TIDMCNN
RNS Number : 5156X
Caledonian Trust PLC
20 December 2023
Information contained within this announcement is deemed by the
Company to constitute inside information as stipulated under the
Market Abuse Regulations (EU) No. 596/2014 ("MAR") which forms part
of Domestic UK Law pursuant to the European Union (Withdrawal) Act
2018.
20 December 2023
Caledonian Trust plc
(the "Company" or the "Group")
Audited Results for the year ended 30 June 2023
Caledonian Trust plc, the Edinburgh-based property investment
holding and development company, announces its audited results for
the year ended 30 June 2023.
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
Daniel Dearden-Williams
CHAIRMAN'S STATEMENT
Introduction
The Group made a pre-tax profit of GBP718,000 in the year to 30
June 2023 compared with a loss before tax of GBP1,302,000 last
year. The earnings per share was 6.09p and the NAV per share at 30
June 2023 was 203.4p compared with a loss per share of 11.05p and
NAV per share of 197.3p last year. The net valuation gain in the
year was GBP480,000 compared to a net valuation loss in the
previous year of GBP500,000.
Income from rent and service charges increased to GBP 373,000
from GBP306,000 in 2022. Property sales in the year were
GBP2,665,000 whereas there were none in the previous year.
Administrative expenses were GBP626,000 (2022: GBP887,000), the
decrease being attributable to the non-recurring purchase of
intellectual property to enhance the value of the potential
development of St. Margaret's House for GBP363,000. Interest
payable was GBP251,000 (2022: GBP139,000), reflecting the increases
in base rate during the year.
Review of Activities
The Group's property investment business continues unchanged,
except that the public house in Alloa, the last of the four
originally refurbished in the late 1990s, is currently under
offer.
In my statement accompanying our interim results issued on 30
March 2023 I reported that we had selected a preferred bidder from
unsolicited non-binding proposals from three separate parties for
our largest investment property, St. Margaret's House, Meadowbank,
Edinburgh, but unfortunately, and for differing reasons, this has
not led to an agreement to sell, as detailed in the Company's
announcement released on 11 October 2023.
St Margaret's House, continues to be fully let at a nominal rent
GBP1.50 per ft(2) of lettable space (excluding VAT), to a charity,
Edinburgh Palette, which has reconfigured and sub-let all the space
to over 200 artists, artisans, entrepreneurs and galleries. The
exceptional value ensures St Margaret's continues to have a waiting
list.
We have gained and, subsequently, endured the planning
permission for a development of 377 student bedrooms and 107
residential flats and recently secured a non-material variation of
the consent to increase the number of studio rooms in the student
block from 73 to 277 while reducing the cluster bedrooms from 304
to 84. Consequently, we continue to receive unsolicited interest in
St. Margaret's from a broad spectrum of parties. We have retained
Montagu Evans to advise on the sale of St Margaret's House for
which we plan to launch a marketing campaign in Spring 2024
provided market conditions are propitious.
At Brunstane, in East Edinburgh, in September 2022 we completed
the construction of the third phase of its development, the
Steading Courtyard, comprising five new build stone faced houses
over 8,650ft(2) . We sold three of the houses in October and
November 2022 for an aggregate GBP2.0m and a fourth in March 2023
for GBP0.7m. The final house was sold in August 2023 for GBP0.66m.
The application for 10 new houses (c.20,000ft(2) ) "Upper
Brunstane", in the field to the east of the steading was granted in
November 2022 - we intend to prepare the site for development, take
up the planning consent and secure the requisite building warrant
with a view to undertaking the development as soon as market
conditions improve. An application to modify the consent for a very
large house (3,500ft(2) ), "Plot 10", lying between the Steading
phase and Upper Brunstane, by replacing the existing permission
with two smaller houses of a combined similar size, was
unsuccessful.
At Wallyford, East Lothian, we are currently finalising several
minor but important variations to the planning consent for six
detached houses and four semi-detached houses totalling over
13,350ft(2) . We obtained detailed tender prices last September,
but delayed construction in light of the current and prospective
market conditions. The site lies within 400m of the East Coast
mainline station, is near the A1/A720 City Bypass junction and is
contiguous with a large completed development of houses. To the
south of Wallyford another very large development of new houses is
being built at St Clement's Wells on ground rising to the south,
affording extensive views over the Forth estuary to Fife. Taylor
Wimpey, Barratt, Cruden Homes and Ambassador Homes are currently
building at Wallyford, but recent sales volumes have declined and
incentives are often offered. Nearby, Dandara have delayed a site
start on their site of 87 homes. Wallyford, no longer a mining
village, is rapidly becoming another leafy commuting Edinburgh
suburb on the fertile East Lothian coastal strip.
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. We have endured planning consents on all
of those sites where planning consent has been granted, most
recently at Larennie Farm, Peat Inn near St. Andrews. No further
development work has been undertaken at these sites as there are
more attractive immediate opportunities for the Group in and around
Edinburgh.
Economic Prospects
"Cold Turkey", colourfully describes the UK's present economic
condition and prospects. Since the Global Financial Recession
("GFC"), the UK has benefited from negative Real Interest Rates
(NIESR, p14), a very powerful drug. The very high doses of the
monetary opioid administered by the Monetary Policy Committee
("MPC"), very successfully blurred the pain of the serious economic
damage caused by Covid and, post Covid, its supply consequences,
Brexit, and the economic effects of the Ukraine war. This
"Monetary" opioid was administered in increasing "doses" of lower
interest rates and was supplemented by Quantitative Easing ("QE"),
the equivalent of adrenaline injections. Opioids trigger the
brain's release of endorphins, the feelgood neurotransmitter,
substituting for their natural production, creating dependency. The
surge of artificial endorphin "highs" ends abruptly whenever the
artificial opioid stimulus is withdrawn when it is only very slowly
replaced by natural endorphin. The Bank of England ("the Bank") has
abruptly withdrawn its artificial low interest endorphin and the
economy is enduring the unavoidable transition.
The natural economic functioning of the economy was jeopardised
by the many serious economic constraints experienced during and
since the Covid pandemic. To supplement the economy's natural
functioning the Bank reduced interest rates to 1/2 %, the maximum
reduction below which further reductions are ineffective, and
maintained them at unnaturally low rates for an extended period
while using QE to flood the economy with yet more stimulant. The
economy's natural economic function became replaced by, and
temporarily reliant on, such artificial stimuli. But the economic
"patient", unlike the human patient, has restarted its innate
production of economic stimulus while still receiving the
artificial MPC stimulus: the MPC overprescribed.
Indeed, the House of Lords Economic Affairs Committee has just
reported that, due to an overreliance on inadequate forecasting,
the Bank erred in the conduct of monetary policy by delaying too
long before starting to put up interest rates. The outcome of this
prolonged over stimulus has been to exacerbate, unnecessarily, all
the non-monetary inflation factors, such as supply shortages
induced by economic dislocation, wars, weather and by the oil
cartel.
Thus, the UK's economy's incipient recovery, reinforced by
massive continuing monetary stimulus, has increased demand without
increasing supply. Aggregate demand from 1998 to 2020/21 (omitting
the "Covid years") was below aggregate supply (1 3/4 %), but in
2022 demand was in excess of supply by 1 1/4 % and is forecast to
continue to be in excess of supply by 1/2 % in 2023 (an increase
from the 1/4 % forecast in the May report).
Unfortunately, the inflation resulting from this demand / supply
imbalance has been supplemented and overshadowed by external demand
/ supply commodity imbalances, chiefly "food" and electricity and
gas resulting from the Ukraine war. CPI inflation peaked at 11.1%
in October 2022 but had fallen to 4.6% by November 2023 primarily
as these commodities fell in price. By November about 80% of
inflation was in services and in other goods - the UK's inflation
is currently endemic and exogenous factors are not expected to
contribute to inflation in 2024 to 2026.
The Bank says: - "The UK economy has been in excess demand over
recent quarters, but an increasing degree of economic slack is
expected to emerge after the middle of next year". The Bank
forecasts excess supply to return from 2024 but only of a 1/4 %, a
reduced forecast from the 1/2 % in the May report. Patently, the
Bank Rate does not of itself influence the aggregate balance
between aggregate supply and demand, but acts through its effect on
economic output. Unless the economy is depressed, the Bank Rate has
little influence on supply, which depends primarily on productivity
in which the Bank expects no change in the years 2023 and 2024. The
Bank's indirect influence on the economy is determined almost
wholly by its influence on demand. There is a lag between changes
in the Bank Rate and changes in demand: there is a high and
unquantifiable inertia in the course of the economy.
The course of an ocean racing yacht responds almost
instantaneously to instructions to change, but a 250,000 tonne
tanker only very slowly. Similarly, if the economy's course has to
be changed a touch on the economic "tiller" produces no immediate
results, no discernible results at all, even by the time the next
tiller adjustment is due in a month's time, when, apparently,
nothing has happened: another touch is required... and so on!
Since, and including, December 2021, 23 months ago, the Bank has
raised interest rates 14 times, 14 touches of the tiller, including
a sharper movement of 0.50 percentage points as recently as June
2023. Given the tanker's slow response, had the adjustments before
the last touches already been sufficient to bring the tanker about
or is even further adjustment needed to gain the desired
course?
The response rate of the economy to changes in the Bank Rate,
like the tanker's, is both slow and uncertain, depending on
specific conditions that vary independently. To adjust policy
appropriately the MPC has to determine the specific rate of change
relevant - the "transmission rate" - to the economy. Differing
opinions on which are inherently expressed by the voting pattern of
the MPC members: in August 2023 six members voted to increase the
Bank Rate to 5.25%; two preferred to increase the Bank Rate by 0.5
percentage points to 5.5%; and one member preferred to maintain the
Bank Rate at 5%!
Imbalances between aggregate supply and demand are rebalanced by
increasing supply or reducing demand, or both. However, the supply
response is extremely slow, requiring an increase in productivity,
a variable which has recently changed only very slowly and for
which there is no known mechanism of change. In contrast demand can
be varied much more rapidly by changing fiscal policy ("tax") or by
changing monetary policy ("interest rates"), the latter being the
preferred mechanism instigated when the MPC was created. Interest
rates do not directly influence demand and the rate of their
influence depends on the rate of transmission - the loosely termed
"pass through rate".
The delayed effect of interest rate rises on demand is stark.
The Bank Rate has been increased from 0.1% to 5.25% in 21 months,
but the economy still suffers from an almost unchanged excess
demand of 0.25%. The transmission rate to the economy is a variable
incorporated into one of the Bank's economic forecasting models,
but the current transmission rate is subject to current economic,
social and political conditions which almost certainly vary
considerably from those on which the model was based. Swati
Dhingra, a MPC member, considers that only "20-25% of tightening
has hit home so far", the Bank Minutes record "For one member, the
risks of overtightening policy had continued to build. Lags in the
effects of monetary policy meant that sizeable impacts from past
rate increases were still to come through". This opinion is that
the rate at which the economic tanker will respond has been
misinterpreted to the extent that more than sufficient adjustment
may already have been made and the correction may prove to have
been overdone.
External shocks such as food or fuel price increases directly
and immediately affect inflation, but monetary policy has an
indirect and delayed effect. It is as if the financial Guy Fawkes,
plotting in unprecedented circumstances, having set the fuse alight
with no quick response adds more and more gunpowder without knowing
the timing or the extent of the subsequent explosions. The unusual
circumstances of the current position include: starting from the
GFC 13 years of negative real interest rates (excluding seven
months only with a real rate of 0.75%), 36 months with interest
rates at 0.50% or lower; unprecedented QE resulting in an effective
bank rate, designated as "a Shadow rate" of -2% to -6% for several
years; and exogenous shocks, including the pandemic and the Ukraine
War. Additionally, the rate of rise of the Bank Rate is
unprecedented in the last 50 years. As the current economic
position is so very materially different from previous conditions,
the forecast outcome of the speed of transmission is subject to a
wide range of equally likely interpretations - in "Bankspeak" the
fan chart of likely outcomes would be very wide.
A model quoted by the Bank shows that between 1992 and 2019
(i.e. mostly before the recent 10 years of low interest rates) a 1%
change in Base Rate is expected to have an immediate beneficial
effect on CPI - due to a Sterling appreciation - of 0.3 percentage
points which moderates after 12 months and subsequently falls off.
Currently, any immediate effect on CPI is likely to have been
minimal, as increases in interest rates are a worldwide phenomenon
and any Sterling appreciation from increased interest rates,
reducing import costs, is very much reduced. Significantly, the
model's estimate of a 1 percentage point interest rate change on
GDP is that "Real GDP" barely moves on impact (i.e. coincident with
the 1 percentage point rise in rates), and slowly falls with a
statistically significant maximum fall of 1.25% after around two
years - an outcome consistent with the 18-24 months of the "long
and variable lags story", i.e. there is a "low transmission
rate".
The extent of such lagged responses is subject to the important
qualification that tightening from a loose stance has less effect
on inflation than tightening from a tight stance. Thus, early
increases in the Bank Rate up to, say, 3% only a year ago in
November 2022 are likely to have a more limited effect than the
subsequent increases to 5.25%. Surely this reflects practical
reality: an increased interest cost reducing income from GBP4 to
GBP3, although a 25% drop, is less unpleasant than after a
subsequent increase reducing income to only GBP2, a 33% drop,
leaving a foreboding that a further similar increase would reduce
income by 50%: increasing rates have increased affects.
Thus, early increases in the Bank Rate will have had
disproportionately little effect. Increases in the Bank Rate before
May 2022 (Bank Rate 1.00%) are only now approaching maximum GDP
influence: all rises before, say, November 2022, i.e. from loose
conditions will have less than "normal" effects; and the 2.25
percentage points increase since November 2022 will only start to
have a maximum effect from mid-2024. The slow burning fuse is yet
to reach a series of economic time bombs. The delayed effect of
tightening has probably influenced the MPC who voted 5 - 3 to hold
rates steady. Indeed, Swati Dhingra, whom the FT describes as "one
of the most dovish members of the MPC", has argued that "just 20 -
25 per cent of the tightening has hit home so far."
Changes in economic circumstances are often sudden: the cause of
such sudden change is almost invariably unrecognised, as, if
recognised, it would have had influence, changed expectations, and
be discounted, at least in part. With unexpected and therefore
undiscounted changes, there are precipitate tipping points, most
dramatically illustrated when Lehman Brothers collapsed initiating
the Global Financial Crisis. Ernest Hemingway's character in the
"Sun Also Rises", eloquently illustrates such abrupt changes, being
asked: "How did you go bankrupt?" Two ways, he replied, "gradually,
then suddenly".
There is a discernible risk that the current expected direction
of monetary policy will lead to a moderate recession. The Bank
argues that there will be no peak, but a "Table Mountain" of
maintained high interest rates at or about the current level, that
the economy will grow 0.5% in 2023, nil in 2024, 0.25% in 2025 and
0.75% in 2026 - effectively "flat lining", giving a period of
economic consolidation before returning to an historically low
growth pattern, an attractive "Goldilocks" or "soft landing"
prospect.
A Bank report says "empirical estimates of the effects of
monetary policy on macroeconomic aggregates are strictly speaking",
only if, "we believe that the structure of the economy has not
changed in any way that would invalidate our estimates." In many
important respects the economic background and conditions have
changed and may preclude so smooth a transition. The rate of rise
in the Bank Rate has been dramatic; it has risen from very low
nominal levels; it has risen from negative real levels; the QE is
unprecedented; rises in the Bank Rate from a low base have a lower
transmission rate; the effect of rises to 2.25% in November 2022
are not yet at their maximum effect; later rises are up almost two
years from their maximum effect; and the marginal effect of each
successive rise is likely to have a greater impact than the
previous marginal effects. These conditions slowing transmission
did not apply in the Bank's sample period of 1992 - 2019 therefore
the current transmission rate is lower - there is a longer lag in
the effects of the interest rate rises.
In 1978 only variable rate mortgages were available and, as
recently as 2004 75% were variable, but by 2021 74% were fixed
term, 37% originally for two years. Currently 80% of mortgages are
fixed with a longer average term. Consequently, for the vast
majority of mortgagors, changes in the Bank Rate have no short-term
effect, blunting and delaying the impact of Bank Rate rises. The FT
put it "monetary policy transmission consisted of subjecting large
numbers of indebted households to small and concentrated amounts of
financial stress, changed to one in which a small number of
indebted households are unnecessarily subjected to large amounts of
financial stress". Indeed: on an interest only fixed term
GBP200,000 mortgage at 2% the interest paid of GBP4,000 per year
changes at, say, 6% to GBP12,000. If joint earnings before tax are
GBP40,000, say GBP34,000 after tax and NI and pensions the
increased interest equals almost an additional quarter of
"post-tax" income! Over the next year over 1,600,000 owner-occupied
fixed rate mortgages will expire - a delayed effect of the
increased interest rates.
A second factor delaying transmissions are the high savings
generated during the Covid period, although this is being rapidly
depleted. High savings from the high rates currently available are
supporting expenditure, but such savings will soon be overwhelmed
by the high rates paid on remortgaging. Moreover, the influence of
such savings is greatly diminished by the differing average
marginal propensities to spend in savers and mortgagors. Savers,
broadly wealthier consumers, spend a smaller proportion of their
increased savings while mortgagors' consumption is greatly affected
by their interest costs. The current savings effect on transmission
is diminishing rapidly.
The third factor currently delaying transmission is consumers'
delayed recognition of the deterioration of their wealth. The shock
of lower assets and relatively higher debt tilts consumers' balance
from spending towards saving and paying down debt: psychologically,
being "poorer" - and loss aversion is a much stronger behavioural
characteristic than gain aspiration - reduces consumption, even if
the losses are not realised. Such balance sheet losses become stark
when house prices fall, as they are doing, and the recent very high
inflation lightly veils the real loss of house value by about 10%.
In 2024 further real house price falls of over 5% are forecast,
reducing real wealth and consequently spending.
Total consumer assets comprise property, physical assets (cars
etc.), pensions and insurances, and financial assets. While
property comprised about 36% of consumer assets in 2020 pensions
and "insurances" comprised an amazing 42%. Since the December 2021
peak, about 17% of a typical pension fund has recently been wiped
out, or about 30% in real terms. In due course, such large losses
in wealth are likely to cause apprehension, lower confidence and
reduce consumption causing an even longer lag to the transmission
process than falls in house price.
Business (non-financial corporations) are unlikely to contribute
to any increased lag in the transmission of monetary tightening.
80% of business loans, unlike consumer mortgages, continue on
floating rates and are almost immediately affected by the Bank
rate. Over the last year corporation interest on loans has
increased from GBP1200m to GBP2800m partially offset by a rise in
savings interest of about GBP900m. The consumer change in interest
cost was wholly offset by interest gained, a short position, but
one delaying the effect of the rate change.
In November 2023 the Bank considered a "restrictive monetary
stance was likely to be warranted for an extended period of time",
reinforcing previous statements that rates will be "higher for
longer", and will resemble the "Table Mountain (a plateau) rather
than the Matterhorn" (a sharp peak). This does not fully allow for
the effect on the economy of the exceptional rate of tightening
which, due to a slower rate than expected of transmission, has not
yet had the effect expected, leading the Bank in recent decisions
to raise rates to beyond the levels required once their full
effects have been transmitted to reduce inflation appropriately.
Concluding my opening analogy, the tanker was already set to change
course as desired, without needing yet further alterations to the
tiller.
Thus, the Bank may already have overdone the necessary
tightening - undoubtedly, they were "behind the time" in starting
the tightening and may have over compensated. Indeed, the Institute
of Economic Affairs recommended in November that the Bank Rate be
reduced to 5.0%, Goldman Sachs forecast that rates would start to
be cut from mid-2024 and, reflecting such a lowering of rates, the
five-year swaps price has fallen from 5.1% in August to 4.5% in
November.
The Bank Rate next year will depend on the delayed quickening
effect of the severe monetary tightening on an economy that has
already stalled, following a contraction of 0.3% in October showing
no growth in the last quarter and only a measly 0.2% in the second
quarter. Severe industrial stress is already evident and an FT
leader says "waves of corporate insolvencies are expected". It
comments that prolonged interest rates have addicted many "Zombie"
businesses, including 10% of listed global companies. The UK, given
its poor economic performance, is unlikely to be an exception and
its smaller companies, often more dependent on debt, are likely to
be more than proportionally affected. The low interest drug has
been withdrawn and many such businesses will not survive the "cold
turkey" trauma. The increase in stress in the consumer sector may
be even more acute as increasing numbers of mortgages will have had
to been refinanced at much higher rates.
Forward economic indicators indicate deteriorating conditions.
The Purchasing Managers' Index remains at 48.5, a level
historically consistent with contraction, business optimism
recently weakened and sharp falls occurred in the growth
expectations of both manufacturing and services sectors, together
comprising over three quarters of economic output. Consumer
confidence has also deteriorated, rapidly falling nine points to
minus 30 in October. Most forecasters consider these gloomy
expectations only presage a stagnant economy, but Capital Economic
forecasts a recession starting later this year and Deutsche Bank,
having analysed the historic economic precursors to a recession,
concludes the UK economy currently satisfies them: a 2.5 percentage
point increase in interest costs; inflation rising by 3 percentage
points; and an inverted yield curve. A recession occurred over 30%
of the time any one of these conditions were met. Melding all three
factors together makes a recession very much more likely, although
patently they are not additive!
The average of the recent forecasts reported by His Majesty's
Treasury imply that, contrary to historic patterns, the progress of
taming inflation will be relatively painless and those forecasts
reported by HMT in the last three months expect 2.5% growth in
2024. They forecast that, notwithstanding the Bank Rate averaging
4.7% in Q4 2024, unemployment will only be 4.7% (sic!). In effect
the economy will have a "soft landing" giving a near painless
adjustment to low inflation: surely, so benign a change is
unrealistic! The purpose and the effect of high interest rates is
to reduce demand to the extent that existing supply, which is
unlikely to be augmented by any growth, equals demand. In previous
corrections the consequent decrease in demand has induced
recessions in which unemployment increased by 50% which will imply
an increase soon in unemployment to about 6.0% or more, from the
current 4.2% - a rise far in excess of the HMT's recently reported
forecast of 4.7%.
The "soft landing" widely forecast represents an optimal outcome
to the current inflationary binge. Moreover, such an outcome is
both contrary to precedent and to the specific circumstances. In
particular, the effect of the unprecedented rate of increase from
an unprecedented low interest rate of 0.1/0.25% for an
unprecedented time (the lowest rate since 1650) coupled with the
unprecedented delay of the rate of transmission, indicates that
economic conditions will prove much less benign than most
forecasts. In consequence it is to be hoped that, as this outcome
becomes apparent, the MPC will not, as in previous changes, misread
the direction of the economy, but will reduce the Bank Rate rapidly
in order to staunch the prospective accelerating deterioration in
the economy. I am pessimistic for the economy, but optimistic that
the Bank's economic model will be modified consequent upon the
House of Lords report, and their forecasting improved, so
transforming their management of the economy.
I forecast that there will be a more rapid and deeper
contraction of the economy than is currently expected with the
consequent surge in business collapses, losses of employment and
falling income and return on capital. Once this trend is
recognised, sooner rather than later, one hopes the Bank Rate will
be reduced sufficiently, sharply and quickly, mitigating the worst
effects of the past tightening. Due to the current longer delays in
transmission, recovery will occur, but unfortunately more slowly
than seen historically. However, the reversal of interest rate
rises and the expectation of further faster reductions will have a
rapid effect on longer term interest rates. Yields on all assets
will fall relatively quickly and the value of bonds, equities, long
term assets and property will rise. I expect this rapid yield
reversal to occur from late 2024 and interest rates will fall in
early 2025 to between three and three and a half percent, a real
interest rate of one to one and a half percent. The immediate
economic prospects are poorer than generally forecast, but
thereafter prospects will prove better than currently forecast.
Property Prospects
The economic prospects provide an unfavourable background for
property. Little economic growth is expected, the Bank forecasting
none in 2024, a feeble 0.25% by Q4 2025, and only 0.75% in 2026.
The per capita NIESR Gross National Product forecasts are -0.2% in
2024, 0.2% in 2025 and 0.8% in 2026. However, for house prices the
forecast fall in interest rates by mid-2024 will radically change
sentiment and improve their prospects.
The extensive, dramatic and rapid change in monetary policy has
increased interest rates and reduced credit availability, the
solvency ratio of loans, and the margin between the return on
property and other investment classes. In consequence the demand
for both investment and residential property is falling and, as the
full effects of the change are transmitted, will fall further.
The interest rate rises are increasing financial distress in
both business and residential property owners and causing an
increasing supply of property. Simultaneously, lower business
profitability margins and lower consumer incomes are reducing
demand for both business premises and residential premises,
reducing rents for business premises, and values for almost all
property types.
These adverse monetary effects are being reinforced by a tighter
fiscal policy, primarily caused by the fiscal drag caused of not
indexing most personal tax allowances.
Interest rates were reduced from December 2007 to mitigate the
effects of the GFC and from then until November 2023 (when
inflation fell to 4.60%) real interest rates - actual interest
rates less CPI inflation - have been negative. Low interest rates
were maintained post Covid for much longer than required to support
the economy, reinforcing the exogenous inflation resulting from
supply shortages caused by the Ukraine War. These shortages coupled
with "green" fossil fuel supply restrictions allowed the renewed
exploitation by the OPEC+ oligopoly of oil and gas suppliers,
transferring considerable wealth from the consuming economies to
the supplying economies. Productivity growth for the twenty years
before the GFC of 2008 was 2 1/4 %, but fell to only 1/2 % between
2010 - 2019, except a brief improvement to 3/4 % post Covid in 2022
before becoming negative in 2023, severely reducing economic growth
in the years prior to the exogenous shocks imposed by Covid 19 and
the Ukraine War period.
The monetary policy response was an effective support for the
economy, but it caused a disproportionate benefit by temporarily
raising the value of all asset classes and by increasing the
incomes of the minority involved in all aspects of asset handling,
managing and transferring these assets. The returns to capital have
been extraordinarily high and the returns to labour very low, a
disequilibrium contributing to the high levels of service inflation
and dislocation of the economy by strikes.
The effect on the commercial property sector has become
increasingly evident. Until August 2022 the MSCI Index had returned
18.0% over one year and 9.1% per year over 10 years. In September
2023 the MSCI Property Index total returns for one year were
-13.8%, which after rental income of, say e.g. 5% per annum,
represents a capital fall of 17.9%. These returns are the worst
since the GFC in 2008 when the total return to All Property was
-22.10% which, after including the reported income of 5.58%
represented a fall in capital value of (100-22.10) x 100/105.58 or
26.2%.
The November 2023 CBRE reports on the investment yields of 22
separate classes and sub-classes of Office, Industrial and Retail
commercial property, 15 of leisure and 21 separate classes and
sub-classes of "bed" investment [residential] property of which
they described all 58 categories as "trending weaker", or falling
in value except for High Street Shops (except Secondary Shops) and
all 5 categories of student accommodation, a similar trend to that
previously shown in October 2023 except that in October all five
classes of Industrial were classified as "stable". Since December
2022, commercial property yields have increased generally except
for Supermarkets, Secondary Retail Warehouses and Shops (the latter
two are already at 12% to 16%), Hotels, Residential outside London
and Student Accommodation.
Changes in capital value vary significantly within and among
classes and sub-classes. In the classes of investment "housing"
only half of the sub-classes have declined in value, and generally
by only 0.25 percentage points while the remainder are stable.
Larger falls of up to 0.50 percentage points occurred in
Residential investments in London and South East prime properties
(yields rising from 3.5% to 4.0% in London Prime) representing a
fall in value of 12 1/2 %. In contrast, only one sub-class of
Student Accommodation, Central London Direct Let, has fallen in
value while all other five sub-classes are unchanged since 2022. Of
this sub-class CBRE comment: "Sentiment remains positive for best
in class "clear and green" properties with strong rental growth
prospects ..."
In the four Retail classes, High Street Shops, Supermarkets,
Shopping Centres and Retail Warehouses yields are higher by 0.25 to
0.50 percentage points, except for Prime Supermarkets, but
"secondary" retail sub-classes are unchanged, having already high
yields of 12% for Secondary Shops and Secondary Shopping Centres
and 16% for Secondary Shopping Centres. These high yields are
unchanged since 2021.
In the Industrial and Office classes all sub-classes fell in
value over the last year, Industrials by up to 0.5 percentage
points. The falls in office values were marked with all
sub-classes, except West End, falling last month, notably the City
of London where yields rose 1.25 percentage points to 5.75%, a fall
of 21.7% in value.
The Investment Property Forum ("IPF") surveys forecasts of
return for Office, Industrial and Retail properties whose findings
are consistent with the continuing fall in Capital Values reported
by CBRE. Their November 2023 survey forecast that in 2023 all their
property classes would suffer capital losses and overall "All
Property" will fall by 5.1%. City Offices will have the greatest
fall of 11.8%, All Offices 10.5%, but West End Offices a lower
6.1%. The Retail sector continues its long fall in value with
Standard Retail down 5.0%, Shopping Centres 5.4% and Retail
Warehouse by a lesser 1.9%. Industrial Capital Values are expected
to fall least - by "only" 1.5%.
In 2023 rental values are estimated to increase by only 2.2%
(but decrease in real value!). Values are estimated to fall for
Shopping Centres and City Offices, but to be minimal for all
sectors except Industrial which is expected to rise by 5.1%. In
2023 the total return to All Property is estimated to be -0.5%,
after including rents received. The overall forecast for 2024 is
better, but not good, as Offices continue to fall in value, City
Offices by a further 2.7% (11.8% in 2023), Offices generally by
1.8% (10.5% in 2023) and West End Offices by 0.5% (gain of 1.5% in
2024). Only Industrials are forecast to gain appreciably by
3.1%.
The forecast for 2025 is noticeably better than that for 2024
forecasting a total return of 7.5%, resulting from both rental and
capital value growth in all sectors. Industrials again have both
the highest growth in rental value (2.7%) and capital value (3.8%).
Forecasts for 2026 and 2027 are similar to 2025, and include a
recovery in retail returns of about 5.0%, while Industrials
continue to produce the highest returns at 8.0%.
Forecasts by Colliers, but covering a slightly wider range of
sectors, are broadly similar to the IPF except that their forecast
returns are generally higher with average total return of about
7.0% pa (IPF 5.6%) for the five years 2023 to 2027. Industrials
return 10.1% (IPF 6.9%), Shopping Centres 8.3% (IPF 5.9%), City
Offices 4.3% (IPF 2.6%) and West End Offices 4.8% (IPF 2.6%). The
other sectors are not comparable with IPF sectors.
The immediate prospects for property vary greatly between
sectors, being best for Industrials and worst for Offices,
particularly "City" offices. Retail Warehouses and Shopping Centres
returns are about 25% lower than the best sector, Industrials, but
Standard Retail returns are only about 25% better than the worst
sector, "Offices".
The prospective poor returns from most commercial property
result from three separate factors. The current inflation is caused
by excessive demand - the exogenous inflation caused by the Ukraine
War and fuel and food shortages now dropping off the index - and is
being controlled by severe monetary tightening that will reduce
that demand, contracting the economy and demand for almost all
types of property.
The second factor influencing the poor returns is exceptional.
Since the start of the Great Recession in 2008, interest rates have
been held at abnormally low levels by aggressive monetary policies
resulting in negative real interest rates - except very briefly in
2015. Capital asset values, including all commercial property,
reflecting the very low cost of capital, have risen in value.
However, the recent atypical period of unnaturally low interest
rates has ended abruptly, and is contributing to a significant fall
to investment property values.
The third factor affecting property capital values is secular
change, whose nature is specific to each sector where,
unfortunately, there are deleterious secular changes in the two
predominant commercial sectors: office and retail. In contrast, the
much smaller industrial sector, including logistics and
distribution, has benefited from the change in distribution systems
required by "online" selling. The resurging industrial sector is
currently recovering from a temporary set-back in 2022 when
overdevelopment temporarily caused rental growth to fall from an
estimated 10% to 3% and capital values to fall by 10%.
The secular change affecting demand for office space is caused
by "hybrid" working, or working from home. A recent survey
concluded that the long-term reduction in space needed would be
between 20% and 40%. Of this change in working practice The
Economist (World Ahead 2024) says:
"the consequences are still working their way through the
corporate hierarchy and the financial system: in 2024 reality will
start to set in".
This new reality, termed "home, and not alone" is that currently
33% of work done outside the office and employees "desire" 47%. Out
of 34 major economies surveyed the extent of home working in the UK
was only exceeded by Canada. In all the countries surveyed,
employees expressed a desire to increase the work from home by
about a day to a day and a half.
An initial analysis carried out by Harvard academics in 2021
concluded that call centre workers handled 8% more calls working
from home, a finding subsequently revised to 4% fewer.
Surprisingly, they found even "solitary" workers perform less well
remotely and "Cerebral" workers were also adversely affected, as a
survey of 214,810 moves by professional chess masters playing under
differing conditions demonstrated. Unsurprisingly, a study showed
that creativity also suffers in "remote" working. In this case the
researchers suggested that focus on the screen deprived
participants of wider stimuli, resulting in less "associative
thinking". There are self-evident exceptions to reduction in
productivity resulting from working from home, where, for instance,
routine, unchanging measurable output tasks can be performed.
Examples occur in traditional "piece work" industries, such as
Harris Tweed weaving and historically in glove making. Such minor
exceptions will not alter the imminent destruction of value of many
classes of office space.
The demand even for "modern", non "state of the art", offices
will be further reduced by the increased demand for office
environments that are "greener", less energy intensive and more
sociologically attractive. The effect of such changes is not yet
fully reflected in the market where the industry appears to shelter
behind a façade of "prime will be fine"!! The same mantra was
repeated in the retail sector when the retail downturn started, but
the prime sector, while initially appearing immune to value falls,
ultimately succumbed, as the downturn persisted.
The pace of the fall in value will be modulated by long-term
contractual arrangements. Leases for quality offices are normally
for 10-15 years thus protecting the income of the landlord until
the earlier of the loan repayment or the lease determination, or a
breach of the loan covenant. Thus, as office values decline there
are a series of ticking "timebombs" whose continuing detonations
will create cumulative self-reinforcing problems. In general, the
office sector has not yet endured the reductions in value that have
affected almost all aspects of the retail trade. A dramatic
harbinger of such a cataclysm has been the recent sale of a vacant
building in the City of London, previously leased to JP Morgan, for
a third of its price 10 years ago.
The retail sector is continuing to make its necessary
adjustments to the penetration of online sales which have
stabilised at around 26%. In October 2023 online sales were 0.4
percentage points higher than a year earlier but, while online
sales in Q3 were 1.0% higher than in 2022, they were 2 percentage
points lower than in 2021. The lagged effect of lease lengths and
loans has been substantially worked through as significant online
substitution started several years ago. Since 2018 23,000 units
have closed of which 5,000 are under redevelopment. Rents have
declined 4.5% per annum compound for five years (shopping centres
6.9%; high street 5.0%; and retail warehousing 3.5%) and yields
have increased by 2.8 percentage points. However, according to the
Local Data Company net closures in 2024 and 2025 are expected to be
lower than in 2023. Vacancy rates in H1 2023, compared to H1 2022,
have fallen marginally for High Street Shops to 13.9%, by 1.2
percentage points to 17.8% for Shopping Centres; and by 2.1
percentage points to 8.1% for Retail Parks where the vacancy rate
is on a par with H1 2019 (7.9%), but still above the c.5.0% of 2016
to 2018. In the changing flux of H1 2023, "Personal Grooming" shops
increased by 576 units (Barbers 304), Fast Food by 186 units and
Convenience / Small Scale Supermarkets by 160 units. The largest
closures were Ladies Hairdressers (414) and Chemists / Toiletries
(310 of which Lloyds Pharmacy in Sainsbury supermarkets 237),
Fashion Shops (262) and Estate Agencies and Pubs (221 each).
Following this carnage, Knight Frank consider that for the overall
retail sector the "bottom" line has been reached, forecasting
rental growth for the next five years, but of a meagre 0.7% per
annum.
The final adjustment to these structural changes together with a
return to real interest rates, the continuing reduction in
householders' real income which is forecast to fall by 3.1% between
2020 and 2025, and very slow growth, if any, in the economy do not
form a favourable background for the commercial sector. Thus, all
sectors of the commercial market, excluding Industrials, are
unlikely to prosper in the immediate future, a long-term trend that
in real terms has persisted since 2007, the peak of the market.
Industrials should continue to prosper, Retail is through its
worst, but the Office sector is entering a period of substantial
decline.
The residential market is not experiencing, and is not about to
experience, the structural changes affecting the commercial market.
Indeed, as the Curate said of his egg to the Bishop: "Oh no, my
Lord, parts of it are excellent".
The letting market has shown exceptional growth in rents for
quite distinct reasons. Demand has increased because of increased
housing costs, primarily mortgage costs and restrictions on
mortgage availability resulting from the Mortgage Market Review
requiring affordability under prospectively higher interest rates.
Demand has also increased because of the expansion of university
students. UCAS acceptances rose from about 360,000 in 2001 to about
560,000 in 2011 without an accompanying rise in student residences.
More importantly, the number of students in the major universities,
the Russell Group, paying "international" fees (including
non-Scottish UK students) has risen from virtually nil to about
220,000 in 2022. The LSE has the highest percentage of
international students, having risen from about 45% in in 2014-15
to about 63% in 2021-22, Edinburgh from 22% to 42%, Cambridge from
20% to about 35%. Obviously, unlike domestic UK students, they
almost all require let property, disproportionately increasing
demand. While demand for let property increases, supply decreases,
as it is being progressively reduced by net sales of letting
property caused by the reduction of individual mortgage interest
relief to 20%, tighter credit controls, higher buy to let mortgage
interest costs, increased stamp duty on second homes and
increasingly severe and unpredictable regulatory impositions -
especially in Scotland where currently, evictions, except for the
persistent non-payment of rent, are unlawful until at least March
2024. Historically, rents do not fall as house prices fall and,
even in the Great Financial Crisis in 2008, when house prices fell
17% in the 17 months to May 2009, English rents fell only 2.2%, - a
fall from which they recovered quickly. Unsurprisingly, JLL
forecast that UK rents (of second-hand properties) will continue to
rise by 5.0% in 2024 before the growth rate reduces progressively
each year to 3.5% in 2028.
In past housing downturns, such as in 2007 when house prices
fell 18%, the supply of rental property may have been noticeably
increased by "accidental landlords" who let properties they were
unwilling to sell because of reduced prices, including properties
available as a result of death, debt or divorce or house moves. In
this downturn relatively fewer repossessions are occurring, because
the security of lenders has been transformed by the stricter
mortgage conditions and prices, so far, have generally "flat-lined"
- at least in nominal terms. Given such market conditions no
meaningful rise in "accidental landlords" has occurred to provide
an extra supply of rental property.
In Scotland rents increased by 13.7% in the year to Q3 2023, and
by 8.3% in the year Q3 2022(.) In Edinburgh rents increased by
15.1% and 14.7% in those years and single bed flats by 13.5% and
13.1% respectively. The Covid 2020 year excepted, rents have risen
consistently over the years and in Edinburgh by 197.7/109.5 or
88.5% over 10 years. Edinburgh agents emphasise shortened "time to
let and "unsatisfied demand" and Retties comments "advertised rents
on new tenancies continue to climb to record levels".
In university towns students comprise a large component of the
rental market which is increasingly being supplied with Purpose
Built Student Accommodation (PBSA), although "StuRents" report that
in 2023 only 12,000 new beds were added against an estimated
overall "shortfall" of 490,000 by 2026. This shortfall stems from
the expected growth in the student population and the continuing
transfer from flats provided by universities and from houses in
multiple occupation, currently providing over half the total
accommodation.
Individual supply of student flats is declining, while demand
for student accommodation is increasing and the demand for the
style, type and high quality of PBSA is increasing: and in this
market there are no "accidental landlords". Empiric Student
Property, a leading supplier, recently reported 10% like-for-like
rental growth for the 2023-2024 academic year. PBSA supply, while
increasing slowly, is insufficient to meet the growing demand and
rents are expected to continue to rise. The FT's summary is:-
'the "student housing is the bubble that won't burst..." it has
"the sort of market that private equity dreams are made of: a
sector with a structural supply imbalance, supported by resilient
demand from wealthy foreign students and well-off middle-class
parents who prioritise spending on their offspring's
education".
Unlike rent, in general house prices are stagnating or falling.
Prices have risen dramatically since Covid, growth peaking in the
year to September 2022 at 9.9% Halifax, and 7.5% Nationwide; and in
Scotland in June 2022 at 9.1% Acadata. Since then, prices have
usually fallen further each month until stabilising recently with
some recent reported small increases. Last year forecasts of price
falls for 2023 ranged widely from 1.3% OBR, 10% Knight Frank and
12% Capital Economics (peak to troughs) and 10% Savills.
In 2023 the economy has performed far better than the major
forecasters' forecasts: in March 2023 the OBR forecast a 2%
reduction in GDP, but in November it was reviewed to growth of
0.6%. Unsurprisingly, in 2023 house prices have performed better
than forecast. To October the Halifax House Price Index fell 3.2%
or 4.1% since the peak of GBP293,992 in August 2022; Nationwide
fell 3.3% or 5.2% from the August 2022 peak; and the Acadata
(England & Wales) Index 4.1%. In contrast, in Scotland the
Acadata Index rose 0.6% in the year to August and is within 0.2% of
its peak in June 2023.
Acadata's price of Edinburgh property reports falls of 0.5% in
both August 2023 and the year to August 2023. In contrast the more
limited and small scale ESPC November survey shows an annual fall
of 4.9% in the City of Edinburgh and very varied falls in
particular city areas. Edinburgh City Centre (All Properties) has
an annual fall of 6.1%, New Town and West End flats a 6.2% fall,
but Portobello / Joppa flats a gain of 4.2%.
Forecasts for 2024 vary considerably. The OBR forecasts a fall
of 4.7%; HMT 5.1%; Zoopla 2.0%; NIESR 2.6%; and Savills 3.0% for
mainstream UK houses and 1.5% to 2.0% for prime UK houses. Savills
five-year forecasts are for mainstream houses to resume growth to
3.5% in 2025 and to grow by 17.9% by end 2028. For prime houses
they forecast 2025 growth of 2.5% to 4.0% and by 3.5% in Scotland,
and five year growth of 16.2% to 21.5% in the UK and of 20.9% in
Scotland.
Price falls in 2023 have been lower than generally forecast and
2024 these are now forecast to "average" about 3.0% for a total
fall of, say, 7.5% over two years before the price rises forecast
for 2025. In contrast, in the GFC, Nationwide recorded peak to
trough falls of 18.6%, while in the early 1990 values fell 20%.
Fortunately, current conditions now are significantly different
from these two occasions in two important respects. Unemployment
remains low at 4 1/2 % and is expected to rise only to 4 3/4 % in
2024 and to peak at 5.0% in 2025. Secondly, repossessions and,
therefore, increased supply - and at distressed prices - are
expected to be much lower than in all previous recent downturns.
Since 2015 the lending criteria used have been governed by the
stricter conditions of the MMR, including requiring mortgagors to
demonstrate ability to service the mortgage at rates several
percentage points above the current rates. Reflecting this change
average household debt to income in 2022 was 131% compared with the
152% high in 2008. Coupled with higher levels of security Bank
guidance requires lenders to consider favourably methods of
preventing repossession. Thus, the risk of large-scale repossession
has been very significantly reduced. I forecast that, following a
further fall in prices in 2024 of up to 5%, prices will
subsequently rise by two or three points above inflation or, say,
4% to 5% per annum.
When price rises resume in 2025 houses will continue to be
substantially cheaper in real terms than the peak price recorded by
the Halifax, GBP199,000 in August 2007, just before the GFC. The
equivalent RPI inflation-adjusted price in October 2023 would have
been 82.2% higher or GBP362,670, and the current Halifax price in
October 2023 is GBP281,974, 22.3% lower in real terms. If house
prices rise at 4.0% per annum and inflation is 2.0% per annum, then
13 more years must elapse before the August 2007 price peak is
regained in real terms.
House prices have proved difficult to forecast accurately, and
past errors have been large, especially around the timing of
reversals and the incidence of unusual events such as we have just
experienced. For the long-term, I repeat my previous forecasts,
"... the key determinant of the long-term housing market in areas
where houses are sought will be a shortage in supply, resulting in
higher prices".
Future Progress
The Group's strategy continues to be the development of its
sites whenever market conditions are favourable in the Edinburgh
housing market areas and in the geographical extension north and
east that is occurring, while maximising the value of its
investment portfolio.
Market conditions are forecast to continue to deteriorate until
later in 2024, and it is expected that by early 2025 long-term
mortgage interest rates should have declined sufficiently to allow
a sustained recovery in the housing market. We are planning
developments to become available for sale in the late summer of
2025. While we hold planning permission on the relevant sites,
preparatory work will require at least a 12-month lead time before
construction commences. Thus, we intend to undertake this
preparatory work from early in 2024 on candidate sites, including
Brunstane and possibly Wallyford. The next phase of development at
Brunstane requires the completion of the access road and the waste
pumping station which we will commence as soon as possible. We
expect that some moderation in construction costs will allow the
start of our 10-house development at Wallyford, East Lothian near
the railway station. We are assessing a site with planning
permission for six high quality houses near a previous development
at Eskbank, Midlothian, which, if acquired, would allow
construction to start in late 2024 following the stabilisation of
shallow mine workings and the realignment of the existing
services.
We have three development sites within commuting distance of St.
Andrews where at one of which, Larennie, Peat Inn, we have gained
and implemented an access agreement. Development of these sites
awaits the expected spread of the very high value currently being
obtained at St. Andrews into the neighbouring areas.
We continue the long extended work with our architects to update
our existing consents at Belford Road with improvements within the
existing consent, so providing 20 modern high amenity flats in
keeping with the high quality and varied style of the location. The
improved design incorporates changes necessary for new insulation
standards and other environmental improvements, and improves
fenestration, the internal layout, and the external and internal
finishes. The planning process has been subject to continued delays
and this updated design, while originally deemed suitable, was then
refined and has been further refined, but is yet to be approved. In
order to expedite this non-material variation to the planning
consent, we have approached a specialist planning consultant to
undertake the necessary further negotiations with the planning
department.
At St. Margaret's House we hold a planning consent for 377
student bedrooms and 107 flats which we implemented late last year.
We recently obtained approval for a non-material variation of that
consent which will allow a reconfiguration of the student
residences more suited to current market conditions.
In Edinburgh present market conditions are particularly
favourable for student development and numerous development
proposals are being brought forward. Some developments are for
areas deemed unsuitable and many others are encountering widespread
community opposition and frequently being denied planning consent.
Early in 2024 the already strict regulations governing student
consents become even more onerous which we expect will further
limit consents granted. Increasing demand and further restrictions
on supply together with the prospect of lower interest rates will
enhance the value of St. Margaret's House which, given such
circumstances, we propose to market early in 2024 or whenever
conditions are propitious. We continue to get unsolicited enquiries
which, unless there are quite exceptional circumstances, we do not
entertain. Currently, SMH is fully let, but at a greatly discounted
value. We are engaging surveyors and tasked them to reduce that
discount, so increasing our revenue.
Our developments require a stable and active housing market, and
with cost inflation having stabilised, we do not depend on further
price increases for successful development, as most of these sites
were purchased unconditionally for prices near their then existing
use value. A major component of the Group's enhancement of value
lies in securing planning permission, and in the extent of that
permission. For development or trading properties, unlike
investment properties, no change is made to the Group's balance
sheet even when improved development values have been obtained.
Naturally, however, the balance sheet will reflect such enhanced
value as the properties are developed or sold.
The strategy of the Group continues to be conservative, but
responsive to market conditions, so continuing a philosophy that
underlay our change from being primarily an investment property
company to expanding our now extensive development programme. This
change in strategy allowed us to escape the devastation caused by
the 2008 Great Recession from which most sections of the property
sector either never fully recovered or had to be recapitalised, and
to avoid both the extensive loss in value associated with the
Covid-19 pandemic and the damaging secular market changes that have
already and will continue seriously to affect the value of the vast
majority of the property investment sector.
The closing mid-market share price on 19 December 2023 was 130p,
a discount of 36% per share to the NAV per share as at 30 June 2023
of 203.4p. The Board does not recommend a final dividend, but
intends to restore dividends when profitability and consideration
for other opportunities and obligations permit.
Conclusion
Economic growth is forecast to be inhibited by short-term and
long-terms difficulties. The short-term difficulties arise from the
requirement to bring aggregate supply and demand into balance in
order to control endogenous inflation. The inflation caused by the
exogenous factors arising from the Covid-19 recovery no longer
impinges on inflation and the inflation caused by the Ukraine war
on fuel and commodity prices is receding fast, although both of
these exogenous factors have had lasting deleterious affects on the
economy, resulting in a real reduction in living standards in the
UK. The reduction in real income, given the high utilisation of
labour and capacity, is being resisted by those groups with market
power to obtain higher incomes and prices, attempting to offset
inflation and thereby reinforcing it.
The residual position is the economy is enduring a classic
Minsky cycle of high inflation resulting from an excess of demand
over supply, the principal cause of which is the prolonged, and
inflationary, period of very loose monetary policy - from which the
consequent inflation has been allowed to fester rather than being
"nipped in the bud" of which the primary cause has been the Bank's
mistiming of the necessary interest rate rises. Ironically, it
mirrors exactly the policy mistiming made by the Bank when it
raised interest rates in July 2007 just as the economic crisis
unfolded.
The long-term difficulty results from the legacy of the economic
cost of underwriting the economy during the Covid pandemic, a
policy that allowed so swift a recovery, but now constitutes a
lasting economic burden. Without doubt it was a price well worth
paying while the rapid creation of the vaccines - of a
revolutionary type - and their deployment and the management of the
vaccination programmes were triumphs of research, management and of
social order and the UK Government's decision making. The
democratic and social order processes that sanctioned, implemented
and suffered these programmes are resounding endorsements of UK
democracy, standing in distinct contrast to the mostly failed Covid
policy of autocracies. But the gross subsidy, which was provided
and prevented the Covid crisis from undermining the economy, was a
capital investment, an investment financed by substantial borrowing
from the UK Treasury which, like all borrowing, requires interest
and principal payments from the recipient, the UK taxpayer.
The Ukraine war put an additional economic burden on the
economy. Consequent upon Russia's invasion of Ukraine, Russia's
restriction of gas supplies, and its acting, together with the
OPEC+ oil cartel, to reduce oil supplies, caused all fuel prices to
rise above free market prices. This has effected a transfer of
wealth from the consumers, such as in the UK, to the producers. A
similar smaller and transitory transfer took place to food
producers. As with the Covid pandemic, the UK Government has
mitigated the immediate extra cost of fuel by subsidy. This subsidy
has required borrowing and, like the cost of the Covid mitigation,
requires interest and capital payments from the recipients, the UK
taxpayer.
Thus, for two separate main reasons, the UK economy is poorer
and much of this diminution in wealth is represented by the
increased borrowing of the Government. It is an unfortunate popular
myth that this borrowing is by some entity independent of the
taxpayer, the Government. There is a general belief some
unspecified party is responsible for these debts, a materialised
"ghost", but certainly not "me, the citizen of the UK" - but
someone, anyone else! Unfortunately, these obligations do and will
continue to burden the economy, the non-acceptance of which in some
increasingly dependent sectors of society, and in organisations
with market power, will hinder the required adjustments necessary
to the economy to create economic growth. Unfortunately, such
burdens on an already stressed society appear less burdensome when,
unlike at present, they constitute a reduction in an increase in
disposable income rather than an actual decrease in disposable
income, even although the same quantum reduction occurs: a lesser
gain in income is more bearable than the equivalent loss.
Undoubtedly, the UK's greatest long-term difficulty is that the
rate of increase in productivity since 2007 has been both small and
unevenly distributed, increasingly in favour of capital and of
services. Due to persistent artificially low interest rates most
owners of capital have benefited from the consequent rise in asset
values and accompanying these beneficiaries were those associated
with services related to capital, notably financial services, all
of which benefits appeared unrelated to performance or merit, as so
spectacularly amplified by the banking scandals, and more generally
in cartelised professions. The malign influence of such
oligarchical "Distributional Coalitions", as so well analysed by
the American economist, Mancur Olson, is widespread.
The low improvement in productivity since the Great Recession
has not only resulted in little change in average living standards,
but the rigidity of the economy and the reaction to minimal
improvement or in falling living standards is inhibiting
appropriate economic adjustments, an adjustment further hindered by
the disproportional distribution of the small gains achieved to a
relatively narrow segment of society. Paul Krugman said
"Productivity isn't everything, but in the long run it's almost
everything".
The diagnosis is clear, but the treatment is opaque. If
productivity could be improved by any one singular action or
activity - a prescribed productivity "pill" - doubtless it would
have already been achieved. The purpose of the "pill" is clear: to
create change, a difficulty that has long been diagnosed - "Change
is not made without inconvenience, even from worse to better" -
Richard Hooker, 1554-1600. Change is multi-faceted, achievable
socially, politically, educationally, technically or
psychologically, but often requiring integration of two or more
such sources. The first, and generally accepted requirement for
change, is for technical change: appropriate education and improved
skills; the second is for sociological change, including greater
freedoms, advancement by application and achievement rather than by
affiliation and association; the third is for attitudinal change,
including less dependency, an acceptance that improvement to public
goods and services, including amenity greening and energy
substitution, requires resources which can only be provided without
diminution elsewhere by increased output, not miraculously conjured
up "out of thin air" or from a mythical Government; the fourth is
an institutional change that rewards entrepreneurship, encourages
competition and destroys oligopolies; and lastly, political change
is required to encourage trade and the interchange of ideas, the
independence of universities, the development of research findings
and support of growth areas and industries rather than subsidising
failures.
The policies necessary to provide higher productivity are
circumscribed, not only by cultural, sociological and political
barriers, but by the present overriding necessity to continue to
"fight fires". When these are doused there will be a greater
opportunity to surmount these barriers, but until then productivity
is expected by the Bank to increase during their forecast period to
2027 at only about 3/4 % per annum.
The forecast interest rates of three to three and a half percent
may appear aberrantly high, but it was the decade or more, suffused
with the stimulants of negative real rates and oceans of liquidity,
that was the aberration. "Cold turkey" is the new reality.
I D Lowe
Chairman
20 December 2023
Strategic report for the year ended 30 June 2023
_______________________________________________________________
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
GBP718,000 (2022 loss: GBP1,302,000). The directors do not propose
a dividend in respect of the current financial year (2022: Nil).
The Group net asset value amounts to GBP23,971,000 (2022:
GBP23,253,000).
Business review
A full revie w of the Group's business results for the year and
future prospects is included in the Chairman's Statement within the
Review of Activities on pages 2 and 3 and Future Progress on pages
13 to 14. In accordance with legislation the accounts have been
prepared in accordance with UK-adopted International Accounting
Standards. As permitted by Section 408 of the Companies Act 2006,
the profit and loss account of the parent Company is not presented
as part of these financial statements.
Key performance indicators
The key financial performance indicators for the Group are net
asset value, gross profit when developments are sold and
maintaining a contribution to costs from rental activities. The
progress on these in 2023 are discussed in the Chairman's
statement.
As a small organisation with a small number of staff working
from a small office, we monitor our impact on the environment
mainly through appropriate upgrading of rental properties and in
the design and delivery of new homes. Professional advisers ensure
we are aware of best practice.
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
Market conditions including interest rate increases could
depress the sales value of new homes. The Group monitors economic
and property prospects and only proceeds with developments when the
margin between cost and expected selling price is satisfactory.
The most significant risk to construction cost of developments
is the financial failure of the building contractor. The Group
mitigates against this risk by careful selection of contractors and
by engaging professionals to monitor progress and financial outlays
as on site work progresses.
Both risks are also mitigated as developments tend to be for
small numbers of new homes and so the construction to sales period
is relatively short.
Planning risk
The risk is that planning permission is not obtained for sites
acquired before planning permission has been granted. This risk is
mitigated by a portfolio approach and acquiring sites without
planning permission at prices which are close to current use
values. Planning permissions are endured once permission has been
obtained.
Property values
The risk is that a market condition reduces the value of
investment properties significantly. This risk is mitigated because
the Group's more valuable investment properties have development
potential which insulates them against the full extent of any
general investment downgrade in commercial property.
Availability of funding
The risk is that external funding may not be available to
finance developments. The relatively low cost of some development
sites may not meet some banking criteria and increases the rate of
interest sought by the lender. This is mitigated through funding
from a related party loan and that, together with cash resources,
should meet foreseen expenditure. As set out in note 17, an
interest rate cap agreed after 30 June 2023 mitigates the risk of
increasing interest rates.
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
Buildings owned and let out are upgraded when they become vacant
to the required EPC levels before re-letting. The houses which the
Group delivers are designed to be energy efficient and are
environmentally sustainable. As proposals for sites are worked up,
the Group seeks to consider environmental risks for each of the
development sites. The majority of development sites are on
brownfield land where as much as practicable of the material on
site is recycled and re-used. Many risk factors are considered
including flood risk, existing land contamination issues,
archaeological assessment where appropriate, water pollution and
biodiversity impacts which are assessed and addressed ensuring that
we support the natural environment, mitigate adverse environmental
impacts and enhance biodiversity where possible.
Corporate Governance
The directors recognise the need for sound corporate governance.
As a company whose shares are quoted on AIM, the Board adopts the
Quoted Companies Alliance's Corporate Governance Code ("the QCA
Code"). Its corporate governance statement including any
disclosures required pursuant to the QCA Code is published on the
Company's website www.caledoniantrust.com.
Section 172 Compliance
Section 172 of the Companies Act 2006 imposes a general duty on
every Director to act in a way they consider, in good faith, would
be the most likely to promote the success of the Group and Company
for the benefits of its shareholders as a whole. In doing so,
Directors should have regard to several matters including:
a) The likely consequences of any decision in the long term;
b) The interests of the Company's employees;
c) The need to foster the Group and Company's business
relationships with suppliers, customers and others;
d) The impact of the Group and Company's operations on the community and environment;
e) The desirability of the Group and Company maintaining a
reputation for high standards of business conduct; and
f) The need to act fairly as between members of the Company.
The Board factors stakeholder interest into its long-term
policies and objectives. The business of the Group and Company
requires engagement with shareholders, customers and tenants, local
planning authorities, employees and suppliers.
When considering stakeholder interest, the Board is responsible
for ensuring that the long-term policies and objectives implemented
allow the Group and Company to provide tenants with properties
which meet their needs and to produce consistently high quality
homes on its developments.
The Executive Directors are responsible for the operations of
the business while the Non-Executive Director is independent and
well positioned to provide objective judgement and scrutiny over
decisions made by the Board.
Information about stakeholders and how the Board has discharged
its duties are included on pages 20 and 21.
M J Baynham
Secretary
20 December 2023
Corporate Governance
QCA Code Compliance and Section 172 Statement
for the year ended 30 June 2023
_______________________________________________________________
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
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
Principles Five and Nine in relation to director appointments, the
ten principles are followed across the Group.
Additionally, the Group complies with Section 172 of the
Companies Act 2006. This report sets out how the Board has
discharged its duties.
Principle One
Business Model and Strategy
The Group's business model is that of a property investment and
development company, which is focused on the Scottish property
market. Further details regarding application of the Group's
business model, its activities and its properties can be found in
the 'Review of Activities' section of the Chairman's Statement on
pages 2 and 3 of the Group's annual report and accounts for the
year ended 30 June 2023. The 'Future Progress' section of the
Chairman's Statement on pages 13 to 14 of the Group's annual report
and accounts for the year ended 30 June 2023 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 17 and 18 of the Group's annual
report and accounts for the year ended 30 June 2023.
Principle Two
Understanding Shareholder Needs and Expectations
As well as compliance with the QCA Code, Directors are required
in accordance with Section 172 of the Companies Act 2006 to include
a statement of how they have taken into account the shareholders in
promoting the success of the Company. This section and information
on pages 22 and 23 set out how the Board has discharged its
duties.
It is important to note that the executive directors are the two
largest shareholders, together holding over 85% of the Company's
issued share capital.
Investors have access to current information on the Company
through its website, www.caledoniantrust.com, through its
regulatory announcements, its annual and interim accounts and
through the directors who are available to answer investor related
enquiries.
Shareholders may contact the Company in writing via email
(webmail@caledoniantrust.com), by telephone on 0131 220 0416 or in
writing to the Company's Head Office, 61A North Castle Street,
Edinburgh EH2 3LJ. Any information provided in response to any such
enquiries will be information that is freely available in the
public domain.
All shareholders are encouraged to attend the Company Annual
General Meeting ("AGM") where the Directors listen to the views of
the shareholders formally during the AGM and informally following
the AGM. In the event of a voting decision not being in line with
its expectations the Board would seek to engage with those
shareholders to understand and address any concerns as appropriate.
Shareholders can continue their engagement with the Directors
through any of the channels already mentioned.
The Board dedicates sufficient time to ensure that communication
is effective with existing and potential shareholders and other key
stakeholders. The Board believes the Company's mode of engaging
with shareholders is adequate and effective.
Principle Three
Wider Stakeholder and Social Responsibilities
On the basis of the Directors' knowledge and long experience of
the operations of the Group the Board recognises that the long-term
success of the Group is reliant upon the efforts of the employees
of the Group, its professional advisors and its contractors. The
directors engage directly on a regular basis with all these
stakeholders which ensures that there is close Board oversight and
contact with the Group's key resources and relationships.
Employees: The Group has a small number of full and part-time
employees. The Executive Directors are in regular contact with the
Group's employees, which provides an opportunity for employees to
discuss matters they wish to raise. The administrative staff are in
contact with the Directors on a daily basis. A pay review took
effect from 1 November 2023.
Customers: The Group aims to deliver quality homes and other
developments. It invests in strong design features and should any
snagging work be required, it ensures rectification is completed
quickly. The Group's interaction with its tenants is constructive
and cordial and any contentious points are quickly resolved. The
Group recognises the important role of all relevant Regulations and
seeks to conform with both the spirit and the requirement of the
regulations.
Suppliers and professional advisors: The Group engages
contractors after appropriate formal and informal vetting, and for
larger projects after formal tendering. The Executive Directors
meet with contractors regularly throughout large projects to review
their recommendations and to review progress. Advisors are selected
on the basis of suitability and experience for the advice required.
For each firm engaged an agreed nominated partner or director is
responsible for the Group's instructions and advice who reports to
the executive directors as required.
Environment: The Board recognises the growing awareness and
requirements in respect of environmental issues and is working with
its professional advisors to promote an environmentally friendly
approach to the design of its new developments.
The Group takes into account feedback received from its key
stakeholders and considers making amendments to working
arrangements and operational plans where appropriate and where such
amendments are consistent with the Group's strategy and objectives.
However, no material changes to the Group's working processes were
required over the year to 30 June 2023, 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 17 and 18 of the Company's
annual report and accounts for the year ended 30 June 2023.
The risks which the Group faces are subject to change and the
measures to counter or to mitigate them are reviewed regularly. The
Board considers that an internal audit function is not necessary,
due to the close day to day control exercised by the Executive
directors.
Principle Five
Maintaining a Well Functioning Board of Directors
As at 20 December 2023 the Board comprised the Chairman and
Chief Executive Officer, Douglas Lowe, one executive director,
Michael Baynham and one non-executive director, Roderick Pearson.
Of the Board's members, Mr Pearson is considered to be independent.
A further commentary on this topic is provided below.
Mr Lowe has been both Chairman and Chief Executive Officer of
the Company for many years. He is the largest shareholder holding
over 79% of the issued share capital and since the banking crisis
of 2007 a private company under his control, Leafrealm Limited, has
provided significant loans to the Group to fund its working capital
requirements. The Board believes that Mr Lowe's shareholding aligns
his interests with the other members' interests and there is ample
evidence to support this.
The Board consider that in these circumstances it is in the best
interests of the Group to maintain Mr Lowe's positions as both
Chairman and Chief Executive Officer contrary to recommended best
practice in the QCA Code. The Board has been assured that, subject
to all debt owed to Leafrealm Limited being repaid, a return to
contractual remuneration levels for Mr Lowe and after the currently
forecast recession, further Board appointments and changes will be
made. Separately, the Board has received an undertaking from Mr
Lowe that if he ceases to work full-time, appropriate Board changes
will be made.
The Company presently does not comply with the QCA Code
recommendation to have at least two non-executive directors who are
identified as independent. For those reasons the Board believes
that, given the present size of the Company and the nature of its
business and operations it is well served by the current
composition of the Board which functions effectively and is well
balanced. This position is considered regularly and where
appropriate and necessary further appointments will be made.
Mr Pearson has been a non-executive director since March 2007
and the rest of the Board consider him to continue to be
independent. Mr Pearson brings the weight of his professional
qualification and experience to the valuations of investment
properties but is sufficiently removed from the day to day
operations of the Company to retain a critical and independent
view. As such he represents the best interests of all the
shareholders.
Mr Lowe and Mr Baynham work full time and Mr Pearson currently
works on average two days per month. Biographical details of the
current directors are set out below. Executive and non-executive
directors are not presently subject to re-election.
The Board met formally on eleven occasions during the year to 30
June 2023 and all directors attended all meetings except that Mr
Lowe and Mr Pearson absented themselves from one meeting each where
they had an interest in the matter being discussed. 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 two occasions during the year ended
30 June 2023 with all members of the committee attending. The
Remuneration Committee met once during the year with all committee
members attending.
As appointments to the Board are made by the Board as a whole it
is not considered necessary to create a Nominations Committee.
Principle Six
Appropriate Skills and Experience of the Directors
The Board currently consists of three directors. Mr Baynham is
also the Group Company Secretary. The Board recognises that it
currently has limited diversity and increasing diversity will be
considered as and when the Board concludes that replacement or
additional directors are required.
The Board is satisfied that with the Directors, it has an
effective and appropriate balance of skills and experience to
deliver the strategy of Group for the benefit of the shareholders
over the medium to long-term. All directors are able to take
independent professional advice in the furtherance of their
duties.
During the year ended 30 June 2023, neither the board nor any
committee has sought external advice on a significant matter and no
external advisers to the board or any of its committees have been
engaged.
I Douglas Lowe
Chairman and Chief Executive Officer
Mr Lowe is a graduate of Clare College Cambridge (MA Hons in
Natural Science and Diploma in Agriculture) and Harvard Graduate
School of Business Administration (MBA and Certificate in Advanced
Agricultural Economics). Until 1977 he was Chief Executive of his
family business, David Lowe and Sons of Musselburgh, property
owners, farmers and market growers established in 1860, which
farmed intensively 2,000 acres and employed over 200 people.
In 1978 and 1979 Mr Lowe was Deputy Managing Director of
Bruntons (Musselburgh), a listed company which manufactured mainly
wire and wire rope and employed approximately 1,000 people. He was
a significant shareholder and, from 1986 until shortly after
joining the Company, Executive Deputy Chairman of Randsworth Trust
PLC, a property company with a dealing facility on the Unlisted
Securities Market. The market capitalisation of Randsworth Trust
PLC increased from GBP886,000 to over GBP250 million between April
1986 and sale of the company in 1989.
Mr Lowe purchased shares in Caledonian Trust PLC in August 1987,
at which time he became Chief Executive. Mr Lowe attends two
broadly constituted private political and economics discussion
groups throughout the year. He maintains close contact with all of
the Group's professional advisers in order to discuss and identify
any new laws, regulations or standards which may affect the Group.
He studies a wide range of relevant economic, political and
technical publications and undertakes extensive research in
preparation of the Chairman's Statements, which accompany the
Annual and Interim Accounts. Mr Lowe's experience in many senior
executive positions in many organisations ensures that he has the
necessary ability to develop and implement the Group's
strategy.
Michael J Baynham
Executive Director and Company Secretary
Mr Baynham graduated in law (LLB (Hons)) from Aberdeen
University in 1978. Prior to joining the Company in 1989, he worked
as a solicitor in private practice specialising in commercial
property and corporate law. He was a founding partner of Orr
MacQueen WS in 1981 and from 1987 to 1989 was an associate with
Dundas & Wilson CS.
Mr Baynham maintains his Practising Certificate with the Law
Society of Scotland and attends professional development seminars
and other relevant seminars on a regular basis throughout the year.
He maintains close contact with all of the Group's professional
advisers in order to understand and apply any new laws, regulations
or standards relevant to the business.
Mr Baynham's experience of corporate law, commercial property
law, commercial property finance, investment and development
ensures that he has the necessary ability to implement the Group's
strategy.
Roderick J Pearson
Non-Executive Director
Mr Pearson is a graduate of Queens' College Cambridge (MA Modern
Languages and Land Economy) and is a Fellow of the Royal
Institution of Chartered Surveyors. He has held senior positions in
Ryden
and Colliers International, practising in Edinburgh, Aberdeen
and Glasgow, and now has his own practice, RJ Pearson Property
Consultants Limited.
Mr Pearson's experience of property as a surveyor in private
practice together with his experience in senior management
positions ensures that he has the ability to support the executive
directors and also to challenge strategy, and decision making and
to scrutinise performance.
All three members of the Board bring relevant sector experience
through their long and varied careers throughout the property,
financial, legal and consulting sectors. The Board believes that
its members possess the relevant qualifications and skills
necessary to effectively oversee and execute the Group's
strategy.
Principle Seven
Evaluation of Board Performance
The directors consider that the size of the Company does not
justify the use of third parties to evaluate the performance of the
Board on an annual basis. The Company does not currently have a
formal appraisal process for Directors but the Chairman assesses
the effectiveness of the Board as a whole and the individual
directors to ensure that their contribution is relevant and
effective. This process is performed over the course of the year.
He also assesses the effectiveness of the Audit Committee and the
Remuneration Committee. During the year ended 30 June 2023, the
Chairman's assessment did not find any shortcoming in Board or
committee effectiveness and did not lead to any material
recommendations for any changes.
The Chairman is the majority shareholder and the above
arrangements are acceptable to him. The Board will continue to
assess this position on at least an annual basis, and if and when
it is deemed appropriate it will establish more prescribed
evaluation processes.
The Directors have given consideration to succession planning
and have in place a strategy to address succession as and when it
becomes necessary. The Board believes the current board and current
committee structure and membership is appropriate, but will
consider whether any board and other senior management appointments
are required on at least an annual basis and will consider the
feedback from the Chairman's assessments, as described above, in
this process.
Principle Eight
Corporate Culture
The Board acknowledges that their decisions on strategy and risk
determine the corporate culture of the Group and its performance.
High standards of ethical, moral and social behaviour is deemed
important in achieving the Group's corporate objectives and
strategy and such standards are actively promoted.
The Group only has a small number of employees who work closely
with the Executive directors. Accordingly, the Board is always well
placed to assess its culture which respects all individuals,
permits open dialogue and facilitates the best interest of all of
the Group's stakeholders. The Board are prepared to take
appropriate action against unethical behaviour, violation of
company policies or misconduct.
The Company has adopted a policy for directors' and employees'
dealings in the Company's shares which is appropriate for a company
whose securities are traded on AIM, and is in accordance with rule
21 of the AIM Rules and the Market Abuse Regulation of the European
Union.
Principle Nine
Maintenance of Governance Structures and Processes
Board Roles and Responsibilities
Ultimate authority for all aspects of the Group's activities
rests with the Board, with the respective responsibilities of the
Directors delegated by the Board. Given the size and nature of the
Group's business both of the executive directors engage directly
with all key stakeholders on a regular basis.
As noted in the disclosure above in respect of Principle Five,
Mr Lowe is both Chairman and Chief Executive Officer of the Company
and the Company therefore does not comply with the QCA Code in this
respect. In his role as Chairman, Mr Lowe has overall
responsibility for corporate governance matters in the Company,
leadership of the board and ensuring its effectiveness on all
aspects of its role. In his role as Chief Executive Officer Mr Lowe
leads the Group's staff and is responsible for implementing those
actions required to deliver on the agreed strategy.
Matters reserved specific to the Board include formulating,
reviewing and approving the Group's strategy, budget, major items
of capital expenditure, acquisitions and disposals, and reporting
to shareholders and approving the Annual and Interim Statements.
The Board is also responsible for assessing the risks facing the
Group and where possible developing a strategy to mitigate such
risk.
The Board complies with the Companies Act 2006 and all other
relevant rules and regulations including their duty to act within
their powers; to promote the success of the Group; to exercise
independent judgement; to exercise reasonable care, skill and
diligence; to avoid conflicts of interest; not to accept benefits
from third parties and to declare any interest in any proposed
transaction or arrangement.
At present, the Board is satisfied with the Group's corporate
governance, given the Group's size and the nature of its
operations, and there are no specific plans for changes to the
Company's corporate governance arrangements in the shorter term. As
the Group expands and when its programme of developments increase,
future Board appointments and Board changes will be considered.
Audit Committee
During the period under review the Audit Committee was chaired
by Mr Pearson. It met to review the Interim Report, the Annual
Report, to consider the suitability of and to monitor the internal
control processes. It also reviewed the directors' valuations of
the investment and stock properties, bringing Mr Pearsons
professional experience and market awareness to the review. 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
2023. 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 Board resolved to increase salaries as more fully set out in
the Remuneration Committee report on page 31. During the year, the
following increases were agreed and implemented:
I D Lowe GBP 6,000 (with effect from 1 January 2023)
M J Baynham GBP40,000 (with effect from 1 January 2023)
R J Pearson GBP 2,000 (with effect from 1 July 2022)
Mr Lowe's remuneration remains below the contracted rate.
The Remuneration Committee terms of reference can be found here
www.caledoniantrust.com/CR11-REMUNERATION-COMMITTEE-M0918.pdf .
As ID Lowe is a member of the Remuneration Committee, the
Remuneration Committee is not made up of independent directors as
envisaged by the QCA Code and the Company therefore does not comply
with the QCA Code in this respect.
No director who sits on the Remuneration Committee takes part in
discussions or votes on matters pertaining to their individual
performance or remuneration.
Details of the directors' remuneration can be found in Note 6 of
the consolidated accounts for the year ended 30 June 2023.
Nomination Committee
The Board have agreed that appointments to the Board will be
made by the Board as a whole and have not created a Nomination
Committee.
At present, the Board is satisfied with the Company's corporate
governance, given the Company's size and the nature of its
operations, and as such there are no specific plans for changes to
the Company's corporate governance arrangements in the shorter
term.
As the Group expands and when its programmes of developments
increase, future Board appointments and Board changes to reflect
such changes will be considered, as appropriate.
Principle Ten
Shareholder Communication
The work of the Company's Audit Committee and Remuneration
Committee during the year is described above and in the reports of
the Audit Committee and Remuneration Committee.
Shareholders have access to current information on the Company
through its website, http://www.caledoniantrust.com, though its
regulatory announcements, its annual and interim financial
reports and via Mr Lowe, Chairman, who is available to answer
investor relations enquiries. Shareholders may contact the company
in writing, via email (webmail@caledoniantrust.com) or by telephone
on 0131 220 0416. Enquiries that are received will be directed to
the Chairman, who will consider an appropriate response.
The results of voting on all resolutions in future general
meetings will be posted to the Group's website and announced via
RNS. Where a significant proportion of votes (e.g. 20% of
independent votes) have been cast against a resolution at any
general meeting, the Board will post this on the Group's website
and will include, on a timely basis, an explanation of what actions
it intends to take to understand the reasons behind that vote
result, and, where appropriate, any different action it has taken,
or will take, as a result of the vote.
The Company's financial reports since 2002 can be found here
http://www.caledoniantrust.com/accounts_details.html . Notices of
General Meetings of the Company for the last five years can be
found here http://www.caledoniantrust.com/AGM_Notices.html .
The Group engages in open communication with its shareholders
and endeavours to reply to all shareholder queries received. The
Chairman prepares a detailed summary of the Group's activities in
his Statement which accompanies the Annual and Interim Financial
Statements. Regulatory announcements are distributed in a timely
fashion through appropriate channels to ensure shareholders are
able to access material information on the Group's progress. A
report of the audit and remuneration committees is included in
respect of Principle Nine above. All shareholders are encouraged to
attend the Company's Annual General Meeting.
M J Baynham
Secretary
20 December 2023
Corporate Governance
Audit Committee report for the year ended 30 June 2023
_______________________________________________________________
Statement from the Chairman of the Audit Committee
On behalf of the Board, I am pleased to present the Audit
Committee Report for the year to 30 June 2023. This report provides
shareholders with an overview of the activities carried out by the
Audit Committee during the year. The Audit Committee ensures the
financial performance of the Group is properly measured and
reported.
Committee Members
The Audit Committee comprises R J Pearson (Chairman) and I D
Lowe. R J Pearson is the independent non-executive Director.
Other members of the Board occasionally attend Audit Committee
meetings when requested by invitation. In the year to 30 June 2023
the Audit Committee met twice with both members being present, and
the other member of the Board attended one of those meetings.
Responsibilities
The Audit Committee, inter alia, determines and examines matters
relating to the financial affairs of the Group including the terms
of engagement of the Group's auditor and, in consultation with the
auditor, the scope of the annual audit. It receives and reviews
reports from management and the Company's auditor relating to the
half yearly and annual accounts and the accounting and internal
control and risk management systems in use throughout the Group;
reviews the Group's overall risk appetite and strategy; and
monitors, on behalf of the Board, the Group's current risk
exposures. The Audit Committee monitors the integrity of the
financial statements produced by the Group and makes
recommendations to the Board on accounting policies and their
application. The Audit Committee receives reports from compliance
functions within the Group and is responsible for reviewing and
approving the means by which the Group seeks to comply with its
regulatory obligations. The Committee also ensures that the
arrangements for employees and contractors to raise concerns
confidentially about possible wrongdoing in financial reporting (or
other matters) are proportionate and allow for independent
investigation. The duties of the Audit Committee are set out in its
terms of reference, which are available from the Company's website.
These are regularly reviewed to ensure they remain applicable and
up-to-date with legislation, regulation and best practice.
The Audit Committee meets at least twice a year. For the year
ended 30 June 2023, the Audit Committee has met twice to review the
Group's draft half year and full year results prior to Board
approval and to consider the external auditor's detailed
reports.
Internal Audit
The Group does not currently have an internal audit function.
The Audit Committee considered the size and nature of the Group and
believes that existing management within the Group is able to
derive assurance as to the adequacy of internal control and risk
management systems without the introduction of an internal audit
function.
Risk Management and Internal Controls
The Group has a range of internal controls, policies and
procedures in place. The Audit Committee works alongside the Board
to review, and where necessary suggest changes to, the current
systems in place.
The Audit Committee is satisfied that the current systems in
place are operating effectively.
External Audit
Johnston Carmichael LLP were re-appointed for the year to 30
June 2023. The Audit Committee monitors the relationship with the
external auditor to ensure independence and objectivity at all
times. The Audit Committee also reports to the Board on the
independence, objectivity and effectiveness of the external
auditor. Johnston Carmichael have been the external auditor for the
Group since 2017 with David Holmes as the Partner for three years
and Grant Roger taking responsibility as Partner in 2020. The Audit
Committee has recommended that Johnston Carmichael LLP are
appointed for the next financial year. Johnston Carmichael LLP do
not carry out any non-audit work for the Group.
External Audit Process
Johnston Carmichael LLP prepare an audit plan. This plan sets
out the scope and timetable of the audit as well as the areas to be
specifically targeted. The plan is provided to the Audit Committee
for approval in advance of the audit. On completion of the audit,
the findings are presented to the Audit Committee by the auditor
for discussion. There were no significant areas of concern
highlighted by the auditor this year.
The Group accountant has regular contact and communication with
the auditor during the year. This allows for any areas of concern
or of significance to be raised with the auditor throughout the
year.
Main Issues Discussed and Conclusions
The table below highlights the issues at the audit close
meeting: -
Issue How it was addressed by the
Audit Committee
Revenue recognition
Revenue from sales of investment During the year, sales comprised
and trading properties is four newly completed houses
recognised on legal completion at Brunstane, Edinburgh. Legal
which is when the buyer takes completions took place well
control of the property whether before the year end date and
it is commercial property, the committee is satisfied
private houses or plots of that sales were correctly
land. Using legal completion recognised in the year ended
minimises the management judgements 30 June 2023.
required to determine when
ownership is transferred.
Revenue from rents are spread One rent free period arose
over the life of the lease during the year and was spread
and for service charges over over the life of the lease
the period to which the service concerned.
relates.
-----------------------------------
Fair value
The approach to assessing fair The Committee discusses each
value of investment properties of the valuations and is satisfied
is conservative. The directors that the valuations reflect
assessed fair value taking the market and the manner in
note of the RICS guidance relevant which the markets perform.
at 30 June 2023. The directors' The values ascribed to specific
assessment of fair value at assets are also considered
30 June 2023 was based on changes and commented upon in the audit
to the lettings and changes report by our auditor, Johnston
in house price values as well Carmichael LLP.
as the independent valuations
by Montagu Evans, Chartered
Surveyors, at 30 June 2022.
Valuations were prepared in
accordance with relevant industry
standards using transactional
evidence and an established
methodology.
Development properties held
as stock
The Committee monitors progress
Trading properties are carried and intentions for each location
at the lower of cost and net and the timing of work to ensure
realisable value. The net realisable that planning consents already
value is an area of judgement given endure.
based on demand, future costs
and the availability of planning
consent.
-------------------------------------
R J Pearson
Chairman of the Audit Committee
20 December 2023
Corporate Governance
Remuneration Committee report for the year ended 30 June
2023
_______________________________________________________________
The Remuneration Committee comprises, R J Pearson (Chairman),
the independent, non-executive director and I D Lowe.
The Committee met once during the year, with both members being
present, to review the remuneration of the Executive Directors. No
director who sits on the Remuneration Committee takes part in
discussions or votes on matters pertaining to their individual
performance or remuneration.
It was resolved that following the easing of the constraints of
Covid-19, the remuneration of the Chair and Chief Executive
increase by GBP6,000 per annum to GBP48,000 per annum. The salary
of M J Baynham had not increased since 2010 and indeed Mr Baynham
had accepted a reduced salary from 2017 to 2022 when the Group's
activities and cash flow were affected by market conditions. In
recognition of the current level of activity and movement in
executive salaries over the last 12 years, it was resolved to
increase Mr Baynham's salary by GBP40,000 per annum with effect
from 1 January 2023.
A meeting of the Executive Directors resolved to increase the
remuneration of the Non-Executive Director by GBP2,000 per annum
with effect from 1 July 2022.
After the increases, the annual salaries of the directors at 30
June 2023 were:
I D Lowe GBP 48,000
M J Baynham GBP165,000
R J Pearson GBP 10,000
Mr Lowe's salary continues to be below his contracted rate.
Details of the directors' remuneration can be found in Note 6 of
the consolidated accounts for the year ended 30 June 2023.
R J Pearson
Chairman of the Remuneration Committee
20 December 2023
Directors' report for the year ended 30 June 2023
Directors
The directors who held office at the year end and their
interests in the Company's share capital and outstanding loans with
the Company at the year-end are set out below:
Beneficial interests - Ordinary shares
of 20p each
Percentage 30 June 30 June
held 2023 2022
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 4,020,000 4,380,000
The interest of I D Lowe in the unsecured loans of GBP4,020,000
(2022: GBP4,380,000) is as controlling shareholder of the lender,
Leafrealm Limited.
No rights to subscribe for shares or debentures of Group
companies were granted to any of the directors or their immediate
families or exercised by them during the financial year.
Rule 9 of the UK City Code on Takeovers and Mergers (the
"Takeover Code") provides, among other things, that where any
person who, together with persons acting in concert with him, holds
over 50 per cent. of the voting rights of a company, acquires any
further shares carrying voting rights, then they will not generally
be required to make a general offer to the other shareholders to
acquire the balance of their shares.
Douglas Lowe is part of a concert party pursuant to the Takeover
Code, which includes the interests in the Company's Ordinary Shares
of his Close Relatives (as defined in the Takeover Code) and
Leafrealm Limited and Sheriffhall Business Park Limited, companies
where Douglas Lowe is the controlling shareholder (the "Douglas
Lowe Concert Party"), which holds in aggregate over 50% of the
voting rights of the Company. The Douglas Lowe Concert Party is
interested in a total of 9,527,582 Ordinary Shares which carry
80.9% of the voting rights of the Company. Douglas Lowe or entities
controlled by Douglas Lowe may accordingly increase their aggregate
interests in shares without incurring any obligation to make an
offer under Rule 9.
Results and dividends
The results for the year are set out on page 43. Ordinary
dividends were not paid in the year (2022: GBPNil). The directors
do not recommend payment of a further dividend.
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
20 December 2023
Directors' Responsibilities Statement in respect of the annual
report and financial statements
The directors are responsible for preparing the Annual Report
and the Group and parent Company financial statements in accordance
with applicable law and regulations.
Company law requires the directors to prepare Group and parent
Company financial statements for each financial year. As required
by the AIM Rules of the London Stock Exchange they are required to
prepare the group financial statements in accordance with
UK-adopted International Accounting Standards and applicable law
and the directors have elected to prepare the parent company
financial statements on the same basis.
The group financial statements are required by law and
UK-adopted International Accounting Standards to present fairly the
financial position and performance of the Group and Parent Company.
The Companies Act 2006 provides in relation to such financial
statements that references in the relevant part of that Act to
financial statements giving a true and fair view are references to
their achieving a fair presentation.
Under company law the directors must not approve the financial
statements unless they are satisfied that they give a true and fair
view of the state of affairs of the Group and parent Company and of
the profit or loss of the Group for that period. In preparing each
of the Group and parent Company financial statements, the directors
are required to:
-- select suitable accounting policies and then apply them consistently;
-- make judgements and estimates that are reasonable and prudent;
-- state whether they have been prepared in accordance with
International Accounting Standards in conformity with the
requirements of the Companies Act 2006; and
-- prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the Group and the parent
Company will continue in business.
The directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Group's and the
parent Company's transactions and disclose with reasonable accuracy
at any time the financial position of the Group and the parent
Company and enable them to ensure that its financial statements
comply with the Companies Act 2006. They have general
responsibility for taking such steps as are reasonably open to them
to safeguard the assets of the Group and parent Company and to
prevent and detect fraud and other irregularities.
The directors are responsible for the maintenance and integrity
of the corporate and financial information included on the website
of Caledonian Trust PLC at www.caledoniantrust.com. Legislation in
the UK governing the preparation and dissemination of financial
statements may differ from legislation in other jurisdictions.
Opinion
We have audited the financial statements of Caledonian Trust PLC
(the 'Parent company') and its subsidiaries (the 'Group') for the
year ended 30 June 2023, which comprise the Consolidated Statement
of Comprehensive Income, Consolidated Balance Sheet, Consolidated
Statement of Changes in Equity, Consolidated Statement of Cash
Flows, Company Balance Sheet, Company Statement of Changes in
Equity, Company Statement of Cash Flows and Notes to the
consolidated financial statements and notes to the Parent company
financial statements, including significant accounting policies.
The financial reporting framework that has been applied in their
preparation is applicable law and UK-adopted International
Accounting Standards.
In our opinion:
-- the financial statements give a true and fair view of the
state of the Group's and Parent company's affairs as at 30 June
2023 and of the Group's profit for the year then ended;
-- the Group financial statements have been properly prepared in
accordance with UK-adopted International Accounting Standards;
-- the Parent company financial statements have been properly
prepared in accordance with UK-adopted International Accounting
Standards; and
-- the financial statements have been prepared in accordance
with the requirements of the Companies Act 2006.
Basis for opinion
We conducted our audit in accordance with International
Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our
responsibilities under those standards are further described in the
Auditor responsibilities for the audit of the financial statements
section of our report. We are independent of the Group and the
Parent company in accordance with the ethical requirements that are
relevant to our audit of the financial statements in the UK,
including the FRC's Ethical Standard as applied to listed entities,
and we have fulfilled our ethical responsibilities in accordance
with these requirements. We believe that the audit evidence we have
obtained is sufficient and appropriate to provide a basis for our
opinion.
Our approach to the audit
We planned our audit by first obtaining an understanding of the
Group and Parent company and its environment.
We tailored the scope of our audit to reflect our risk
assessment, taking into account such factors as the business model
and activities, accounting processes and controls, and the industry
in which the Group and Parent company operates.
The scope of our audit was influenced by our application of
materiality. We set certain quantitative thresholds for
materiality. These together with qualitative considerations, helped
us to determine the scope of our audit and the nature, timing and
extent of our audit procedures on the individual financial
statement line items and disclosures and in the evaluation of the
effect of misstatements, both individually and in aggregate on the
financial statements as a whole.
We evaluated the significance of the Group's components and
determined our planned audit responses based on a measure of
materiality. The Group is made up of a consolidation of three
trading subsidiaries plus the Parent company. We completed full
scope audit statutory audits of the Parent company and the three
trading subsidiaries.
Key audit matters
Key audit matters are those matters that, in our professional
judgement, were of most significance in our audit of the financial
statements of the current period and include the most significant
assessed risks of material misstatement (whether or not due to
fraud) that we identified. These matters include those which had
the greatest effect on: the overall audit strategy; the allocation
of resources in the audit; and directing the efforts of the
engagement team. These matters were addressed in the context of our
audit of the financial statements, as a whole, and in forming our
opinion thereon, and we do not provide a separate opinion on these
matters.
We summarise below the key audit matters in arriving at our
audit opinion above, together with how our audit addressed these
matters and the results of our audit work in relation to these
matters.
Key audit matter How our audit addressed the
key audit matter
Carrying value of investment We obtained the directors' assessment
properties (note 4 and 10 Group, of the valuation at 30 June
and note 5 Parent) 2023, prepared by the non-executive
Group - 2023: GBP17.1M (2021: director. We assessed the inputs
GBP16.6M) and the assumptions inherent
Parent company - 2023: GBP1.7M in these valuations as follows:
(2022: GBP1.7M)
* We considered external local market data for sales or
listings for comparable properties, relevant to each
The Group has a large portfolio property held by the Group. This included
of investment properties, which consideration of the impact of higher inflation and
provide significant rental income interest levels and fluctuations in the housing
to the Group. market.
We focus on the valuation of
investment properties because
of their materiality to the * We have compared the underlying inputs driving the
Group's and Parent company's valuations including agreement of market rent
balance sheet and the inherent assumptions to the Group's rental income and
level of judgement required comparison of yields used in the valuations to
in estimating the year-end value. industry data.
The value at 30 June 2023 is
a valuation by the directors,
based on a third-party valuation * We assessed the competence of the non-executive
as at 30 June 2022, updated director by considering his credentials, and
for the directors' assessment benchmarking valuations against local market data as
of current year factors that specified above.
impact the valuation. The credentials
of the non-executive director
who performed the valuation
can be found in principle 6 The results of our testing did
of the Corporate Governance not indicate any audit findings
Code. The valuation assessment in respect of the valuation
is that two properties have of investment properties.
increased in value, while one
property has decreased in value
with the remainder all retaining
their 2022 value as at 30 June
2023. The assessment has been
based on current year assessment
of rental yields, estimated
rental value and local market
conditions.
------------------------------------------------------------------------
Carrying value of trading properties We reviewed the year end valuation
held in stock (note 4 and 13 of trading properties held in
Group, and note 8 Parent) stock and challenged the key
Group - 2023: GBP9.5M (2022: assumptions and inputs as follows:
GBP10.7M)
Parent company - 2023: GBP1.4M * We obtained management's reconciliation of the
(2022: GBP1.4M) opening carrying value to the closing carrying value
of the trading property stock and agreed a sample of
The Group has a large portfolio additional costs incurred in the year to supporting
of land and properties, which documentation.
are held for development and/or
sale.
We focus on the valuation of * We obtained the current planning status and
trading properties because of development plans for each site from the directors,
their materiality to the Group's to understand if these sites are to be developed
and Parent company's balance internally or sold as plots to external developers,
sheet. Trading properties are including copies of the latest planning permissions
included at the lower of cost and consents.
and their net realisable value.
There is a considerable level
of inherent management judgement
required in estimating net realisable * For properties to be developed internally, we
value. compared management's expected build cost per square
foot to the build costs for similar sites and
Net realisable value is dependent industry data on build costs and obtained
upon availability of planning explanations for any variances.
consent and demand for sites.
* For properties being sold to an external developer,
we formed an auditor's estimate of future build costs
and developer margins by utilising external market
data to calculate expected total cost. This was
compared to management's valuation, with any
variations investigated and reconciled.
* We challenged management's forecast sales prices by
comparing prices per square foot to local market data
and recent housing sales. We also considered the
overall market in Scotland and the relevant regions
by reviewing external reports on house price
movements in Scotland, including consideration of the
increased levels of inflation and general cost
increases and fluctuations in the housing market.
* Finally, we reviewed transactions in year, and post
year end transactions to confirm that sales values
were in excess of carrying value.
The results of our testing did
not indicate any audit findings
in respect of the valuation
of trading properties.
------------------------------------------------------------------------
Our application of materiality
We define materiality as the magnitude of misstatement in the
financial statements that makes it probable that the economic
decisions of a reasonably knowledgeable person would be changed or
influenced. We use materiality in determining the nature and extent
of our work and in evaluating the results of that work. Materiality
was determined as follows:
Materiality Measure Group Parent company
Materiality for the financial GBP280,000 (2022: GBP220,000 (2022:
statements as a whole GBP290,000) GBP215,000)
- we have set materiality
as 1% of the total assets
of the Group/Company as
we believe that benchmark
is the primary performance
measure used by investors
and is the key driver
of shareholder value given
the nature of the business
and significant asset
value in the investment
properties and trading
property stock. We determined
the measurement percentage
to be commensurate with
the risk and complexity
of the audit and the Group's
listed status.
------------------ ------------------
Performance materiality GBP210,000 (2022: GBP165,000 (2022:
- performance materiality GBP217,500) GBP161,250)
represents amounts set
by the auditor at less
than materiality for the
financial statements as
a whole, to reduce to
an appropriately low level
the probability that the
aggregate of uncorrected
and undetected misstatements
exceeds materiality for
the financial statements
as a whole.
In setting this we consider
the Group's overall control
environment, our past
experience of the audit
that indicates a lower
risk of material misstatements.
Based on our judgement
of these factors, we have
set performance materiality
at 75% of our overall
financial statement materiality.
------------------ ------------------
Specific materiality GBP10,000 (2022: GBP10,000 (2022:
- recognising that there GBP10,000) GBP10,000)
are transactions and balances
of a lesser amount which
could influence the understanding
of users of the financial
statements we calculate
a lower level of materiality
for testing such areas.
We have set a specific
materiality of GBP10,000
in respect of related
party transactions.
We used our judgement
in setting these thresholds
and considered our past
experience of the audit,
the history of misstatements
and industry benchmarks
for specific materiality.
------------------ ------------------
Audit Committee reporting GBP14,000 (2022: GBP11,000 (2022:
threshold - we agreed GBP14,500) GBP10,750)
with the Audit Committee
that we would report to
them all differences in
excess of 5% of overall
materiality in addition
to other identified misstatements
that warranted reporting
on qualitative grounds,
in our view. For example,
an immaterial misstatement
as a result of fraud.
------------------ ------------------
Conclusions relating to going concern
In auditing the financial statements, we have concluded that the
directors' use of the going concern basis of accounting in the
preparation of the financial statements is appropriate.
Our evaluation of the directors' assessment of the Group and
Parent company's ability to continue to adopt the going concern
basis of accounting included:
-- evaluating the Directors method of assessing going concern,
including consideration of the nature and reliability of revenues
and costs;
-- assessing and challenging the forecast cashflows used by the
Directors in support of their going concern assessment;
-- assessing the adequacy of the Group's and Parent company's
going concern disclosures included in the Annual Report; and
-- obtaining confirmation that support from Leafrealm Limited
would continue to be provided for at least twelve months from sign
off and that there is no intention to seek repayment of the
remaining loan balance in 2024.
Based on the work we have performed, we have not identified any
material uncertainties relating to events or conditions that,
individually or collectively, may cast significant doubt on the
Group or Parent company's ability to continue as a going concern
for a period of at least twelve months from when the financial
statements are authorised for issue.
Our responsibilities and the responsibilities of the directors
with respect to going concern are described in the relevant
sections of this report.
Other information
The other information comprises the information included in the
Annual Report other than the financial statements and our auditor's
report thereon. The directors are responsible for the other
information contained within the Annual Report. Our opinion on the
financial statements does not cover the other information and,
except to the extent otherwise explicitly stated in our report, we
do not express any form of assurance conclusion thereon. Our
responsibility is to read the other information and, in doing so,
consider whether the other information is materially inconsistent
with the financial statements or our knowledge obtained in the
course of the audit, or otherwise appears to be materially
misstated. If we identify such material inconsistencies or apparent
material misstatements, we are required to determine whether this
gives rise to a material misstatement in the financial statements
themselves. If, based on the work we have performed, we conclude
that there is a material misstatement of this other information, we
are required to report that fact.
We have nothing to report in this regard.
Opinions on other matters prescribed by the Companies Act
2006
In our opinion, based on the work undertaken in the course of
the audit:
-- the information given in the Strategic Report and Directors'
Report for the financial year for which the financial statements
are prepared is consistent with the financial statements; and
-- the Strategic Report and Directors' Report have been prepared
in accordance with applicable legal requirements.
Matters on which we are required to report by exception
In the light of the knowledge and understanding of the Group and
the Parent company and their environment obtained in the course of
the audit, we have not identified material misstatements in the
Strategic Report or Directors' Report.
We have nothing to report in respect of the following matters
where the Companies Act 2006 requires us to report to you if, in
our opinion:
-- adequate accounting records have not been kept by the Parent
company, or returns adequate for our audit have not been received
from branches not visited by us; or
-- the Parent company financial statements are not in agreement
with the accounting records and returns; or
-- certain disclosures of directors' remuneration specified by law are not made; or
-- we have not received all the information and explanations we require for our audit.
Responsibilities of the Directors
As explained more fully in the Directors' Responsibilities
Statement set out on pages 34, the directors are responsible for
the preparation of the financial statements and for being satisfied
that they give a true and fair view, and for such internal control
as the directors determine is necessary to enable the preparation
of financial statements that are free from material misstatement,
whether due to fraud or error.
In preparing the financial statements, the directors are
responsible for assessing the Group's and the Parent company's
ability to continue as a going concern, disclosing, as applicable,
matters related to going concern and using the going concern basis
of accounting unless the directors either intend to liquidate the
Group or the Parent company or to cease operations, or have no
realistic alternative but to do so.
Auditor's responsibilities for the audit of the financial
statements
Our objectives are to obtain reasonable assurance about whether
the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an
auditor's report that includes our opinion. Reasonable assurance is
a high level of assurance but is not a guarantee that an audit
conducted in accordance with ISAs (UK) will always detect a
material misstatement when it exists. Misstatements can arise from
fraud or error and are considered material if, individually or in
the aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of these financial
statements.
A further description of our responsibilities for the audit of
the financial statements is located on the Financial Reporting
Council's website at:
http://www.frc.org.uk/auditorsresponsibilities. This description
forms part of our auditor's report.
Extent to which the audit was considered capable of detecting
irregularities, including fraud
Irregularities, including fraud, are instances of non-compliance
with laws and regulations. We design procedures in line with our
responsibilities, outlined above, to detect material misstatements
in respect of irregularities, including fraud. The extent to which
our procedures are capable of detecting irregularities, including
fraud is detailed below.
We assessed whether the engagement team collectively had the
appropriate competence and capabilities to identify or recognise
non-compliance with laws and regulations by considering their
experience, past performance and support available.
All engagement team members were briefed on relevant identified
laws and regulations and potential fraud risks at the planning
stage of the audit. Engagement team members were reminded to remain
alert to any indications of fraud or non-compliance with laws and
regulations throughout the audit.
We obtained an understanding of the legal and regulatory
frameworks that are applicable to the Group and Parent Company and
the sector in which they operate, focusing on those provisions that
had a direct effect on the determination of material amounts and
disclosures in the financial statements. The most relevant
frameworks we identified include:
-- UK-adopted International Accounting Standards;
-- Companies Act 2006;
-- UK Corporate Tax legislation;
-- AIM Rules for Companies; and
-- UK Market Abuse Regulation.
We gained an understanding of how the Group and Parent company
are complying with these laws and regulations by making enquiries
of management and those charged with governance. We corroborated
these enquiries through our review of any relevant correspondence
with regulatory bodies and board meeting minutes.
We assessed the susceptibility of the Group's financial
statements to material misstatement, including how fraud might
occur, by meeting with management and those charged with governance
to understand where it was considered there was susceptibility to
fraud. This evaluation also considered how management and those
charged with governance were remunerated and whether this provided
an incentive for fraudulent activity. We considered the overall
control environment and how management and those charged with
governance oversee the implementation and operation of controls. We
assessed that a heightened fraud risk exists in relation to
Management override of controls and Revenue recognition.
The audit procedures we performed in response to these risks are
included below.
In addition to the procedures outlined above and in our response
to the identified key audit matters, the following procedures were
performed to provide reasonable assurance that the financial
statements were free of material fraud or error:
-- Substantive analytical procedures over rental income,
supported by agreement of a sample of rental revenue to relevant
documentation, including agreement of a sample of transactions to
underlying contracts and/or invoices and bank statements, ensuring
income has been recorded in the correct period;
-- For total property sales during the year and post year end,
we reconciled the number of sales recorded in the year with
external third-party invoices from Estate Agents, and confirmed
sales value to underlying contracts, missives and bank statements,
ensuring it has been included in the correct period;
-- Reviewing minutes of meetings of those charged with
governance for reference to: breaches of laws and regulation or for
any indication of any potential litigation and claims; and events
or conditions that could indicate an incentive or pressure to
commit fraud or provide an opportunity to commit fraud;
-- Reviewing the level of and reasoning behind the Group's and
Parent company's procurement of legal and professional
services;
-- Performing audit work procedures over the risk of management
override of controls, including testing of journal entries and
other adjustments for appropriateness, evaluating the business
rationale of any significant transactions outside the normal course
of business and reviewing judgements made by management in their
calculation of accounting estimates for potential management bias.
There were no transactions outside the normal course of business
identified;
-- Agreement of the financial statement disclosures to
supporting documentation;
-- Completion of appropriate checklists and use of our
experience to assess the Group and the Parent Company's compliance
with the Companies Act 2006 and AIM Rules for Companies; and
-- Agreement of the financial statement disclosures to
supporting documentation.
Our audit procedures were designed to respond to the risk of
material misstatements in the financial statements, recognising
that the risk of not detecting a material misstatement due to fraud
is higher than the risk of not detecting one resulting from error,
as fraud may involve intentional concealment, forgery, collusion,
omission or misrepresentation. There are inherent limitations in
the audit procedures performed and the further removed
non-compliance with laws and regulations is from the events and
transactions reflected in the financial statements, the less likely
we would become aware of it.
Use of our report
This report is made solely to the Parent company's members, as a
body, in accordance with Chapter 3 of Part 16 of the Companies Act
2006. Our audit work has been undertaken so that we might state to
the Parent company's members those matters we are required to state
to them in an auditor's report and for no other purpose. To the
fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the Parent company and the
Parent company's members as a body, for our audit work, for this
report, or for the opinions we have formed.
Grant Roger (Senior Statutory Auditor)
for and on behalf of Johnston Carmichael .........................
LLP
Chartered Accountants
Statutory Auditor 7-11 Melville Street
Edinburgh
EH3 7PE
Consolidated statement of comprehensive income for the year
ended 30 June 2023
2022
2023
Note GBP000 GBP000
Revenue
Revenue from development property sales 2,665 -
Gross rental income from investment properties 373 306
Total Revenue 5 3,038 306
Cost of development property sales (1,795) -
Property charges ( 139) (90)
-------------------- ---------------------
Cost of Sales (1,934) (90)
-------------------- ---------------------
Gross Profit 1,104 216
Administrative expenses (626) (887)
Other income 10 8
-------------------- ---------------------
Net operating profit/(loss) before investment
property
disposals and valuation movements 488 (663)
-------------------- ---------------------
Valuation gains on investment properties 10 560 190
Valuation losses on investment properties 10 (80) (690)
Net gains/(loss) on investment properties 480 (500)
-------------------- ---------------------
Operating profit/(loss) 5 968 (1,163)
-------------------- ---------------------
Financial income 1 -
Financial expenses 7 (251) (139)
-------------------- ---------------------
Net financing costs (250) (139)
-------------------- ---------------------
Profit/(loss) before taxation 718 (1,302)
Income tax 8 - -
Profit/(loss) and total comprehensive
income for the financial year attributable
to equity holders of the parent Company 718 (1,302)
==================== =====================
Earnings/(loss) per share
Basic and diluted earnings/(loss) per
share (pence) 9 6.09p (11.05)p
The notes on pages 47 - 67 form an integral part of these
financial statements.
Consolidated balance sheet as at 30 June 2023
2022
2023
Note GBP000 GBP000
Non-current assets
Investment property 10 17,090 16,610
Plant and equipment 11 10 8
Investments 12 1 1
--------- ---------
Total non-current assets 17,101 16,619
--------- ---------
Current assets
Trading properties 13 9.451 10,672
Trade and other receivables 14 154 134
Cash and cash equivalents 15 1,953 1,317
--------- ---------
Total current assets 11,558 12,123
Total assets 28,659 28,742
--------- ---------
Current liabilities
Trade and other payables 16 (668) (1,109)
Interest bearing loans and
borrowings 17 - (360)
--------- ---------
Total current liabilities
Non-current liabilities (668) (1,469)
Interest bearing loans and
borrowings 17 (4,020) (4,020)
--------- ---------
Total liabilities (4,688) (5,489)
--------- ---------
Net assets 23,971 23,253
========= =========
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 18,694 17,976
--------- ---------
Total equity attributable
to equity holders of the
parent Company 23,971 23,253
========= =========
NET ASSET VALUE PER SHARE 203.4p 197.3p
The financial statements were approved by the board of directors
on 20 December 2023 and signed on its behalf by:
I D Lowe
Director
The notes on pages 47 - 67 form an integral part of these
financial statements.
Consolidated statement of changes in equity as at 30 June
2023
Capital Share Retained
Issued
share redemption premium earnings Total
capital reserve account
GBP000 GBP000 GBP000 GBP000 GBP000
At 1 July 2021 2,357 175 2,745 19,278 24,555
(Loss) and total
comprehensive expenditure
for the year - - - (1,302) (1,302)
______ ______ ______ ______ ______
At 30 June 2022 2,357 175 2,745 17,976 23,253
Profit and total
comprehensive income
for the year - - - 718 718
______ ______ ______ ______ ______
At 30 June 2023 2,357 175 2,745 18,694 23,971
====== ====== ====== ====== ======
Consolidated statement of cash flows for the year ended 30 June
2023
2022
2023
Note GBP000 GBP000
Cash flows from operating activities
Profit/(loss) for the year 718 (1,302)
Adjustments for:
Net (gains)/loss on revaluation of investment
properties (480) 500
Depreciation 5 5
Net finance expense 250 139
_______ _______
Net operating cash flows before
movements
in working capital 493 (658)
Decrease/(increase) in trading
properties 1,221 (1,359)
(Increase)/decrease in trade
and other receivables (20) 1
(Decrease)/increase in trade
and other payables (377) 574
_______ _______
Cash generated from/(absorbed
by) operations 1,317 (1,442)
Interest received 1 -
Interest paid (315) (251)
_______ _______
Net cash inflow/(outflow) from
operating activities 1,003 (1,693)
_______ _______
Investing activities
Acquisition of property, plant
and equipment (7) (10)
_______ _______
Cash flows (absorbed by) investing
activities (7) (10)
_______ _______
Financing activities
(Decrease) in borrowings (360) -
_______ _______
Cash flows (used) from financing (360) -
activities
_______ _______
Net increase/(decrease) in cash and cash
equivalents 636 (1,703)
Cash and cash equivalents at
beginning of year 1,317 3,020
_______ _______
Cash and cash equivalents at
end of year 1,953 1,317
Notes to the consolidated financial statements as at 30 June
2023
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 2023 comprise
the Company and its subsidiaries as listed in note 7 in the parent
Company's financial statements (together referred to as "the
Group"). The Group's principal activities are the holding of
property for both investment and development purposes. The
registered office is c/o Womble Bond Dickinson, The Spark, Draymans
Way, Newcastle Helix, Newcastle upon Tyne, NE4 5DE and the
principal place of business is 61a North Castle Street, Edinburgh
EH2 3LJ.
2 Statement of Compliance
The Group financial statements have been prepared and approved
by the directors in accordance with UK-adopted International
Accounting Standards. The company has elected to prepare its parent
Company financial statements in accordance with UK-adopted
International Accounting Standards; these are presented on pages 68
to 87.
3 Basis of preparation
The financial statements are prepared on the historical cost
basis except for investments and investment properties which are
measured at their fair value.
The preparation of the financial statements in conformity with
UK-adopted International Accounting Standards requires the
directors to make judgements, estimates and assumptions that affect
the application of policies and reported amounts of assets and
liabilities, income and expenses. The estimates and associated
assumptions are based on historical experience and various other
factors that are believed to be reasonable under the circumstances,
the results of which form the basis of making the judgements about
carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these
estimates.
These financial statements have been presented in pounds
sterling which is the functional currency of all companies within
the group. All financial information has been rounded to the
nearest thousand pounds.
Going concern
The Group's business activities, together with the factors
likely to affect its future development, performance and position
are set out in the Chairman's Statement on pages 2 to 16. 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
is considered for specific development projects. The related party
lender has indicated its willingness to continue to provide
financial support and not to demand repayment of its principal loan
before 30 June 2025.
The directors have prepared cash flow projections for the period
ending eighteen months from the date of their approval of these
financial statements. The Group's cash reserves and existing loan
arrangements are expected to be sufficient for the Group's cash
flow needs for that period.
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 of property is formally measured every 3 years by
suitably qualified, independent individuals in accordance RICS
Appraisal and Valuation Standards, and informally assessed by
Management in the intervening years. Management consideration
includes future rental income, anticipated void costs, the
appropriate discount rate or yield and the potential for
redevelopment. The fair value of a property is deemed to be the
estimated amount for which a property should exchange, on the date
of valuation, in an arm-length transaction.
-- 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 company is likely to achieve in a sale to a
third party. This is then dependent on availability of planning
consent and demand for sites which is influenced by the housing and
property markets.
.
Judgements
-- Deferred Tax (note 20)
The Group's unrecognised deferred tax asset relates to tax
losses being carried forward and to differences between the
carrying value of investment properties and their original tax
base. A decision has been taken not to recognise the asset on the
basis of uncertainty regarding the availability and timing of
future taxable profits.
4 Accounting policies
The accounting policies below have been applied consistently to
all periods presented in these consolidated financial statements
.
Basis of consolidation
The financial statements incorporate the financial statements of
the parent Company and all its subsidiaries all of which have the
same accounting date (see parent Company note 7). Subsidiaries are
entities controlled by the Group. Control exists when the Group has
a) power over the investee; b) exposure or rights to variable
returns from its involvement with the investee; and c) the ability
to use its power over the investee to affect the amount of the
investor's returns. The financial statements of subsidiaries are
included in the consolidated financial statements from the date
that control commences until the date it ceases. Inter-company
balances are eliminated on consolidation.
Revenue
Turnover is the amount derived from ordinary activities, stated
after any discounts, other sales taxes and net of VAT.
Revenue from the sale of investment and trading properties is
recognised in the income statement on legal completion, being the
date on which control passes to the buyer. Standard payments terms
are for payment to be received contemporaneously with
completion.
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.
Standard payment terms for rent is payment in advance of the period
to which the relates.
Other income
Other income comprises income from agricultural land and other
miscellaneous income recognised on receipt.
Finance income and expenses
Finance income and expenses comprise interest payable on bank
loans and other borrowings. All borrowing costs are recognised in
the income statement using the effective interest rate method.
Interest income represents income on bank deposits using the
effective interest rate method.
Taxation
Income tax on the profit or loss for the year comprises current
and deferred tax. Income tax is recognised in the income statement
except to the extent that it relates to items recognised directly
in equity, in which case the charge / credit is recognised in
equity. Current tax is the expected tax payable on taxable income
for the current year, using tax rates enacted or substantively
enacted at the reporting date, adjusted for prior years under and
over provisions.
Deferred tax is calculated using the balance sheet liability
method in respect of all temporary differences between the values
at which assets and liabilities are recorded in the financial
statements and their cost base for taxation purposes. Deferred tax
includes current tax losses which can be offset against future
capital gains. As the carrying value of the Group's investment
properties is expected to be recovered through eventual sale rather
than rentals, the tax base is calculated as the cost of the asset
plus indexation. Indexation is taken into account to reduce any
liability but does not create a deferred tax asset. A deferred tax
asset is recognised only to the extent that it is probable that
future taxable profits will be available against which the asset
can be utilised.
Investment properties
Investment properties are properties which are held either to
earn rental income or for capital appreciation or for both.
Investment properties are recognised initially at cost.
Subsequent to initial recognition:
i. investment properties whose fair value can be measured
reliably are held at fair value. Any gains or losses arising from
changes in the fair value are recognised in the income statement in
the period that they arise; and
ii. no depreciation is provided in respect of investment
properties applying the fair value model.
Rental income from investment property is accounted for as
described in the Revenue accounting policy.
Investment property is measured at fair value at each balance
sheet date. The directors assess market value at each balance sheet
date and external independent professional valuations are prepared
at least once every three years. The fair values are based on
market values, being the estimated price that would be received to
sell an asset or transfer a liability in an orderly transaction
between market participants at the measurement date.
Tangible assets
Tangible assets are stated at cost, less accumulated
depreciation and any provision for impairment. Depreciation is
provided on all tangible assets at varying rates calculated to
write off cost to the expected current residual value by equal
annual instalments over their estimated useful economic lives. The
periods used are:
Fixtures and fittings - 3 years
Motor vehicles - 3 years
Other equipment - 5 years
Trading properties
Trading properties held with a view to development or subsequent
disposal are stated at the lower of cost or net realisable value.
Initial and development 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 2021, 30 June
2022 or 30 June 2023.
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. 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.
A subsidiary is an entity controlled by the company. Control is
the power to govern the financial and operating policies of the
entity so as to obtain benefits from its activities.
Listed investments are held at fair value and subsequently
measured at fair value, with any changes to fair value recognised
in the profit and loss statement.
Current receivables
Trade and other debtors are recognised initially at transaction
price. Subsequent to initial recognition they are measured at
amortised cost using the effective interest method less any
impairment losses.
Cash and cash equivalents
Cash includes cash in hand, deposits held at call (or with a
maturity of less than 3 months) with banks.
Financial liabilities
Current payables
Trade payables are non-interest-bearing and are initially
measured at transaction price and thereafter at amortised cost.
Interest bearing loans and borrowings
Interest-bearing loans and bank overdrafts are initially carried
at transaction price less allowable transactions costs and then at
amortised cost.
Changes in accounting policies
There are no new standards or amendments to existing standards
which are effective for annual periods beginning on or after 1 July
2022 which are relevant to the Group. There are no new standards or
amendments to existing standards or interpretations that are
effective as at 30 June 2023 and relevant to the Group. The
directors have considered standards which are issued but are not
yet effective and do not expect them to have any significant impact
on financial measurement and disclosures.
Operating segments
The Group determines and presents operating segments based on
the information that is internally provided to the Board of
Directors ("The Board"), which is the Group's chief operating
decision maker. The directors review information in relation to the
Group's entire property portfolio, regardless of its type or
location, and as such are of the opinion that there is only one
reportable segment which is represented by the consolidated
position presented in the primary statements.
5 Operating profit/(loss) 2023 2022
GBP000 GBP000
Revenue comprises: -
Rental income from investment properties 373 306
Sale of properties 2,665 -
-------- ---------
3,038 306
======== =========
All revenue is derived from the United Kingdom. Details of
performance obligations and payment terms are disclosed in
accounting policy 4, Revenue.
2023 2022
GBP000 GBP000
Rental income from investment properties 373 306
Direct operating expenses
* for properties generating income (126) (80)
* for properties not generating income (13) (10)
-------- ---------
Gross Profit 234 216
======== =========
2023 2022
GBP000 GBP000
Sale of Properties 2,665 -
Cost of development property sales 1,795 -
-------- ---------
Gross Profit 870 -
======== =========
2023 2022
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) 24 19
- Audit of financial statements of subsidiaries
pursuant to 14 10
legislation
6 Employees and employee benefits 2023 2022
GBP000 GBP000
Employee remuneration
Wages and salaries 318 232
Social security costs 31 17
Other pension costs 28 28
_______ _______
377 277
====== ======
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 4 3
_______ _______
6 5
====== =======
2023 2022
Remuneration of directors GBP000 GBP000
Directors' emoluments 206 135
Company contributions to money purchase
pension schemes 25 25
====== ======
Salary and Pension 2023 2022
Director Fees Benefits Contributions Total Total
GBP000 GBP000 GBP000 GBP000 GBP000
I D Lowe 45 6 - 51 33
M J Baynham 145 - 25 170 119
R J Pearson 10 - - 10 8
______ ______ ______ ______ ______
200 6 25 231 160
Key management personnel are the directors, as listed above. The
total remuneration of key management personnel, including social
security cost, in the year was GBP256,705 (2022: GBP173,491).
2023 2022
GBP000 GBP000
Highest paid director (included above)
Management remuneration 145 94
Pension contributions to money purchase schemes 25 25
_______ _______
170 119
====== ======
Retirement benefits are accruing to the following
number of
directors under:
Money purchase schemes 1 1
====== ======
7 Finance expenses
2023 2022
GBP000 GBP000
Finance expenses
Interest payable:
- Other loan interest 251 139
==== ====
8 Income tax
There was no current nor deferred tax charge in the current or
preceding year.
Reconciliation of effective
tax rate
2023 2022
GBP000 GBP000
Profit/(loss) before tax 718 (1,302)
===== =====
Current tax at 20.5% (2022:
19%) 147 (247)
Effects of:
Expenses not deductible
for tax purposes 1 72
Excess depreciation over
capital allowances
Income not taxable (4) (6)
(2) -
Losses carried forward 39 86
Losses brought forward (83) -
Revaluation of property
not taxable (98) 95
______ ______
Total tax charge - -
===== =====
An increase in the UK corporation tax rate from 19% to 25%
(effective from 1 April 2023) was substantively enacted on 24 May
2021. This will increase the Group's tax charge accordingly.
Deferred tax has been calculated at 25% as this is the rate
effective in the period it is expected to reverse.
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/(loss) attributable to ordinary shareholders by the weighted
average number of ordinary shares outstanding during the period as
follows:
2023 2022
GBP000 GBP000
Profit/(loss) for financial period 718 (1,302)
====== ======
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/(loss) per share 6.09p (11.05) p
Diluted earnings/(loss) per share 6.09p (11.05) p
The diluted figure per share is the same as the basic figure
per share as there are no dilutive shares.
Investment properties
10
2023 2022
GBP000 GBP000
Valuation
At 1 July 16,610 17,110
Fair value gain/(loss) in year 480 (500)
________ ________
Valuation at 30 June 17,090 16,610
======== ========
The fair value of investment property at 30 June 2023 was
determined by the directors based on changes in leases for one
property and changes in market conditions for others. The
non-executive director holds an appropriate professional
qualification and has recent experience in the location and
category of property being valued. Cognisance was also taken of the
independent valuation by Montagu Evans, Chartered Surveyors as at
30 June 2022.
The valuation methodology applied by the directors and the
external valuers was in accordance with the RICS Valuation Global
Standards July 2017 which is consistent with the required IFRS 13
methodology. IFRS 13 defines fair value as the price that would be
received to sell an asset or paid to transfer a liability in an
orderly transaction between market sector participants at the
measurement date. The properties were valued individually and not
as part of a portfolio.
The 'review of activities' and 'property prospects' within the
Chairman's statement provides commentary on the Group's
properties.
The historical cost of investment properties held at 30 June
2023 is GBP8,805,509 (2022: GBP8,805,509). The cumulative amount of
interest capitalised and included within historical cost in respect
of the Group's investment properties is GBP451,000 (2022:
GBP451,000).
Valuations were based on vacant possession, rental yields or
residual (development) appraisal rather than investment income in
order to achieve the highest and best use value. To obtain the
residual valuation the end development value is discounted by
profit for a developer and cost to build to reach the base
estimated market value of the investment. Only two properties were
valued using an appropriate yield with allowance for letting voids,
rent free periods and letting/holding costs for vacant
accommodation and early lease expiries/break options, together with
a deduction for purchaser's acquisition costs in accordance with
market practice. The resulting net yields have also been assessed
as a useful benchmark. Yields of 7.5% and 11% were applied
respectively.
Assuming all else stayed the same, a decrease in net rental
income or estimated future rent will result in a decrease in the
fair value whereas a decrease in the yields will result in an
increase in fair value. A decrease of 1% in the yields would result
in an increase in valuation of GBP206,000 (2022: GBP221,000). An
increase of 1% in the yields would result in a decrease in the fair
value of GBP172,000 (2022: GBP181,000).
All the investment properties have been categorised as Level 2
in both years as defined by IFRS 13 Fair Value Measurement. Level 2
means that the valuation is based on inputs other than quoted
prices that are observable for the asset, either directly (i.e. as
prices) or indirectly (i.e. derived from prices).
The amount of unrealised gains or losses on investment
properties is charged to the statement of comprehensive income as
the movement in fair value of investment property. For the year to
30 June 2023 this was a fair value profit of GBP480,000 (2022: loss
GBP500,000). There were no realised gains or losses on the disposal
of investment properties in the year ended 30 June 2023.
11 Plant and equipment
Motor Fixtures Other
Vehicles and fittings equipment Total
GBP000 GBP000 GBP000 GBP000
Cost
At 30 June 2021 1 15 69 85
Addition in year - 10 - 10
At 30 June 2022 1 25 69 95
---------- -------------- ----------- --------
Depreciation
At 30 June 2021 1 15 66 82
Charge for year - 3 2 5
At 30 June 2022 1 18 68 87
---------- -------------- ----------- --------
Net book value
At 30 June 2022 - 7 1 8
========== ============== =========== ========
Motor Fixtures Other
Vehicles and fittings equipment Total
GBP000 GBP000 GBP000 GBP000
Cost
At 30 June 2022 1 25 69 95
Additions in year - 3 4 7
At 30 June 2023 1 28 73 102
---------- -------------- ----------- --------
Depreciation
At 30 June 2022 1 18 68 87
Charge for year - 4 1 5
At 30 June 2023 1 22 69 92
---------- -------------- ----------- --------
Net book value
At 30 June 2023 - 6 4 10
========== ============== =========== ========
12 Investments
2023 2022
GBP000 GBP000
Listed investments 1 1
====== ======
13 Trading properties
2023 2022
GBP000 GBP000
At start of year 10,672 9,313
Additions 574 1,359
Sold in year (1,795) -
_________ _________
At end of year 9,451 10,672
======== ========
Finance costs related to borrowings specifically for a
development are included in the cost of developments. At 30 June
2023 the total finance costs included in stock and work in progress
was GBP1,910 (2022: GBP9,552).
14 Trade and other receivables 2023 2022
GBP000 GBP000
Amounts falling due within one year
Other debtors 118 103
Prepayments and accrued income 36 31
_______ _______
154 134
====== ======
The Group's exposure to credit risks and impairment losses
relating to trade receivables is given in note 18.
15 Cash and cash equivalents 2023 2022
GBP000 GBP000
Cash 1,953 1,317
====== ======
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
2023 2022
GBP000 GBP000
Trade creditors 21 59
Other creditors including taxation 13 14
Accruals and deferred income 634 1,036
_______ _______
668 1,109
====== ======
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
2023 2022
GBP000 GBP000
Unsecured loan - 360
====== ======
Non-current liabilities
Unsecured loans 4,020 4,020
======= =======
Net debt reconciliation
2023 2022
GBP000 GBP000
Cash and cash equivalents (note
15) 1,953 1,317
Liquid investments (note 12) 1 1
Borrowings - repayable with
one year (note 17) - (360)
Borrowings - repayable after
one year (note 17) (4,020) (4,020)
Net debt (2,066) (3,062)
Cash and liquid investments 1,954 1,318
Gross debt - variable interest
rates (4,020) (4,380)
Net debt (2,066) (3,062)
Cash/bank Liquid Borrowing Borrowing
overdraft investments due within due after
1 year 1 year Total
GBP000 GBP000 GBP000 GBP000 GBP000
Net debt at 30
June 2021 3,020 1 (360) (4,020) (1,359)
Cashflows (1,703) - - - (1,703)
Net debt at 30
June 2022 1,317 1 (360) (4,020) (3,062)
Cashflows 636 - 360 - 996
Net debt at
30 June 2023 1,953 1 - (4,020) (2,066)
=========== ============= ============ =========== ========
Terms and debt repayment schedule
Terms and conditions of outstanding loans were as follows:
2023 2022
Nominal interest Fair Carrying Fair Carrying
Currency rate value amount value amount
GBP000 GBP000 GBP000 GBP000
Unsecured loan GBP Base +3% 4,020 4,020 4,020 4,020
Unsecured development
loan GBP Base +0.5% - - 360 360
4,020 4,020 4,380 4,380
The unsecured loan of GBP4,020,000 is from Leafrealm Limited and
is repayable in 12 months and one day after the giving of notice by
the lender. Interest was charged at 3% over the Bank of Scotland
base rate until 10 October 2023 when the terms were amended to a
margin of 2% over the Bank of Scotland base rate, capped at 5%
overall and with a minimum rate, including margin, of 2%. Leafrealm
Limited retains the right to require the interest rate to return to
3% over the Bank of Scotland base rate and the maximum and minimum
cap to be varied at any time on the giving of not less than 3
months notice.
The short-term unsecured development loan of GBP360,000 for
Brunstane was from Leafrealm Limited and was repaid during the
year. Interest was charged at a margin of 0.5% over the Bank of
Scotland base rate.
The weighted average interest rate of the floating rate
borrowings was 5.7% (2022: 3.2%).
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:
2023 2022
Fair value Carrying Fair value Carrying
amount amount
GBP000 GBP000 GBP000 GBP000
Trade and other receivables
(note 14) 118 118 103 103
Cash and cash equivalents
(note 15) 1,953 1,953 1,317 1,317
------------- --------- ----------- ---------
2,071 2,071 1,420 1,420
------------- --------- ----------- ---------
Loans from related parties
(note 17) 4,020 4,020 4,380 4,380
Trade and other payables
(note 16) 21 21 59 59
------------- --------- ----------- ---------
4,041 4,041 4,439 4,439
------------- --------- ----------- ---------
Estimation of fair values
The following methods and assumptions were used to estimate
the fair values shown above:
Trade and other receivables/payables - the fair value of
receivables and payables with a remaining life of less than
one year is deemed to be the same as the book value.
Cash and cash equivalents - the fair value is deemed to
be the same as the carrying amount due to the short maturity
of these instruments.
Other loans - the fair value is calculated by discounting
the expected future cashflows at prevailing interest rates.
Overview of risks from its use of financial instruments
The Group has exposure to the following risks from its use
of financial instruments:
* credit risk
* liquidity risk
* market risk
The Board of Directors has overall responsibility for the
establishment and oversight of the Group's risk management
framework and oversees compliance with the Group's risk
management policies and procedures and reviews the adequacy
of the risk management framework in relation to the risks
faced by the Group.
The Board's policy is to maintain a strong capital base so as to
cover all liabilities and to maintain the business and to sustain
its development.
The Board of Directors also considers whether or not dividends
should be paid to ordinary shareholders.
For the purposes of the Group's capital management, capital
includes issued share capital and share premium account and all
other equity reserves attributable to the equity holders. There
were no changes in the Group's approach to capital management
during the year.
Neither the Company nor any of its subsidiaries are subject to
externally imposed capital requirements.
The Group's principal financial instruments comprise cash, short
term deposits and loan finance. The main purpose of these financial
instruments is to finance the Group's operations.
As the Group operates wholly within the United Kingdom, there is
currently no exposure to currency risk.
The main risks arising from the Group's financial instruments
are interest rate risks and liquidity risks. The board reviews and
agrees policies for managing each of these risks, which are
summarised below:
Credit risk
Credit risk is the risk of financial loss to the Group if
a customer or counterparty to a financial instrument fails
to meet its contractual obligations and arises principally
from the Group's receivables from customers, cash held at
banks and its investments.
Trade receivables
The Group's exposure to credit risk is influenced mainly
by the individual characteristics of each tenant. The majority
of rental payments are received in advance which reduces
the Group's exposure to credit risk on trade receivables.
Other receivables
Other receivables consist of amounts due from tenants and
purchasers of investment property along with a balance due
from a company in which the Group holds a minority investment.
Credit risk (continued)
Investments
The Group does not actively trade in equity investments.
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
2023 2022
GBP000 GBP000
Investments (note 12) 1 1
Other receivables (note 14) 118 103
Cash and cash equivalents (note 15) 1,953 1,317
________ ________
2,072 1,421
======= =======
The Group made an allowance for impairment on trade receivables
of GBPNil (2022: GBP31,000). As at 30 June 2023, trade
receivables of GBP41,000 (2022: GBP37,000) 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: 2023 2022
Number of days past due date GBP000 GBP000
Less than 30 days 19 19
Between 30 and 60 days 1 1
Between 60 and 90 days 7 5
Over 90 days 14 12
________ ________
41 37
======= =======
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 (2022: 8 tenants).
One tenant accounts for 21% (2022: 34%) of the trade receivables
past due by more than 90 days.
Liquidity risk
Liquidity risk is the risk that the Group will not be
able to meet its financial obligations as they fall due.
The Group's approach to managing liquidity is to ensure,
as far as possible, that it will always have sufficient
liquidity to meet its liabilities when due without incurring
unacceptable losses or risking damage to the Group's
reputation. Whilst the directors cannot envisage all
possible circumstances, the directors believe that, taking
account of reasonably foreseeable adverse movements in
rental income, interest or property values, the Group
has sufficient resources available to enable it to do
so.
The Group's exposure to liquidity risk is given below
Carrying Contractual 6 months 6-12 2-5
30 June 2023 GBP'000 amount cash flows or less months years
---------------------------
Unsecured loan 4,020 4,226 72 134 4,020
Trade and other payables 668 668 668 - -
-------- ----------- -------- ------- ----------
Carrying Contractual 6 months 6-12 2-5
30 June 2022 GBP'000 amount cash flows or less months years
---------------------------
Unsecured loan
4,020 4,261 136 105 4,020
Unsecured development
loan 360 365 365 - -
Trade and other payables 1,109 1,109 1,109 - -
--------- ----------- -------- ------- ----------
Market risk
Market risk is the risk that changes in market prices, such as
interest rates, will affect the Company's income or the value of
its holdings of financial instruments. The objective of market risk
management is to manage and control market risk exposures within
acceptable parameters, while optimising the return.
Interest rate risk
The Group borrowings are at floating rates of interest based
on the Bank of Scotland base rate.
The interest rate profile of the Group's borrowings as at
the year-end was as follows:
2023 2022
GBP000 GBP000
Unsecured loan - Base +3% 4,020 4,020
Unsecured loan - Base +0.5% - 360
===== =====
The effect of the interest rate change and the cap described
in note 17 is to reduce the interest rate by 3% from the
rate applicable at 30 June 2023 and is expected to increase
profits for the year ending 30 June 2024 by GBP93,000. As
a result of the cap, there would be no further change in
the Group's sensitivity to an increase or decrease in base
rate movements of up to 1%, which the Directors consider
to be a reasonably possible change.
Should Leafrealm Limited amend the margin from 2% to 3%
and change the caps, any 1% movement would be expected to
change the Company's/Group's annual net interest charge
by GBP40,200 (GBP43,800).
19 Operating leases
Leases as lessors
The Group leases out its investment properties under operating
leases. Operating leases are those in which substantially
all the risks and rewards of ownership are retained by the
lessor. Payments, including prepayments made under operating
leases (net of any incentives such as rent free periods)
are charged to the income statement on a straight line basis
over the period of the lease. The future minimum receipts
under non-cancellable operating leases are as follows:
2023 2022
GBP000 GBP000
Less than one year 184 209
Between one and five years 304 352
Greater than five years 206 261
_____ _____
694 822
===== =====
The amounts recognised in income and costs for operating leases
are shown on the face of the income statement.
20 Deferred tax
At 30 June 2023, the Group has a potential deferred tax
asset of GBP1,607,000 (2022: GBP1,662,000) of which GBP113,000
(2022: GBP120,000) 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 GBP1,494,000 (2022: GBP1,542,000).
This has not been recognised due to uncertainty regarding
the availability and timing of future taxable profits.
Movement in unrecognised deferred tax asset
Balance Additions Balance Additions/ Balance
1 July / 30 June (reductions) 30 June
21 (reductions) 22 23
at 25% at 25% at 25%
GBP000 GBP000 GBP000 GBP000 GBP000
Investment
properties 79 41 120 (7) 113
Tax losses 1,409 133 1,542 (48) 1,494
_____ ______ _____ ______ _____
Total 1,488 174 1,662 (55) 1,607
_____ ______ _____ ______ _____
21 Issued share capital
30 June 2023 30 June 2022
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.
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 2023 was
GBP4,020,000 (2022: GBP4,020,000) with interest payable at 3% over
Bank of Scotland base rate per annum. The margin applies with
effect from 1 July 2020 in line with the terms of the loan.
Interest charged in the year amounted to GBP243,017 (2022:
GBP135,694). With effect from 10 October 2023 the terms were
amended to a margin of 2% over the Bank of Scotland base rate,
capped at 5% overall and with a minimum rate of 2%.
During the year, the Company repaid 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
2023 was GBPNil (2022: GBP360,000) with interest payable at a
margin of 0.5% over base rate. Interest charged in the year
amounted to GBP8,132 (2022: GBP2,163).
Contracting work on certain development and investment property
sites has been undertaken by Leafrealm Land Limited, a company
which was 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 2023 amounts to GBP2,396 (2022: GBP8,219) 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 2023 was GBPNil (2022: GBP630).
Lowe Dalkeith Farms, a business wholly owned by I D Lowe,
provided equipment used in the maintenance of the Group's
investment or development sites. The value of the equipment hire
from Lowe Dalkeith Farms charged in the accounts for the year to 30
June 2023 amounts to GBP398 (2022: GBP2,249) at rates which do not
exceed normal commercial rates. The balance payable to Lowe
Dalkeith Farms in respect of invoices for this work at 30 June 2023
was GBPNil (2022: GBP630).
In 2022, property advisory services on two investment property
transactions was undertaken by RJ Pearson Property Consultants
Limited, a company under the control of R J Pearson. The value of
the work done charged in the accounts for the year to 30 June 2023
amounts to GBPNil (2022: GBP25,000) at rates which do not exceed
normal commercial rates. The balance payable to RJ Pearson Property
Consultants Limited in respect of invoices for this work at 30 June
2023 was GBPNil (2022: GBPNil).
For a full listing of investments and subsidiary undertakings
please see note 7 of the parent Company financial statements.
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END
FR GZMZZVGNGFZM
(END) Dow Jones Newswires
December 20, 2023 11:12 ET (16:12 GMT)
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