TIDMCNN
RNS Number : 0305J
Caledonian Trust PLC
31 March 2015
Caledonian Trust PLC
(the "Group")
Unaudited interim results for the six months ended 31 December
2014
Caledonian Trust PLC, the Edinburgh-based property investment
holding and development company, announces its unaudited interim
results for the six months ended 31 December 2014.
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
Nick Athanas Tel: 0203 328 5656
Alex Brearley
Chairman's Statement
Introduction
The Group made a pre-tax loss of GBP187,000 in the six months to
31 December 2014 compared with a pre-tax loss of GBP262,000 for the
same period last year. The loss per share was 1.59p and the NAV per
share was 145.6p compared with a loss per share of 2.22p and NAV
per share of 143.6p last year.
Investment property values were unchanged. Income from rent and
service charges was GBP156,000 compared with GBP177,000 last year.
Administrative expenses were GBP363,000 compared with GBP352,000
last year.
Review of Activities
The Group's primary emphasis is now on development, including
works to secure existing planning consents, and the provision of
infrastructure for development plots and the marketing of house
plots and houses.
We have four main development sites in Edinburgh. Brunstane Home
Farm lies in the green belt in east Edinburgh but is just off the
A1 and lies immediately adjacent to Brunstane railway station with
services to Edinburgh (7 minutes) and then north over the Forth
Bridge to Fife. The route south is substantially constructed and
the Borders Railway to Tweedbank/Galashiels is due to open in
September 2015. We have completed the extensive alterations to four
listed Georgian stone-built, two-bedroom cottages together with the
infrastructure necessary for the next stages of the development.
The first of the cottages was sold in November 2013, the second
was
sold in November 2014 for GBP225,000. The two remaining cottages are currently being marketed.
The cottages with the stone steading to the east and an amenity
plantation to the west form a courtyard. We have recently obtained
planning consent for two larger stone -fronted houses over
2,300ft(2) to the south which will complete an attractive
courtyard. We await final tenders for the construction of these
houses which we anticipate will commence soon.
Work has started on the next phase of five houses, the
Horsemill, which comprises five stone arched cartsheds, a
single-storey cottage, the main barn and an hexagon horsemill, a
notable feature. Once the stone repairs are complete we anticipate
we will commence the next phase of five houses later this year.
We have implemented a consent for eight detached houses at a
site in Wallyford, Musselburgh which is within 400m of the east
coast mainline station and near the A1/A720 city bypass junction.
It is contiguous with a larger, recently-completed development of
250 houses by two national housebuilders and Taylor Wimpey are
building over 400 houses nearby but on the other side of the
mainline railway which are selling rapidly at prices which have
risen quickly to over GBP200/ft(2) for large houses and to over
GBP240/ft(2) for small three- and two-bedroom houses. The market
for small houses in the area has improved relative to larger houses
and we have obtained consent to replace the two largest detached
houses with four semi-detached houses providing ten houses with a
larger saleable area of 12,496ft(2). The environment at Wallyford,
formerly a mining village, but well located on the East Lothian
coastal strip continues to improve as a result of recent and
current developments. We intend to start development shortly.
Our site in Belford Road, Edinburgh, lies in a quiet cul-de-sac
less than 500m from Charlotte Square and the West End of Princes
Street where we have implemented a long-standing office consent for
22,500ft(2) and fourteen car parking spaces and where we also hold
the planning consent for a residential development of twenty flats
over 21,000ft(2) together with indoor parking for twenty cars which
we have recently taken up, so securing the development potential.
We continue to seek and to promote and improve consents and
additional construction and engineering changes further to reduce
development costs which will allow the development to start.
At St Margaret's House, our largest Edinburgh development site,
our proposals to renew the PPP are well advanced, a lengthy and
expensive process. The continuing improvements in the Edinburgh
residential market bode well for St Margaret's which has a geared
exposure to such rising values. We continue to consider a variety
of possible developments.
The Company has three large development sites in the Edinburgh
and Glasgow catchment areas. Two are at Cockburnspath on the A1
just east of Dunbar and the East Lothian border where we have
implemented the planning consent for 72 detached and four
semi-detached family houses.
The third large development site is seven miles from central
Glasgow at Gartshore, Kirkintilloch, on the Union Canal and
comprises the nucleus of the large estate formerly owned by the
Whitelaw family. In order to meet local house building objectives
we continue to promote the creation of a new village of a few
hundred cottages and houses together with local amenities
preserving the existing designed landscape. Such a development
would complement our proposals for a high-amenity business park in
a rural setting, including an hotel and a destination leisure
centre. This is a long-term project for which we are building
support in the local community and which meets existing needs and
development criteria.
The company owns fourteen separate rural development
opportunities, nine in Perthshire, three in Fife and two in Argyll
and Bute, all set in areas of high amenity. In Perthshire at
Tomperran, a thirty acre smallholding in Comrie on the River Earn,
we hold a consent for twelve detached houses over 19,206ft(2). We
have now submitted an application for a revised layout for this
site and another planning application for a further thirteen houses
on our adjoining two-acre site which until recently was zoned for
industrial use. These two applications for twenty-five new houses
will occupy over 40,000ft(2). At Chance Inn, Cleish, by Kinross, we
hold a consent for ten houses over 21,836ft(2) in the farm steading
and a consent for two houses on plots adjacent to the former
farmhouse. These two house plots will be marketed shortly once the
arrangements necessary to meet the strict phosphate reduction
programme required for conservation of Loch Leven have been met.
Negotiations to meet these criteria for the farm steading
conversion should complete shortly.
Nearby at Carnbo, on the A91 Kinross to Stirling road, we
recently completed negotiations for the Section 75 Agreement to
enable the development of four houses over 7,900ft(2). It is
intended to market these plots in the spring.
Our largest rural development site is at Ardpatrick, a peninsula
of great natural beauty on West Loch Tarbert and within two hours'
drive of Glasgow and central Scotland. South Lodge, which has
commanding views over West Loch Tarbert and which we had fully
refurbished, was sold in November 2014. We are marketing several
development sites: Bay Cottage, a bothy for conversion with consent
for an extension to form a three-bedroom house set in a paddock
with views to Achadh-Chaorann Bay; Oak Lodge, a waterfront site
with consent for a 1,670ft(2) house; two plots set in a small field
just off the Kilberry Road; and a further three sites on the UC33,
a cul-de-sac, which leads to the estate.
Economic Prospects
A tale by a 22nd century Grimm:-
At Eagle Ford, a besieged fort in Texas, Commander PEA K'oil's
ghost danced, translucent in the flickering will o'the wisps. Smoke
signals, pale blue in the moonlight, betrayed Chief Mon O'Poly's
pow-wow with the Algonquinsaids. PEA K'oil's men prayed for General
Rig's promised relief; all waited: a bear growled menacingly. A
trembling cacophony broke the dawn flaring on the US Cavalry in
drill order. Col S O G Frack surveyed the field. Mon O'poly and the
Algonquinsaids had fled .... a bear lay, skinned. K'oil's men
thanked Mammon, Prophet Technopole and the Animal Spirits, but they
feared Mon O'poly's return.
The UK economy, like all the OECD economies, continues to
recover from the longest depression in over a hundred years. Stark
evidence is provided by the monetary policies of the Bank of
England, the Fed, the Bank of Japan and the ECB all of whose base
rates continue at record lows and whose use of quantitative easing
is widespread. Additionally, particular problems, largely of their
own making, attend the Eurozone economies. Into this recovery the
US "Cavalry" have ridden providing a boost from significantly lower
oil prices - equivalent to a deus ex machina. Only a year ago such
a price reduction was very widely unforeseen, but has now occurred,
as I wrote in my report dated 23 December 2013:-
"Interestingly, Saudi is reported to have said that it no longer
intends to increase its oil capacity beyond its current level [c
11,000m bpd] before 2040 because of the growth of supplies
elsewhere. The increasing supply from fracking coupled with other
higher cost sources such as oil sands and Arctic oil and the
increasing competition from gas, where supply is likely to benefit
even more from fracking, seem likely to outweigh the continuing but
differing supply interruptions as exemplified by the "Arab Spring".
Prices will fall from the present $100, but on present technology a
limit of $60 to $80 seems likely as that is currently the cost
below which most oil from most unconventional sources, including
fracking, becomes uneconomic."
Undoubtedly, such a reduction in oil prices, while injurious to
oil producers, would further stimulate the economic recovery. More
important effects will be geo-political. Low oil prices reinforced
by continuing reduction in output, would undermine the economy of
an independent Scotland. In the Middle East and Russia, economic
and political outcomes are interdependent and oil prices will
determine their external relations.
In 2014 UK GDP grew by 2.6%, the fastest growth since before the
2008 recession and the subsequent depression which ended only in
late 2013. GDP in Q4 2014 rose 0.5%, lower than the 0.6% widely
expected, and well below the 0.7% in the third quarter, but this
slight recorded reduction in growth rate should properly be
reviewed in the context of "seasonal" adjustment, revisions to the
GDP estimate, and the range of significant margin of error which is
over 0.2%. The 2014 growth rate is broadly comparable with rates
occurring before the recession, and, while a great relief after so
long a depression, is hardly a cause for celebration, as rates of
growth following a depression are usually above pre-recession
levels - a process of "catch up". For instance, following the
previous recession in 1990, a recession of only 3.0%, subsequent
annual rises in GDP were 3.2%, 4.8% and 2.9% respectively.
Forecasts for 2015, while not characterised by such a "bounce", are
extremely encouraging and surprisingly consistent. Interestingly,
of the 2015 comparisons quoted by the OBR, the highest is the Bank
of England 2.9% and the lowest the OBR itself at 2.5%, with the
IMF, the OECD, the EC and the NIESR all within this range, as is
the HM Treasury March 2015 "comparisons of independent forecasts".
A remarkable uniformity! Forecasts for 2016 are similar and almost
equally uniform. The Bank of England is again the highest with a
repeat forecast of 2.9% and the OBR the lowest, dropping 0.2
percentage points for 2015 to 2.3% and all the other forecasts are
either at or between these limits.
Prospective UK growth in 2015 compares favourably with other
economies. It is the highest amongst the G7, other than the US,
3.2%, but higher than the Eurozone, 1.2%. A remarkable recovery is
expected in Ireland with growth of 3.3% and a severe contraction in
Russia of 5.0% - and high growth of 7.0% in China and India.
Projected growth rates between the UK regions continue to be
marked. London and South East regions which grew 3.0% and 2.9%
respectively in 2014, are expected to continue at these levels,
while the poorest performing region, Northern Ireland, is expected
to fall from 1.8% in 2014 to 1.7% in 2015. The projected rate of
output growth in the UK's regions drops steadily from c3.0% in
London and the South East to 2.4% in East Anglia, Yorkshire and
Humberside and the South West to 1.9% in the North East. Scottish
growth is expected to fall from 2.7% in 2014 to 2.3% in 2015, a
fall reflecting the contraction of the oil sector.
The recovery in the UK economy and its good prospects are
rightly a cause for relief. In particular, they provide further
proof of the wisdom of those few earlier policy-makers who resisted
the shrill voices of those advocating joining the Eurozone, in
which some members still flirt with recession, whose growth rate
was a meagre 0.8% in 2014 and is expected to be only 1.2% in 2015.
The Chancellor, in his Budget speech on 18 March 2015, celebrated
the success of his long-term economic plan, the much-vaunted Plan
"A" saying: "We set out our
plan;"; "A government whose plan is delivering jobs"; and "only if we work through the plan".
Consistency, purposefulness and long-term planning, provided
there are palpable results, makes good theatre and even better
politics, especially when an election looms. In reality Mr Osborne
has exhibited the even greater political attributes of review,
adaptation and expediency and his success derives from the targets
he has abandoned, so avoiding the worst effect of these policies
rather than those to which he has adhered. A key element in Plan A
was to eliminate, or nearly so, the structural deficit -8.7% of GDP
in 2010 - largely by austerity. This year the deficit is likely to
be about 4.5%, or GBP50bn more than first planned. Reacting to weak
economic growth, caused in part by the Eurozone's poor economic
performance, the Chancellor rightly delayed planned austerity,
pushing it back to the next Parliament. The resulting deficit
spending increased economic growth, probably avoiding another
recession: Plan B by the back door. Plan A endorsed the previous
Labour government's policy to cut capital budgets, and in the first
two years under Plan A public investment fell by 35%. Happily this
policy was reversed in practice, although not renounced, in 2011 as
this closet Keynesian policy was implemented - better late than
never. The third reversal of policy took place in another policy
area, but it bears heavily on the economic recovery. Coalition
immigration policy pledged to reduce annual net migration to "tens
of thousands", but now, four years later, the latest count is
298,000 and rising! Immigrants are predominantly young, healthy and
hardworking and, accordingly, have boosted UK GDP. Since the
Coalition was formed GDP has risen 7.8%, but GDP per person has
only risen 4.2% in spite of the disproportionately high
contribution by the immigrants who so greatly assisted the
proclaimed success of "long-term plans" which plans specifically
excluded them. Good political tactics beat, or at least rebalance,
poor policy.
Plan A, or Plan A modified, has coincided with the recovery.
Whether the recovery is because of, or in spite of it, or even
independent of it, is not determinable from the coincidence of the
events. A point that is indisputable is the weakness of the
recovery compared with those since 1955, an analysis most clearly
made in GDP per capita which has risen by only about 1.0% pa since
its trough in mid-2009, or roughly 5.6% by end 2014. In the five
previous recessions, the earliest one in the mid-1950s, per capita
GDP had risen by 15% or more over the same period. Thus the longest
recession is being followed by the slowest recovery and therefore
it is hardly surprising that the loosest monetary policy ever
continues, but what is surprising is that this policy has had so
little apparent effect on output or inflation.
Low interest rates are pervasive, affecting not just short-term
rates but long-term gilts and Treasuries at 2.5%,
Japanese bonds at 1.5% and 30 year German Bunds at 0.7% and index-linked gilts at minus 0.7%. QE understandably influenced long-term yields, lowering them by up to one percentage point but they have remained low since QE ceased and were low in Germany even before QE was contemplated.
Unusual phenomena usually have unusual causes, an egregious one
posited by Martin Wolf, writing in the Financial Times. Rates are
low because the market rates are low and the Central Banks are
reacting to market forces: the supply of credit only balances the
demand for credit at low interest levels because investment
opportunities have risky or small returns, a product of risk
aversion and low demand: a phenomenon labelled "Secular Stagnation"
by Lawrence Summers as Central Banks ultimately respond to global
economic contraction. Previously these "excess" world savings were
repackaged by the banks into consumer credit, creating or at least,
reinforcing the pre-recession boom. Amazingly the boom, the bust
and the boring recovery share a common ancestor, excess
savings.
An oil price fall transfers resources from the oil producers to
the oil consumers, a group with a much higher propensity to spend.
The UK, a net importer of oil and gas, is benefitting from this
increase in demand. The Bank considers that each 10% fall in oil
prices increases UK GDP by 0.12% or a 50% fall, by 0.6%, but if the
underlying increase in GDP is 2.25% then GDP is increased by 27%.
The OBR review several empirical studies on the effects of oil
price changes. For long-term changes, say three years or more, the
NIESR consider that a drop from $100 to $80 would lead to an
increase in UK GDP of 0.5%, a much larger response than the Bank's
estimate. While it follows that a drop to $50 would have a larger,
but not necessarily a proportionate, effect, the boost to GDP would
probably be at least 1.0%. The effect on inflation is also very
significant, but quite separate, and is about 0.75 percentage
points, again very significant as the inflation rate in the UK is
already very low. The marginal effect on inflation is at its
greatest after one year, and as inflation effects are computed
compared with previous periods, the effects virtually drop out of
the figures in two years.
The UK remains a significant but rapidly declining oil producer.
The OBR assumes that oil prices recover quickly to over $60 and
remain in the $60 - $80 range until at least 2020. (Crude Oil Brent
Futures are currently January 2016, 60.99; December 2020 $75.85.)
Given this assumption, they estimate that under the pre-2015 Budget
fiscal regime, the oil price fall would have reduced UK North Sea
oil output by 30%. However, the ameliorating effects of the tax
reductions announced in the 2015 Budget would reduce this 30% fall
to 15%, a fall in output reducing the UK GDP by, say, 0.1%. Thus,
for the UK as a whole, the OBR estimates that the likely continuing
low oil price will increase GDP by, say, a net 0.4%. Patently, the
increase implied by the NIESR's estimate would be greater. In
addition, the OBR estimates that productivity growth will increase
by 0.25 percentage points as a result of lower oil prices, a large
improvement on the current 0.9% rate of productivity growth
currently estimated by the Bank.
The beneficial effect of lower oil prices for the UK masks the
net detrimental effect on the oil-producing locations. The UK oil
sector employs about 375,000, of whom about 160,000 are in
Aberdeen. In December 2014 the Government estimated that up to
35,000 of these jobs would be lost if oil prices did not recover,
although the Scottish Secretary estimates the recent fiscal
relaxation announced by the Chancellor in the 2015 Budget will save
"tens of thousands" of these jobs. Currently there are almost daily
reports of job losses, anecdotal accounts of oil agency workers not
obtaining work and of offshore jobs now having 50% longer onshore
leave. The fall in employment will not be a one off disaster as was
the closure of the Ravenscraig steel works, but gradual, more like
the coal industry. The production cycle of large capital off-shore
projects is very long with marginal costs well below average costs,
leading to the retention of facilities operating below "costs".
However, new facilities to replace depleted ones will not be
established. Some estimates of long-term job losses seem
conservative. The trade organisation, Oil and Gas UK, estimated
that, while even 5% of North Sea fields operate at a loss in the
"good times", with prices at $50 almost one third of the fields are
unprofitable.
Industry sources recall previous price collapses to $10 in 1986
and to $12 in 1998 and comment: "The black stuff always bounced
back in the end". However, this time is different, as both the
economics of the North Sea and the long-term pricing power of OPEC,
and therefore its strategy, have changed. North Sea oil and gas
production peaked in 1999, fell slowly until 2010 and then declined
rapidly. Operating costs have more than doubled in the last five
years and the North Sea is now the most expensive offshore basin in
the world, and even the shallower North Sea fields cost more to
work than the deep waters in the Gulf of Mexico!
These low prices will inevitably reduce the development of new
fields or the extension of existing fields (only eight wells were
drilled in 2014 compared with twelve in 2014 and 28 in 2009) which
in turn will reduce the use of shared facilities, such as
pipelines. The progressive reduction in the use of shared
facilities makes such facilities uneconomic even for existing
fields and leads to closure. One or two cards can bring down the
whole edifice.
Field closure reduces the market for specialist services
supporting the oil industry and makes relocation to areas nearer
expanding markets more attractive. Thus what is at risk is not just
the production economy but also the service economy. Scotland has
had leading positions in other industries with supporting services
such as the steel, ship-building and mining and engineering
industries, but the absence now of the previously large supporting
industries is, unfortunately, notable. There is no guarantee it
will not become so with the oil-supporting services.
The potential damage to the Scottish economy of a prolonged
period of low oil prices is serious, and is wisely being mitigated
by fiscal and other measures by the UK Government. However, the
damage to the Nationalists' case, as predicated on the economic
benefit of North Sea oil is incapable of such mitigation. The SNP's
preferred forecast assumed an independent Scotland would receive
GBP20.2bn of revenue between 2016-17 and 2018-19 based on $113 per
barrel. At the present c $50 per barrel the Scottish revenue
allocation from these three years would be a paltry GBP1.0bn per
annum. The early Scottish Nationalists may rightly have campaigned:
"It's Scotland's oil", but its value has virtually vanished due to
depletion, increased cost and a more competitive market.
The price collapse has several disparate causes. Recently most
commodity prices have declined as shown by lead indicators such as
the Copper price and the Baltic Dry Shipping Index, which has
almost halved in a year, illustrating a reduction in demand, or at
least its growth but oil supply has increased in spite of recurring
interruption in the Middle East and Africa, primarily because of
the growth of US supplies from fracking. Small changes in supply
cause a disproportionate change in price because the demand for oil
is relatively inelastic - an airline will keep to its schedule
independent of its fuel prices, at least in the short term, so must
keep buying. The OBR estimate that oil supply is about 94.25mb/d
while usage is 93.25 mb/d, or a surplus of about 1mbd. The Bank
say: "Oil supply news is likely to have been the biggest driver of
[the] drop in oil prices, although a weakening outlook for demand
is also likely to have played a material role". Given the
inelasticity of demand, small differences in supply at the "tipping
point", where supply and demand balance, clearly effect large price
changes.
The oil production and distribution industry has large economies
of scale, particularly in operations outside the consuming country,
and requires vast capital investment to "enter". It has long been
dominated by a few large companies, notably the "Seven Sisters"
forming the cartel, "Conservatism in Iran" from WWII until the
1970s. These "girls" - Anglo-Persian Oil; Gulf; Texaco; Shell and
Standard Oils of New York, of New Jersey and of California
controlled 85% of the world's petroleum reserves, and effectively
the international oil market. Another cartel, OPEC, was formed in
1960 "to secure the best price available from the major oil
companies" for the OPEC countries which controlled about 40% of
world production. OPEC objectives have been well served by the
political maelstrom that has prevailed in the Middle East since
just over a decade after their foundation. Their members instigated
the Arab Oil Embargo in 1973-74, the time of the Yom Kippur war,
which quadrupled prices and the members subsequently benefited from
the supply interruptions caused by the Iranian revolution and the
Iran-Iraq war in the late 1970s and early 1980s. Prices rose (in
2010 US dollars) from c $15 to c $40 because of the embargo, and to
$80 in the early 1980s at the time of the Iran-Iraq war.
The American saying: "The cure for high prices is high prices"
is proving accurate. In the US, price rises encouraged political
changes which eliminated price controls, reduced taxes and
otherwise encouraged production.
High prices enabled the development of many higher cost
resources: for example in the North Sea, in Russia, which in 1980
became the world's largest producer, and in the USA where the
high-cost Alaska field alone supplied 2m bpd of oil, almost 3% of
the world's supply. Simultaneously, oil consumption in the USA,
Europe and Japan declined by 13% over a short period and the oil
price, which peaked in early 1981, started to decline.
To maintain prices OPEC cut production in 1980, the principal
cuts being made to Saudi Arabia where production fell from 10m bpd
in 1981 to 3.5m bpd in 1985, but the price continued to fall
reaching $27 in 1985. The planned OPEC cuts were not met by most
other OPEC members who inflated their reserves to achieve higher
quotas, cheated, or just refused to honour their undertakings.
Saudi Arabia, selling less at lower prices, abandoned their role as
"swing" producer and produced at full capacity, resulting in a
large surplus, which for a brief two months in mid-1986, drove
prices below $10 before recovering again, but to less than $20 for
the next few years.
The years following the Arab Embargo in 1973 had made OPEC seem
impregnable, but the same forces had exposed a growing weakness as
the market responded to the cartel's high prices. In the 1970s
OPEC's share of world production was about 50% but by the 1980s it
had contracted to less than a third. The unsettled political
situation which had contributed so greatly to the price rises from
which the OPEC members had so greatly benefited militated against
them as the antagonisms inherent between them prevented the
co-operation and discipline so necessary to operate an effective
cartel.
Paradoxically, the political acrimony, so damaging to the
purposes of the OPEC cartel, was again instrumental in achieving
OPEC's purpose. Iraq invaded Kuwait in 1990, alleging, inter alia,
Kuwait's transgression of the OPEC rules and its theft of Iraq's
oil by pumping it underground across the border into Kuwait from
Iraq's Romaila field. The war caused a temporary spike to $30, but
prices then eased back in the range $15-20 before rising above $20
in 1996/97. Consumption rose only 14.5% between 1986 and 1996, but
output rose in the Middle East by 53%, more than compensating for a
44% fall in the Soviet Union, an empire then in disarray.
Increasing supplies from many sources, including renewed Iraqi
exports, entered a market reduced by the Asian economic crises and
by a mild winter in the Northern hemisphere and resulted in a
surplus of about 1.5m bpd. (The current surplus is estimated at 1.0
m bpd - see above). The coup de grâce was OPEC's suicidal decision
in November 1997 to raise its quotas. Unsurprisingly, the price
dropped rapidly in 1998 falling briefly below $10, similar to the
low point in the 1986 crisis.
OPEC, an organisation of unbridled power in 1975, lost market
control in the 1980s, a control only re-enacted after the powerful
and expensive demonstration by Saudi Arabia of the effects of
ill-discipline, sought outside support in order to limit production
and restore prices. In 1995 an accord was reached between Saudi
Arabia and Venezuela and Mexico whereby Saudi Arabia matched their
combined output cut of 300,000 bpd, an accord which formed the
basis of further cuts within OPEC and in certain non-OPEC
producers. With outside help the cartel managed to re-establish
higher prices.
For the next decade political and economic events secured both
higher volumes and higher prices for OPEC producers as the events
of 11 September 2001 precipitated political upheaval in the Middle
East and the long economic boom before the crash of 2007/08 boosted
demand and prices, while production and production capacity lagged
so reducing "spare output capacity" over that period. Supply was
effectively limited by economic considerations and not by OPEC and
prices rose very rapidly peaking at over $145.85 in 2008. The onset
of the 2008/09 recession, exacerbated by the ill-judged decision
not to rescue Lehman Brothers, caused a collapse in all asset
values and oil fell very briefly to $32 in December 2008, before
recovering during 2009 to $80.
The enduring high oil prices, abundant credit and the "animal
spirit" of the pre-recession boom years fostered an array of oil
production schemes, some requiring break-even oil prices of about
$100 - heady days! Principal amongst these schemes was "fracking",
a technique very successfully adapted to the US shale oil industry
which has boomed in recent years, whose high production costs, some
over $80, have now been significantly reduced, occasionally to $40
and further productivity increases are expected. For example, this
year BHP report that in Eagle Ford, Texas drilling costs have
declined 17% in six months. From 2008 the US shale oil output has
risen from virtually nil to over 4.0b bpd, a third of total US
output, making the total US production almost equal to the largest
producers, Russia and Saudi Arabia and in 2014 world supply
increased 2.5%.
Fracking is a classic "swing" supplier. If prices rise above the
breakeven additional production is available within a year, and,
inversely, if prices fall, no new production is undertaken and the
existing wells deplete so rapidly that total production quickly
declines. Fracked wells are almost like short-term agricultural
commodities - a rise in wheat prices soon stimulates extra
production and vice versa and in classical Ricardian economics
brings marginal land into production. Deep North Sea production
could not be more different; highly capital intensive, large
"ticket" investment, five - ten year start-up times and 20-40 year
production cycles.
In 2013, as quoted above, Saudi Arabia announced that it
intended to maintain its market share and specifically not restrict
output in order to increase oil prices. On close analysis this
decision, although largely unexpected, has a rational
interpretation which has unfortunate implications for the UK
traditional oil industry.
A key conclusion is the OPEC cartel today is different from the
OPEC cartel of 1973. Then its members were cohesive, now they
cheat, pursuing short-term individual gain; then they controlled
about 50% of the market, now they control only 30% making increased
output restriction necessary to move the market; then they
controlled virtually all the easily accessible oil situated in
distant continents which required huge capital infrastructure to
extract and transport it, now a drilling rig and $1m or so produces
oil in the world's principal consumers' backyard, a material change
that has undermined OPEC.
There is another important underlying strategic consideration
but one not immediately obvious. In 1978, five years after the Oil
Embargo, world oil reserves were estimated to be less than thirty
times the then production.
In 1996, after thirty-eight years of production, world oil
reserves were estimated to be over forty times that much higher
output. Now BP estimate that world reserves at December 2013 were
53.3 times the 86.8m bpd production in 2013. The largest producer,
Saudi, has a Reserve/Production ratio of 63.2 years! The Red Queen
might observe the more you produce, the more you will have
.......
There will be many elegant calculations to be made to determine
the return from delaying present production and possibly getting
higher prices and the present value of these future supplies.
Amongst the complicating assumptions are the effects of current
higher oil prices on supply: for instance, past high prices have
allowed the development of high cost sources, promoted fuel
switches, alternative energy and energy saving, and what value does
it have if it is not realised? Additionally, it seems likely the
reserves will be extended as these reserves do not include the
potential of the huge shale oil deposits distributed across the
world, largely outwith OPEC territories.
A small cloud obscures all these calculations as it hangs over
all fossil fuel producers: obsolescence. Perceptively, even at the
time when OPEC was most powerful in 1973, it was the Saudi Oil
Minister Sheik Yamani who said: "The paleolithic age did not end
because we ran out of stones." The possibility of low-priced
alternative energy creeps higher year by year, much encouraged by
the recent high price of fossil fuels. In particular there is an
aesthetic elegance in utilising sunlight directly rather than have
it routed via plants, and possibly plankton in the case of oil,
with a delay of many millions of years.
For years shale was discussed as unworkable, then it was
minimised as unsustainable and now it is hailed as an economic and
geopolitical game changer. Solar power is presently subject to the
same strictures, but those treating it as a mirage may discover it
also as a reality. Certainly it has many times been declared a
winner, only to founder, but all technological advance is erratic,
entering many cul-de-sacs and progressing as if through a fog.
Solar power accounts for 1% of the global energy supply and has
expanded 50% for six years! In California 40% of solar
installations operate without state subsidies. There are continuing
revolutions in the production of solar panels. Industrialisation,
especially in China, has given mass production, economies of scale,
improved production processes and lowered profit margins.
Technological advance has reduced the price of the raw material,
polysylicone, by 90% and solar panel costs have fallen 80% since
2005. Prices fell by 5% - 12% in the first half of 2014. Emulation
of the electronics industry would yield considerable further
economies. The third factor is technological innovation. Solar
panels currently convert 20% of the incident energy into
electricity - two watts for every ten falling. New materials are
expected to improve this conversion where a one percentage point
increase in efficiency gives a 5% reduction in the whole system
cost.
Historically, the OPEC cartel may have increased their current
income, and possibly rightly so, but they have contributed to the
development of other oil extraction methods and higher cost oil
supplies and the extensive development of other energy supplies,
all contributing to the undermining of their once dominant
position.
Saudi Arabia appears likely to continue to defend its market
share and a robust attempt to corner the oil market seems unlikely
and, if made, likely to fail, barring any major interruption of
normal supplies occasioned by, say, a major geopolitical event. In
these circumstances oil prices will be controlled by the fracking
swing producers, at, say, $60-$80 as posited above. For Scotland,
for the UK, the North Sea oil bonanza is over - perhaps this
conventional oil was harvested at the optimal time. However, shale
oil offers a major opportunity for the UK where the distribution is
relatively uniform.
For the whole of the UK economic conditions are more favourable
than they have been since 2007, but Scotland faces the consequences
of a more rapid contraction of the oil industry than previously
seemed likely.
Property Prospects
The IPD Index commercial property returns were 17.8% in 2014,
10.7% in 2013, 2.7% in 2012, 8.1% in 2011, 14.5% in 2010, 2.1% in
2009 and - 22.5% in the disaster year of 2008. The 2014 return
comprised 5.2% "Income" return and 12.0% "Capital" return. Equities
returned 0.5%, Property Equities 24.3% and Gilts 11.8%. Over ten
years, Property has returned 6.2%, Equities 6.8%, Property Equities
2.4% and Bonds 6.3% while inflation has been 3.1%. The CBRE All
Property Yield in December 2014 was 5.6%, a 0.4 percentage points
decrease in the year. The 10 Year Gilt Yield fell 0.9 percentage
points in the year to December 2014 to 1.8%, 3.8 percentage points
lower than the All Property Yield. At the market peak in May 2007
the All Property Yield was 4.8% compared with the current 5.6%, or
equivalent to a fall in property values of 14.3%, assuming
unchanged rents. The All Property Rent Index was 188 in May 2007
compared with 180 in December 2014 which, with the yield change, is
equivalent to a fall of 17.9% in investment value since the
peak.
Over the year the yields fell for all sectors in all
geographical areas, the largest sectoral fall was 0.63 percentage
points in the "All Retail Warehouses", and the largest geographical
fall was 0.8 percentage points in the North West and in Scotland,
both for Industrials. Present yields are very approximately the
same as they were at the end of 2007, having started to rise quite
sharply prior to the 2008 recession, but Gilt yields were then over
2.5 percentage points higher than the present extremely low
1.8%.
Rental growth took place last year in all sectors, averaging
3.8%, except Retail Warehouses where rental values declined 1.2%.
Shop rentals rose overall but they continued to decline outside
London and, surprisingly, Scotland. Offices improved by 8.2%
overall, largely due to 10% or higher rises in Central London. The
recovery in the commercial market, which began in 2013, has
accelerated in 2014 and returns in 2015 are expected to be very
good but below 2014's exceptional 17.8% return. The IPF forecast
"Total returns" of 12.4% in 2015, significantly above their
forecast of 9.2% given last year for 2015. Rental growth of 6.6% is
forecast for Offices and 3.0% for Industrials, but lower rates for
all retail categories, and capital growth, including some further
reductions in yield, results in forecast returns of 14.6% for
offices, 13.9% for Industrials and just over 11.0% for all retail
categories. IPF are forecasting rental growth continuing in 2016 at
3.0%, 0.3 percentage points lower than in 2015, but capital value
growth will fall to 3.1% because yields are expected to improve
only marginally, resulting in total returns of 8.2%. The five year
return to the end of 2019 is forecast at 7.2%. Surveyors' reports
are even more optimistic. Cluttons report that in 2014 43% of
investment purchases were made by overseas buyers, rising to 60% in
London, as investors are attracted by prospective rental growth and
the yield difference of about four percentage points over bonds.
Colliers report that investment sales in 2015 are 20% higher than
in 2014 and declining stocks and better yields are attracting
investors to the better regional areas. In general yields are
expected to decline, especially outside London, with returns for
Offices and Industrials expected to be over 20%.
The commercial property market has recovered from a very
significant fall. Some investment property values, notably in
London and the South East, will probably exceed 2007 peak levels,
but many are unlikely to regain such levels. In particular, the
continuing revolution in retailing is having widespread significant
effects. I repeat my previous assessment that segments of the
investment market will continue to suffer a secular erosion caused
by technical obsolescence, loss of locational primacy and
competition from new formats.
In 2014 the residential market continued the improvement in 2013
that followed three years of little change. In Scotland, the LSL
house prices index rose 4.2% compared with 3.1% in 2013 and in
England and Wales the price index rose by 9.6% but, excluding
London and the South East, by 5.7% compared with 3.4% in 2013. A
remarkable feature of 2014 was the annual rise in house prices in
Greater London of 20.4% in the year to June. The Halifax and the
Nationwide report lower rises of c8.0% for UK houses for 2014, but
their sample is based on their mortgages and exclude the
approximately 35% of cash buyers. If cash buyers are more frequent
in the higher-priced properties that have been rising more quickly
in London and the South East then the mortgage-based indices will
show lower average price increases. Additionally, both these
mortgage providers give national figures, including Scotland where
growth rates have been lower, so compounding that bias.
In 2014 in England and Wales the largest price rise in the LSL
index occurred in Greater London, 18.1%, with the neighbouring
area, the South East, rising 10.8%. East Anglia, the South West and
South East Midlands rose about 7.0% and the other regions about 5%
excepting the North at 3.5%. Throughout England and Wales price
rises were greater for the most expensive properties and least for
the cheapest: the most expensive quartile rose 10.7% and the
cheapest quartile rose 2.9%.
In Scotland there has been no overall house price boom as
Registers of Scotland report prices increased only by 3.4%, only
marginally above the 3.1% in 2013. In contrast to England and Wales
where the highest increases were in Central London, Scotland's most
outlying district recorded the largest rise: in Shetland the
average price rose by 17.6% and by 26.2% in the last quarter alone!
Absent an "oil rush", surely a statistical anomaly!!
In Scotland, in the major conurbations, price changes were more
varied among geographical areas than among price quartiles. In
Aberdeen prices rose by 5.4%, the highest of any Local Authority,
but in Glasgow by only 0.3%. The category of housing having the
greatest price rise varied among the cities. In Edinburgh, detached
houses, the most expensive category, averaging GBP395,000, rose by
13.1%. In Glasgow, semi-detached houses averaging GBP156,000, rose
by 13.0%. Lastly in Aberdeen, the cheapest houses, flats, rose by
7.8%. Encouragingly, LSL Property Services report that in January
2015, Scottish prices, having risen by 1.0%, achieved a record
average high of GBP166,771, in national terms GBP1,238 more than at
the peak of the housing boom in May 2008. Tellingly, perhaps, given
the developing oil crisis, prices in the city of Aberdeen fell
2.0%.
Independent forecasts for UK house prices are published by HMT.
In February 2014 the forecast growth for 2015 was 7.3% with a range
from 16.0% to 3.2%. This year the median forecast growth is 5.0%
with a range from 7.4% to 2.0% and for 2016 the forecast is 3.7%
growth with a range from 9.9% to 2.0%. The OBR are forecasting
growth rates of 4.5% in 2015 and of between 4.3% and 7.0% until
2020.
Savills dintinguish between "Mainstream" and "Prime" housing
markets. UK Mainstream prices, including London, are expected to
rise by 2.0%, 5.0%, 5.0%, 3.0% and 3.0% from 2015 onwards, rising
19.3% over five years. In Scotland, Savills expect Mainstream
prices to rise by 3.5% in 2015 and then by 4.0%, 4.0%, 2.5% and
2.5% or by 17.6% over five years. These projections are slightly
lower than those made last year, and, possibly unusually for
surveyors, lower than many other forecasters. Savills consider that
the stricter mortgage availability testing introduced by the Bank
effectively caps individual borrowing, reducing demand. This Bank
test has caused the average loan-to-income multiple to decline from
a peak reached in June 2014. The Prime housing market is being
affected by the more progressive (and higher) stamp duties now in
force together with the threat of the introduction of a "mansion"
tax. Prime house prices are not expected to change appreciably in
2015 and are expected to be stable or fall in London and Scotland.
The five year Prime forecast is for a 20 - 25% gain in Central
London and for over 20 - 25% in England, but in Scotland the
forecast rise is restricted to 17.5%.
The continuing rapid growth in the UK economy together with the
increased availability of credit, at least within the limits of the
Bank's criteria, and crucially for first-time buyers, the
Government Help to Buy schemes, will increase demand substantially.
The available short-term supply, principally an overhang of sellers
previously unable to get their sale prices, has substantially
cleared. Longer-term supply becomes available only after a long
production cycle, including particularly planning, and continues to
be restricted by the elimination of many small house builders and
by the lack of finance. I foresee that, given political stability,
prices will continue to increase, especially for family homes for
which the supply seems most constrained and for which the potential
demand seems greatest.
Conclusion
The UK has at last emerged from the longest depression in
recorded history. Economic prospects for the UK are at present very
favourable, and only slightly less so for Scotland, given their
political uncertainty and economic adjustment due to lower oil
prices. The UK housing market is expected to continue to improve
significantly subject to specific local constraints.
We continue to promote our strategic land sites, some of which
are nearly ready for development, provided market conditions
continue to improve. In our existing portfolio most development
properties are valued at cost, usually based on existing use, and,
when these sites obtain consent and are then developed or sold, the
considerable upside value will be realised.
I D Lowe
Chairman 31 March 2015
Consolidated statement of comprehensive income for the six
months ended 31 December 2014
6 months 6 months Year
ended ended ended
31 Dec 31 Dec 30 June
2014 2013 2014
Note GBP000 GBP000 GBP000
Revenue from properties 156 177 344
Property charges (112) (116) (181)
Sale of trading properties 440 513 513
Cost of sale of trading properties (273) (480) (480)
____ ____ _____
Net rental and related property
income 211 94 196
____ ____ _____
Other income 27 47 53
Other expenses (4) - -
____ ____ _____
Net other income 23 47 53
____ ____ _____
Administrative expenses (363) (352) (761)
____ ____ _____
Operating loss before investment
property disposals and valuation
movements (129) (211) (512)
Valuation gains on investment
properties - - 975
Valuation losses on investment
properties - - (195)
____ ____ ____
Operating (loss)/profit before
net financing costs (125) (211) 268
Finance income - - 1
Finance expenses (58) (51) (105)
____ ____ ____
(Loss)/profit before taxation (187) (262) 164
Income tax expense 5 - - -
____ ____ ____
(Loss)/profit for the financial
period attributable to equity
holders of the company (187) (262) 164
=== === ===
(Loss)/profit per share
Basic (loss)/profit per share
(pence) 4 (1.59p) (2.22p) 1.39p
Diluted (loss)/profit per share
(pence) 4 (1.59p) (2.22p) 1.39p
Consolidated statement of changes in equity for the six months
ended 31 December 2014
Share Other Retained
capital reserves earnings Total
GBP000 GBP000 GBP000 GBP000
At 1 July 2014 2,357 2,920 12,068 17,345
Loss for the period - - (187) (187)
_____ _____ ______ ______
At 31 December 2014 2,357 2,920 11,881 17,158
==== ==== ===== =====
At 1 July 2013 2,357 2,920 11,904 17,181
Loss for the period - - (262) (262)
Share buyback - - - -
_____ _____ ______ ______
At 31 December 2013 2,357 2,920 11,642 16,919
==== ==== ===== =====
At 1 July 2013 2,357 2,920 11,904 17,181
Profit for the period - - 164 164
Share buyback - - - -
_____ _____ ______ ______
At 30 June 2014 2,357 2,920 12,068 17,345
==== ==== ===== =====
Other reserves consist of the share premium account GBP2,745,000
and the capital redemption reserve of GBP175,000
Consolidated balance sheet as at 31 December 2014
31 Dec 31 Dec 30 June
2014 2013 2014
Note GBP000 GBP000 GBP000
Non current assets
Investment properties 9,415 8,635 9,415
Plant and equipment 38 24 35
Investments 1 - 1
______ ______ ______
Total non-current assets 9,454 8,659 9,451
Current assets
Trading properties 11,308 11,317 11,498
Trade and other receivables 99 170 67
Cash and cash equivalents 285 376 34
______ ______ ______
Total current assets 11,692 11,863 11,599
______ ______ ______
Total assets 21,146 20,522 21,050
______ ______ ______
Current liabilities
Trade and other payables (658) (503) (525)
Interest bearing loans and
borrowings (3,330) (3,100) (3,180)
______ ______ ______
Total liabilities (3,988) (3,603) (3,705)
______ ______ ______
Net assets 17,158 16,919 17,345
===== ===== =====
Equity
Issued share capital 6 2,357 2,357 2,357
Other reserves 2,920 2,920 2,920
Retained earnings 11,881 11,642 12,068
______ ______ ______
Total equity attributable
to equity holders of the
parent company 17,158 16,919 17,345
===== ===== =====
Net asset value per share 145.6p 143.6p 147.2p
Consolidated cash flow statement for the six months ended 31
December 2014
6 months 6 months Year
ended ended ended
31 Dec 31 Dec 30 June
2014 2013 2014
GBP000 GBP000 GBP000
(Loss)/profit for the period (187) (262) 164
Adjustments
Investment property valuation
movements - - (780)
Depreciation - - 13
Net finance expense 58 51 104
____ ____ ___
Operating cash flows before
movements
in working capital (129) (211) (499)
Decrease in trading properties 190 455 273
(Increase)/decrease in trade
and other receivables (32) 6 108
Increase/(decrease) in trade
and other payables 75 21 (10)
_____ _____ _____
Cash inflows/(outflows) from
operating 104 271 (128)
activities
Interest paid - - -
Interest received - - 1
_____ _____ _____
Cash inflows/(outflows) from
operating 104 271 (127)
activities _____ _____ _____
Investing activities
Purchase of listed investments - (1) (1)
Purchases of property, plant
and equipment (3) - (24)
_____ _____ _____
Cash (outflows) from investing
activities (3) (1) (25)
_____ _____ _____
Financing activities
Increase in borrowings 150 100 180
_____ _____ _____
Cash flows from financing activities 150 100 180
_____ _____ _____
Net increase in cash and
cash equivalents 251 370 28
Cash and cash equivalents at
beginning
of period 34 6 6
_____ _____ _____
Cash and cash equivalents at
end of period 285 376 34
==== ==== ====
Notes to the interim statement
1 This interim statement for the six month period to 31 December
2014 is unaudited and was approved by the directors on 31 March
2015. Caledonian Trust PLC (the "Company") is a company domiciled
in the United Kingdom. The information set out does not constitute
statutory accounts within the meaning of Section 434 of the
Companies Act 2006.
2 Going concern basis
After making enquiries, the Directors have a reasonable
expectation that the company and the group have adequate resources
to continue in operational existence for the foreseeable future.
Accordingly, they continue to adopt the going concern basis in
preparing this interim statement.
3 Accounting policies
Basis of preparation
The consolidated interim financial statements of the Company for
the six months ended 31 December 2014 comprise the Company and its
subsidiaries, together referred to as the "Group". The financial
information set out in this announcement for the year ended 30 June
2014 does not constitute the Group's statutory accounts for that
period within the meaning of Section 434 of the Companies Act 2006.
Statutory accounts for the year ended 30 June 2014 are available on
the Company's website at www.caledoniantrust.com and have been
delivered to the Registrar of Companies. These accounts have been
prepared in accordance with International Financial Reporting
Standards ("IFRS") as adopted by the European Union. The auditors
have reported on those financial statements; their reports were (i)
unqualified, (ii) did not include references to any matters to
which the auditors drew attention by way of emphasis without
qualifying their reports, and (iii) did not contain statements
under Section 498 (2) or (3) of the Companies Act 2006.
The financial information set out in this announcement has been
prepared in accordance with International Financial Reporting
Standards as adopted by the European Union ("adopted IFRS"). The
financial information is presented in sterling and rounded to the
nearest thousand.
The financial information has been prepared applying the
accounting policies and presentation that were applied in the
preparation of the company's published consolidated financial
statements for the year ended 30 June 2014.
In the process of applying the Group's accounting policies,
management necessarily makes judgements and estimates that have a
significant effect on the amounts recognised in the interim
statement. Changes in the assumptions underlying the estimates
could result in a significant impact to the financial information.
The most critical of these accounting judgement and estimation
areas are included in the Group's 2014 consolidated financial
statements and the main areas of judgement and estimation are
similar to those disclosed in the financial statements for the year
ended 30 June 2014.
4 Profit or loss per share
Basic profit or loss per share is calculated by dividing the
profit or loss attributable to ordinary shareholders by the
weighted average number of ordinary shares outstanding during the
period as follows:
6 months 6 months Year ended
ended ended
31 Dec 31 Dec 30 June
2014 2013 2014
GBP000 GBP000 GBP000
(Loss)/profit for financial
period (187) (262) 164
=== === ===
No. No. No.
Weighted average no. of shares:
For basic and diluted profit
or
loss per share 11,783,577 11,783,577 11,783,577
======== ======== ========
Basic (loss)/profit per share (1.59p) (2.22p) 1.39p
Diluted (loss)/profit per
share (1.59p) (2.22p) 1.39p
5 Income tax
Taxation for the 6 months ended 31 December 2014 is based on the
effective rate of taxation which is estimated to apply to the year
ending 30 June 2015. Due to the tax losses incurred there is no tax
charge for the period.
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. At 31 December 2014 there is a
deferred tax asset which is not recognised in these accounts.
6 Issued share capital
31 December 31 December 30 June 2014
2014 2013
No GBP000 No. GBP000 No. GBP000
000 000 000
Issued and
fully paid
Ordinary shares
of 20p each 11,784 2,357 11,784 2,357 11,784 2,357
===== ==== ===== ==== ===== ====
This information is provided by RNS
The company news service from the London Stock Exchange
END
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