TIDMCNN
RNS Number : 7351S
Caledonian Trust PLC
23 December 2016
The information contained within this announcement is deemed by
the Company to constitute inside information as stipulated under
the Market Abuse Regulations (EU) No. 596/2014 ("MAR")
23 December 2016
Caledonian Trust PLC
(The "Company" or the "Group")
Audited Results for the year ended 30 June 2016
Caledonian Trust PLC, the Edinburgh-based property investment
holding and development company, announces its audited results for
the year ended 30 June 2016.
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
Charlie Donaldson
CHAIRMAN'S STATEMENT
Introduction
The Group made a pre-tax profit of GBP105,000 in the year to 30
June 2016 compared with a profit of GBP565,000 last year. The
profit per share was 0.89p and the NAV per share was 152.88p
compared with a profit of 4.79p and 151.99p respectively last
year.
Income from rent and service charges was GBP351,000 compared
with GBP334,000 last year. One investment property was sold at a
gain and the remaining property investment value increased during
the year. Profit on the sale of development properties was
GBP47,000 compared with GBP168,000 last year. Other operating
income was GBP15,000 compared with GBP28,000 last year.
Administrative expenses were GBP635,000 compared with GBP726,000
last year. Net interest payable was GBP22,000 compared with
GBP116,000 last year, largely reflecting the reduced margin payable
on the borrowings. The average base rate for the year was 0.5%.
Review of Activities
The Group's investment business continues virtually unchanged.
In October 2015 we sold our garage in Gloucester Lane to an
adjoining proprietor and realised a substantial premium to book
value. We continue to hold two high yielding retail parades and
some central Edinburgh garage investments.
The Group's management resources are almost wholly engaged in
property development, including development necessary to secure
consents, and on the provision of infrastructure for development
plots.
Last year I reported that, due to the poor market conditions, in
the year to September 2015 - prices in Scotland fell 0.5% - and the
prospect of a deterioration in these conditions, we had continued
to postpone all of our larger schemes. This time last year Scottish
market conditions and prospects appeared to be improving
considerably, but in the first half of 2016 house prices reported
by the Registers of Scotland in Scotland fell 8.4% in Q1 and 2.3%
in Q2.
The continuing deterioration in the Scottish economy,
highlighted by the shrinkage of the oil industry, and reinforced by
the uncertainties of the outcome of the "Brexit" vote were almost
certainly major influences at that time. Thus, late 2015 and early
2016 did not seem a propitious time to undertake major speculative
development. In Q3 the Registers of Scotland report that average
Scottish prices rose 0.6% and by 5.7% in Edinburgh with higher
rises in Midlothian and East Lothian. As is discussed later, market
conditions and prospects have again improved and, in those areas
where market conditions appear propitious, we will expand our
development activity and, in parallel, increase our marketing of
house plots.
Our largest property is St Margaret's House, London Road,
Edinburgh, a 92,000ft(2) 1970s multi-storey building on the A1
about one mile east of the Parliament and Princes Street, and
adjacent to Meadowbank Stadium. Pending redevelopment it has been
let since November 2010 at a nominal rent to a charity, the
Edinburgh Palette, who have reconfigured and sub-let all the space
to over 200 "artists" and "artisans" and "galleries". Tenant
turnover is low and there is a long "waiting list" attracted to
this high-quality space by the subsidised rent, the excellent
management and the empathetic culture. The subsidised rent has
assisted the tenant to effect substantial repairs and improvements,
to build up reserves and to establish their internationally
recognised brand.
In view of Edinburgh Palette's much improved circumstances we
agreed a large rent increase phased over a year to March 2017. To
mitigate possible hardship we are discussing the provision of
specific measures to protect the Edinburgh Palette's important
charitable, cultural and social contribution. We expect to be able
to agree a further phased increase in rent. The current level of
subsidy is not necessary for most of the charity's purposes, and,
indeed, a transition, carefully modulated to ensure possible
deleterious effects are mitigated, will allow the charity to
develop into a stronger organisation more able to support its
purposes.
The rent that will accrue to the Group by March 2017 is
significantly less than GBP2 per ft(2) of occupied space. For
sub-lets of 100ft(2) (one "window" in Edinburgh Palette terms) this
represents less than GBP5/week of rent: in artists' terms less than
a glass of wine.
One hundred and twenty of the parking spaces at St Margaret's
are let to the Registers, our immediate neighbours, at GBP1.20 each
per week day. Parking is an increasingly valuable resource in
Edinburgh and I am confident that, notwithstanding the history of
below market pricing, a rent increase will be agreed. We hold a
consent for a 'digital' advertising hoarding with a rental value of
up to GBP35,000 but the site establishment costs and difficulties
are delaying a letting. The sum of the market rents at St
Margaret's is about GBP500,000 and the measures being taken will
allow a progressive move to a more realistic level.
Improved rents will start to compensate for the high cost of
holding the building and the long and very expensive process of
gaining consent in September 2011, based on our application in July
2009, for Planning Permission in Principle (PPP) for a 231,000ft(2)
mixed-use development of residential and/or student accommodation,
a hotel, offices and other commercial space together with parking
for 225 cars. Unfortunately, the poor and constantly-changing
market conditions since 2011 precluded the design of specific
proposals. Accordingly, we applied for a renewal of the PPP in May
2014 for which we had to update all the many technical reports and
undertake several new ones: all a lengthy and expensive process.
The consent was renewed in June 2015, subject to a Section 75
Agreement signed in September 2016.
I commented last year that the redevelopment prospects for St
Margaret's had improved very considerably. Since then site values
for flats for sale, for flats for the Private Rented Sector and for
student accommodation have continued to rise rapidly as an
increasing demand remains unsatisfied. The City of Edinburgh
Council ("CEC") perceives there is an acute shortage of a wide
range of accommodation, particularly near the city centre. Because
of a shortage of sites in the city centre and a desire by the
University to diversify their holdings from south of Princes Street
areas north and east of Princes Street have become more valuable.
The benefits of this change in the market have been reinforced by
CEC's proposal to redevelop the adjacent Meadowbank Stadium to
provide a new smaller modern sports facility and a large
residential development of over 400,000ft(2) of housing and further
mixed use development.
The CEC have commissioned a review of the funding requirements
and a cost appraisal, a study costing nearly GBP1m. The sports
facility is reported to have a gross cost of circa GBP42m of which
about GBP35m is expected to be realised by asset sales. The review
which is due shortly will ascertain the extent of any shortfall,
which is expected to be met out of central funds. The project is
scheduled to be approved by the CEC early next year.
We continue to evaluate development options for St Margaret's.
If part of the existing building were retained, a series of smaller
developments, each of 40,000ft(2) to 60,000ft(2) , could be built.
Part of the site is ideal for an hotel, occupying the higher
westerly "tower" with views to the Castle, Arthur's Seat, the City
and the Forth estuary. A part of the site has also been assessed
for private rented housing at the "higher market rent level", but
valuations are lower than for other uses. The probable
re-development of Meadowbank makes student accommodation much more
attractive, given the central location with excellent bus routes,
the adjacent Meadowbank sports facility, easy access to the Park
and daytime bus services from the door to Old College and the
nearby George Square every twelve minutes and to Queen Margaret
University and Heriot Watt every half hour. Amongst many other
possible office uses, the 231,000ft(2) consent would be eminently
suitable for any centralisation of Government offices, or for a
large-scale relocation of "back offices" from London or the South
East. Very neatly, a discount store could occupy a street-level
frontage, complementing existing local stores and catering
conveniently for the greatly enlarged resident population.
Conditional on the outcome and the timing of the CEC's decision on
Meadowbank, the Company intends either to develop or undertake a
joint venture development of St Margaret's or, if suitable offers
are made, to realise its value.
Since 2007 we have delayed the development of our other three
sites in or near Edinburgh because of economic conditions. In 2015
I repeated the warning first given in my 2012 statement: "There is
a tangible risk of a further fall in house prices. In these
circumstances a large development of a block of flats or a number
of houses requiring heavy infrastructure investment would result in
an illiquid investment with very limited or nil profit margin:
accordingly, we continue to delay any major investment and only
undertake small, low-investment, low-infrastructure projects. We
will not commission any major development until market conditions
improve." This view proved prescient as in the year to June 2016
Registers report that the average house price in Scotland fell by
2.3% and by a slightly smaller 1.4% in Edinburgh, because of falls
of 5.0% in terraced houses and 0.9% in flats. However, in the most
recent quarter, July - September 2016, Q3, post the EU Referendum,
Scottish prices rose significantly and by 3.7%, compared to Q2. In
consequence, Scottish prices, compared to September 2015 rose by
0.6% and by 5.7% in Edinburgh where flats rose a remarkable 8.0%.
Clearly the Edinburgh market is improving markedly. Within this
market new or fully refurbished flats, especially in better
residential areas or within two miles of the city centre are
gaining in price even more rapidly, according to agents' reports
and other anecdotal evidence. The less insecure economic conditions
and a marked improvement in this sector of the market now offers an
attractive commercial opportunity which is available at a much
reduced risk and of which we are starting to take advantage,
subject to prudent risk assessment and funding availability.
We have increased development activity at Brunstane where, prior
to the sale of four cottages, we owned five cottages, open ground
to the south of the cottages, a large listed Georgian steading and
two adjacent acres of land, all part of Brunstane Home Farm, which
was in the Green Belt in east Edinburgh, but is just off the A1,
and lies immediately adjacent to Brunstane railway station with
services on the newly opened Borders Railway between Tweedbank and
Edinburgh (seven minutes). Four years ago we commenced the
extensive alterations to four listed Georgian, stone built,
two-bedroom cottages together with some of the infrastructure
necessary for the subsequent larger development which was completed
two years ago. The end-terraced cottage sold then for nearly
GBP250,000, approximately GBP300/ft(2) , a high price for the area.
A mid-terraced house, with a lower valuation, was sold two years
ago for about 5% less. The second mid-terraced cottage sold in
September 2015 and the end terraced cottage, abutting the steading,
sold in 2016, a sale delayed until the completion of the extensive
demolition immediately adjacent to it and by the partial
reconstruction of that part of the stone built steading. Following
these sales we have one cottage remaining at Brunstane.
On the open ground south of these cottages we secured consent in
2014 to construct two new semi-detached houses which, together with
a mature wood to the west, completes a traditional farm courtyard.
These two new houses, each 1,245ft(2) are of modern construction
but with the elevations faced with natural stone. Earlier this year
we gained consent to extend the easterly gable and add a
conservatory to the west elevation, increasing the total size to
2,850ft(2) . Work on the reconfigured development started in August
and the houses will be completed shortly. We expect to market them
early in the New Year at prices around GBP300/ft(2) .
We have consent to convert the listed stone-built Georgian
steading, to refurbish and extend a cottage attached to it and to
form ten individually designed houses of various sizes comprising
over 14648ft(2) in total. These houses have been extensively
redesigned, principally to provide contemporary style large
dining/living spaces, more en-suite bathrooms and better
fenestration, together with lower construction costs. Work on the
stonework for the next phase of five houses, the "Horse Mill",
which comprises the five stone-arched cart sheds, the single-storey
cottage, the main barn and an hexagonal Horse Mill, a notable
feature, is nearing completion. The extensive and uncertain nature
of the stone replacements and repairs required, some of it highly
"tooled", resulted in quotations of over GBP250,000 for this work
alone, a figure that would have been greatly extended as the work
required, due to the undetectable deterioration in many of the
stones and unforeseen remedial work to the structure, would have
resulted in an estimated gross cost of circa GBP400,000. In order
to reduce this estimated cost, we have employed contract staff
directly and will effect all the necessary repairs - including
those omitted in the original estimates - for less than the initial
estimates. The progress of the masonry work, which requires the use
of traditional lime mortar, unsuitable for use under 5degC, is very
weather dependent. Paradoxically, much of the repair work takes
longer than rebuilding completely in stone. We hurry slowly, but
the quality is exceptional, as can clearly be seen in the finished
stone elevations.
The work has taken three years but, given the recent grave
market uncertainties and the improved market, the delay is not
disadvantageous. Once the stonework is complete five new-build
timber frame houses will be inserted in the reconstructed outer
shell, which is complete with under building and foundations and
will use existing recycled slate, factors all reducing the build
cost. I expect the phase to follow shortly after the completion of
the two new houses.
The masonry repairs of the Horsemill phase include restoring its
east elevation, a barn wall which is part of the Stackyard, the
next phase without natural stone of a further five houses. Apart
from this east barn, all the Stackyard construction will be new,
allowing a similar high quality product, but at a much lower
construction cost and a marginal servicing cost. I expect the sales
value of this Horsemill refurbishment and the new Stackyard to be
around GBP4.5m.
A detached stone building sits east of the main steading with
consent for conversion and extension to form a detached farmhouse
extending to 3,226ft(2) . The farmhouse site is on open ground with
clear views to the Forth estuary to the north and to the Pentland
Hills to the south. Around the farmhouse and in open ground to the
east we hold a further two-acre site, which has just been
abstracted form the Green Belt in the newly adopted Edinburgh Local
Development Plan. Proposals for the development of this two-acre
site, including the existing farmhouse site have been accepted in
principle, suitable for a development of 19 new-build houses over
2,5149ft(2) . Beyond our two acre site EDI have lodged a planning
application for an extensive residential development.
In relation to the developments at Brunstane we put in place an
additional loan facility of up to GBP360,000 from Leafrealm Limited
to fund the construction costs for two semi-detached houses at
Brunstane. As at the date of this announcement, the Company has
drawn down a total of GBP160,000 under the loan facility.
At Wallyford, Musselburgh, we have implemented a consent for six
detached houses and four semi-detached houses over 12,469ft(2) .
The site lies within 400m of the East Coast mainline station, is
near the A1/A720 City Bypass junction and is contiguous with a
recently-completed development of 250 houses. Taylor Wimpey are
building over 400 houses nearby, but on the other side of the
mainline railway, which are selling rapidly at prices of up to
GBP246/ft(2) for smaller terraced houses and GBP214/ft(2) for
larger detached houses. Persimmon started building in Wallyford in
the spring and in early December of the 49 plot development only
four unfinished plots remained for sale at GBP250/ft(2) for two
bedroom houses and GBP200/ft(2) for a four bedroom house.
On the southern boundary of Wallyford a very much larger
development of 1050 houses has commenced. The Master Plan for this
development includes a secondary school, a supermarket and many
civic amenities and is subject to a proposal to expand the housing
allocation to 1,450 by incorporating land immediately east. The
environment at Wallyford, formerly a mining village, but well
located and on the fertile East Lothian coastal strip, is rapidly
becoming another leafy commuting Edinburgh suburb. Given these
greatly improved circumstances I expect to continue the development
of our ten houses next year.
The third of our delayed sites is in Edinburgh at Belford Road,
a quiet cul-de-sac less than 500m from Charlotte Square and the
west end of Princes Street, where we have taken up an office
consent for 22,500ft(2) and fourteen cars by starting construction.
Also, we hold a separate residential consent for a development of
twenty flats over 21,000ft(2) together with indoor parking for
twenty cars on which work started in 2014, so securing that
consent. Belford Road, one of the very few remaining of Edinburgh's
"black holes", has been haunted - it is a former church site! - by
the spectres of "abnormal costs": site access; excavation and rock
breaking; and piling retention. I said last year "We propose to
undertake further site work to allow construction costs to be more
accurately assessed and the risk of construction cost overruns
reduced, facilitating lower tender prices." We have created a good
vehicle and machinery access to the site; cleared the soil and
collapsed masonry to the southern retaining wall; identified that
the rock levels overall are as expected; that this rock is solid
and load bearing but friable (no expensive rock breaking will be
required); that there is no ground water; and that the previously
expected extensive piling requirement can be very much reduced.
The underlying structurally sound rock provides a good basis for
the retaining wall on the south side, for the adjoining buildings
and for the foundations of the development. The easy availability
of the substrate throughout the site allows detailed structural
assessments to be made without the need for expensive
over-engineering to cover contingent or unknown requirements. Less
tangibly, but equally importantly, the site work has exorcised the
three "spectres": psychologically the site now invokes visions of
the future, no longer haunted by the past. We continue to refine
our understanding of the site and in the spring will complete some
further minor excavation, requiring only another few weeks'
work.
The fuller understanding of the site conditions allows us to
make small adjustments to the consented proposal, to make the
building easier to construct and to modernise aspects of the
design, particularly in the finishes and the fenestration.
Simultaneously we will seek to commence the development with a
value in excess of GBP10m next year.
The Company has three large development sites in the Edinburgh
and Glasgow catchments of which two are at Cockburnspath, on the A1
just east of Dunbar. We have implemented the planning consent on
both the 48 house plot northerly Dunglass site and on the 24 house
plot southerly Hazeldean site. Additionally, there are four
affordable house plots on the Hazeldean site. The Dunglass site
extends to fifteen acres of which four acres is woodland. There is
an additional area within the fifteen acre site which is capable of
holding up to thirty houses and it is continuing to be evaluated,
as the ground conditions, which initially appeared to preclude
development, may be remediated. At Hazeldean several options
continue to be considered to satisfy the planning requirement for
the four affordable houses.
These two sites lie just east of the East Lothian/Scottish
Borders boundary. In the year to September 2015 East Lothian prices
fell 4.4% and detached houses, the category almost exclusively in
our two sites fell 8.2%, but this year East Lothian prices rose by
4.3% and by 9.1% in the quarter to September 2016 and detached
houses rose by 5.3% and 3.3% respectively. The Registers' figures
include all sales and so do not distinguish between existing and
new house sales. The high rate of sales in the new build sites
throughout East Lothian corroborates the evidence that the market
is buoyant. Six miles west of Cockburnspath, at Dunbar, Persimmon
are booking sales for 2017 at prices for houses of around
1,000ft(2) - small four bedroom - of GBP220/ft(2) . At Dunglass a
section of the site, holding just six plots, lies just off the
former A1. We intend to build a few houses there in order establish
demand, which we expect to be good, but possibly at a discount to
nearby Dunbar, unless this discount is offset by our more exclusive
development. I expect the results will allow us to develop the
whole site, but at a modest build rate.
The third large development site is only seven miles from
central Glasgow at Gartshore, Kirkintilloch (on the Union Canal),
East Dunbartonshire, and comprises the nucleus of the large estate
owned until recently by the Whitelaw family. It includes 120 acres
of farmland, 80 acres of policies and tree-lined parks, a designed
landscape with a magnificent Georgian pigeonnier, an ornate
15,000ft(2) Victorian stable block, three cottages and other
buildings and a huge walled garden. Gartshore is near Glasgow, two
miles from the M73/M80 junction, seven miles from the M8 (via the
M73) and three miles from two Glasgow/Edinburgh mainline stations
and from Greenfaulds, a Glasgow commuter station. Gartshore's
central location, its historic setting and its inherent amenity
identify it as a natural site for development. To make the best use
of these attributes, proposals have been prepared for a village of
several hundred cottages and houses together with local amenities,
all within the existing landscape setting. This development would
complement our separate proposals for a high-quality business park,
including a hotel and a destination leisure centre, all situated in
mature parkland. Discussions with East Dunbartonshire Council
continue and we are seeking Council support for a joint promotion
of the site. Part of the stable block has been refurbished as an
exhibition and visitor centre and will open in the spring to
provide an on-site nucleus for Gartshore's promotion.
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. Such small developments
are outwith major housing allocations and local authorities may not
give them high priority. Being located in attractive areas, they
are more subject to objection to which local authority members, now
elected by proportional representation, are increasingly sensitive,
as their seats are less secure. Thus, gaining planning consent for
such developments has become ever more tortuous, requiring in some
cases the scale of development to be restricted, but such
difficulties do restrict supply, enhancing value. Notwithstanding
these difficulties, we continue to promote sites successfully
through the planning process and to add new or improved consents to
those we already hold.
In Perthshire, at Tomperran, a 30 acre smallholding in Comrie on
the River Earn, we hold a consent for twelve detached houses
totalling over 19,206ft(2) . The demolition of the farm buildings
required to secure the planning consent for the houses has been
completed. West of this site and nearer Comrie we submitted an
application in 2014 for a further thirteen houses on our adjoining
two acre area, which had been previously zoned for industrial use.
The application has recently been approved and will be issued
following the signing of the S75 Agreement. In total the
twenty-five new houses covering two areas will occupy over
33,912ft(2) . The original farmhouse currently let, will remain
within the development. A modern terraced 1 1/2 storey house over
1,150ft(2) (3 bedrooms) sold recently in Comrie for GBP277,500,
about GBP240/ft(2) .
At Chance Inn farm steading we were granted a consent for ten
new houses on 28 August 2015 over 21,831ft(2) following acceptance
of our proposals for the mandatory environmental improvements.
Chance Inn, part of the Loch Leven catchment area, is subject to
very strict regulations governing the phosphate flows into the
Loch. New developments are required to effect a reduction in the
total phosphate emissions to the Loch such that, for every 1.00
grams of phosphate that a new development is deemed to discharge,
1.25grams of phosphate has to be eliminated. New developments with
suitable treatment discharge very low levels of phosphate but,
patently, do not effect an overall reduction. In order to allow our
developments at Chance Inn to proceed we have created extensive
arrangements to reduce the existing emissions from four
neighbouring houses at a cost of over GBP100,000, following
negotiations lasting over five years.
Work has started to implement these agreements and facilitate
the development of two plots of 2,038ft(2) and 2,080ft(2) with
planning permission in the former garden of Chance Inn farmhouse
and 10 new houses over 21,836ft(2) at Chance Inn steading. One of
the two Chance Inn farmhouse plots was sold in October 2016 for
over GBP100,000 together with a small paddock for GBP34,000. We
hold sufficient land next to the farm steading to allow the sale of
11 more such paddocks to purchasers of the new houses.
Nearby at Carnbo, on the A91 Kinross to Stirling road, the
recent Local Plan included in the village settlement the paddock
which we retained when we sold the former Carnbo farmhouse. Based
on the changes to the Local Development Plan consent was issued on
29 July 2015 for the development of four houses over 7,900ft(2) .
Our first planning application here was registered by the planning
authority on 26 June 2008, seven years earlier! Work is in progress
to install the services necessary to market the individual plots
which will be specified to allow for a possible extension of the
development area.
At Strathtay we gained consents in 2011 for two large detached
houses totalling over 6,040ft(2) and for a mansion house and two
ancillary dwellings over 10,811ft(2) in a secluded garden and
paddock near the River Tay. We have completed initial building
works and have taken up the consent for both the detached houses
and, separately, for the mansion house. Work is in progress to move
services to permit the formation of entrances onto the public road
in order to allow marketing of the two large house plots.
At Myreside Farm, in the Carse of Gowrie between Perth and
Dundee, we had five planning attempts and appeals since our first
application in 2007 and, after guidance from the planning
department, we gained approval two years ago for five new-build
houses over 8,531ft(2) , adjacent to the existing listed farmhouse
which is let on a short-assured lease. The consent requires the
re-use of the stone from the original farm buildings which is so
expensive as to prejudice economic development. Accordingly we are
seeking a variation of this requirement limiting the use of stone
from the farm buildings much of which is of too poor quality for
residential use.
In Fife we have attractive rural sites near St Andrews. At
Larennie, adjacent to the Michelin-starred Peat Inn, five miles
from St Andrews, consent was gained in October 2011 to renovate and
extend an existing stone-built cottage, to convert stone buildings
to four houses and to build four new houses over 19,325ft(2) ,
forming nine dwellings. Due to poor market conditions development
has been delayed, but a start will be made to the development in
order to endure the consent which currently expires in April 2017.
At Frithfield, only six miles from St Andrews, a site with stunning
views south to the Forth estuary, we continue to undertake work to
meet the planning criteria including a changed access over land in
our control for a development of twelve houses over 20,236ft(2) .
Following an assessment of existing stone conditions and quality,
plans will be prepared which maintain the integrity of the stone
construction but are economical to build. Our third site at Nydie,
only three miles from St Andrews, is just outside Strathkinness for
which proposals will be prepared for 7 houses over 10,000ft(2) . We
expect all our Fife developments to benefit from the manifest and
growing attraction of nearby St Andrews.
Ardpatrick is our largest rural development site, a peninsula of
great natural beauty on West Loch Tarbert, but less than two hours'
drive from Glasgow and the Central Belt. The long-term prospects
for residential property are excellent, but their realisation
continues to require investment, skill and patience to rectify the
cumulative effect of severe prolonged neglect. Fortunately, the
original design and construction of most of both the original
Georgian and the later Victorian addition was of a very high
standard and remains intact and recoverable. Repairs to some of
Ardpatrick's buildings, farm sheds and landscape caused by the
exceptional storms in recent years continue to be delayed by even
more urgent work. The reported high rainfall of recent years has
highlighted the deterioration of much of the arterial and field
drainage systems, and of the risk of enhanced water levels further
damaging roads, accesses, walls and fields. The recent very wet
summers have both validated the repairs achieved and highlighted
and hindered those still to be made. Frustratingly, unlike most
repairs, the majority of them are largely hidden and the benefits
not readily appreciated, but comparison of the present conditions
of the fields with those in five to ten year old photographs
reveals the extent of the recovery. An important consequence of
this recovery is that a much higher percentage of the property
falls into a higher more valuable grade of agricultural land, so
qualifying for higher EU support, and the stock carrying capacity
of the land is greatly increased, much above the current
stocking.
At Ardpatrick the development framework is informed by the 2009
North Kintyre Landscape Capacity Study. Prior to that study we
gained consent to change the use of "Keepers", a bothy situated
among the Achadh-Chaorann group of cottages, and to extend that
building to form a three-bedroom house, conditional on providing a
new access and drive. This work has been constructed and consent
has been granted for an enhanced design. This property is currently
being marketed for offers over GBP175,000. Several other consents
originally obtained or granted in 2009 have been renewed. The
consent to sub-divide Ardpatrick House and to develop Oak Lodge, a
two-storey 1,670ft(2) new build on the Shore Road, has also been
renewed and the Oak Lodge plot is being marketed at offers over
GBP125,000. Consents have also been renewed to convert the
"Gardener's Bothy" into a 1,300ft(2) single storey house, to
convert the Garage complex into two flats, to extend the Laundry
Cottage and to build a new 1,600ft(2) single storey house within a
corner of the walled garden.
There are a number of practicable development opportunities
within the areas designated in the Landscape Capacity Study. In
2011 we secured consent for two one-and-a half storey houses each
of 2,200ft(2) at the north end of the estate on the B8024 Kilberry
Road. Early in 2017 work will be undertaken to endure these two
consents. Nearby on the east side of the UC33 Ardpatrick Road we
hold an outline consent for two houses on the Dunmore schoolhouse
field, bordering the Cuildrynoch Burn and we will renew an outline
consent for a detached house in a woodland setting on the West side
of the UC33.
Unfortunately at present sales of new sites and conversion sites
are commercially difficult to realise. Current market conditions
continue to be unhelpful as prices in Argyll and Bute fell 4.6% in
the year to September 2016. Since Q4 2012 detached house prices are
unchanged, although there was a surge of 27.1% in Q1 2015, the year
of the introduction of LBTT which penalises higher priced houses,
but detached house prices have since fallen 21.1%, effectively
reversing the upsurge. The poor market conditions are exacerbated
by the cost of upgrading the inadequate infrastructure, partially
due to the required enhancement of the public services.
Additionally, the number of competing sites continues to rise. It
is not difficult to envisage that second homes, holiday homes and
relocation/retirement homes would be amongst the last to recover
following a depression, a recovery now slowed by the tax
impositions on second homes and on buy-to-lets. With this
background it is encouraging to note that one or more new houses
are built, and others renovated, in the Ardpatrick corridor each
year greatly improving the area and establishing it as a centre
properly renowned for its landscapes and wildlife. In any recovery
Ardpatrick's pre-eminent position will continue to command a
premium.
Economic Prospects
Forecasts for the UK economy for a year ahead have normally been
reasonably accurate. For instance during 2007 successive forecasts
given that year were for growth of 2.7% to 3.1% and for 2.0% to
2.5% in 2008. The forecasts of growth changed little month by
month. Economic growth had been consistent and steady for 64
quarters since the recovery from the brief 1990/1991 recession.
Gordon Brown proudly proclaimed:- "We today in our country have
economic stability not boom and bust ..." "we have Abolished Boom
and Bust". Unsurprisingly the forecasts over that period had proved
reasonably accurate but dangerously complacent. In March 2008 the
average of The Economist poll of forecasts for 2008 was 1.9% and
for 2009 was 2.0%: the outturn was -0.1% for 2008 and -4.9% for
2009. The enormity of the depth of the Great Recession was wholly
unforeseen by the forecasters polled until it was upon them.
Indeed, as Her Majesty the Queen disingenuously enquired of the
Director of the London School of Economics, Professor Luis
Garicano, "If these things were so large, how come everyone missed
them?". Colourfully, as the FT surmises, the Queen had not been
briefed "from the man who comes weekly to tell her what is going on
- not the nice smooth one - he went some time ago. Now it's the
grumpy Scottish one" whose view is that the crisis materialised
unannounced as an evil spectre fleeing New York. Professor Garicano
reportedly replied that "at every stage someone was relying on
somebody else and everyone thought they were doing the right
thing".
A seismic turning point in economic activity was not forecast.
The poor forecasting of abrupt changes has long been recognised, as
exemplified by Paul Samuelson's quip in 1966 that economic
commentators "predicted nine out of the last five recessions".
The economic consequences of Brexit are forecast to be dire. The
NIESR observe that, while economists usually disagree, on Brexit
they do not. The Economist notes that "a host of studies - the
NIESR, the Treasury, the Institute of Fiscal Studies, Oxford
Economics, PriceWaterhouseCoopers, the Centre for European Reform
and the London School of Economics agree with the international
bodies " - the IMF and the OECD - " that Brexit would mean less
trade, lower foreign direct investment and slower productivity
growth".
Moreover the immediate effect, a conclusion not disputed even by
the pro Brexit economists, would be a negative shock, yielding, in
the Treasury's view, a "do-it-yourself recession". Indeed the
Chancellor George Osborne warned that a vote to leave would force
him to raise taxes or cut spending by GBP30bn. After the referendum
Martin Wolf endorsed the Treasury view saying "The Treasury might
even have been underestimating the shock. It would be astonishing
if there were to be no recession" and the Economist in a jeremiad
says "as confidence plunges, Britain may well dip into
recession".
The initial reaction to the referendum vote appeared to justify
the projection of the established economic forecasters. The GBP
fell from over $1.50 before the vote to a 31 year low of under
$1.30 in early July; the Governor of the Bank declared risks "were
starting to crystallise"; Standard Life and other property funds
froze their redemptions; the FT's headline "Brexit sell-off signals
house price fall" reported that investors were pricing in a 5% fall
in home values, that shares in the UK's four largest housebuilders
had fallen between 28% and 37%, and that trading in Barratt
Developments, Crest Nicholson, Taylor Wimpey and Berkeley had been
suspended briefly after each company had dropped precipitously
enough to trigger the FTSE "circuit breaker"; Merrill Lynch
expected a 10% house price drop over the coming year; estate
agents' shares fell - Savills 26%, Countrywide 32% and Foxtons'
37%; and shares in the UK's three principal banks, fell by over
25%. Martin Wolf, the FT's Chief Economics Commentator stated, "So
far, the experts, dismissed by Michael Gove, Justice Secretary,
have been proved right ... it would be astonishing if there were to
be no recession".
To avoid traversing this Bunyanesque Slough of Despond, "this
miry slough, such a place as cannot be mended", Martin Wolf hoped,
paraphrasing Emperor Hirohito's remarks at the end of the Second
World War, that a new Prime Minister would declare that, given the
unexpected economic damage and the risk of a break-up of the UK the
situation "had developed not necessarily to the UK's advantage". He
might forget the whole thing, or, alternatively, call another
referendum. Calls for another referendum were part of a hysteria
given widespread press coverage with FT headlines such as "BREXIT
CRISIS". Accordingly, calls were made for another referendum to
redress such a mad, damaging and irrational result, typified by
Tony Blair "I wouldn't write us out of Europe yet, OK?" ... "I mean
I can't see us having another referendum at this point. But I
wouldn't rule anything out". Certainly such a move is consistent
with previous reactions to unfavourable votes on the EU. In 1992
the Danes voted to reject the Maastricht Treaty. The Irish voted to
reject both the Nice Treaty in 2001 and the Lisbon Treaty in 2008.
The Danes and the Irish were granted concessions sufficient for
subsequent referendums to overturn their earlier rejection of these
treaties. Even Boris Johnson, a Brexit leader, concedes that "all
EU history shows that they only really listen to a population when
it says, No"! Martin Wolf, favouring a wait and see policy,
recounts the story of the man condemned to death who told his king:
"I could teach your horse to sing, within a year." The king
replied: "Very well. But if the horse is not singing a year from
now, you will be executed." Upon the criminal's return, his
cellmate remonstrated: "You know you can't teach that horse to
sing." He replied: "I have a year I didn't have before. A lot of
things can happen in a year. The King might die. The horse might
die. I might die. And, who knows? Maybe the horse will sing. I
suggest we try that year or so."
Some commentators expected a sharp contraction in the economy
similar to that following the Lehman Brothers' bankruptcy in 2008
including the former Finnish Prime Minister who said the UK could
face a "Lehman Brothers" moment and a former Chief Economist of the
OECD who said "We are more worried - for the UK - than we were in
2008 or any other post-Second World War crisis". The EIU predicted
an economic contraction of 1% in 2016 following a sharp downturn in
growth for 2016 and a drop of 4 percentage points below its
previous forecast for 2017. Support for these gloomy forecasts was
provided by PMI's "flash" June index which fell from 51.9 to 47.3,
described by MPC member Martin Weale as "a lot worse than I thought
... for the best short-term indicator we have ...". The GfK UK
consumer confidence survey for July 2016 showed a 12 point fall in
July compared to the pre-referendum figure, the deepest fall in 26
years, even deeper than during the financial crisis and the CBI
industrial trends survey had a negative balance of 48% in line with
the Great Recession and the 9/11 terrorist attacks. Such consumer
surveys appear to support economic analysis but they may be more a
reflection of the publicity given to economic forecasts than a
considered view. The forecasts may cause the survey outcomes but
the survey outcomes may in a circular way influence the forecasts.
Such survey evidence should be taken in context as publicity almost
certainly has a significant influence on them. Indeed, Lord King,
the former Governor, criticising the "hysterical tone" of the
Chancellor before the referendum, accused Mr Osborne of turning
"incredibly speculative forecasts into facts". The former Governor,
unlike most analysts, was sanguine on the outlook for the economy,
commenting on 27 June "I'm not saying it's nothing to worry about,
but there's no reason to extrapolate this [cut in growth forecasts]
into a sort of mindless panic. Foreign-direct investment
undoubtedly will probably fall and be on hold for a period, and
that was the largest likely short-term economic impact of leaving
the EU. But that reflects the uncertainty, and at some point that
uncertainty will disappear."
Lord King has proved prescient, as in the quarter following the
Leave vote the economic performance has been strong, quite contrary
to the indications given by surveys of "confidence" and to the
almost hysterical forebodings of most leading forecasters and of
government agencies, and, in particular, the Bank. Respected
international forecasters were also proved to be unduly pessimistic
and, as the Guardian says, "The IMF and the OECD's prediction of
economic gloom went away". When no immediate lasting damage
occurred, they reverted to a second position: the strength of the
economy was due to consumer spending but that investment would be
weak, a prediction refuted by the upturn in investment in Q3
compared to Q2. The OECD has now defaulted to forecasting the UK
growth will slow from 2.0% in 2016 to 1.2% in 2017 and to 1.0% in
2018.
Recent data confirms strong growth in Q3. GDP rose 0.5% quarter
on quarter resulting in an annual growth of 2.1%, employment rose a
further 37,000, retail sales rose by 1.9% compared to the previous
month and by 7.4% compared to the previous year and the index of
services rose by 0.7% in Q3, or by 2.9% for the year, Market
Services and Construction Indices indicated increasing activity and
Consumer confidence was positive. Given such positive data it is
unsurprising that the now-casting.com forecast for Q4 is for 0.61%
growth, giving UK growth of 2.1% in 2016. Similar 2016 growth
forecasts are given by the Economist poll of forecasters 2.0%; by
NIESR 2.0%; and by the Bank 2.2%, a revisal up from 2.0% in August
2016.
In June 2016 the Economist poll of forecasters forecast average
growth of 1.9% in 2016, of which it transpires 1% had already
occurred, leaving an implied forecast of 0.9% for the second half
of 2016. In the subsequent three months the implied forecasts for
the second half of 2016 were marked sharply down to 0.5% in July,
and to 0.6% in the subsequent two months and are currently at 1.0%,
a rate even higher than the first six months of 2016. Such figures
are consistent with an analysis that a Brexit vote would
immediately be damaging, that a high probability of such a vote
would have downgraded the forecast prior to the vote, that a Leave
vote had damaged the economy severely, but that, as it transpired,
little, if any, damage has occurred, as the growth has returned to
the level of the original forecasts.
The Economist poll figures are "averages" of 23 individual
institutions of which 15 are included in the HMT "Forecasts for the
UK Economy". In July 2016 three of the 17 "City" HMT forecasters,
including Barclays and Credit Suisse, forecast virtually no growth
for the remainder of 2016. The overall average then was 0.5%, but,
in line with Economist poll of forecasters, by October 2016 the
average had risen to 0.9%. A similar reversal took place in the
forecasts for 2017. The July forecasts for 2017 by the 17 "City"
forecasters were: Contraction four (of which one -1.3%); less than
1% growth 12 forecasters; and 1.5% growth, Capital Economics. By
October 2016 however all forecasts were for at least 1.7% growth in
2017. One wonders how much money was spent on producing the
analysis to make such forecasts and one trusts that not too much
clients' money was risked in consequence!
Self-evidently the errors in the post Brexit forecasts made pre
Brexit were outwith any random or statistical error, and given that
most 2017 forecasts are now not far removed from the UK's "normal"
2.0% to 2.25% growth rate, the immediate and the near term effects
on GDP growth of the Brexit vote is now considered to be meaningful
but small. In essence the forecast, indeed the sharp warnings, of
an economic shock provoking an economic downturn proved misplaced.
What is even more remarkable is that the forecast of an immediate
downturn was from the overriding majority of those sampled,
probably all deemed expert.
How did so many get it so wrong? In the days preceding voting
the likelihood of a "remain" win increased and just before 23 June
2016 the "remain" had a substantial lead in the polls and the
probability of remain winning based on betting odds was about 80%.
Perhaps a considered analysis in the wake of the Brexit vote was
compromised by a panic reaction and allowed an intuitive response
to a result for which they were unprepared. The official line of
the IMF, the OECD, foreign administrations, the Chancellor and the
Bank was that Brexit was highly inimical to the UK economy and this
became the new orthodoxy.
The forecasters quoted shared much of the background experience
and values of such official organisations and, in addition, had a
strong political incentive, because of these vested interests, to
remain within mainstream thinking. Many were centred in London
sharing a reclusive world of high finance. They were subject to the
same external influences from other contacts outside the
institutions and from similar pressure from within them. Not
unnaturally such groups were likely to develop similar values, and
a common approach, even to the extent of adopting group views with
which they do not necessarily concur - "group think".
Unfortunately, it appears "OK" to be wrong when everyone else is
wrong, but to be wrong when everyone else is right is catastrophic,
but inversely to be right, when everyone else is wrong, is not
similarly prized. Such asymmetry reinforces conformity.
Apart from social, psychological and motivational parameters
there are deeper causes of poor forecasting. Neither academic
brilliance nor abstract or theoretical intellectual capability are
highly correlated with forecasting skills - they are necessary but
not sufficient. Accurate forecasting has been shown to require a
specific skill.
Historically there was an important distinction between
forecasting and prediction, words now used almost interchangeably.
Prediction's etymology "prae" before and "dicere" to say - implies
a foretelling, a fate, a predisposition or a certainty. A forecast
has no implied certainty but arises from analysis under
uncertainty. Shakespeare's Caesar colourfully illustrates these
shades of measuring as he is warned of impending disaster, notably
"to beware of the Ides of March" to which Caesar replies:-
"Whose end is purposed by the mighty gods?
Yet Caesar shall go forth, for the predictions
are to the world in general as to Caesar".
In contrast Cassius, persuading Brutus to join the conspiracy,
says "Men at some time are masters of their fate": The future "at
some time" was manipulable. Forecast is derived from the northern
European 'kasta' to throw (as a fishing line) which by the 13(th)
Century also meant "calculate", or, in Cassius' usage, plan
Caesar's assassination. Separately, Shakespeare notes a
psychological tendency causing errors in forecasting: Cicero
reflects on Caesar's dismissal of the warnings. [But] "men may
continue things after their fashion/clean from the purpose of the
things themselves". We see what we want to see!
"To continue things after their fashion" is self-evidently a
poor basis for forecasting as obviously is the insufficient
questioning of trends. In the mid-1980s Professor Philip Tetlock of
Wharton engaged in a large scale practical experiment whose final
results were published in 2005. His experiment engaged 284 US
professionals employed in analysis in academia, think tanks, US
Government, international organisations and the media. These
volunteers with post graduate degrees, including half with PhDs,
were engaged in an experiment designed to answer the key questions
- how good are the forecasters; who are the best; and what sets
them apart? The "control", epitomised as a random dart throwing
chimpanzee, amusingly titled the "chimp". Quite astonishingly, the
average result of the tested professionals differed very little
from the "chimp"! On analysis the subjects comprised two
statistically different types of experts, but between these types
the backgrounds, academic abilities, politics and prejudices were
very similar. One of the two groups of types unfortunately failed
to do better than random guessing - the "chimp" - and even managed
to lose to the "chimp" in their long-term forecasts. The second
group barely beat simple adages such as "always predict no change"
or "predict the recent rate of change" but they did beat the chimp,
if by only a modest margin. The two groups had similar numbers of
PhDs, of optimists and of liberals and of information, including
classified information.
The two groups differed not in what they thought but how they
thought. The poorer performing group tended to have clear Big
Ideas, concepts, political attributions and certainties: while
widely divided by differing ideologies, they were united by their
adherence to them. Problems and prospects were viewed through the
prism of seeking and keeping a rigid structure, discarding misfits
and rejecting subsequent competing evidence. The better performing
group were more tentative, weighing probabilities and
possibilities, and less fixated on conclusions. During analysis
they changed their views, retracted, rephrased and re-concluded.
They enjoyed a flexibility extending to the information they
sought, the approach to it and to its interpretation.
Thinking varied between the groups, a difference in style noted
by the Greek poet Archilochus: "The hedgehog knows one big thing
but the fox knows many things". Tetlock described the Big Idea
experts as hedgehogs and the more eclectic experts as foxes. The
difference between the two groups was neither their intellect nor
their intelligence nor what they thought: it was how they thought.
Good forecasters and poor forecasters had similarly high
intelligence and advanced academic training, a normally necessary
condition, but not a sufficient one. Tetlock had discovered this
difference within this population and by testing a method of
distinguishing between "the way they thought", the selection of
good forecasters had become possible.
Tetlock recognised that a quite separate and established
technique of forecasting gave excellent results under some
conditions. In 1906 Sir Francis Galton FRS attended the West of
England Fat Stock and Poultry Exhibition in Plymouth. At the fair
787 people guessed the dressed deadweight of a live ox. The median
average on which he reported was 1,207lbs (actually, as discovered
later, 1,208lbs!). The reported deadweight was 1,197lbs but for
reasons unknown he used the median average in his paper! As
probably the world's most eminent contemporary statistician, he may
have been aware that in Mendel's pioneering work on "inheritance
factors" (genes) using peas, that the actual results Mendel
recounted, exactly fitting the precise ratios he expounded, had a
very small probability of occurring in any one series of trials due
to random factors: perhaps the wily monk, not being versed in such
statistical variation, had after all not worked forward from the
results to the hypothesis, but vice versa - tut, tut! Galton's
observation of this "wisdom of the crowd" led him to the general
conclusion that the average error of any one person was greater
than the average error of a large number. Like many great ideas,
once formulated - and that is the genius - it's commonplace.
Tetlock hypothesised that he could add this extra dimension -
the wisdom of the crowd - to improve the results of smaller groups
of specialised forecasters already selected for the "way they
thought". Tetlock screened 3,200 possibly suitable candidates
through his established methodology, selecting about 200 - "the
crowd". From such a large group he then tested and isolated 40 who
excelled in accuracy. Then he retested the whole "crowd" group to
assess Galton's "wisdom of the crowd". For a final integrated
forecast he combined the results from the crowd with the results
from the 40 but gave disproportionate weight to the views of the 40
who excelled. Tetlock then tested a further refinement of the
integration of these two separate strands of forecasting. He
arbitrarily intensified the direction of the weighted collective
view of the crowd and the 40: to "extremise" it in his word by
making the final integrated forecast more extreme or nearer one or
zero, depending on which side of the centre, or 0.5, the final
integrated forecast lay.
Tetlock used his "extremised" technique to test the accuracy of
a group against established experts. He found his selected groups
using these techniques outperformed established experts even when
such experts had access to and use of classified information. He
concluded that educated non-specialists working together in such a
structured format outperformed experts selected by the current
criteria. How you think beats what you know, especially if you are
buffered and protected by a wide range of knowledge and experience
so that outlier and very specialised contributions are
included.
The enduring lesson of the sophisticated Tetlock experiments was
that Tetlock's super forecasters had a "different way to think" as
the defining feature of their superiority. This is a truth that is
sometimes immediately obvious in practice. One notable failure of
political forecasting illustrates the failure of closed rather than
open thinking. The Iranian revolution of 1979 and the overthrow of
the Shah whose government was closely integrated into the UK
diplomatic sphere of influence, was entirely unexpected by the UK
Foreign Office and because of this failure, the Foreign Secretary
instigated a secret inquiry into why British diplomats had not
forecast it. The inquiry found that a major problem was that
embassy staff had little contact outside the elites around the
Shah. Reportedly, the Foreign Office now value "ground truth",
outside protected established and perhaps prejudiced views, a
source so valuable that one subsequent Ambassador to Iran is
reported to check whether his staffs' shoes were dirty: "If not, I
know they hadn't been getting out of the embassy and meeting
people".
In his succinct summary of the abject failure of economic
forecasting prior to the 2008 Great Recession Professor Garicano
replied to Her Majesty the Queen's very diplomatic enquiry. "If
these things were so large how come everyone missed them?"; that at
every stage someone was relying on somebody else and everyone
thought they were doing the right thing". They hadn't been getting
out.
The widespread experts' forecast of an immediate collapse in the
UK economy following the Brexit vote has proved equally misplaced,
but fortunately much less damaging. It seems likely many such
experts did not share in the "wisdom of the crowd" and moved
primarily amongst the elites of their own and of other professions.
It is possible to argue that they saw and read information from
their peers who were equally introspective and they did not "get
out" enough: certainly they appear not to have got their shoes
dirty.
Any forecast is crucially dependent on the starting position.
The experts' view of the immediate dire economic consequences of a
Brexit vote are not necessarily inconsistent because if the
starting position is that it is axiomatic that the present is
highly desirable, and satisfactory, and necessary, then the
alternative is by definition wholly otherwise. It follows that the
prospect of this dire alternative makes its support improbable.
Moreover, there was good evidence to support a view of the
universality of such perceived benign current conditions. The
screens and the statistics told the experts unemployment was only
five percent, the lowest for 11 years, the economy was growing
reasonably, participation in the labour market was near a record
high and income inequality had declined since the 2008 recession
began. But the figures did not reconcile with conditions on much of
the ground, as dirtying their shoes would have found, where large
numbers continued under difficult conditions, where high local
unemployment existed because of structural economic changes or
outsourcing, and disaffection was felt by many workers, most of
whom had not enjoyed a rise in real wages for almost 10 years. If
they had "got out" the experts would have known for sure: "It's
cold up North".
A less tangible but insidious cold pervades much of the North,
like a mutating virus. Its manifestations include resentment, envy,
and an inherent feeling of the injustice of the system that seems
to reward, not punish, the failure of financiers, bankers and
professionals in the face of austerity. Reinforcing such trends is
the continuing large immigration, often seen as threat to many, for
the convenience, partly disguised as moral fulfilment, of others:
in short, the re-awakening of populism, the common manifestation of
popular discontent. It is difficult to encompass such views in
forecasting models currently used which are so different to that
espoused by Tetlock.
The relationship with the EU is a major determinant of the UK's
economic prospects, a relationship that is likely to change
appreciably but over stages. The first stage has already passed
subsequent to the referendum. The leave vote resulted in a sharp
shock to the economy, a steep decline in confidence and a
short-term economic contraction followed by a swift recovery to a
growth rate similar to that before the vote. This recovery was
assisted by a sharp devaluation of the GBP and, to a lesser extent,
by monetary support and by assurances of further support from the
Bank. If business investment has been reduced or foreign direct
investment been delayed or diverted, there has been no obvious sign
so far and, indeed, none would be expected because of the long
cycle time of such decisions.
The first key question is, will Brexit happen? There will be
continuing skirmishes with pro EU initiatives provided by various
groups, of which the current Supreme Court case is evidence. A
Parliamentary process is almost certain to be required and the
Government's business will prevail, possibly with minor amendment.
There will be ongoing opposition in the Commons and the Lords, and
the majority of MPs who are in favour of continuing within the EU
will always seek to ameliorate the exit conditions, and, in
extremis, overturn policy. However, without a cataclysm sufficient
to produce a recognisable and defensible material change of
circumstances, the latent parliamentary majorities will not risk a
showdown with what is regarded as the democratic will of the
people. However, given any suitable opportunity they will seek to
re-open the debate in an effort to hold a further referendum.
But what does "Brexit means Brexit" mean? And what are the
implications, of any given meaning, as these implications are
largely interdependent. Clearly, it means different things to
different people, and crucially, varies over time. While the
immediate post referendum panic, a shock reflex reaction from the
mistaken forecast of the referendum outcome, has proved misplaced,
the medium-term effect, over say five years, is independent of this
short-term recovery and is likely to be significant. Forecasts made
post referendum, post panic, are encouraging. The OBR forecasts
growth for the next few years as 1.4% in 2017, 1.7% in 2018 and
2.1% from 2019 onwards, only marginally down from its forecast in
November 2015 by 0.8% in 2017 and 0.4% in 2018. Thus, the change
from the pre-referendum position to the "certain" Brexit position
is quite small. The return of growth to 2.0% or over from 2019
indicates that the OBR considers on its present assumptions on
Brexit conditions that the UK will return to or near to the
long-term growth pattern by 2019. The Bank also forecast a drop of
growth to 1.4% in 2017 but a slower recovery in their forecast
period up to 2019. Forecasts from NIESR, Oxford Economics and IMF
are broadly similar to the OBR's forecast, confirming a return to
near normal growth in 2019.
The growth figures appear anomalous as the lowest growth is
forecast over the next two years during which there will be no
changes to the trading relationship between the UK and the EU, as
the exit cannot be before Article 50 is invoked in March 2017 and
is most unlikely to be before March 2019. The low forecast for
short-term growth probably results from the present expectation of
low fixed investment prior to the settlement of the exit terms.
The long-term effect of leaving the EU will depend on what the
trading terms with EU27 are and what affect these changes have on
the UK economy. The determining factor will be the balance between
trade destruction by leaving the EU and trade creation outwith the
EU. Changes in domestic investment and FDI in the UK will be
determined by the analysis of such likely trade patterns which such
investment will continue to reinforce iteratively.
The cumulative loss to GDP until 2021 on leaving the EU is
significant. Ernst and Young forecast, published in October 2016,
the cumulative loss resulting from lower UK Growth of GDP by 2030
at nearly 4.0%. Since then they have revised upwards their
relatively low forecast for 2016 and 2017 growth to 2.0% and 0.9%
respectively. Compared to the OBR's forecast, Ernst and Young
forecast 0.3% to 0.5% lower growth in GDP in each of the years
until 2020, when they forecast only 1.8% growth, well below the
UK's long-term average that the OBR expects. If Ernst and Young's
forecast is upgraded by even 0.15% each year for five years,
conservatively less than the OBR figure, then the resultant loss to
GDP is 3.25%.
The estimated GDP loss is very damaging but much greater losses
have occurred. In the Great Recession of 2008 real GDP dropped by
5% over two years, a contrast to a loss of a potential decrease of
3.5% over several years. A greater thief of actual GDP growth
compared to potential GDP has been the significant reduction in
productivity. In the eight years before the 2008 recession
productivity rose 19% or about 2.35% per annum following a 20% rise
in the previous eight years. Since 2008 there has been virtually no
rise in productivity in the UK, and there has been a very large
loss of potential GDP, dwarfing the potential 3.25% loss over the
next five years. Productivity may seem less important than the loss
of trading opportunities but as Paul Krugman, the Nobel Laureate,
says "productivity isn't everything, but in the long run it is
almost everything". More output per unit of input underlies all
economic advance.
The potential damage from whatever "Brexit" is agreed or, if not
agreed, occurs will be mitigated by any transition period. The
longer the period the more time is available to develop other trade
links so that the economic cost of the loss of trade with the EU
can be compensated by the benefit of trade elsewhere, such links
taking many years to establish and develop. The UK did not invoke
Article 50 soon after the election, but the Government has said it
will do so in March 2017, probably as a result of political
pressure, as the date is entirely at the UK's discretion. But
having invoked Article 50, the initiative lies wholly with the
EU27, all of those members would have to agree to any extension.
The EU chief negotiator, Mark Barnier, an experienced French
Minister and a senior EU official, was acutely aware of the shift
in the balance of power when he outlined the EU27 negotiating
position in early December: that Brexit talks would be a short
negotiation lasting less than 18 months; that EU27 unity was the
first over-riding priority; and that the final deal would have to
be worse than EU membership. Eighteen months is clearly an
unrealistic timetable to negotiate a change in more than part of
the complex web of relationships that the UK has with the EU, even
if, and this is by no means certain, the parties have a genuine
desire to reach such a settlement.
M Barnier is adopting a strong negotiation position and setting
rules, timetables and intimating the restricted discretion
available because of the requirement for any agreement to be
approved by all the 27 member states. However, his position is very
strong: the UK wish to leave the "Club"; the institutional
framework and the voting structure in the Club is very
unfavourable; the EU27 economy is considerably larger than the UK's
and the mutual economic damage from any trade disruption would be
much lower per person in the EU; the UK military and security
"assets" will continue through NATO and mutual interest; and, most
importantly of all, the UK is not a "core" member of the EU, is not
a Eurozone member, does not have a cultural memory of the domestic
devastation of two world wars and unlike many EU nations does not
have a continuing reminder of successive defeat at the hands of
German economic strength and military power. Indeed, for the
principal EU nations the EU is a political organisation and the
economic affiliations, of which the major manifestation is the
Euro, are primarily a means to achieving the political goal. Thus,
if there is an economic cost in negotiating the UK Brexit, it is a
small added
price to pay in relation to the continuing costs of existing
politically oriented economic policies.
In general, the UK has never shared the identity of the common
cause, "The dream of Europa", the inspiration of many members of
the EU. In short, for the UK economics matters more than politics,
but for the EU27 politics matters more than economics, an
unfortunate asymmetry for the UK. Unlike any previous occasion the
entire political construct is threatened by "Brexit". Brexit
strikes at the heart of Europa when she is already suffering from
the continuing instability of the "Club Med", particularly Italy;
poor EZ economic performance; the rise of populist and other anti
EU groups in France, Italy, Greece, Hungary and many other nations;
and by separatist ambitions elsewhere, notably Catalonia. Thus, to
create significant exceptions or give special treatment now to the
UK would fuel the growing anti EU clamour and centrifugal
ambitions. As Hilaire Belloc said of Jim "and always keep ahold of
Nurse, for fearing of finding something worse", a somewhat tardy
admonition in practice, as the lion had already eaten all but poor
Jim's head! The UK's Brexit is an unprecedented attack on
centralist EU aspirations and inflicts heavy reputational damage on
the concept. For the EU27, the political imperative of maintaining
at least the appearance of cohesion and not awakening Europa from
her dream outweigh economic considerations. The secondary
importance of economic considerations means the Brexit negotiations
will not meet many of the current UK expectations, and certainly
not the UK's aspirations.
There are several possible models for the UK relationship post
Brexit. Norway has a relationship allowing unfettered access to the
single market. Norway is inside the Schengen area, allowing free
movement, and any similar proposal for the UK would be totally
unacceptable to the electorate for whom immigration control is a
sine que non. Switzerland has a series of bilateral trade
agreements with the EU but like Norway has agreements on
association with the Schengen area which renders the Swiss model
also unacceptable.
The communique issued by the EU27 following their immediate post
referendum summit confirmed that no relaxation of the EU principle
of free movement would be acceptable. This may seem non-negotiable,
although the EU has been notorious for extolling rigorous adherence
to rules but then finding "fudges" such as stopping the clock in
CAP negotiations, allowing violations of Maastricht rules by France
and by Germany on the assimilation of East Germany, suspending the
free movement of capital to keep Greece in the EMU - if the
political risk is high enough, short-term expediency rules, but as
the UK would require an unacceptable long-term exception, such
"fudging" is unlikely.
The three possible options for the UK EU27 economic relationship
are: (a) a customs union similar to the 1995 EU-Turkey Ankara
agreement; (b) a free trade agreement similar to the EU-Canada
Comprehensive Economic and Trade Agreement; and, (c), a reversion
to World Trade Organisation Rules. A customs union would allow
tariff free access inside the EU but would impose tariffs
externally as determined by the EU, including high agricultural
tariffs, and would of itself make no provision for services, the
largest net UK export to the EU. A FTA would be preferable to a
Custom Union as it would allow free imports from world goods
markets, but it leaves all exports subject to complicated rules of
origin, possible border controls and financial services prone to
non-tariff barriers to which unfortunately they are especially
vulnerable. Such an agreement would be preferable to a Customs
Union but, if the current Canadian experience is a precedent, would
take five to ten years to enact.
When the UK leaves the EU, trading arrangements will be governed
by WTO rules of which the EU and all member states are members.
This is the certain UK default position which requires no EU27
ratification. However, given that there are many aspects of the UK
economic, political and strategic structures that are attractive to
the EU27, it seems likely that an enhanced WTO arrangement will be
made - this is the most likely option and one which might allow
mutually beneficial transitional arrangements. Such a compromise
would be economically favourable to the EU27 and would minimise
further political damage.
The default WTO position is calumniated as a residual default
position to any negotiations, and as a result the UK economy is
considered likely to suffer a decline in GDP compared to the status
quo ante. However, the level of decline is considered by the NIESR
to be 2.5% in the short term and 2.7% in the long term. These
predicted falls are similar to Ernst and Young's forecast and are
lower than other estimates. Much more could be gained if the
previous rate of productivity was restored.
In the referendum the voters were not given impartial guidance
on the forecast likely cost of a "WTO Brexit" settlement to GDP, if
such an assessment could be made. Certainly, the record of the
survey of economic forecasting as demonstrated above would not
place a high probability on such accuracy. Unfortunately, often
choices have to be made on the basis of similar great uncertainty.
The economic performance of the UK is impeded by many similarly
unquantified choices. These include regulations, social concerns,
centrally provided public services and goods, welfare and
environmental and green policies, regional industrial policies,
planning regulations, cartels and monopolies, and self-regulating
professionals all which are considered, probably rightly, should be
delivered irrespective of the precise cost to economic growth.
Perhaps the cost of Brexit is a cost that the electorate are
prepared to pay, although it is a heavy one as the 2.5% loss is a
continuing year after year loss. Billie Bunter understood it well:
if he missed a meal he could never catch it up.
Restrictions of trade provide one of the main forecast costs of
Brexit, but the forecast costs may be overstated. Trade exports to
the EU have declined from a rate of 60% of all exports in 1990 to
44% in 2016 while exports elsewhere have continued to expand. The
effect of EU tariffs is likely to be much lower than is often
realised, as many high volume goods are subject to tariffs of less
than 3%.
The highest EU tariff falls on some agricultural products where
they reach 18%, more than five times the weighted mean for
manufactured products. EU agriculture is a very highly protected
industry of which tariff protection provides only a part. The UK
economy would gain considerably from the removal of EU external
tariffs as world agricultural prices are generally lower, and UK
agricultural income could be protected, as appropriate, through a
much cheaper reinstated UK agricultural policy. The range of
tariffs on manufactured products is wide - less than 1% for
pharmaceuticals and oil and fuel, rising to 6% for plastics and 10%
for cars - but the weighted average is 3.24% and only 2.3% for
industrial goods.
The effect of such tariffs for UK manufacturers on their
sterling receipts is greatly mitigated by the devaluation of
sterling. Indeed, if the wholesale prices in UK is 75% of the final
EU27 retail price, then, assuming no inflation of the UK
manufacturer's import costs, the current devaluation of the GBP
compensates for an increased tariff of as much as 10%. The UK
currently imports about GBP100bn more goods from the EU than it
exports to it. Given the relatively small tariff barrier and the
massive sterling devaluation the traded goods sector should not be
severely damaged by adopting a WTO trading system.
The services sector is a net exporter of about GBP20bn, of which
the financial sector has a net positive balance of about GBP17bn
and the only significant net negative balance is the travel
industry where circa GBP10bn more was spent on "travel" by the UK
outside the UK than within the UK by EU27 travellers. Brexit will
not affect the travel industry and, given sterling's devaluation,
the net balance should decline.
The restriction in trade in the other service sectors is not
related to tariffs but primarily to regulation, licencing and
controls; and the individual service sectors in each EU27 country
are still highly protected - the much vaunted single market does
not operate in these areas - and as John Kay, possibly echoing the
All-Party Parliamentary Group's conclusion "there is no single
market in services in any meaningful sense" says "for most
services, however, the single market remains an aspiration rather
than reality". Thus leaving the EU will be a greater opportunity
cost than an existing cost for most of the service industry. It
seems very likely that a significant number of the EU privileges of
the financial sector will be withdrawn and that in consequence
administrative structures to meet the regulatory requirements of
the EU will have to be introduced. This will certainly result in
some existing non-UK institutions relocating some functions outside
the UK and an increased cost for UK institutions who decide to meet
the changed regulatory requirements. The competitive advantages of
most service industries are related to location, quality,
convenience, inertia and habituation and skill and, to a lesser
extent, price, than the trade sector. For UK institutions the costs
of meeting foreign regulations will usually be not significant in
relation to the margins on the business transactions and the
strategic importance of providing a comprehensive service to
clients. The contraction of the service sectors, particularly the
financial sector, will prove less severe that many commentators
contend, but margins may be reduced.
Scotland's economy has underperformed the UK economy for the
last five years. Forecasts for Scotland are lower than before the
Leave vote, and in November Mackay Consultants estimated growth in
2016 of 1.5% and forecast 1.2% for 2017. Mackay's 2017 forecast is
lower than EY's 2.0%, but higher than the Fraser of Allander's 0.5%
and PWC's 0.3% whose forecasts', Tony Mackay says, drolly but
accurately, "have been very poor in recent years"!
Scotland's poorer economic prospects have four main causes.
Scotland has a proportionally larger public sector which, as
evidenced in the Education PISA results, has low productivity,
Scotland is outside the higher growth area of London and the South
East, a difference that has become more marked since the collapse
of its two largest institutions, the RBS and the Bank of Scotland.
Fortunately, the skills training and aptitude necessary for the
executive and administrative functions remain and support the
financial sector in Edinburgh and Glasgow, but the strategic
function has been diminished together with the associated
professional expertise.
Indy ref 2, as a possible second referendum is quaintly termed,
detracts from Scottish economic performance as it casts a shadow
over investment in Scotland, but this threat to economic progress
is diminishing. The value of prospective Scottish Government
revenue from North Sea Oil and Gas is now so small that the fiscal
deficit of an independent Scotland would be about 10%, comparable
with Greece in the Great Recession. Such harsh reality is sapping
the SNP's exceptional ardour. Indeed, the widespread discussion of
the economic cost of Brexit may have drawn attention to the very
considerably greater cost to Scotland of a Sc-exit, given its
closer economic ties to England than the UK to the EU. If the UK
with its own currency has difficulty negotiating with the EU27, how
much greater would the difficulty be for Scotland negotiating with
the UK? A separate, often unrecognised point, is that if Scotland
fears for its lack of influence over UK policy, how much less
influence will it have over the much larger and more different EU27
policy?
The November 2016 YouGov poll showed support for a 'Yes' vote
was 44%, its lowest poll since September 2014 when 45% voted Yes.
This outcome was surprising as commentators considered that a
Brexit vote by the UK was contrary to the Scottish vote to Remain
and a preference for the EU would provide a windfall for the SNP.
John Curtice commented that "While some people might have switched
from No to Yes in the wake of Brexit, as the SNP anticipated, there
was also a risk that some people would switch from Yes to No - for
them, the prospect of being in a UK outside the EU becomes much
more attractive than a Scotland intent on remaining inside the EU".
He estimates that between a quarter and a third of people who voted
Yes in September 2014 voted Leave in June 2016. Thus, a significant
number of Yes and Leave voters are deciding it's more important to
be outside the EU than it is to be part of an independent Scotland.
John Curtice continued "Sturgeon's apparent assumption was that
Brexit would shake the apples off the tree in her direction. In
fact, some of the apples have gone in the other direction."
The oil industry is the fourth cause of Scotland's poor economic
prospects as its decline continues to damage the economy as new
investment is reduced, long cycle projects complete and damaged
businesses continue to collapse. Existing firms expect staff losses
to be 33% by mid-2017. Oil prices have improved recently and
without doubt the nadir in oil prices has passed and the GBP
devaluation increases revenues from North Sea oil to the extent
that costs are not $ denominated. The OPEC agreement gives evidence
of a new rapprochement among Middle Eastern enemies who, in plain
terms now "hate the effects of low oil prices more than they hate
each other" and have agreed to restrict supply and have persuaded
Russia and other countries to co-operate for mutual gain.
Incremental supply cuts are also taking place on a progressive
basis as older fields are depleted. Prior to 2015 non-OPEC fields
declined at about 3% per annum but, owing to low margins leading to
lower capital investment, the decline over the last two years has
been about 5.75% per annum. In 2017 mature oil fields, will deliver
3.5m bpd less than in 2014. These reductions in supply will take
place as the IEA forecasts that demand for oil will grow by about
1.2% a year for the next few years. However, as prices rise,
increased supply will become available at short notice from the
very extensive US shale interests where the breakeven price at the
margin is $55 to $60 and this increased supply will limit further
price rises. Supply will be maintained at most existing fields as
they can be operated profitably at this price although many may not
make a return on sunk investment at that level. The production cuts
envisaged have increased the Brent Oil one month future price by
just over $10 to $55. However, the five-year futures price is only
$5 higher, indicating that little significant price change is
expected in the next five years. Nor is a change expected in the
years beyond that as the longest dated month, December 2024, is
only $2 dearer ... at $62.01! One explanation for the low futures
price is that US shale operators are selling forward oil at prices
sufficient to exploit their very considerable reserves profitably.
Like coal before oil, many owners of oil reserves already realise
that there are reserves that may never be realised - in truth some
"jam today" is much much better than "no jam tomorrow"!
Property Prospects
In the previous investment cycle the CBRE All Property Yield
Index peaked at 7.4% in November 2001, then fell steadily to a
trough of 4.8% in May 2007, before rising in this cycle to a peak
of 7.8% in February 2009, a yield surpassed only twice since 1970,
on brief occasions when the Bank Rate was over 10%. Since then
yields fell to 6.1% in 2011, rose by 0.2 percentage points in 2012
and fell steadily to 5.4% in 2015 before rising to 5.5% this year.
Unlike the last two years' yields are unchanged in all components
of the Index except Retail Warehouses where the yield increased by
0.5% points to 5.7%. Significantly CBRE remark "Prime yields for
All Property remained relatively flat despite the uncertainty
following the EU Referendum result in Q3".
Yield changes within each component of the All Property Index
have been small. The main change has been an increase in yields in
Central London prime offices which in the last quarter rose by 17
bps to 4.4%, presumably in response to an expected lower demand for
London offices following the Brexit vote. Yields fell very slightly
in all "Southern" areas. Within Shops, yield on Central London
shops fell in the year to Q2 but rose 25 bp in Q3 and yields
increased in the "Rest of UK", but in Scotland fell by about 10
bps. Within Industrials, yields in the East and West Midlands
increased by about 25 bps, presumably a reaction to the referendum
vote in important manufacturing centres.
The peak All Property yield of 7.8% in February 2009 was 4.6
percentage points higher than the 10-year Gilt, then the widest
"yield gap" since the series began in 1972 and 1.4 percentage
points wider than the previous record yield gap in February 1999.
The 2012 yield of 6.3% marked a record yield gap of 4.8 percentage
points, due largely to the then exceptionally low 1.5% Gilt. The
yield gap fell to a low of 3.3% in 2014, but rose to 3.6% last
year, due mostly to a fall in gilt yields. This year a small rise
in yields to 5.5% has again been offset by a 0.3 percentage points
fall in gilts to 1.5%, widening the yield gap to 3.9%.
The All Property Rent Index, which apart from the brief fall in
2003, had risen consistently since 1994, fell 0.1% in the quarter
to August 2008 and then fell by 12.3% in the year to August 2009.
Since 2009 there have been small increases of only 0.9%, 0.1% and
0.6% in the years to August 2012, but since then rental growth has
improved slightly by 2.6%, 2.9% and 5.0% in the three years to 2015
and has risen by 4.6% this year for the first time to a level above
the previous peak attained in June 2008. Rent rises in the
individual sectors were 8.6% Shops, 6.1% Industrials, 4.5% Offices
and around 1.5% Shopping Centres and Retail Warehouses, two sectors
which also had the lowest rent rises last year. Within the sectors
the most notable changes, computed before any effect of the
referendum, have been a further large increase of over 20% in
Central London shops. Within Offices London City offices rose over
20%, but there was little change in West End offices although
Suburban London, South-East and East offices all rose about 10%,
but rents changed little in all peripheral areas. Within
Industrials the largest increases were nearly 10% in London and
about 6.0% in the South East. In all other areas much smaller
increases occurred. Since the depression began eight years ago, the
All Property Rent Index has risen by 2%; Shops by 3%; Offices by
8%; Industrials by 9%, but Retail Warehouses have fallen by 16%.
Since the market peak of 1990/91 the CBRE rent indices, as adjusted
by RPI for inflation, have all fallen: All Property 28%; Offices
32%; Shops 18%; and Industrials 31%.
Property returns as measured by IPD rose 2.9% in the year to
October 2016, a much poorer return than the 14.7% achieved last
year, and the 20.1% in 2014. Previous years' returns were 7.4%,
3.1%, 8.7%, 20.4% minus 14.0%, and minus 22.5% in the calendar year
2008 when in December alone the index fell a record 5.3%. The IPD
income returns are approximately 5.0% per annum and changes in
returns are largely due to changes in capital values. Capital
returns were 8% in 2015 but in early 2016 the increase was only to
0.2% per month before falling by 0.6% in March 2016 and then by
over 2% in July, subsequent to the Referendum when values,
especially of London offices, fell sharply.
Forecasts for the full 2016 year and for 2017 and beyond have a
notable inflexion point depending which side of the June Referendum
date they are made. In August 2015 the IPF Survey Report forecast
overall returns of 9.2% in 2016, subsequently modified to 7.1% in
May 2016. However, in August the overall return was forecast at
-0.4%, due primarily to a fall in capital values of 5.3%. The IPF
comment "This represents the largest quarter-on quarter downward
shift in total returns forecast by this survey to date. The last
occasion the consensus Forecasts recorded negative returns was in
November 2009 (of -2.6%) for that year being the eighth and final
consecutive quarter of sub-zero predictions for the then current
year." IPF, to their credit, confess the actual return for 2009, as
shown by IPD, was plus 3.5%. IPF forecast growth in capital values
for 2018, 2019 and 2020 which, together with an income return of
just about 5.0%, gives returns of 5.7%, 6.8% and 7.1% respectively.
The total return forecast over the four years up to and including
2020 is 3.9% per annum.
Colliers provide the most comprehensive surveyors' forecast,
giving detailed consideration to each sector. The near term
forecast for 2016 is an All Property return of -0.4%, similar to
IPF but Colliers has a higher forecast of 2.4% for 2017 and of 4.6%
for 2016-20. One source of variation may be that, while the
Colliers report was published in September, three months after the
referendum, the IPF forecasts were published in August having been
collated up to 12 weeks previously. In contrast Colliers say that
data released "suggest economic activity has shrugged off post-vote
uncertainty". Colliers expect the Industrial sector to give the
highest return in 2017 at 6.5% and, over the four years to 2020,
7.1% per annum. Rental growth will be higher in the Industrial
sector than in other sectors with the London and the South-East
areas continuing to have the greatest increases.
The Shops and Offices sectors are both expected to suffer
capital declines from rising yields in 2017 and from 2016 - 2020
with total returns of 2.3% at 0.3% respectively in 2017 and 4.1%
and 3.8% for 2016 - 2020. Standard Shops rents are expected to
increase by 1.2% per annum in 2016 - 2020 but Shopping Centres and
Retail Warehouses will have lower rental growth and rents will
continue to fall for Supermarkets. Standard shop rents are expected
to rise more rapidly in Central London, but very small rental falls
are expected outwith the wider South-East region.
Forecasts for the office sector are broadly similar to the shop
sector as falling capital values reduce total returns to 0.3% in
2017 and 3.8% per annum in 2016 - 2020. Brexit is expected to
reduce demand from financial services who currently account for
about 24% of City office demand but there are large requirements
from media and tech firms who continue to take space and such
demand may partially offset falling demand from financial services.
London rents are expected to be stable at best in the second half
of 2016 but to fall in 2017, particularly in the City, by 5.0%,
before recovering to grow by about 1% per annum from 2016 - 2020.
In the South-East a similar trend is expected with a lower
amplitude. For the rest of the UK Colliers expects even more modest
rental growth of 0.5% in 2016 - 2020. This year rent rises have
been notable in Manchester, Swindon and Exeter but, in Scotland,
not unexpectedly, Aberdeen rents fell by 12.5%, while Edinburgh and
Glasgow rents were unchanged at GBP30 for grade A space.
Forecasters are notoriously unable to detect pivotal points such
as the unexpected Brexit vote which was largely responsible for the
marked change in the IPF forecasts from March 2016 to August 2016.
Current forecasts are essentially for a small continuing
improvement from the present position - a trend analysis. However
economic growth is forecast by the OBR at 1.4% in 2017 and rising
thereafter, no recession is premised, and the initial response by
the economy appears much less disadvantageous than previously
feared. I think that, in general, returns over the 2016 - 2020
period will be above those currently forecast.
This time last year forecasts for house prices in 2016 were
optimistic. HMT's "Average of Forecasts" was for a rise of 6.1%,
and the OBR forecast 6.8%, figures in line with current estimates
of 5.0% by the HMT survey and 7.8% by the OBR. Increases in house
prices in the twelve months to the end of October 2016 are reported
as: 6.1% Halifax; 4.7% Nationwide; and 3.0% Acadata, or 3.6%
excluding London and the South-East. The Acadata index includes
cash purchases excluded from the Mortgage providers' figures. The
downturn has been more severe in London than most regions, and as a
higher percentage of houses are bought with cash in London, rises
reported in the Acadata index are reduced compared to those indices
excluding cash buyers.
The average annual figures mask a wide disparity over time and
among the regions of England and Wales. Acadata report that prices
rose by 0.4% in the month of October, a modest increase but the
largest since 2.1% in February 2016, prior to the introduction of
the 3% stamp duty surcharge on investment properties and on second
homes, and the subsequent June Brexit vote. The annual price change
in October was 3.0%, a sharp reduction from the 9.1% reported in
February. In February Greater London had the highest house price
growth but currently growth is lower there than every region except
Wales and Yorkshire and Humberside.
It is considered that there is a high positive correlation
between house price rises and transaction volumes. Certainly, this
year transactions peaked at 120,000 in March and since then have
been 5,000 to 10,000 lower than in 2015 and 2014 and in October
were 10,000 to 20,000 lower than in the last three years. In Q3
Greater London transactions were 32% lower than in 2015, more than
double the percentage drop of 14% for all England and Wales, a
result consistent with Greater London having the lowest increase in
price of any major English region. For 15 of the last 21 years
sales have been higher in October than in September, but the
October 2016 sales are about 12% lower, a change Acadata consider
may be a continuing one off effect of Brexit or indicative of a
longer term trend from ownership to renting.
There continues to be a great disparity in price rises among the
regions, marked by the relegation of Greater London to one of three
regions, together with Wales and Yorkshire and Humberside, with
less than 1.0% growth. The three regions with the highest annual
growth are East of England 7.0%, South East 6.5% and South West
4.7%.
Interpretation of the changes in prices is complicated by the
differing reported results among the reporting agencies. The
largest difference is currently between the band of 3.0% to 4.6%
annual price rises comprising Acadata and the mortgage providers,
together with Rightmove, and the new ONS, which returns a rise of
9.0%. The difference occurs because ONS uses a geometric mean
whereas all the other providers use an arithmetic mean. The
geometric index gives a reduced weighting of high value properties
compared to the arithmetic mean, and in consequence, the fall of
central London high prices is under-reported by the geometric based
ONS system.
In Scotland house prices remain "resilient" according to
Acadata, increasing by 2.4% in the year to August 2016, a higher
rate than the 0.3% recorded to August 2015. The average prices are
distorted by a reduction in the number of houses over GBP500,000
sold this year. Sales of high priced houses were brought forward to
early 2015 to avoid the penal 10% LBTT for the GBP325,000 to
GBP750,000 band and 12% thereafter. Throughout Scotland 31% fewer
such houses were sold in H1 2016 than in H1 2015, the largest
number 115, and the highest percentage of such sales, being in
Edinburgh, causing the current average Edinburgh sales price to be
depressed compared to last year. In Scotland a GBP1m house now
costs GBP78,350 in LBTT but "only" GBP43,750 in SDLT in England and
Wales, a difference in tax of GBP34,600.
The Registers of Scotland provide detailed figures up to Q3
2016. Within mainland Scotland the largest rise in price occurred
in East Renfrewshire where a large number of new expensive houses
were sold in Newton Mearns. Edinburgh recorded the second highest
rise of 5.7%, and Aberdeen City recorded the largest fall of 7.5%
as detached houses there fell 14.6%. In Edinburgh flats rose by
8.0% and anecdotal evidence indicates that price rises are very
strong for refurbished flats and new flats. New flats, even those
peripheral to the established residential areas, are obtaining
prices of GBP340/ft(2) to GBP360/ft(2) , a rise of probably over
15% compared to last year. Agents report a strong and continuing
market for such properties.
The OBR expect house prices to rise by 3.4% in 2017 and by 28.5%
over the next six years. HMT expect prices to rise 2.2% in 2017 and
then by about 10.6% over the following three years. Forecasts of
nil or 1% for 2017 are given by JLL, Savills and Knight Frank, RICS
expects price rises to be 1.5% in 2017 and around 20% over the next
five years.
Savills provide house price forecasts, carefully distinguishing
them as second-hand, for up to five years for both Prime and
Mainstream markets. The forecasts are very conservative compared to
this time last year as "rarely, if ever, has economic forecasting
been less certain. The myriad of Brexit outcomes ...". The
Mainstream UK market is forecast to have no growth in 2017 and to
grow by only 13% over five years. Scottish prices are reported to
fall 2.5% next year and to grow only 9% in five years, lower than
any other UK market. Savills consider that in 2017 household
income, a good indicator of house price movement, will grow only
1%, less than inflation, and that employment will decrease by 0.4%.
Aberdeen will continue to be a "drag" on the national figure unless
oil prices rebound.
According to Savills prime markets will perform equally poorly
in 2017 but grow strongly in 2019 and increase in Central London
and Commuting areas up by about 20%. Scotland's prime market is
expected to perform least well of all the regions and prices to
rise only 12% over five years.
Savills compare prices in July 2016 with peak prices in 2007/08.
Prices in all areas north of the Midlands and in Wales have fallen
and by 6% in Scotland, but South-East and East regions have risen
over 20%. London, a class alone, has risen 58%.
The Halifax index peaked at the GBP199,600 recorded in August
2007. The equivalent inflation-adjusted price in October 2016 would
have been 27.89% higher, or GBP255,259 but the current October 2016
Halifax index price is GBP217,411 - a long way off! If house prices
rise at about 3.5% and inflation is 2.0%, then ten more years will
elapse before the August 2007 peak is regained in real terms. House
prices are difficult to predict and historically errors have been
large, especially around the timings of reversals or shocks. I
repeat what I said last year and previously. "... the key
determinant of the long-term housing market will be a shortage in
supply, resulting in high prices".
Future Progress
The Group is starting to take advantage of a housing market
which is stable in the Scottish Central belt and which I expect to
remain stable over the next few years.
We will continue to invest in projects that require long-term
planning work, but on a reduced scale. We will emphasise the
completion and realisation of previously postponed development
opportunities which can be built and marketed shortly, provided
market conditions allow. We will seek to develop our major sites
with the necessary consents and, for the largest projects, continue
our analysis of innovative financial methods and joint ventures as
appropriate.
While we do require a stable and liquid housing market, we do
not depend on a recovery in prices for the successful development
of most of our sites, as almost all of these sites were purchased
unconditionally, ie without planning permission, for prices not far
above their existing use value and before the 2007 house price
peak. A major component of the Group's site development value lies
in securing planning permission, and in its extent, and it is
relatively independent of changes in house values. For development
or trading properties, unlike investment properties, no change is
made to the Group's balance sheet even when improved development
values have been obtained. Naturally, however, the balance sheet
will reflect such enhanced value when the properties are developed
or sold.
The policy of the Group will continue to be considered and
conservative, but responsive to market conditions and
opportunistic. The mid-market share price on 21 December 2016 was
85.5p, a not insignificant discount to the NAV of 152.88p as at 30
June 2016. The Board does not recommend a final dividend, but
intends to restore dividends when profitability and consideration
for other opportunities and obligations permit.
Conclusion
The UK recovered from the Great Recession of 2008 and the
longest depression since 1873-96 but growth since then, although
restored to nearly the normal trend level, has been poor, while
unusually there has been no rebound of above average growth after
the recession, or "catch up".
The continuing restrictive fiscal policies have delayed a return
to the pre-recession growth level and the long depression and
credit controls have damaged the economy's productivity and its
long-term supply capability. The opportunity to expand demand and
to invest in capital projects at low interest cost has been
neglected contributing to the virtual stagnation of productivity
growth. A fiscal stimulus without an improvement in productivity
may threaten the inflation target. Fortunately, at long last, the
view is gaining credence that the inflation level is "the inflation
level" but it is not the "holy grail" of economic management nor
even a necessary pre-condition for a successful growing economy,
but one of many target indicators. The crisis in the EZ is a more
obvious example of the consequences of such misplaced emphasis.
The management of the economy, the inflation target, the fiscal
balance, the "golden rules" are derived from forecasts based on
economic modelling. Such forecasting has proved fallible, at times
contributing to, if not causing, severe economic damage. Past
examples include the Great Depression, the policies before the New
Deal, the recent Great Recession, the EMU, including particularly
the extensive UK lobbying to join the EZ, the now waning fixation
with the inflation target, and most recently and, quite vividly,
the forecast short term consequences of a proposal to leave the EU.
Patently, forecasting will always be imprecise, but experiments on
refining their accuracy has shown that the skills of experts in
their own fields are not the skills required for more accurate
forecasting. Returns from investing in defining, isolating and
using these skills and techniques would be high.
Forecasts for the final relationship between the UK and the EU
and for the economic consequences require to be considered in the
knowledge of the uncertainties of such forecasts. My forecast is
the economic penalty for withdrawing from the EU will be measurable
but manageable. This political choice is but one of many that may
not be economically optimal - perhaps economists should accept that
at the margin sometimes other priorities are preferred. This might
even improve their forecasting.
I D Lowe
Chairman
22 December 2016
Consolidated income statement for the year ended 30 June
2016
2016 2015
Note GBP000 GBP000
Revenue
Revenue from development property
sales 438 440
Gross rental income 351 334
Property charges (241) (224)
------- -------------------
Net rental and related income 548 550
Cost of development property
sales (391) (272)
Administrative expenses (635) (726)
Other income 15 28
------- -------------------
Net operating loss before investment
property
disposals and valuation movements 5 (463) (420)
------- -------------------
Gain on sale of investment
properties 99 -
Valuation gains on investment
properties 675 1,100
Valuation losses on investment (185) -
properties
------- -------------------
Net valuation gains on investment
properties 589 1,100
------- -------------------
Operating profit 126 680
------- -------------------
Financial income 7 1 1
Financial expenses 7 (22) (116)
------- -------------------
Net financing costs (21) (115)
------- -------------------
Profit before taxation 105 565
Income tax 8 - -
Profit for the financial period
attributable to equity
------- -------------------
holders of the Company 105 565
======= ===================
Profit per share
Basic and diluted profit per
share (pence) 9 0.89p 4.79p
The notes on pages 30 - 49 form an integral part of these
financial statements.
Consolidated balance sheet as at 30 June 2016
2016 2015
Note GBP000 GBP000
Non current assets
Investment property 10 10,905 10,515
Property, plant and
equipment 11 15 24
Investments 12 1 1
--------- -------- ---
Total non-current
assets 10,921 10,540
--------- -------- ---
Current assets
Trading properties 13 11,166 11,418
Trade and other receivables 14 153 96
Cash and cash equivalents 15 103 131
--------- -------- ---
Total current assets 11,422 11,645
Total assets 22,343 22,185
--------- -------- ---
Current liabilities
Trade and other payables 16 (698) (645)
Interest bearing loans
and borrowings 17 - (3,530)
--------- -------- ---
Total current liabilities 17 (698) (4,175)
Non current liabilities (3,630) (100)
Interest bearing loans
and borrowings
--------- -------- ---
Total liabilities (4,328) (4,275)
--------- -------- ---
Net assets 18,015 17,910
========= ======== ===
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 12,738 12,633
--------- -------- ---
Total equity attributable
to equity holders
of the parent Company 18,015 17,910
========= ======== ===
NET ASSET VALUE PER SHARE 152.88p 151.99p
The financial statements were approved by the board of directors
on 22 December 2016 and signed on its behalf by:
ID Lowe
Director
The notes on pages 30 -49 form an integral part of these
financial statements.
Consolidated statement of changes in equity as at 30 June
2016
Share Capital Share Retained
capital redemption premium earnings Total
reserve account
GBP000 GBP000 GBP000 GBP000 GBP000
At 1 July
2015 2,357 175 2,745 12,633 17,910
Profit for
the year - - - 105 105
______ ______ ______ ______ ______
At 30 June
2016 2,357 175 2,745 12,738 18,015
====== ====== ====== ====== ======
At 1 July
2014 2,357 175 2,745 12,068 17,345
Profit for
the year - - - 565 565
______ ______ ______ ______ ______
At 30 June
2015 2,357 175 2,745 12,633 17,910
====== ====== ====== ====== ======
Consolidated cash flow statement for the year ended 30 June
2016
2016 2015
GBP000 GBP000
Cash flows from operating
activities
Profit for the year 105 565
Adjustments for :
Gain on sale of investment (99) -
property
Gains on revaluation of investment
property (490) (1,100) )
Depreciation 11 14
Net finance expense 22 116
_______ _______
Operating cash flows before
movements
in working capital (451) (405)
Decrease in trading properties 252 80
(Increase) in trade and
other receivables (57) (29)
Increase in trade and
other payables 30 3
_______ _______
Cash absorbed by the operations (226) (351)
Interest received 1 1
_______ _______
Net cash outflow from
operating activities (225) (350)
_______ _______
Investing activities 199 -
Proceeds from sale of
investment property
Acquisition of property,
plant and equipment (2) (3)
_______ _______
Cash flows from investing
activities 197 (3)
_______ _______
Increase in borrowings - 450
_______ _______
Cash flows from financing
activities - 450
_______ _______
Net increase in cash and cash
equivalents (28) 97
Cash and cash equivalents
at beginning of year 131 34
_______ _______
Cash and cash equivalents
at end of year 103 131
Notes to the consolidated financial statements as at 30 June
2016
1 Reporting entity
Caledonian Trust PLC is a company domiciled in the United
Kingdom. The consolidated financial statements of the Company for
the year ended 30 June 2016 comprise the Company and its
subsidiaries as listed in note 8 in the parent Company's financial
statements (together referred to as "the Group"). The Group's
principal activities are the holding of property for both
investment and development purposes.
2 Statement of Compliance
The Group financial statements have been prepared and approved
by the directors in accordance with International Financial
Reporting Standards and its interpretation as adopted by the EU
("Adopted IFRSs"). The Company has elected to prepare its parent
Company financial statements in accordance with IFRS; these are
presented on pages 50 to 69.
3 Basis of preparation
The financial statements are prepared on the historical cost
basis except for available for sale financial assets and investment
properties which are measured at their fair value.
The preparation of the financial statements in conformity with
Adopted IFRSs requires the directors to make judgements, estimates
and assumptions that affect the application of policies and
reported amounts of assets and liabilities, income and expenses.
The estimates and associated assumptions are based on historical
experience and various other factors that are believed to be
reasonable under the circumstances, the results of which form the
basis of making the judgements about carrying values of assets and
liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates.
These financial statements have been presented in pounds
sterling which is the functional currency of all companies within
the Group. All financial information has been rounded to the
nearest thousand pounds.
Going concern
The Group's business activities, together with the factors
likely to affect its future development, performance and position
are set out in the Chairman's Statement on pages 2 to 19. The
financial position of the Group, its cash flows, liquidity position
and borrowing facilities are described in Note 18.
In addition, note 18 to the financial statements includes the
Group's objectives, policies and processes for managing its
capital; its financial risk management objectives; details of its
financial instruments and hedging activities; and its exposures to
credit risk and liquidity risk.
The Group and Company finance their day to day working capital
requirements through related party loans (see note 23). The related
party lender has indicated its willingness to provide further funds
to facilitate the continued construction of certain properties
during 2017.
The Directors have prepared projected cash flow information for
the period ending twelve months from the date of their approval of
these financial statements. These forecasts assume the Group will
make property sales in the normal course of business to provide
sufficient cash inflows to allow the Group to continue to
trade.
Should these sales not complete as planned, the directors are
confident that they would be able to sell sufficient other
properties within a short timescale to generate the income
necessary to meet the Group's liabilities as they fall due.
For these reasons they continue to adopt the going concern basis
in preparing the financial statements.
Areas of estimation uncertainty and critical judgements
Information about significant areas of estimation uncertainty
and critical judgements in applying accounting policies that have
the most significant effect on the amount recognised in the
financial statements is contained in the following notes:
-- Valuation of investment properties (note 10)
The fair value has been calculated using third party valuations
provided by external independent valuers. The valuations are based
upon assumptions including future rental income, anticipated void
cost, the appropriate discount rate or yield. The independent
valuers also take into consideration market evidence for comparable
properties in respect of both transaction prices and rental
agreements.
-- 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.
-- Deferred Tax (note 20)
A significant proportion of the Group's deferred tax asset
relates to differences between the carrying value of investment
properties and their original tax base. A decision has been taken
not to recognise the asset on the basis of the uncertainty that
surrounds the availability of future taxable profits.
4 Accounting policies
The accounting policies below have been applied consistently to
all periods presented in these consolidated financial
statements.
Basis of consolidation
The financial statements incorporate the financial statements of
the Company and all its subsidiaries. Subsidiaries are entities
controlled by the Group. Control exists when the Group has the
power to determine the financial and operating policies of an
entity so as to obtain benefits from its activities. The financial
statements of subsidiaries are included in the consolidated
financial statements from the date that control commences until the
date it ceases.
Revenue
Rental income from properties leased out under operating leases
is recognised in the income statement on a straight line basis over
the term of the lease. Costs of obtaining a lease and lease
incentives granted are recognised as an integral part of total
rental income and spread over the period from commencement of the
lease to the earliest termination date on a straight line
basis.
Revenue from the sale of trading properties is recognised in the
income statement on the date at which the significant risks and
rewards of ownership are transferred to the buyer with proceeds and
costs shown on a gross basis.
Other income
Other income comprises income from agricultural land and other
miscellaneous income.
Finance income and expenses
Finance income and expenses comprise interest payable on bank
loans and other borrowings. All borrowing costs are recognised in
the income statement using the effective interest rate method.
Interest income represents income on bank deposits using the
effective interest rate method.
Taxation
Income tax on the profit or loss for the year comprises current
and deferred tax. Income tax is recognised in the income statement
except to the extent that it relates to items recognised directly
in equity, in which case the charge / credit is recognised in
equity. Current tax is the expected tax payable on taxable income
for the current year, using tax rates enacted or substantively
enacted at the reporting date, adjusted for prior years under and
over provisions.
Deferred tax is provided using the balance sheet liability
method in respect of all temporary differences between the values
at which assets and liabilities are recorded in the financial
statements and their cost base for taxation purposes. Deferred tax
includes current tax losses which can be offset against future
capital gains. As the carrying value of the Group's investment
properties is expected to be recovered through eventual sale rather
than rentals, the tax base is calculated as the cost of the asset
plus indexation. Indexation is taken into account to reduce any
liability but does not create a deferred tax asset. A deferred tax
asset is recognised only to the extent that it is probable that
future taxable profits will be available against which the asset
can be utilised.
Investment properties
Investment properties are properties owned by the Group which
are held either for long term rental growth or for capital
appreciation or both. Properties transferred from trading
properties to investment properties are revalued to fair value at
the date on which the properties are transferred. When the Group
begins to redevelop an existing investment property for continued
future use as investment property, the property remains an
investment property, which is measured based on the fair value
model, and is not reclassified as property, plant and equipment
during the redevelopment.
The cost of investment property includes the initial purchase
price plus associated professional fees. Borrowing costs directly
attributable to the acquisition or construction of qualifying
assets are capitalised during the period of construction.
Subsequent expenditure on investment properties is only capitalised
to the extent that future economic benefits will be realised.
Investment property is measured at fair value at each balance
sheet date. External independent professional valuations are
prepared at least once every three years. The fair values are based
on market values, being the estimated amount for which a property
could be exchanged on the date of valuation between a willing buyer
and a willing seller in an arms-length transaction after proper
marketing wherein the parties had each acted knowledgeably,
prudently and without compulsion.
Any gain or loss arising from a change in fair value is
recognised in the income statement.
Purchases and sales of investment properties
Purchases and sales of investment properties are recognised in
the financial statements at completion which is the date at which
the significant risks and rewards of ownership are transferred to
the buyer.
Property, plant and equipment
Property, plant and equipment are stated at cost, less
accumulated depreciation and any provision for impairment.
Depreciation is provided on all property, plant and equipment at
varying rates calculated to write off cost to the expected current
residual value by equal annual instalments over their estimated
useful economic lives. The principal rates employed are:
Plant and equipment - 20.0 per cent
Fixtures and fittings - 33.3 per cent
Motor vehicles - 33.3 per cent
Trading properties
Trading properties held for short term sale or with a view to
subsequent disposal in the near future are stated at the lower of
cost or net realisable value. Cost is calculated by reference to
invoice price plus directly attributable professional fees. Net
realisable value is based on estimated selling price less estimated
cost of disposal.
Financial assets
Trade and other receivables
Trade and other receivables are initially recognised at fair
value and then stated at amortised cost.
Financial instruments
Available for sale financial assets
The Group's investments in equity securities are classified as
available for sale financial assets. They are initially recognised
at fair value plus any directly attributable transaction costs.
Subsequent to initial recognition they are measured at fair value
and changes therein, other than Impairment losses, are recognised
directly in equity. The fair value of available for sale
investments is their quoted bid price at the balance sheet date.
When an investment is disposed of, the cumulative gain or loss in
equity is recognised in profit or loss. Dividend income is
recognised when the company has the right to receive dividends
either when the share becomes ex dividend or the dividend has
received shareholder approval.
Cash and cash equivalents
Cash includes cash in hand, deposits held at call (or with a
maturity of less than 3 months) with banks, and bank overdrafts.
Bank overdrafts that are repayable on demand and which form an
integral part of the Group's cash management are shown within
current liabilities on the balance sheet and included with cash and
cash equivalents for the purpose of the statement of cash
flows.
Financial liabilities
Trade payables
Trade payables are non-interest-bearing and are initially
measured at fair value and thereafter at amortised cost.
Interest bearing loans and borrowings
Interest-bearing loans and bank overdrafts are initially carried
at fair value less allowable transactions costs and then at
amortised cost.
New Standards and interpretations not yet adopted
The International Accounting Standards Board (IASB) and
International Financial Reporting Interpretations Committee has
recently issued the following new standards and amendments which
are effective for annual periods beginning on or after 1 January
2016, unless stated otherwise, and have not been applied in
preparing these consolidated financial statements.
- IFRS 9 Financial Instruments: Classification and Measurement
which is the first phase of a wider project to replace IAS 39.
Financial Instruments: Recognition and Measurement, replaces the
current models for classification measurement of financial
instruments. Financial assets are to be classified into two
measurement categories: fair value and amortised cost.
Classification will depend on an entity's business model and the
characteristics of contractual cash flow of the financial
instrument. The standard is effective for annual periods beginning
on or after 1 January 2018.
As at the time of publication of these financial statements, the
IASB is re-deliberating the requirements for classification and
measurement in IFRS 9 while the requirements of latter phases of
IFRS 9 are in development and therefore remain uncertain.
- IFRS 15 Revenue fom contracts with customers
The standard specifies how and when revenue is recognised, using
a principles based five-step model. The standard is effective for
accounting periods beginning on or after 1 January 2018 but has not
yet been endorsed.
- IFRS 16 Leases
This standard will eliminate the current IAS 17 dual accounting
model, which distinguishes between on-balance sheet finance leases
and off-balance sheet operating leases and, instead, introduces a
single, on-balance sheet accounting model that is similar to
current finance lease accounting. The standard is effective for
accounting periods beginning on or after 1 January 2-19 but has not
yet been endorsed.
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 2016 2015
GBP000 GBP000
The operating profit is stated
after charging :
Depreciation 11 14
Amounts received by auditors
and their associates in respect
of:
- Audit of these financial statements
(Group and Company) 12 7
- Audit of financial statements
of subsidiaries pursuant to 6 6
legislation
====== ======
6 Employees and employee benefits 2016 2015
GBP000 GBP000
Employee remuneration
Wages and salaries 373 412
Social security costs 39 43
Other pension costs 30 31
_______ _______
442 486
====== =======
Other pension costs represent contributions
to defined contribution plans.
The average number of employees during the
year was as follows:
No. No.
Management 2 2
Administration 3 3
Other 3 4
_______ _______
8 9
====== =======
2016 2015
Remuneration of directors GBP000 GBP000
Directors' emoluments 228 251
Company contributions to money
purchase pension schemes 25 26
====== ======
Director Salary Benefits Pension 2016 2015
and Contributions Total Total
Fees
GBP000 GBP000 GBP000 GBP000 GBP000
ID Lowe 87 5 - 92 115
MJ Baynham 125 3 25 153 153
RJ Pearson 8 - - 8 9
______ ______ ______ ______ ______
220 8 25 253 277
7 Finance income and finance expenses
2016 2015
GBP000 GBP000
Finance income
Interest receivable:
- on bank balances 1 1
=== ===
Finance expenses
Interest payable:
- Other loan interest 22 21
- Loan stock repayable within
five years - 95
____ ____
22 116
==== ====
8 Income tax
There was no tax charge/(credit) in the current or preceding
year.
2016 2015
GBP000 GBP000
Profit before tax 105 565
===== =====
Current tax at 20%
(2015 : 20.75%) 21 117
Effects of:
Expenses not deductible
for tax purposes 9 20
Indexation on chargeable (20) -
gains
Losses carried forward 88 91
Revaluation of property
not taxable (98) (228)
______ ______
Total tax charge - -
===== =====
Reductions in the UK corporation tax rate from 23% to 21%
(effective from 1 April 2014) and 20% (effective from 1 April 2015)
were substantively enacted on 2 July 2013. Further reductions to
19% (effective from 1 April 2017) and to 18% (effective from 1
April 2020) were substantively enacted on 26 October 2015. This
will reduce the Company's future current tax charge
accordingly.
An additional reduction to 17% (effective 1 April 2020) was
substantively enacted on 6 September 2016. This will reduce the
company's future current tax charge accordingly.
In the case of deferred tax in relation to investment property
revaluation surpluses, the base cost used is historical book cost
and includes allowances or deductions which may be available to
reduce the actual tax liability which would crystallise in the
event of a disposal of the asset (see note 20).
9 Profit per share
Basic profit per share is calculated by dividing the profit
attributable to ordinary shareholders by the weighted average
number of ordinary shares outstanding during the period as
follows:
2016 2015
GBP000 GBP000
Profit for financial period 105 565
====== ======
No. No.
Weighted average no. of
shares:
for basic earnings per
share and for diluted
earnings per share 11,783,577 11,783,577
======== ========
Basic profit per share 0.89p 4.79 p
Diluted profit per share 0.89p 4.79 p
The diluted figure per share is the same
as the basic figure per share as there are
no dilutive shares.
10 Investment properties
2016 2015
GBP000 GBP000
Valuation
At 30 June 2015 10,515 9,415
Sold in year (100) -
Revaluation in year 490 1,100
________ ________
Valuation at 30 June 2016 10,905 10,515
======== ========
Investment properties were valued at GBP9,505,000
as at 30 June 2016 by Montagu Evans, Chartered
Surveyors, external valuers not connected
with the Group. They were valued at fair value
in accordance with the RICS Valuation - Professional
Standards (January 2014, revised April 2015)
published by the Royal Institution of Chartered
Surveyors (RICS). The valuations are arrived
at by reference to market evidence of transaction
prices and completed lettings for similar
properties. The properties have been valued
individually and not as part of a portfolio
and no allowance has been made for expenses
of realisation or for any tax which might
arise. They assume a willing buyer and a willing
seller in an arm's length transaction, after
proper marketing and where the parties had
each acted knowledgeably, prudently and without
compulsion. The valuations reflect usual deductions
in respect of purchaser's costs, SDLT and
LBTT as applicable at the valuation date.
The valuer makes various assumptions including
future rental income, anticipated void cost,
the appropriate discount rate or yield.
One investment property was valued at GBP1,400,000
as at 30 June 2016 by Rettie & Co, an independent
firm of property specialists not connected
with the Group. The valuation was undertaken
by a Chartered Surveyor in accordance with
the RICS Standards and willing buyer and seller
referred to above. The market value was arrived
at having regard to local comparable data,
adjusted to reflect the individual circumstances
and unique characteristics of the valuation
subjects.
The 'review of activities' within the Chairman's
statement provides the current status of the
Group's property together with an analysis
of the 'property prospects' for 2017 and beyond.
The historical cost of investment properties
held at 30 June 2016 is GBP9,521,406 (2015:
GBP9,620,837). The cumulative amount of interest
capitalised and included within historical
cost in respect of the Group's investment
properties is GBP451,000 (2015: GBP476,000).
11 Property, plant and equipment
Motor Fixtures Other
Vehicles and fittings equipment Total
GBP000 GBP000 GBP000 GBP000
Cost
At 30 June 2014 18 14 62 94
Additions in year - - 3 3
---------- -------------- ----------- --------
At 30 June 2015 18 14 65 97
---------- -------------- ----------- --------
Depreciation
At 30 June 2014 11 9 39 59
Charge for year 2 4 8 14
At 30 June 2015 13 13 47 73
---------- -------------- ----------- --------
Net book value
At 30 June 2015 5 1 18 24
========== ============== =========== ========
Motor Fixtures Other
Vehicles and fittings equipment Total
GBP000 GBP000 GBP000 GBP000
Cost
At 30 June 2015 18 14 65 97
Additions in year - - 2 2
---------- -------------- ----------- --------
At 30 June 2016 18 14 67 99
---------- -------------- ----------- --------
Depreciation
At 30 June 2015 13 13 47 73
Charge for year 3 1 7 11
At 30 June 2016 16 14 54 84
---------- -------------- ----------- --------
Net book value
At 30 June 2016 2 - 13 15
========== ============== =========== ========
12 Investments
2016 2015
GBP000 GBP000
Available for sale investments
At the start of the year 1 -
Purchased in year - 1
_______ _______
Available for sale financial
assets 1 1
====== ======
13 Trading properties
2016 2015
GBP000 GBP000
At start of year 11,418 11,498
Additions 139 190
Sold in year (391) (270)
_________ _________
At end of year 11,166 11,418
======== ========
14 Trade and other receivables 2016 2015
GBP000 GBP000
Amounts falling due within
one year
Other debtors 67 68
Prepayments and accrued income 86 28
_______ _______
153 96
====== ======
The Group's exposure to credit risks and impairment
losses relating to trade receivables is given
in note 18.
15 Cash and cash equivalents 2016 2015
GBP000 GBP000
Cash 103 131
====== ======
Cash and cash equivalents comprise cash at
bank and in hand. Cash deposits are held with
UK banks. The carrying amount of cash equivalents
approximates to their fair values. The company's
exposure to credit risk on cash and cash equivalents
is regularly monitored (note 18).
16 Trade and other payables
2016 2015
GBP000 GBP000
Accruals and other creditors 698 645
====== ======
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
2016 2015
GBP000 GBP000
Floating rate unsecured Loan
Notes 2016 - 2,725
Unsecured loan - 805
________ _________
- 3,530
======= ========
Non current liabilities
Unsecured loans 3,630 100
======= =======
Terms and debt repayment schedule
Terms and conditions of outstanding loans
and loan stock were as follows:
2016 2015
Nominal interest Fair Carrying Fair Carrying
Currency rate value amount value amount
GBP000 GBP000 GBP000 GBP000
Unsecured
loan GBP Base +3% 3,530 3,530 805 805
Floating
rate unsecured GBP Base + 3% - - 2,725 2,725
loan stock
Unsecured
loan GBP Base + 3% 100 100 100 100
3,630 3,630 3,630 3,630
The unsecured loan of GBP3,530,000 is repayable in 12 months and
one day after the giving of notice by the lender. Interest is
charged at 3% over Bank of Scotland base rate but the lender varied
its right to the margin over base rate until further notice.
An unsecured loan of GBP100,000 is repayable in July 2017.
Interest is charged at a margin of 3% over Bank of Scotland base
rate.
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:
2016 2015
Fair Carrying Fair Carrying
value value
amount amount
GBP000 GBP000 GBP000 GBP000
Trade and other
receivables 153 153 96 96
Cash and cash equivalents 103 103 131 131
---------- ------------ -------------------- ---------
256 256 227 227
---------- ------------ -------------------- ---------
Loans from related
parties 3,630 3,630 3,630 3,630
Trade and other
payables 698 698 645 645
---------- ------------ -------------------- ---------
4,328 4,328 4,275 4,275
---------- ------------ -------------------- ---------
Estimation of fair values
The following methods and assumptions were
used to estimate the fair values shown above:
Available for sale financial assets - as such
assets are listed, the fair value is determined
at the market price.
Trade and other receivables/payables - the
fair value of receivables and payables with
a remaining life of less than one year is
deemed to be the same as the book value.
Cash and cash equivalents - the fair value
is deemed to be the same as the carrying amount
due to the short maturity of these instruments.
Other loans - the fair value is calculated
by discounting the expected future cashflows
at prevailing interest rates.
Overview of risks from its use of financial
instruments
The Group has exposure to the following risks
from its use of financial instruments:
* credit risk
* liquidity risk
* market risk
The Board of Directors has overall responsibility
for the establishment and oversight of the
Company's risk management framework and oversees
compliance with the Group's risk management
policies and procedures and reviews the adequacy
of the risk management framework in relation
to the risks faced by the Group.
The Board's policy is to maintain a strong
capital base so as to cover all liabilities
and to maintain the business and to sustain
its development.
The Board of Directors also monitors the level
of dividends to ordinary shareholders.
There were no changes in the Group's approach
to capital management during the year.
Neither the Company nor any of its subsidiaries
are subject to externally imposed capital
requirements.
The Group's principal financial instruments
comprise cash and short term deposits. The
main purpose of these financial instruments
is to finance the Group's operations.
As the Group operates wholly within the United
Kingdom, there is currently no exposure to
currency risk.
The main risks arising from the Group's financial
instruments are interest rate risks and liquidity
risks. The board reviews and agrees policies
for managing each of these risks, which are
summarised below:
Credit risk
Credit risk is the risk of financial loss
to the Group if a customer or counterparty
to a financial instrument fails to meet its
contractual obligations and arises principally
from the Group's receivables from customers,
cash held at banks and its available for sale
financial assets.
Trade receivables
The Group's exposure to credit risk is influenced
mainly by the individual characteristics of
each tenant. The majority of rental payments
are received in advance which reduces the
Group's exposure to credit risk on trade receivables.
Other receivables
Other receivables consist of amounts due from
a company in which the Group holds a minority
investment.
Available for sale financial assets
The Group does not actively trade in available
for sale financial assets.
Bank facilities
At the year end the Company had no bank loan
facilities available (2015: Nil).
Exposure to credit risk
The carrying amount of financial assets represents
the maximum credit exposure. The maximum exposure
to credit risk at the reporting date was:
Carrying value
2016 2015
GBP000 GBP000
Available for sale investments 1 1
Other receivables 67 68
Cash and cash equivalents 103 131
________ ________
171 200
======= =======
The Group does not have an allowance for impairment
on trade receivables as, based on historical
experience, management does not consider that
such an impairment is required.
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.
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
amount cash or less months years
30 June 2016 GBP'000 flows
--------------------- -------- ----------- -------- ------- ----------
Unsecured loan 3,530 3,548 9 9 3,530
Unsecured loan 100 107 2 2 103
Trade and other
payables 698 698 698 - -
--------------------- -------- ----------- -------- ------- ----------
Carrying Contractual 6 months 6-12 2-5
amount cash or less months years
30 June 2015 GBP'000 flows
--------------------- -------- ----------- -------- ------- ----------
Floating rate
unsecured loan
stock 2,725 2,774 48 2,726 -
Unsecured loan 805 817 12 805 -
Unsecured loan 100 107 2 2 103
Trade and other
payables 645 645 645 - -
--------------------- -------- ----------- -------- ------- ----------
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 LIBOR or Base Rate.
The interest rate profile of the Group's borrowings
as at the year end was as follows:
2016 2015
GBP000 GBP000
Unsecured loan 3,530 805
Unsecured loan 100 100
Floating rate instruments
- financial liabilities - 2,725
======= =======
The weighted average interest rate of the
floating rate borrowings was 3.5% (2015: 3.5%).
As set out in Note 17, the lender varied its
right to the margin of interest above base
rate until further notice and so the rate
of interest charged in the year is 0.5%.
A 1% movement in interest rates would be expected
to change the Group's annual net interest
charge by GBP36,300 (2015: GBP36,300).
19 Operating leases
Leases as lessors
The Group leases out its investment properties
under operating leases. The future minimum
receipts under non-cancellable operating leases
are as follows:
2016 2015
GBP000 GBP000
Less than one year 221 146
Between one and five years 418 310
Greater than five years 216 284
_____ _____
855 740
===== =====
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 2016, the Group has a potential deferred tax asset of
GBP971,000 (2015: GBP971,000) of which GBP74,000 (2015: GBP153,000)
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 GBP897,000 (2015:
GBP818,000). This has not been recognised due to the uncertainty
over the availability of future taxable profits.
Movement in unrecognised deferred tax asset
Balance Additions/ Balance Additions/ Balance
1 July reductions 30 June reductions 30 Jun
14 15 16
at 20% at 18% at 18%
GBP000 GBP000 GBP000 GBP000 GBP000
Investment
properties 321 (168) 153 (79) 74
Tax losses 841 (23) 818 79 897
_____ ______ _____ ______ _____
Total 1,162 (191) 971 - 971
_____ ______ _____ ______ _____
21 Issued share capital 30 June 2016 30 June 2015
No GBP000 No. GBP000
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 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 ID Lowe is the controlling shareholder.
The balance due to this party at 30 June 2016 was GBP3,530,000
(2015: GBP3,530,000) with interest payable at 3% over Bank of
Scotland base rate per annum. Leafrealm Limited varied its right to
the margin of interest over base rate until further notice.
Interest charged in the year amounted to GBP17,698 (2015:
GBP95,000).
The Group and Company has an unsecured loan from Mrs V Baynham,
the wife of a director. This is on normal commercial terms. The
balance due to this party at 30 June 2016 was GBP99,999 (2015:
GBP99,999) with interest payable at 3% over Bank of Scotland base
rate per annum. Interest charged in the year amounted to GBP4,382
(2015: GBPnil). The loan is due to be repaid on 1 July 2017.
Contracting work on certain of the Group's development and
investment property sites has been undertaken by Leafrealm Land
Limited, a company under the control of ID Lowe. The value of the
work done by Leafrealm Limited since 2011 has been accrued in the
accounts for the year to 30 June 2016 and amounts to a total of
GBP44,627 at rates which do not exceed normal commercial rates.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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