquidity position
and borrowing facilities are described in note 18 to the
consolidated financial statements.
In addition, note 18 to the financial statements includes the
Group's objectives, policies and processes for managing its
capital; its financial risk management objectives; details of its
financial instruments; and its exposures to credit risk and
liquidity risk.
The Group and parent Company finance their day to day working
capital requirements through related party loans and bank funding
for a specific development project. A related party lender has
indicated its willingness to continue to provide financial support
and not to demand repayment of its principal loan during 2021.
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 the directors'
assessment of the impact of the Covid-19 pandemic and assume the
Group will make property sales in the normal course of business to
provide sufficient cash inflows to allow the Group to continue to
trade.
Should these sales not complete as planned, the directors are
confident that they would be able to sell sufficient other
properties within a short timescale to generate the income
necessary to meet the Group's liabilities to third party creditors
as they fall due.
For these reasons they continue to adopt the going concern basis
in preparing the financial statements.
Areas of estimation uncertainty and critical judgements
Information about significant areas of estimation uncertainty
and critical judgements in applying accounting policies that have
the most significant effect on the amount recognised in the
financial statements is contained in the following notes:
Estimates
-- Valuation of investment properties (note 10)
The fair value has been assessed by the directors at 30 June
2020 taking account of third-party valuations provided by external
independent valuers at 30 June 2019. The independent valuations are
based upon assumptions including future rental income, anticipated
void cost and the appropriate discount rate or yield. The
independent valuers also take into consideration market evidence
for comparable properties in respect of both transaction prices and
rental agreements. It is not expected that Covid-19 will have a
material effect on the carrying values of investment
properties.
-- 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 of the timing of future taxable profits.
4 Accounting policies
The accounting policies below have been applied consistently to
all periods presented in these consolidated financial
statements.
Basis of consolidation
The financial statements incorporate the financial statements of
the parent Company and all its subsidiaries. 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
Revenue from the sale of investment and trading properties is
recognised in the income statement on legal completion, being the
date on which control passes to the buyer.
Rental income from properties leased out under operating leases
is recognised in the income statement on a straight-line basis over
the term of the lease. Costs of obtaining a lease and lease
incentives granted are recognised as an integral part of total
rental income and spread over the period from commencement of the
lease to the earliest termination date on a straight-line
basis.
Other income
Other income comprises income from agricultural land and other
miscellaneous income recognised on receipt.
Finance income and expenses
Finance income and expenses comprise interest payable on bank
loans and other borrowings. All borrowing costs are recognised in
the income statement using the effective interest rate method.
Interest income represents income on bank deposits using the
effective interest rate method.
Taxation
Income tax on the profit or loss for the year comprises current
and deferred tax. Income tax is recognised in the income statement
except to the extent that it relates to items recognised directly
in equity, in which case the charge / credit is recognised in
equity. Current tax is the expected tax payable on taxable income
for the current year, using tax rates enacted or substantively
enacted at the reporting date, adjusted for prior years under and
over provisions.
Deferred tax is 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.
The cost of investment property is recognised on legal
completion and includes the initial purchase price plus associated
professional fees and historically also includes borrowing costs
directly attributable to the acquisition. Subsequent expenditure on
investment properties is only capitalised to the extent that future
economic benefits will be realised.
Investment property is measured at fair value at each balance
sheet date. External independent professional valuations are
prepared at least once every three years. The fair values are based
on market values, being the estimated amount for which a property
could be exchanged on the date of valuation between a willing buyer
and a willing seller in an arms-length transaction after proper
marketing wherein the parties had each acted knowledgeably,
prudently and without compulsion.
Any gain or loss arising from a change in fair value is
recognised in the income statement.
Tangible assets
Tangible assets are stated at cost, less accumulated
depreciation and any provision for impairment. Depreciation is
provided on all tangible assets at varying rates calculated to
write off cost to the expected current residual value by equal
annual instalments over their estimated useful economic lives. The
principal rates employed are:
Fixtures and fittings - 33.3 per cent
Motor vehicles - 33.3 per cent
Other equipment - 20.0 per cent
Trading properties
Trading properties held for short term sale or with a view to
subsequent disposal are stated at the lower of cost or net
realisable value. Cost is calculated by reference to invoice price
plus directly attributable professional fees. Interest and other
finance costs on borrowings specific to a development are
capitalised through stock and work in progress and transferred to
cost of sales on disposal. Net realisable value is based on
estimated selling price less estimated cost of disposal.
Financial instruments
The Group had no hedge relationships at 1 July 2018, 30 June
2019 or 30 June 2020.
Financial assets
Investments
The Group's investments in equity instruments are measured
initially at fair value which is normally transaction price.
Subsequent to initial recognition investments which can be measured
reliably are measured at fair value with changes recognised in the
profit or loss. Other investments are measured at cost less
impairment in profit or loss. Dividend income is recognised when
the Group has the right to receive dividends either when the share
becomes ex dividend or the dividend has received shareholder
approval.
Current receivables
Trade and other receivables with no stated interest rate and
receivable within one year are recorded at transaction price
including transaction costs. Assessments for impairment are
performed at each reporting date and any losses are recognised in
the statement of comprehensive income. Impairment reviews take into
account changes in behaviours and the patterns of receipts from
tenants on a case by case basis.
Cash and cash equivalents
Cash includes cash in hand, deposits held at call (or with a
maturity of less than 3 months) with banks, and bank overdrafts.
Bank overdrafts that are repayable on demand and which form an
integral part of the Group's cash management are shown within
current liabilities on the balance sheet and included with cash and
cash equivalents for the purpose of the statement of cash
flows.
Financial liabilities
Current payables
Trade payables are non-interest-bearing and are initially
measured at fair value and thereafter at amortised cost.
Interest bearing loans and borrowings
Interest-bearing loans and bank overdrafts are initially carried
at fair value less allowable transactions costs and then at
amortised cost.
Changes in accounting policies
IFRS 16 "Leases" replaced IAS 17 and was effective for the Group
from 1 July 2019. It establishes principles for the recognition,
measurement and disclosure of leases. One impact is the requirement
for lessees to recognise "right of use assets" and corresponding
lease liabilities. The Group has no relationships where it is
lessee and so there was no impact as lessee from the adoption of
IFRS 16. IFRS 16 may also affect lessors whose tenants are affected
by its adoption.
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 2020 2019
GBP000 GBP000
Revenue comprises: -
Rental income 446 441
Sale of properties 90 440
536 881
======= =======
All revenue is derived from the United Kingdom
2020 2019
GBP000 GBP000
The operating profit is stated after charging:
-
Depreciation 5 5
Amounts received by auditors and their associates
in respect of:
- Audit of these financial statements (Group
and Company) 15 16
- Audit of financial statements of subsidiaries
pursuant to 8 8
legislation
======= =======
6 Employees and employee benefits 2020 2019
GBP000 GBP000
Employee remuneration
Wages and salaries 174 407
Social security costs 13 41
Other pension costs 29 32
_______ _______
216 480
====== ======
Other pension costs represent contributions to defined
contribution plans.
The average number of employees including executive directors
during the year was as follows:
No. No.
Management 2 2
Administration 3 3
Other 2 2
_______ _______
7 7
====== =======
2020 2019
Remuneration of directors GBP000 GBP000
Directors' emoluments 52 249
Company contributions to money purchase
pension schemes 25 25
====== ======
Director Salary and Benefits Pension 2020 2019
Fees Contributions Total Total
GBP000 GBP000 GBP000 GBP000 GBP000
I D Lowe - 6 - 6 116
M J Baynham 38 - 25 63 150
R J Pearson 8 - - 8 8
______ ______ ______ ______ ______
46 6 25 77 274
The Company does not operate a share option scheme or other
long-term incentive plan.
Key management personnel are the directors, as listed above. The
total remuneration of key management personnel, including social
security cost, in the year was GBP85,010 (2019: GBP305,319).
2020 2019
Retirement benefits are accruing to the following
number of
directors under:
Money purchase schemes 1 1
====== ======
7 Finance expenses
2020 2019
GBP000 GBP000
Finance expenses
Interest payable:
- Other loan interest 29 37
==== ====
8 Income tax
There was no current nor deferred tax charge in the current or
preceding year.
Reconciliation of effective
tax rate
2020 2019
GBP000 GBP000
Profit before tax 95 2,059
===== =====
Current tax at 19% (2019:
19%) 18 391
Effects of:
Expenses not deductible
for tax purposes (6) 13
Excess depreciation over (3) -
capital allowances
Losses carried forward 38 47
Revaluation of property
not taxable (47) (451)
______ ______
Total tax charge - -
===== =====
In the case of deferred tax in relation to investment property
revaluation surpluses, the base cost used is historical book cost
and includes allowances or deductions which may be available to
reduce the actual tax liability which would crystallise in the
event of a disposal of the asset (see note 20).
9 Earnings per share
Basic earnings per share is calculated by dividing the profit
attributable to ordinary shareholders by the weighted average
number of ordinary shares outstanding during the period as
follows:
2020 2019
GBP000 GBP000
Profit for financial period 95 2,059
====== ======
No. No.
Weighted average no. of shares:
for basic earnings per share and
for diluted
earnings per share 11,783,577 11,783,577
======== ========
Basic earnings per share 0.81 p 17.47 p
Diluted earnings per share 0.81 p 17.47 p
The diluted figure per share is the same as the basic figure
per share as there are no dilutive shares.
10 Investment properties
2020 2019
GBP000 GBP000
Valuation
At 1 July 17,470 15,095
Revaluation in year 250 2,375
________ ________
Valuation at 30 June 17,720 17,470
======== ========
The fair value of investment property at 30 June 2020 was
determined by the directors based on their knowledge of the market
and taking account of an independent valuation by Montagu Evans,
Chartered Surveyors and for one property, by Rettie & Co, a
firm of property specialists as at 30 June 2019. Both valuers have
appropriate recognised professional qualifications and recent
experience in the location and category of property being valued.
Neither external valuers are connected with the Group.
All valuations were prepared in accordance with the RICS
Valuation Global Standards July 2017, including the UK National
Supplement 2018, often referred to as the "Red Book" which is
consistent with the required IFRS 13 methodology. IFRS 13 defines
fair value as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between
market sector participants at the measurement date. The properties
were valued individually and not as part of a portfolio.
The 2020 valuations reflect changes in lettings and progress on
the potential sale of St Margaret's House, Edinburgh which is the
subject of a conditional agreement for sale for GBP11.5 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 2021 and beyond.
The historical cost of investment properties held at 30 June
2020 is GBP9,521,406 (2019: 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 (2019:
GBP451,000).
For most properties, valuation was based on vacant possession as
the properties were vacant or on short term leases and one used a
residual (development) appraisal rather than investment income in
order to achieve the highest and best use value. To obtain the
residual valuation the end development value is discounted by
profit for a developer and cost to build to reach the base
estimated market value of the investment. Only two properties were
valued using an appropriate yield with allowance for letting voids,
rent free periods and letting/holding costs for vacant
accommodation and early lease expiries/break options, together with
a deduction for purchaser's acquisition costs in accordance with
market practice. The resulting net yields have also been assessed
as a useful benchmark. Yields of 9.82% and 10% were applied
respectively.
Assuming all else stayed the same, a decrease in net rental
income or estimated future rent will result in a decrease in the
fair value whereas a decrease in the yield will result in an
increase in fair value. A decrease of 1% in the average yield would
result in an increase in valuation of GBP160,000 (2019:
GBP160,000). An increase of 1% in the yield would result in a
corresponding decrease in the fair value.
All the investment properties have been categorised as Level 2
in both years as defined by IFRS 13 Fair Value Measurement. Level 2
means that the valuation is based on inputs other than quoted
prices that are observable for the asset, either directly (i.e. as
prices) or indirectly (i.e. derived from prices).
The amount of unrealised gains or losses on investment
properties is charged to the income statement as the movement in
fair value of investment property. For the year to 30 June 2020
this was a fair value profit of GBP250,000 (2019: profit
GBP2,375,000). There were no realised gains or losses on the
disposal of investment properties in either the year ended 30 June
2020 or 2019.
The Group does not expect that Covid-19 will have a significant
impact on the value of its investment properties due to the nature
of the properties and that demand will be maintained from tenants
for small commercial properties and for quality housing.
11 Plant and equipment
Motor Fixtures Other
Vehicles and fittings equipment Total
GBP000 GBP000 GBP000 GBP000
Cost
At 30 June 2018 20 16 68 104
Additions in year - - 4 4
---------- -------------- ----------- --------
At 30 June 2019 20 16 72 108
---------- -------------- ----------- --------
Depreciation
At 30 June 2018 19 15 63 97
Charge for year - 1 4 5
At 30 June 2019 19 16 67 102
---------- -------------- ----------- --------
Net book value
At 30 June 2019 1 - 5 6
========== ============== =========== ========
Motor Fixtures Other
Vehicles and fittings equipment Total
GBP000 GBP000 GBP000 GBP000
Cost
At 30 June 2019 20 16 72 108
Disposals in year (8) - - (8)
Additions in year 9 - - 9
---------- -------------- ----------- --------
At 30 June 2020 21 16 72 109
---------- -------------- ----------- --------
Depreciation
At 30 June 2019 19 16 67 102
Disposals in year (8) - - (8)
Charge for year 3 - 2 5
At 30 June 2020 14 16 69 99
---------- -------------- ----------- --------
Net book value
At 30 June 2020 7 - 3 10
========== ============== =========== ========
12 Investments
2020 2019
GBP000 GBP000
Listed investments 1 1
====== ======
13 Trading properties
2020 2019
GBP000 GBP000
At start of year 12,398 11,650
Additions 690 991
Sold in year (82) (243)
_________ _________
At end of year 13,006 12,398
======== ========
Finance costs related to borrowings specifically for a
development are included in the cost of developments. At 30 June
2020 the total finance costs included in stock and work in progress
was GBP117,000 (2019: GBP58,000).
14 Trade and other receivables 2020 2019
GBP000 GBP000
Amounts falling due within one year
Other debtors 89 124
Prepayments and accrued income 33 27
_______ _______
122 151
====== ======
The Group's exposure to credit risks and impairment losses
relating to trade receivables is given in note 18.
15 Cash and cash equivalents 2020 2019
GBP000 GBP000
Cash 72 131
====== ======
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
2020 2019
GBP000 GBP000
Trade creditors 133 76
Other creditors including taxation 100 22
Accruals and deferred income 980 1,108
_______ _______
1,213 1,206
====== ======
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
2020 2019
GBP000 GBP000
Unsecured loan 360 360
Secured development loan 1,143 521
_______ _______
1,503 881
====== ======
Non-current liabilities
Unsecured loans 4,120 4,070
======= =======
Net debt reconciliation
2020 2019
GBP000 GBP000
Cash and cash equivalent 72 131
Liquid investments 1 1
Borrowings - repayable with
one year (1,503) (881)
Borrowings - repayable after
one year (4,120) (4,070)
Net debt (5,550) (4,819)
Cash and liquid investments 73 132
Gross debt - variable interest
rates (5,623) (4,951)
Net debt (5,550) (4,819)
Cash/bank Liquid investments Borrowing Borrowing
overdraft due within due after
1 year 1 year Total
GBP000 GBP000 GBP000 GBP000 GBP000
Net debt at 30
June 2018 451 1 (360) (4,070) (3,978)
Cashflows (320) - (521) - (841)
Net debt at 30
June 2019 131 1 (881) (4,070) (4,819)
Cashflows (59) - (622) (50) (731)
Net debt at 30
June 2020 72 1 (1,503) (4,120) (5,550)
=========== =================== ============ =========== ========
Terms and debt repayment schedule
Terms and conditions of outstanding loans were as follows:
2020 2019
Nominal interest Fair Carrying Fair Carrying
Currency rate value amount value amount
GBP000 GBP000 GBP000 GBP000
Unsecured loan GBP Base +3% 4,020 4,020 3,970 3,970
Unsecured development GBP Base +0.5% 360 360 360 360
loan
Unsecured loan GBP Base +3% 100 100 100 100
Secured bank
loan GBP Base + 5.1% 1,143 1,143 521 521
5,623 5,623 4,951 4,951
The unsecured loan of GBP4,020,000 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 waived
its right to the margin over base rate until 30 June 2020. The
margin will apply with effect from 1 July 2020.
The short-term unsecured development loan of GBP360,000 is
repayable after the disposal of Phase 2 of the Brunstane
development. Interest is charged at a margin of 0.5% over Bank of
Scotland base rate.
The unsecured loan of GBP99,999 is not repayable before 1 July
2021. Interest is charged at a margin of 3% over Bank of Scotland
base rate.
The bank loan is secured by a standard security over one of a
subsidiary's developments, by a floating charge over the assets of
that subsidiary and by a limited guarantee by Caledonian Trust PLC.
The loan is repayable from the proceeds of sale of completed
dwellings at the same development and has a termination date of 28
February 2021. Interest is charged at 5.1% over Bank of Scotland
base rate.
The weighted average interest rate of the floating rate
borrowings was 3.9% (2019: 3.5%). As set out above, a lender varied
its right to the margin of interest above base rate until 30 June
2020 and so the rate of interest charged in the year is 1.64%
(2019: 0.92%).
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:
2020 2019
Fair value Carrying Fair value Carrying
amount amount
GBP000 GBP000 GBP000 GBP000
Trade and other receivables 89 89 124 124
Cash and cash equivalents 72 72 131 131
------------- --------- ----------- ------------
161 161 255 255
------------- --------- ----------- ------------
Loans from related parties 4,480 4,480 4,430 4,430
Bank loan 1,143 1,143 521 521
Trade and other payables 1,196 1,196 1,188 1,188
------------- --------- ----------- ------------
6,819 6,819 6,139 6,139
------------- --------- ----------- ------------
Estimation of fair values
The following methods and assumptions were used to estimate
the fair values shown above:
Trade and other receivables/payables - the fair value of
receivables and payables with a remaining life of less than
one year is deemed to be the same as the book value.
Cash and cash equivalents - the fair value is deemed to
be the same as the carrying amount due to the short maturity
of these instruments.
Other loans - the fair value is calculated by discounting
the expected future cashflows at prevailing interest rates.
Overview of risks from its use of financial instruments
The Group has exposure to the following risks from its use
of financial instruments:
* credit risk
* liquidity risk
* market risk
The Board of Directors has overall responsibility for the
establishment and oversight of the Group's risk management
framework and oversees compliance with the Group's risk
management policies and procedures and reviews the adequacy
of the risk management framework in relation to the risks
faced by the Group.
The Board's policy is to maintain a strong capital base so as to
cover all liabilities and to maintain the business and to sustain
its development.
The Board of Directors also monitors the level of dividends to
ordinary shareholders.
For the purposes of the Group's capital management, capital
includes issued share capital and share premium account and all
other equity reserves attributable to the equity holders. There
were no changes in the Group's approach to capital management
during the year.
Neither the Company nor any of its subsidiaries are subject to
externally imposed capital requirements.
The Group's principal financial instruments comprise cash and
short term deposits. The main purpose of these financial
instruments is to finance the Group's operations.
As the Group operates wholly within the United Kingdom, there is
currently no exposure to currency risk.
The main risks arising from the Group's financial instruments
are interest rate risks and liquidity risks. The board reviews and
agrees policies for managing each of these risks, which are
summarised below:
Credit risk
Credit risk is the risk of financial loss to the Group if
a customer or counterparty to a financial instrument fails
to meet its contractual obligations and arises principally
from the Group's receivables from customers, cash held at
banks and its investments.
Trade receivables
The Group's exposure to credit risk is influenced mainly
by the individual characteristics of each tenant. The majority
of rental payments are received in advance which reduces
the Group's exposure to credit risk on trade receivables.
Other receivables
Other receivables consist of amounts due from tenants and
purchasers of investment property along with a balance due
from a company in which the Group holds a minority investment.
Investments
The Group does not actively trade in equity investments.
Bank facilities
One subsidiary has a bank facility to fund a specific development.
The facility amounts to GBP1,415,000 of which GBP1,143,000
had been drawn down at 30 June 2020 (2019: GBP521,000).
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
2020 2019
GBP000 GBP000
Investments 1 1
Other receivables 89 124
Cash and cash equivalents 72 131
________ ________
162 256
======= =======
The Group made an allowance for impairment on trade receivables
of GBP11,000 (2019: GBP10,000). As at 30 June 2020, trade
receivables of GBP52,000 (2019: GBP33,000) 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: 2020 2019
Number of days past due date GBP000 GBP000
Less than 30 days 18 15
Between 30 and 60 days 17 4
Between 60 and 90 days 2 -
Over 90 days 15 14
________ ________
52 33
======= =======
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 9 tenants (2019: 9 tenants).
One tenant accounts for 54% (2019: 53%) 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 2020 GBP'000 amount cash flows or less years
---------------------------
Unsecured loan 4,020 4,177 95 62 4,020
Unsecured development
loan 360 375 - 375 -
100
Unsecured loan 124 20 2 102
Secured bank loan 1,143 1,295 934 361 -
Trade and other payables 1,196 1,196 1,196 - -
-------- ----------- -------- ----------- ----------
Carrying Contractual 6 months 6-12 2-5
30 June 2019 GBP'000 amount cash flows or less months years
---------------------------
Unsecured loan
3,970 4,058 73 15 3,970
Unsecured development
loan 360 373 - 373 -
Unsecured loan 100 121 17 2 102
Secured bank loan 521 551 15 536 -
Trade and other payables 1,190 1,190 1,190 - -
-------- ----------- -------- ---------- ----------
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:
2020 2019
GBP000 GBP000
Unsecured loan - see note 17 4,020 3,970
Unsecured loan - Base +0.5% 360 360
Unsecured loan - Base +3% 100 100
Secured loan - Base +5.1% 1,143 521
======= =======
A 1% movement in interest rates would be expected to change
the Group's annual net interest charge by GBP56,230 (2019:
GBP49,150).
19 Operating leases
Leases as lessors
The Group leases out its investment properties under operating
leases. Operating leases are those in which substantially
all the risks and rewards of ownership are retained by the
lessor. Payments, including prepayments made under operating
leases (net of any incentives such as rent free periods)
are charged to the income statement on a straight line basis
over the period of the lease. The future minimum receipts
under non-cancellable operating leases are as follows:
2020 2019
GBP000 GBP000
Less than one year 204 257
Between one and five years 199 145
Greater than five years 137 147
_____ _____
540 549
===== =====
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 2020, the Group has a potential deferred tax asset of
GBP1,174,000 (2019: GBP1,017,000) of which GBP84,000 (2019:
GBP75,000) relates to differences between the carrying value of
investment properties and the tax base. In addition, the Group has
tax losses which would result in a deferred tax asset of
GBP1,090,000 (2019: GBP942,000). This has not been recognised due
to the uncertainty over the timing of future taxable profits.
Movement in unrecognised deferred tax asset
Balance Additions/ Balance Additions/ Balance
1 July (reductions) 30 June (reductions) 30 June
18 19 20
at 17% at 17% at 19%
GBP000 GBP000 GBP000 GBP000 GBP000
Investment
properties 34 41 75 9 84
Tax losses 909 33 942 148 1,090
_____ ______ _____ ______ _____
Total 943 74 1,017 157 1,174
_____ ______ _____ ______ _____
21 Issued share capital 30 June 2020 30 June 2019
No GBP000 No. GBP000
Authorised share capital
Ordinary shares of 20p
each 20,000,000 4,000 20,000,000 4,000
======== ======= ======== =======
Issued and
fully paid
Ordinary shares of 20p
each 11,783,577 2,357 11,783,577 2,357
======== ======= ======== =======
Holders of ordinary shares are entitled to dividends declared
from time to time, to one vote per ordinary share and a share of
any distribution of the Company's assets.
22 Capital and reserves
The capital redemption reserve arose in prior years on redemption
of share capital. The reserve is not distributable.
The share premium account is used to record the issue of
share capital above par value. This reserve is not distributable.
23 Ultimate controlling party
The ultimate controlling party is Mr I D Lowe.
24 Related parties
Transactions with key management personnel
Transactions with key management personnel consist of
compensation for services provided to the Company. Details are
given in note 6.
Lowe Dalkeith Farm, a business wholly owned by I D Lowe, used
land at one of the Group's investment properties as grazings for
its farming operation. Rent has been agreed and paid at GBP1,575
per annum (2019 : GBP1,575).
Other related party transactions
The parent company has a related party relationship with its
subsidiaries.
The Group and Company has an unsecured loan due to Leafrealm
Limited, a company of which I D Lowe is the controlling
shareholder. The balance due to this party at 30 June 2020 was
GBP4,020,000 (2019: GBP3,970,000) with interest payable at 3% over
Bank of Scotland base rate per annum. Leafrealm Limited varied its
right to the margin of interest over base rate until 30 June 2020.
The margin will apply with effect from 1 July 2020. Interest
charged in the year amounted to GBP22,069 (2019: GBP28,905).
The Group and Company also have an unsecured development loan
due to Leafrealm Limited, a company of which I D Lowe is the
controlling shareholder. The balance due to this party at 30 June
2020 was GBP360,000 (2019: GBP360,000) with interest payable at a
margin of 0.5% over base rate. Interest charged in the year
amounted to GBP3,806 (2019: GBP4,421).
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 2020 was GBP99,999 (2019:
GBP99,999) with interest payable at 3% over Bank of Scotland base
rate per annum. Interest charged in the year amounted to GBP3,564
(2019: GBP3,719). The loan is not due to be repaid before 1 July
2021.
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 I D Lowe. The value of the
work done by Leafrealm Land Limited charged in the accounts for the
year to 30 June 2020 amounts to GBP2,333 (2019: GBP26,875) 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 2020 was GBP91,638 (2019: GBP59,488).
For a full listing of investments and subsidiary undertakings
please see note 7 of the parent Company financial statements.
25 Post balance sheet event
On 15 December 2020, the Company entered into an agreement to
sell the entire Ardpatrick Estate for cash consideration of GBP2.70
million. The carrying value of the property at 30 June 2020 is
GBP2.99 million attributable partly to investment property and
partly to trading properties. The sale price reflects the decision
to sell the properties comprising the Estate as a single asset. The
transaction is expected to complete on 24 March 2021.
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