TIDMCNN
RNS Number : 2631A
Caledonian Trust PLC
22 December 2017
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")
22 December 2017
Caledonian Trust PLC
(The "Company" or the "Group")
Audited Results for the year ended 30 June 2017
Caledonian Trust PLC, the Edinburgh-based property investment
holding and development company, announces its audited results for
the year ended 30 June 2017.
Enquiries:
Caledonian Trust plc
Douglas Lowe, Chairman and Chief Executive Officer Tel: 0131 220 0416
Mike Baynham, Finance Director Tel: 0131 220 0416
Allenby Capital Limited
(Nominated Adviser and Broker)
Nick Athanas Tel: 0203 328 5656
Alex Brearley
CHAIRMAN'S STATEMENT
Introduction
The Group made a pre-tax profit of GBP1,040,000 in the year to
30 June 2017 compared with a profit of GBP105,000 last year. The
profit per share was 8.83p and the NAV per share was 161.71p
compared with a profit of 0.89p and NAV per share of 152.88p last
year.
Income from rent and service charges increased to GBP410,000
from GBP351,000 in 2016. The return of a retention from a property
sale in 2012 resulted in a gain on investment property realisation
of GBP259,000 and the value of other investment properties
increased by a net amount of GBP1.175 million during the year. The
disposal of two small plots of land resulted in a profit on sale of
development properties of GBP37,000 (2016: GBP47,000).
Administrative expenses were GBP611,000 (2016: GBP635,000) and
interest payable was GBP14,000 (2016: GBP22,000). The fall in the
interest charge reflects the reduction in base rate on 4 August
2016 and the average base rate for the year was 0.27% compared to
0.5% in the previous year.
The Company has changed its auditors to Johnston Carmichael LLP.
The Board wishes to thank KPMG for its many years of audit
services.
Review of Activities
The Group's property investment business continues virtually
unchanged. We continue to hold two high yielding retail parades,
and our North Castle Street office, where the surplus space is let
out, and some central Edinburgh garage investments. In September
2017 we recovered GBP266,000 a part of the purchase price retained
on the sale of Baylis Road, London SE1 in 2012 against potential
exceptional costs arising because of building adjacent to the
London Underground Northern line. Previously, no recognition of any
recovery had been made.
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. Until recently our developments have been delayed by poor
market conditions almost certainly resulting from the relative poor
performance of the Scottish economy, particularly affected by the
shrinkage of the oil industry and reinforced by political
uncertainty.
In the year to September 2015 Scottish house prices fell 0.5%
and Edinburgh prices fell 3.1%. In the year to September 2016
Scottish house prices rose 0.6% and Edinburgh prices rose 5.7%, a
greatly improving trend which has continued and in the year to
September 2017 Scottish prices rose 3.1% and Edinburgh a remarkable
9.0%. The market is discussed in the statement later but other
notable features are the large falls of 3.5% in Aberdeen and of
2.0% in Aberdeenshire and the small rises in Angus 0.3%, Highland
0.8%, Perth & Kinross 2.1% and in many areas around Glasgow.
Flats or masionettes rose 4.2% but semi-detached properties only
2.1% while new builds rose 5.7%, compared to 3.1% for "existing
resold property". The improving market conditions probably reflect
improving economic conditions, particularly in Edinburgh, where in
2015 according to the ONS Regional analysis, growth in gross value
added (GVA) was 5.8%, the highest of any UK city.
Edinburgh, despite the loss of banking jobs and in spite of
political uncertainties, is the UK "hot house" for growth although
Scotland as a whole only achieved 1.8%. I believe that these trends
will likely be shown to be repeated in the still unpublished 2016
statistics and will continue in 2017 and in 2018. Given these
propitious circumstances, we have concentrated our development
focus on Edinburgh where our largest property, St Margaret's House,
a 92,000ft(2) 1970s multi-storey building is located on the A1
about one mile east of the Parliament and Princes Street, and
adjacent to Meadowbank Stadium. Pending redevelopment, it has been
let since November 2010 at a nominal rent to a charity, 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 "waiting list" attracted to this high-quality
space by the subsidised rent, the excellent facilities management
and the empathetic culture. This subsidy has been partially passed
to the occupants but has also allowed Edinburgh Palette to effect
repairs and improvements, to restore reserves and to establish an
internationally recognised brand.
In view of Edinburgh Palette's much improved circumstances we
agreed a modest rent increase, phased over a year to March 2017, to
a level which is still 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. We are negotiating
another increase, allowing time for Edinburgh Palette to adjust
their serviced studio prices to a more realistic level and for the
many charities to obtain appropriate funding. Inevitably, this will
result in some turnover in the occupancy, but demand for space is
reported to be high, and the quality of the space at St Margaret's
and its convenient location would command much higher prices, if
offered to other charities. Edinburgh Palette recognise that in
order to secure and develop their charitable purposes the charity
must be managed more commercially. Accordingly, they have converted
open space into more studios and sub-divided some of their larger
galleries into smaller studios commanding higher rents per square
foot. There is considerable scope for further such management
changes as well as less subsidised sub-lets. 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 car parking is also under-let. Until recently one hundred
and twenty of the parking spaces at St Margaret's were let to the
Registers of Scotland, our immediate neighbours, at GBP1.20 each
per week day. Six spaces have been allocated for disabled parking
and six others have been let privately at a higher rent. Parking is
an increasingly valuable resource in Edinburgh and I am confident
that, notwithstanding the history of below market pricing, an
increase to GBP2.00 per space per week day that has been agreed in
principle will in due course be documented. The sum of the market
rents at St Margaret's is over GBP500,000 and the measures being
taken will allow a slow but progressive move to a more realistic
level.
Improved rents are required to compensate for the high cost of
holding the building and the long and very expensive process of
gaining Planning Permission in Principle (PPP) in September 2011
for a 231,000ft(2) mixed-use development of residential and/or
student accommodation, an hotel, offices and other commercial
space, together with parking for 225 cars. 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. The consent was
renewed in June 2015, subject to a Section 75 Agreement signed in
September 2016.
The redevelopment prospects for St Margaret's have improved
considerably, particularly over the last two years. 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. This change in the market has been reinforced by CEC's
decision in February 2017 to redevelop the adjacent Meadowbank
Stadium. Unless a contractor/developer is appointed for the whole
site, CEC currently proposes to develop the north section of the
site, wrapping round a new sports centre, together with a second
section, the most easterly triangle, just over the railway from St
Margaret's, into 374 houses of various tenures, both sections
entering off Marionville Road. The new sports complex, entering off
London Road as at present, will be redeveloped by CEC on a more
compact scale, an investment of about GBP42m, and the fourth
section, a two-hectare site east of the stadium and west of St
Margaret's, also entering off London Road, would be sold next year
for "commercial" development. Such a development, adjacent to St
Margaret's, and the siting of the main sports complex on the
street, rather than the present "dated" spectator stadium, will
greatly improve the streetscape, and extend it on an uninterrupted
basis as far as St Margaret's, continuing the line of residential
development virtually unbroken up to St Margaret's, so integrating
it into the City. This redevelopment, or even the prospect of it,
improves the value of St Margaret's. Such large projects, however
desirable, are often subject to changes, sometimes long delays, and
we do not intend to make any modification to the
timescale of the redevelopment of St Margaret's on account of
it. St Margaret's stands on its own.
We have been evaluating development options for St Margaret's
for several years. To assist us we have commissioned two
professional firms of surveyors to prepare comprehensive analyses
of the options available, whose reports are due shortly. While
these analyses will concentrate on comprehensive redevelopment, we
are also considering recycling the existing building, as has been
done successfully elsewhere, and building on the most valuable West
Point of the site and, quite separately, the possibility of
achieving full market rents either with the existing tenants or by
alternative serviced or charity uses in the unlikely event of the
redevelopment prospects seeming less desirable. We regularly
receive unsolicited approaches for a variety of purposes.
Development at Brunstane has become increasingly attractive but
the realisation of its great potential has been delayed. Prior to
the sale of four houses, we owned five houses, open ground to the
south of these houses, a large listed Georgian steading and two
adjacent acres of land, all part of Brunstane Home Farm, 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 recently opened Borders Railway between Tweedbank
and Edinburgh (eight minutes) and on to South Gyle and Fife. We
refurbished the four listed Georgian, stone built, two-bedroom
houses together with some of the infrastructure necessary for the
subsequent larger development five years ago. The end-terraced
house sold then for nearly GBP250,000, approximately GBP300/ft(2) ,
a high price for the area, and the other, mid-terraced houses
followed at slightly lower prices. The last house, abutting the
steading, sold in 2016, a sale being delayed by the immediately
adjacent building works. A mid-terraced house was resold earlier
this year for over GBP350/ft(2) after attracting eight bids.
On the open ground south of these houses 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, originally 1,245ft(2) each, are of modern
construction but with the elevations faced with natural stone. In
2016 we gained consent to extend the easterly gable and add a sun
room to the west elevation, increasing the total area to nearly
3,000ft(2) . Work on the reconfigured development started in August
2016 and was expected to be completed in the Spring of 2017. A few
weeks before completion the builder, a medium sized
contractor/developer, went into liquidation. A replacement was
engaged as soon as practically possible and a completion delay of
15 to 20 weeks was expected. However, it transpired that the funds
paid to the original contractor for the utilities had been
misappropriated and the long process of securing the utilities had
to be repeated, a process over which we had no control and which
took several months, further delaying completion until recently, so
missing the autumn market. The finished product is excellent, and
the houses are currently being marketed at over GBP300 / ft(2) at
offers over GBP435,000 and GBP445,000 respectively with one of the
houses under offer at above the asking price.
We have consent to convert the listed stone-built Georgian
steading, to refurbish and extend a house attached to it to form
ten individually designed houses comprising 14,648ft(2) , with a
development value of over GBP4.5 million. The houses have been
extensively redesigned, principally to provide contemporary style
large dining/living spaces, more en-suite bathrooms and better
fenestration, together with lower construction costs. Work on the
stonework for the next phase of five of these ten houses, the
"Horse Mill" phase, which comprises the five stone-arched cart
sheds, the single-storey cottage, the main barn and a hexagonal
Horse Mill, a notable feature, is complete. The masonry work
requires the use of traditional lime mortar, a material which is
slow to work and very weather dependent, and one reason why,
paradoxically, such extensive repairs cost far more than rebuilding
with new stone. The detectable repairs and renewals required, some
highly "tooled", were quoted at over GBP250,000 and the undetected
stone deterioration and unforeseen remedial work would have
increased this to over GBP400,000. To reduce cost, we have employed
contract staff directly and effected all the necessary repairs and
renewals, including those omitted in the original estimates, more
economically. The quality of the work, especially evident in the
Horsemill, is exceptional and, while the delay has proved
frustrating, the "overhead" site costs have been minimal, due to
the use of our own existing facilities and equipment, and helpfully
the potential sales values have increased over that period.
The completion of the stonework allows five new-build timber
frame houses to be inserted in the reconstructed outer shell. In
order to reduce delay we went to tender for a comprehensive
contract for the then current stage of the works to completion.
Many contractors were unwilling to tender and the resulting tenders
were well in excess of budget for many reasons: the extent of the
unfinished stonework was uncertain; the extent and specification of
the remaining demolition works were uncertain; the ground-works
design was unfinished and uncertain; the construction method
necessary and the restoration materials specified were expensive;
the design included infrastructure for subsequent phases; and the
overhead cost was inflated because of the contract length. It
seemed all the contractors had an aversion to such a complex
restoration project. These problems are currently being remedied:
the stonework, demolitions and clearances are nearing completion;
the design is being refined and the construction work simplified;
materials have been changed, the saving in roofing alone being over
GBP20,000; and any unnecessary infrastructure reallocated to its
appropriate phase. To reduce uncertainty the contract may be split
between the complex ground-works and the now less complex building
works, all in modern materials. If tender pricing is within budget
the ground-works should start in the Spring.
The further investment now in the Horsemill phase has a quite
bizarre benefit. Because of the establishment of a misguided
principle, or possibly, to save management cost in credit
verification, all funders now require the site cost, defined as
purchase price plus costs, to be a high proportion of the finished
value in accordance with their "Loan to Cost" criterion. As the
site value is the historic cost, there is no allowance for
valuation change, even after twelve years as in the case of
Brunstane. The carrying valuation of Brunstane, as in the vast
majority of our sites, is so low that this criterion of the
mainstream lenders is not met. As a result finance costs would be
over 10%, rising significantly if there were any overrun. The
investment now being undertaken will increase the site cost which
will allow development funding at about three percentage points
over base.
The masonry repairs of the Horsemill phase include restoring its
east elevation, a single storey barn wall which is part of the
Stackyard, the next five house phase. Apart from this east barn,
all the Stackyard construction will be "new build", giving a
similar high quality product, but at a much lower construction cost
and at a marginal servicing cost. I expect the development value of
the Horsemill phase and the new Stackyard phase to be over
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) . Around the farmhouse and in open ground
bounded on the east by a copse, we hold a further two-acre site,
which has just been abstracted from the Green Belt in the Edinburgh
Local Development Plan adopted in November 2016. Proposals for the
development of the farmhouse site and the remainder of the two acre
site have been accepted in principle to provide 19 new-build houses
over 25,149ft(2) . East of our two-acre site the Brunstane master
plan has been approved for an extensive residential development for
which ground investigations have just been completed, and EDI are
already marketing part of their site.
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
completing the construction of over 400 houses nearby, but on the
other side of the mainline railway, which are selling rapidly at
prices of up to GBP237/ft(2) for smaller terraced houses and
GBP213/ft(2) for larger detached houses. Persimmon started
developing 49 homes in Wallyford in the Spring of 2016 which sold
out within a year 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 Wallyford house market
circumstances we had intended to continue the development of our
ten houses in 2017, but this has been delayed. In order to meet the
changing market conditions the layout of the ten houses has been
altered to provide two blocks of semi-detached houses in place of a
terrace of four houses. An earlier eight house consent endures but
permission for the changed layout has been awaited since August
2017. Given the improved market conditions, a slightly higher
specification is proposed including a low enclosing site wall with
railings which will enhance the setting and form a clear division
from nearby housing. The delay will prove beneficial as it should
allow the construction of the site as a whole rather than
piecemeal, potentially saving over GBP10,000/month on overhead site
costs, say GBP50,000 overall, and, with the additional input of
equity which we now propose, allow funding at a moderate 3% over
base.
Work on Belford Road progresses, but more slowly than previously
envisaged. The site lies between Belford Road and Bells Brae to the
north, the original route to the Water of Leith crossing, and faces
onto Belford Road which is a quiet cul-de-sac less than 500m from
Charlotte Square and the west end of Princes Street. By starting
construction we have taken up an earlier office consent for
22,500ft(2) and fourteen cars. We hold a separate later residential
consent for twenty flats over 21,000ft(2) with indoor parking for
twenty cars on which sufficient work started in 2014 to secure that
consent also. Over the last year we have undertaken further site
work which allows construction costs to be more accurately assessed
and the risk of construction cost overruns reduced, facilitating
lower tender prices and a reduction in construction
"abnormals".
In continuing the clearance of this site we have created an
effective vehicle and machinery access; removed the soil and the
collapsed masonry on the now exposed southern retaining wall;
identified that the rock levels intrude into the site as little as
expected; confirmed that this rock is solid and load bearing but
friable and that there is no ground water present. Additionally, we
have completed the mandatory archaeological study.
The existing access, which will be further widened within our
site, is considered by a piling contractor to be more than
sufficient for the rig necessary; the south retaining wall reduces
or eliminates the need for piling, provided support is given at low
levels by the structure of the development; the rock levels require
little excavation - our standard JCB with its existing breaker is
more than adequate, given its friable nature; and there is no
ground water requiring pumping. Further work on clearing has been
delayed for several months while obtaining Scottish Water's
approval for a six inch sewer diversion which has only recently
been granted.
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, all
variations of the existing consent. Given that the development
value is likely to exceed GBP11 million next year and, given that
finance is available at "normal" rates, we aim to commence
development as soon as possible.
The Company has three large development sites in the Edinburgh
and Glasgow catchments of which two are at Cockburnspath, on the A1
just east of Dunbar. We have implemented the planning consent on
both the 48 house plot northerly Dunglass site and on the 28 house
plot, including four affordable, southerly Hazeldean site. The
Dunglass site is fifteen acres of which four acres is woodland, but
within the eleven acres lies an area capable of holding up to
thirty houses if the ground conditions, which initially appeared to
preclude development, could be remediated.
These two sites lie just east of the East Lothian/Scottish
Borders boundary. In the year to September 2016 East Lothian prices
rose 4.3% and by a further 5.3% by September 2017. 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 selling small four bedroom
houses of around 1,000ft(2) for GBP230 per foot. We will continue
to monitor the market in order to start development when
appropriate.
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
15,000ft2 Victorian stable block, three cottages and other
buildings and a huge walled garden. Gartshore is near Glasgow, two
miles from the M73/M80 junction, seven miles from the M8 (via the
M73) and three miles from two separate Glasgow/Edinburgh mainline
stations and from Greenfaulds, a Glasgow commuter station.
Gartshore's central location, its historic setting and its inherent
amenity identify it as a natural site for development. To make the
best use of these attributes, proposals have been prepared for a
village of several hundred cottages and houses together with local
amenities, all within the existing landscape setting. This
development would complement our separate proposals for a
high-quality business park, including a hotel and a destination
leisure centre, all situated in mature parkland. Discussions with
East Dunbartonshire Council continue from whom we seek support for
a joint promotion of the site. One of the stables has been
refurbished as an exhibition and visitor centre in order to provide
an on-site nucleus for Gartshore's promotion and will open when
some external repairs to the stable block and external landscaping
have been completed.
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 where they are more
subject to objection to which local authority members, now elected
by proportional representation, are increasingly sensitive and such
small developments, outwith major housing allocations, may not
merit high priority. Thus, gaining planning consent for such
developments has become ever more tortuous, a restriction which
should enhance their value. Notwithstanding these difficulties, we
have promoted many sites successfully through this planning
process. The rural housing market has not been experiencing the
rapid growth taking place in Edinburgh over the last two years with
some regions such as Perth and Kinross, Argyll and Bute and
Highland declining in real terms. Accordingly, no immediate
investment is proposed in the rural portfolio, except to maintain
existing consents or to endure them.
In Perthshire, at Tomperran, a 30 acre smallholding in Comrie on
the River Earn, we hold a consent for twelve detached houses
totalling over 19,206ft(2) which has been endured by the demolition
of the farm buildings. West of this site, nearer Comrie, we hold a
consent for a further thirteen houses on our adjoining two acre
area, previously zoned for industrial use, which awaits the signing
of the S75 Agreement. We expect to gain consent to change the
current terrace of four houses into three detached and two
semi-detached houses. In total the twenty-five new houses covering
these two areas will occupy over 33,912ft(2) . The original
farmhouse, currently let, will remain intact within the
development. A small bungalow over 877ft(2) (3 bedrooms) sold
recently in Comrie for GBP195,500 or GBP223/ft(2) .
At Chance Inn farm steading we hold a consent for ten new houses
over 21,831ft(2) following acceptance of our proposals for the
mandatory environmental improvements. Chance Inn, part of the Loch
Leven catchment area, is subject to very strict regulations
governing the phosphate flows into the loch. New developments are
required to effect a reduction in the total phosphate emissions to
the loch such that, for every 1.00 grams of phosphate that a new
development is deemed to discharge, 1.25grams 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. This
work will be complete when the final connection is made at a
further cost of up to GBP25,000. We intend to do that work in the
next year at the same time as we start the demolition of an
existing building in order to endure the consent for the 10 houses
over 21,831ft(2) . When we sold Chance Inn farmhouse we retained
land in the former garden on which we gained consent for two new
houses of 2,038ft(2) and 2,080ft(2) . One of 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 such paddocks
to purchasers of the new houses.
Also in Perthshire, nearby at Carnbo, on the A91 Kinross to
Stirling road, the Local Plan now includes within the village
settlement the paddock which we retained when we sold the former
Carnbo farmhouse. Based on this new Plan consent was issued on 29
July 2015 for the development of four houses over 7,900ft(2) in the
paddock. The planning application was first registered by the
planning authority on 26 June 2008, seven years earlier! Early in
2018 we hope to undertake the archaeological works which are an
essential pre-condition of the planning consent and then undertake
building works so to as endure the consent.
Work on our other Perthshire sites is restricted to improving
marketing and to maintaining or enduring consents. At Strathtay we
endured all consents gained in 2011 for two large detached houses
totalling over 6,040ft(2) and for a mansion house and two ancillary
dwellings over 10,811ft(2) in a secluded garden and paddock near
the River Tay. We propose 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, after five planning attempts and appeals
since our first application in 2007 and, following guidance from
the planning department, we finally gained approval three years ago
for five new-build houses over 8,531ft(2) , adjacent to the
existing listed farmhouse which is let on a short-assured lease.
The redevelopment has been frustrated by the high cost entailed in
using reclaimed stone. However, we are renewing the existing
consent which we will seek to adjust given the impracticality of
the present requirements, as almost all the stone, used only for
farm buildings and never of high quality, has delaminated further.
At Ardonachie, just off the A9 at Bankfoot, the consent for ten
houses over 16,493ft(2) is being extended. The small site at
Camghouran on Loch Tummel has consent for three units on 2,742ft(2)
for which the consent is endured. When rural market conditions
improve this site will be marketed.
The opening of the Queensferry Crossing and the completion of
the associated roadworks will improve the marketability of all our
development sites north of the Forth estuary. Further north the A9
is being dualled over a distance of c. seven miles from Luncarty
(four miles north of Perth) to Birnam ("wood to Dunsinane hill" of
Macbeth fame!), giving an uninterrupted dual carriageway to our
site at Ardonachie where we have planning permission for ten units
of over 16,493ft(2) . The extension of the dual carriageway will
also result in our sites at Balnaguard (15,994ft(2) ) and Strathtay
(6,060ft(2) and 10,811ft(2) ) being only about ten miles from the
dual carriageway to Perth.
Work on our three sites near St Andrews, Fife has been largely
suspended pending an improvement in markets. The expansion of the
University of St Andrews east of Guardbridge marks a significant
move away from the narrow confines of St Andrews which should in
future be reflected in the local housing market. In the interim we
are renewing our consent for nine units over 19,329ft(2) at
Larennie, by Peat Inn only 6.9 miles from St Andrews.
Ardpatrick is our largest rural development site, a peninsula of
great natural beauty with six miles of sea frontage on West Loch
Tarbert, but less than two hours' drive from Glasgow and the
Central Belt. The long-term prospects for residential property are
excellent, but their realisation continues to require investment,
skill and patience to rectify the cumulative effect of severe
prolonged neglect. Fortunately, the original design and
construction of most of the period property was of a very high
standard and is intact or recoverable. Repairs to some of
Ardpatrick's buildings, farm sheds and landscape caused by the
exceptional storms in recent years continue to be delayed by even
more urgent work. However, significant repairs have been effected
to roads, culverts, ditches, drainage, field accesses, dykes, and
fences and the very wet summers have both validated the repairs
achieved and highlighted and hindered those being made.
Frustratingly, unlike most repairs, the majority of these achieved
are not obvious and the benefits not readily appreciated, but
comparison of the present conditions of the landscape with 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 should be greatly
increased.
Ardpatrick development possibilities fall into two groups. Prior
to the 2009 North Kintyre Landscape Study relatively few sites were
deemed suitable for development. Prior to that study we gained
consent to change the use of "Keepers", a bothy situated amongst
the Achadh-Chaorann group of cottages, and to extend that building
to form a three-bedroom house complete with stone outhouses
conditional on providing a new access and drive. On completion this
property was available for offers over GBP175,000. Other consents
originally obtained or granted in 2009 have been renewed including
the sub-division of Ardpatrick House, the conversion of the
"Gardener's Bothy" into a 1,300ft(2) single storey house, the
Garage complex into two flats, and the extension of the Laundry
Cottage. Additionally, a consent was gained to build a new
1,600ft(2) single storey house within a corner of the walled
garden. The consents have heavy unnecessary infrastructure
requirements which, together with the high cost of conversion in
poor market conditions limit economic development. In addition they
all impose some impairment cost on nearby property. An exception is
the consent to develop Oak Lodge, a two-storey 1,670ft(2) new build
on the Shore Road, where consent has been renewed and the Oak Lodge
plot is available at offers over GBP125,000 and continues to
attract viewers. Work will be done in the Spring 2018 to improve
further its approach and landscaping.
We have gained several consents in areas designated in the
Landscape Capacity Study. In 2011 we secured consent for two
one-and-a half storey houses each of 2,200ft(2) at the north end of
the estate on the B8024 Kilberry Road and a road access has
recently been formed to endure these two consents. Nearby on the
east side of the UC33 Ardpatrick Road we hold an outline consent
for two houses on the Dunmore schoolhouse field, bordering the
Cuildrynoch Burn which we are applying to convert to a full
consent. On the east side of the UC33 we will renew an outline
consent for a detached house in a woodland setting.
Since the 2009 study the number of consents had risen markedly
and at least twenty plots are available from Ardpatrick to the
environs of nearby Tarbert. Economic realisation of new sites and
conversions are unlikely in these circumstances, especially with
the infrastructural impositions at Ardpatrick.
The poor market conditions are exacerbated by the cost of
upgrading the inadequate infrastructure, partially due to the
required enhancement of the public services. It is not difficult to
envisage that second homes, holiday homes and relocation/retirement
homes would be amongst the last to recover following a depression,
a recovery now slowed by the tax impositions on second homes and on
buy-to-lets. Despite this background it is encouraging to note that
one or more new houses are built, and others renovated, in the
Tarbert to Ardpatrick corridor each year, greatly improving the
area and establishing it as a centre properly renowned for its
landscapes, seascapes and wildlife. In any recovery Ardpatrick's
pre-eminent position will continue to command a premium, especially
with its extensive coastline. Until then further development will
be limited and the properties put on a care and maintenance basis,
possibly with a view to establishing short-term lettings where
conditions allow.
Economic Prospects
The UK's economic prospects will be greatly influenced by the
conditions, the timing and the consequences of the UK's withdrawal
from the EU. The influence of these variables and their
inter-reaction, while possibly profound, is extremely complex.
Given such complexities, most forecasters appear to assume, as
stated by the Bank of England, that "the MPC's projections are
conditional on the average of a range of possible outcomes for the
UK's eventual trading relationship with the EU". While the terms of
the UK's withdrawal from the EU are a major determinant of the UK's
economic prospects, they could either be benign or malign.
The benign prospect derives from the possibility of greatly
increasing trade between the UK and all other non EU countries,
extending the benefit the UK derives currently from the EU single
market, the largest of the world trading blocs, but still only a
small fraction of the world market. The EU market in goods is
largely unrestricted, except notably for some agricultural goods
and some specific manufactures such as cars, but is still deeply
restricted in services. In theory current trade access to the EU
could continue - with some technical restrictions - but with
improved access to the much larger non EU economies, so increasing
UK trade and economic growth.
Such protectionist tendencies, if expressed in the current
negotiations, will result in a non-optimal economic outcome both
for the UK and for the EU, although the malign effect per head on
the much larger EU economy will be considerably lower. The EU has
had and continues to have the option at any time to reduce its
trading barriers with non EU countries but it has made only limited
such trading arrangements over a very long period of time. Thus it
has chosen to restrict trade unnecessarily in favour of
protectionist policies. Such policies are also endemic within the
EU as EU members continue to place severe restrictions on services
which, although in theory are part of the Single Market, in
practice, at least to a great extent, they are not.
The likelihood of such a non-optimal outcome derives from the
fundamental difference between the UK and the EU in their
perception of the purpose of the integration of the constituent
countries within the current EU. These differences may have become
attenuated over the years but remain evident. Fundamentally the
understanding of the social "contract" that is implicit in the
construction of the EU differs between continental Europe and the
UK. The difference has not been given appropriate prominence since
the inception of the organisations of which the EU is the
successor, but this reality has never been extinguished and is at
the heart of the present differences between the EU and the UK.
This conceptual difference between the two parties is long
established. The prospect of a "common market", discussed in
Messina in 1955, was dismissed by the then Chancellor, "Rab" Butler
as "some archaeological diggings ... in an old Sicilian town!".
Churchill is widely regarded as promoting such European integration
after WWII. In 1946 he said "The first step in the recreation of
the European family (sic) must be a partnership between France and
Germany, adding, "Great Britain, the British Commonwealth of
Nations, mighty America and I trust Soviet Russia - for then indeed
all would be well - must be the friends and sponsors of the new
Europe and must champion its right to live and shine" and so he
clearly envisaged Britain remaining outside such a European
association, a sentiment which, in his meeting with Konrad Adenauer
in 1953, he amplified as comprising three circles, UK, US and
Europe, interwoven with each other yet independent, with UK
remaining on the periphery.
During WWII Jean Monnet, a French diplomat on the National
Liberation Committee of the de Gaulle "government" in exile,
accredited by Keynes as having shortened the war by a year because
of his influence on President F D Roosevelt, said on 5 April 1943
"There will be no peace in Europe, if the states are reconstituted
on the basis of national sovereignty ... The countries of Europe
are too small to guarantee their peoples the necessary prosperity
and social development. The European states must constitute
themselves into a federation."
The first steps towards this goal were taken on 9 May 1950 when
Robert Schuman, a French Minister, announced the intention to form
what became the European Coal and Steel Community. The Schuman
declaration prepared by Monnet said "Europe will not be made all at
once, or according to a single plan. It will be built through
concrete achievements which first create a de facto solidarity. The
coming together of the nations of Europe requires the elimination
of the age-old opposition of France and Germany."
The Schuman plan, while a tactic very cleverly designed to
appear only to resolve a dispute between France and Germany over
privileged French access to German coal, advanced the strategic
actions of integration, as the declaration, prepared by Monnet, but
delivered by Schuman illustrates: "Through the consolidation of
basic production and the institution of a new High Authority, whose
decisions will bind France, Germany and any other countries that
join, this proposal represents the first concrete step towards a
European federation, imperative for the preservation of peace".
France gave up some contentious war reparation payouts by forming a
permanent European body, incorporating a control over German assets
and advancing its stated ambitions for a more integrated Europe,
while Germany gained recognition as an equal in an European
institution. This coup, control of German economic assets and their
dispersion into a wider organisation, echoed a much earlier similar
grand stratagem. In 1919, at the Versailles Peace Conference,
Monnet, then an assistant in the Ministry of Commerce, proposed but
had rejected "a new economic order", based on European cooperation.
Then, in 1945, his reparation plan, "The Monnet Plan" succeeded in
his words - "in taking control of the Ruhr and Saar coal producing
areas and redirecting the production away from German industry and
into French, thus permanently weakening Germany and raising the
French economy above its pre-war levels". As part of "Europeanism"
these assets were moved into the "High Authority" of ESCA, presided
over by Monnet, whose decisions bound - i.e. they were
supra-national - the sovereign nations in or joining the Authority.
Germany gained the abolition of the further dismemberment of its
industry and the limit on its industrial production. M. Monnet's
skills were deployed widely. In 1946 he negotiated the Blum-Byrnes
agreement giving US films access to French cinemas for up to 9 out
of every 13 weeks in exchange for expunging a WWI $2.8bn debt and
providing a new low interest loan of $650m. The manifestation of
his influence bizarrely extended to his private life. He arranged
for his employee Silvia Giannini, the married mother of their
daughter Anna, to meet him in Moscow where, with the assistance of
the American and French ambassador in Moscow and the Soviet
Ambassador to China, she obtained a divorce, divorce being unlawful
in France, and subsequently married Monnet. Quelle chance!
In 1955 Monnet founded the Action Committee for the United
States of Europe which provided the initiatives leading to the EEC
established by Treaty of Rome in 1957, whose six signatories
declared that they were "determined to lay the foundations of an
ever-closer union among the people of Europe".
Subsequent events have continued to build on this foundation, a
great building like the Cathedral of Santa Maria del Fiore took 150
years to complete, and the EU construction continues, erecting a
deeper distinction between the perceptions of the EU founders and
the UK. Philip Stephens, writing in the FT puts it "for all its
decades of membership, Britain has never really joined the EU. ...
it has never properly grasped the psychology of European
integration. For France, Germany, Italy and the rest, the union was
a political project with emotional roots deeper than the economic
rationale. For Brits, it was a commercial transaction - a club they
had signed up to by dint of straitened economic circumstance rather
than political choice." A mindset, the FT comments, that heralds a
disorderly exit.
The "ever closer union" concept continued to permeate policy and
shape strategy. Following changes in 1961 in the EEC currency rates
which severely distorted support prices in the Common Agricultural
Policy and threatened the political balance in the EEC the French
Commissioner, R Marjolin, argued for a fixing of rates, claiming in
1962, that currency disturbances undermined the Common Market. In
1964 he told the EEC central bank governors to prepare for
"monetary unification" and in 1965 he declared it an "inevitable
obligation". The concept of political centralisation was expressed
by de Gaulle in 1968, as described by the German Chancellor
Kiesinger, "General de Gaulle once told me that his country had
become terribly run down in the last 150 years, 'damaged' was the
word he used. He saw his task as bringing about a turnaround, as
far as he could. For this, he needed a period of calm, and he would
let no one disturb this... As France went through a process of
renewal, the General would like to see other European states
grouped around it forming a type of confederation under French
leadership. But he could realise this aim only if he kept Britain
out."
The 1960s were marked by several exchange rate crises, including
the UK 1967 devaluation of 14.3% against the $ under Harold Wilson
... "the pound in your pocket! ..." For economic reasons the GBP
had weakened, but this weakness was intensified by de Gaulle's
project for world monetary reform, to be achieved by strengthening
the role of gold which he said has "no nationality ... and ...
which is eternally and universally accepted" and eliminate the
reserve currency status of sterling and the dollar. GBP and $ trade
deficits were financed by foreign holders of such currency
liabilities, prompting the French philosopher Raymond Aron's
comment ... "they paid their foreign debts with their own currency,
when it was devalued, holders had to take the consequences".
Fortified by de Gaulle's grandeur and his belief France had played
a strong role in world affairs only when its currency had been in
order, France attacked the $35 exchange rate of gold by
aggressively selling dollars for gold and bullion and between 1958
and 1966 France acquired about 40 tonnes of gold, per year. The
French attack on the established monetary system coincided with
increased concern over the dollar, weakened by the USA's
increasingly deep involvement in Vietnam and by rising USA
inflation. The French anti-dollar stance was supported by other
smaller EEC nations, but initially not by Germany who for domestic,
political and defence reasons - it was the height of the Cold War -
sided with USA. The attack on sterling, already considerably
weakened by its high inflationary environment, making UK exports
increasingly less competitive, contributed to the UK 14.3%
devaluation of which the Deutsche Bundesbank's President, Otmar
Emminger, said the devaluation was caused by "the inability of the
British economy to compete". Sterling's devaluation was highly
destabilising, resulting in further gold purchases and dollar and
sterling sales, as the UK external balances were slow to react to
the devaluation. Consequently, the "Gold Pool", set up in 1961 and
operated by Central Banks in the USA and seven European countries
to stabilise the $35 gold price, but weakened by the French
withdrawal from the Pool in 1967, collapsed in March 1968. The
delayed benign effect of the sterling devaluation, coupled with
international support for sterling, restored confidence in the GBP,
which together with the effective devaluation of the $, following
the collapse of the Gold Pool, exposed the overvaluation of the
Franc especially compared to the DM.
This presaged the end of de Gaulle's dream of a "Franc fort",
leaving only a devaluation of the Franc "faible" and a DM
revaluation - a telling undisguisable symbol of the DM's relative
economic strength - as a practical solution. Faced with so obvious
a sign of French weakness, de Gaulle blocked the proposed currency
realignment, imposing strict exchange controls. Immediately after
this the European Commission presented proposals for a common
currency, a proposal advocated by Raymond Barre, the French
Commissioner, successor to Robert Marjolin who had earlier
promulgated such an idea. These proposals were blocked by Karl
Blessing for the Deutsche Bundesbank and others, nominally because
of loss of sovereignty.
For France, for Germany and for the EU this defeat of French
economic policy marked a turning point. Shortly before he resigned
in early 1969 de Gaulle told Chancellor Kiesinger:- "France has a
certain hesitancy and caution regarding Germany's economic
strength, as it does not wish to be inundated by German industry.
Germany has been a large industrialised country for a long time. As
a result, with its entrepreneurs, its population and its
infrastructure it is best equipped for production, trade and
especially export. That is the nature of Germany, that is the
German reality. France has been an agricultural country for much
longer, with far fewer large cities and large corporations there is
nothing to compare with the enormous complex of the Ruhr or the
former Silesia ... In industry and trade Germany is in the
lead."
The extent to which industry and trade in Germany was "in the
lead" became increasingly apparent. Three devaluations of the Franc
occurred in the next seven years and one revaluation of the D-Mark,
a series of France devaluations which from the 1960 inauguration of
the 'New' Franc until its consolidation into the Euro in 1999 lost
7/8ths of its value. The economic weakness of France, keenly sensed
by de Gaulle was fully exposed as his foreign minister Michel Debré
wrote: "In November 1968 the strength of the Mark promoted Germany
for the first time to speak with a very loud voice. This strength
ensured it of the economic supremacy that made it the master of
Europe for a very long time." Under de Gaulle France engaged in a
ten-year trial of strength with the great international financial
powers. Playing for the highest stakes, it lost.
Following these French reversals, President Pompidou sought to
widen and deepen the EEC by including the UK, Ireland, Denmark and
Norway and produced detailed plans for Economic and Monetary Union.
Chancellor Brandt understood the underlying reason for enlargement
was to overcome the fear that "the Economic Strength of the Federal
Republic could upset the balance within the Community".
The acceptance of the European Monetary Union (EMU), for
different reasons, by different countries initiated a policy
struggle that lasted a quarter of century between the French desire
for currency fixing and reserve pooling and German desire for
flexible currency with monetary union happening only when European
economies had converged. The EMU proposals exposed inherent
contradictions between France and Germany, but they also ignited
different contradictions within the UK, contradictions which have
festered until exposed by the 2016 referendum and the implications
of its implementation. A previously secret contemporary Bank of
England paper, released in 2000 after 30 years, says "the plan for
EMU has revolutionary long-term implications, both economic and
political. It could imply the creation of a European federal state,
with a single currency. All the basic instruments of national
economic management (fiscal, monetary, incomes and regional
policies) would ultimately be handed over to the central federal
authorities".
The forces uniting Europe were those threatening to destroy it.
Externally lay the uniting force, overseen and fostered by the USA,
but beyond the Iron Curtain, the Berlin Wall, the "Kidnapped West"
was the Soviet Union. Exposed and defenceless on its Eastern border
was the German nation without military power and stripped of all
moral authority by the carnage and atrocities of War. Internally,
the ghost of the past economic and military power of Germany, one
that had crushed France thrice in a hundred years, haunted a France
fearing a resurgence, not necessarily a military one, but a
political and economic one, leading to a re-establishment of German
supremacy within Western Europe. At the meeting of the European
leaders in Strasburg in 1989 where the basis of the 1997 Maastricht
Treaty was agreed, President Mitterrand said to the UK delegation
"that he was fearful that he and the Prime Minister would find
themselves in the situation of their predecessors in the 1930s who
had failed to react in the face of constant pressing forward by the
Germans" and to the West German Foreign Minister Hans-Dietrich
Genscher that "if Germany did not commit itself to the EMU we will
return to the World of the 1930s". While such extreme and unlikely
sentiments now appear even more out of place, for a generation that
had directly and personally experienced the horrors of war, as for
instance Mitterrand had as a POW in Germany and, after escape, as a
"double agent", they were standing threats. Their differences drove
them together.
The UK, unlike the continental European countries, was
unconquered and manifestly proudly so, notwithstanding the
overriding debt to its Allies, particularly the USA, with which it
continued to identify, sharing many common interests in addition to
opposition to Soviet expansionism. Separately, the UK had residual
imperial interests to which it clung. But, self-evidently, these
were diminishing ties, while pan-europeanism, actively fostered to
pre-empt nationalism, flourished. As early as 1960, ten years
before the French inspired Werner plan for European integration,
the UK Prime Minister Harold MacMillan mused: "Shall we be caught
between a hostile (or at least less and less friendly) America and
a boastful but powerful 'Empire of Charlemagne' - now under French,
but later bound to come under German control?" A question that
still may be unanswered.
Since WWII a central argument for Western European integration
was the Soviet threat, immediately and ominously visible in the Red
Army presence in a divided Berlin and in East Germany. Indeed,
Soviet leaders from Joseph Stalin to Leonid Brezhnev were
indirectly leading proponents of European integration. The common
Soviet threat, the division of Germany and the USA support for a
stronger integrated Europe, not divided against itself, fostered
European supra nationalism. The much-heralded deadline for the
EEC's single market in 1992 had wide influence on Germany, on the
Soviet Union and on the Eastern Bloc countries, an influence
coupled with the growing and obvious difference in prosperity
between the command and the free market economies exposed by the
EEC. Travel, vivid TV images and the greater freedoms espoused by
the reforming USSR leader Mikhail Gorbachev undermined the
collective acceptance of the status quo. The "velvet revolutions",
starting first in Hungary with the relaxations of border controls
and culminating in the "fall" of the Berlin Wall, allowed first a
trickle and then a flood of Eastern bloc refugees into the
West.
The more accommodating stance of the USSR since Gorbachev took
office in 1985 influenced many West Germans, inclining a minority
to question the role of NATO, of expensive foreign troops on German
soil and of the political bias towards the West. Left wing
intellectuals talked of "nationalism and neutralism" and Mitterrand
warned "Unless we make progress in the construction of Europe, we
will not escape bargaining over Germany between East and West".
Worried by the prospect of German defection Mitterand proposed an
extension of the 1963 Elysée Treaty, a token gesture. Mitterand's
advisors advocated more tangible initiatives, especially as the
Delors policy of integration by small steps had run its course,
always being blocked by the Bundesbank and the D-Mark. A meeting
resulting from this initiative, nominally a discussion on the joint
decision making on the deployment of French nuclear weapons, was
hijacked by Mitterrand's advisor, Jacques Attali, who said "So that
we can have a balance, let us now talk about the German atom bomb".
The German officials were astonished, replying 'You know we don't
have the atomic bomb - what do you mean?' Attali said: 'I mean the
D-Mark'. Such was the importance in which the French held the
Bundesbank's dominance in European monetary policy."
Germany's economic resurgence, based on cultural values of
thrift, precision and obedience, had so often eclipsed Gallic
"gloire", hauteur and droit which had gilded French ideals since
Louis' Versailles, embraced the deep, very deep, political ideal,
the "Fatherland" that with the prospects of the reunification with
East Germany would entail a very significant cost for Germany.
Internationally reunion required strong political support to ensure
the enlarged Federal Republic was recognised in NATO and other
International treaties. The political cost was the agreement to
Monetary Union against the advice of the independent Bundesbank.
The German minutes of the Kohl's meeting with US Secretary of State
John Baker immediately after the key Strasburg meeting record Kohl
"took this decision against the German interests... . For example
the president of the Bundesbank was against the present
development. But the step was politically important, since Germany
needed friends", adding "as one does, when one is trying to unite
Germany without blood and iron". At the time one wit quipped "the
whole of Deutschland for Kohl, half the deutsche Mark for
Mitterrand". Superb French diplomacy secured a further tether on
Germany binding with France tying them into the EU, away from the
East and hitching a ride on the pre-eminent economic power in
Western Europe.
The achievement of French diplomacy, the pan European cause
predominantly fostered by them represented "une grande réussite".
The efforts of Monn et, Schuman, Delors etc over many years
appeared to have come to fruition and France, having established
political leadership over the rest of the members, had fired a
harpoon as a mooring line to the German economy to secure it for
them. Professor Ash, writing in Foreign Affairs, says "the pact was
to gain some control over Germany's currency, not for Germany to
gain control over France's budget". But the harpoon deployed,
rather than reeling in the Germany economy, caused the elegant
French schooner to be tethered to a German quayside where the tide
was ebbing from Kohl's vision of a European Germany towards a
German Europe.
The transition to a German Europe, an unannounced policy, has
been facilitated by events outside Europe and within Europe it has
been unopposed. Paul Volcker, former Chairman, US Federal Reserve
Board, 2007 describes it: "the French made a very honourable effort
to cling to the D-Mark. They didn't like to play second fiddle to
the Germans, yet they didn't have the power, the authority or the
currency to do otherwise. They learned over a period of years a
rather ironic lesson: that in order to stand up to the Germans, you
had to be subservient to them - by following their lead in key
questions of monetary affairs". The strong French diplomatic
positions so carefully and successfully nurtured since the Schuman
Plan founded on the torments and guilt of the war ebbs away being
in the memory of fewer and fewer. The formative years of the young
of today have been in a Europe of peace, freedom and ever greater
prosperity. The struggle for Europe is one in which it has been
proved vital not to fight yesterday's wars. Just as the French
Maginot line which served as a bulwark against a formal frontal
attack was simply bypassed to the North by the Blitzkrieg, so the
French diplomatic strategy, certainly vis-a-vis Germany, while
having succeeded in constructing an elaborate defence, became
bypassed. In real politic terms France is now the co-driver to
Germany's driver, but commands the continuing position as
navigator, a position confirmed by M Barnier as European Chief
Negotiator.
The EU's concern over the UK departure and the terms of its
departure has an earlier manifestation. Greenland, part of Denmark,
voted to leave the EU in 1982 and left in 1985, following
negotiations which Lars Vertebirk described as "surprisingly
unpleasant ... they were not willing to accept that you should or
could leave ..."
The unification of the EU is unfinished business whose
underlying basis has changed with world circumstances, proceeding
by what has been called the "Monnet method" of unification, after
Jean Monnet, a founding father who proposed moving forward, step by
step, with technocratic measures of economic integration, hoping
there would catalyse political unification. He promulgated that
"Crises are a great unifier!" and they have been, but such
destabilisation by crises also have great inherent risks. I believe
that the current destabilisers are the failure of the Euro, the
political winds of change, populism and low economic growth, ISIS
and immigration, and the departure of the UK which is both a
symptom and a cause of the crisis. The political necessity is one
of damage limitation, a necessity far outweighing any economic
damage which, however great, is difficult to attribute to a
particular cause and whose effects are almost certainly a long way
away. To secure the political integrity of the whole EU differences
have to be bypassed a requirement that empowers centralised
bureaucracies for whom control of decision making procedures is
important - a process lampooned in the 1980 UK sitcom "Yes,
Minister". Ironically this was ennunciated most clearly not by a
bureaucrat but by the Monarch, the sun King, Louis XIV (Louis -
Dieudonné!)" L'Etat c'est moi." Similarly M. Barnier, former
Vice-President of the European Commission, emphasises continued
integrity of the existing protocols.
"Power tends to corrupt and absolute power corrupts absolutely"
and may also impair judgement. To avoid the UK referendum David
Cameron sought limited reforms of the EU, notably an opt out of the
need to forge "ever closer union", but the nominal concessions
granted were insufficient to avoid the referendum: a further
gesture would probably have deflected the UK's choice. The EU has a
long history of late night compromises - the clock "stopped", for
instance, and of "fudging" obligations and even downright disavowal
of Treaty obligations as in Germany's (indeed!), and France's
violation of the Stability and Growth Pact of the Maastricht Treaty
without penalty in 2003-4. Surely within the rules, or whatever the
rules, a sufficient accommodation could have been found for the UK.
Was it bad judgement? Was it just a mistake? Or it was motivated by
a bureaucratic defence of the status quo as in "Yes, Minister?".
Such traits are evident in all such bureaucratic institutions,
although at a less imperious level than occurred in the EU in 1992
when the Danish referendum rejected the Maastricht Treaty. Trichet,
the French Treasury Minister, subsequently Governor of the ECB,
declared "Denmark should be punished for its foolishness".
Punishment of the UK may be implicit in the UK negotiations: if
defectors are punished, a Roman style decimation, "pour encourager
les autres", then the central authority is reinforced.
Fear for the integrity of the European concept is inherent in
the removal of the external threats - the necessity is gone - and
by its outstanding early success. After conception post 1945 it
went from war to peace, from deprivation to prosperity and from
fear to hope. At the time Cameron sought modest reform part of the
EU had inverted from prosperity to high unemployment, from a
centripetal to a centrifugal force and from hope to fear, a
widespread stirring of populism so evident across Western society
and then clearly manifested in the USA and the UK. Such fear was
most manifest in Greece where the anti-EU factions were only
narrowly defeated, depicted by the cartoonist Patrick Chappelte by
a tramp at a ballot box under the Acropolis, exclaiming "Good news!
Fear Triumphed over Despair". With success and changed
circumstances the European cause has lost many roles and has
dissident elements threatening its most important goal. Perhaps the
UK withdrawal removes an obstacle to that goal of "ever closer
union", an end, by definition, never achievable!!
Empires wax and wane. Two thousand years ago just south of the
Caspian Sea the Great Empires of Rome and of the Han Dynasty nearly
met, together dominant from the Atlantic to the China Sea, for
nearly five hundred years. Others, India, Persian, Greek and
Phoenician had come before and others Byzantine, Mongol, the
Islamic Abbasid Caliphate and the Frankish empire, ultimately under
Charlemagne, followed before the Western maritime empires of the
Netherlands, France, Britain, Spain and Portugal. For the maritime
powers empire followed trade - as in India, but central political
domination followed. Such external political control is likely to
have contributed to their ultimate failure.
One empire was different. The empire of Charlemagne occupied an
area strikingly similar to the EU's precursor, the ECSC, i.e.
Western Europe without Spain and the UK. Charlemagne had the added
distinction of being crowned Emperor (or Caesar, hence Kaiser) in
Rome by the Pope in 800AD. The tripartite division of the empire
under Salic Law on Charlemagne's death formed the fault line, the
central Kingdom (Lothmagia) Lorraine, between the Western Kingdom
of Charles the Bold and the Eastern Germanic Kingdom under Ludvik
which has persisted until the 20(th) Century. Otto extended the
Germanic Kingdom, regaining the West and extending his boundary
east to Hungary and south to Italy. By 1500 this empire composed an
area similar to Charlemagne's except for France, but containing a
whole mix of political entities, a Bassett's "All Sorts"! The
emperor was an elected office, chosen latterly by 10 electors
(George I was Elector of Hanover!), the leading secular and
ecclesiastical princes. But within that hierarchy there were 180
secular and 136 ecclesiastical cities and 83 imperial cities, some
of them republics, which all considered themselves free, or
autonomous, with religious self-determination. Frederick II
attempted to reverse such freedoms, prompting the famous
defenestration in Prague in 1618, a prelude to the Thirty Years
War, a proxy for religious intolerance in which all the European
powers joined, and cost the lives of about 1/3 of its population
until the peace conference of Westphalia in 1648.
Five years later the 1653 Reichstag settled the governance of
the Empire until its formal demise, "a chaotic mess of rotted
imperial forms and unfinished territories" as described by the
Prussian von Treitschke in 1806. But not so in the peace
negotiations in Regensburg, the Brussels of the time, when
Ferdinand III, Hapsburg Emperor of the Holy Roman Empire, descended
with 3,000 attendants including an opera cast, 60 musicians and
three dwarves. A year later in similar style he left for Vienna in
a flotilla of 164 ships! The chief debate was between a centralised
union as advocated by the Emperor's administration or,
alternatively, a decentralised federation, favoured by the princes
led by the "upstart" Elector of Brandenburg. The Emperor's
proposals included tax raising powers authorised by the Reichstag
for redistribution by the central body - a transfer union - as
exists only partially but prospectively in the EU. The defeat of
the Emperor's centralist proposals dispersed power to the
constituent "states" and allowed considerable subsidiarity to
evolve, resulting in a political structure that has some
similarities to the EU.
The Reichstag sat in perpetual session consisting of three
legislative chambers - electors; other princes; and free imperial
cities, which considered proposals put to them by the elector of
Mainz, a position similar to the Council of Ministers, decision
making was never codified: should members from over 300 territories
get one vote, or should votes be weighted by territory, or should
decisions be taken by majority, qualified majority or unanimity? In
these matters the empire was as the EU: characteristically
"it-all-depends!" This, like the EU, gave a balance between
protection for small states and action as a federation. For
religious matters there were separate Protestant and Catholic
councils, tasked to reach agreement, an attractive vision of
peaceful settlement following the Thirty Years War.
The empire, and the EU, adopt the juridical principle embodying
the requirement to resolve disputes by law rather than by force.
The judicial system gave territories recourse to two imperial
courts in Speyer and in Vienna, analogous to the ECJ in Luxembourg,
which were open to all citizens, including peasants. The Reichstag
allowed wide public access both for conflict resolution and for
proposed legislation. As the EU legislated on the curvature of
cucumbers - and I had an enforcement order served on me for not so
observing - so the Reichstag declined to ban indigo dyes (to
protect the woad industry) but agreed to ban ribbon-making
machinery to protect employment ...! Such detail provided a rich
"diet" for bureaucracy - so often complained of in the EU as "etwas
auf die lange Bank schieben", a phrase originating in the
"everlasting". Reichstag files of "decisions pending" being left on
a long bench - one being still visible in the Regensburg's former
city hall. In the Empire, like the EU, the doctrine of subsidiarity
applied with simple cases determined at village level. For more
complex cases jurisdiction fell to the "Kreise", ten circles or
blocks of states' administration units that crucially regulated its
monetary system and the tariffs between the Kreise. The currencies
in the Empire were diverse and were minted independently by the
separate princes and states within the Kreis, so allowing
opportunities to debase the coinage, a widespread practice. Each
Kreis monitored those separate currencies and constantly converted
them to fixed independent units within the Kreise jurisdiction.
Such arrangements adumbrated the EU Exchange Rate Mechanism, the
precursor to the Euro.
Religious tolerance, social pluralism, peace and prosperity
brought the Empire a rich and varied culture. Individual rights
were safeguarded, diversity and culture flourished attracting
highly qualified Jewish, Mennonite and Huguenot immigrants,
reinforcing the social milieu that attracted them. Such prosperity
did not weaken the empire, as is often alleged of the Roman Empire:
but supported a strong military that repelled eight successive
Ottoman attacks over 300 years. The Empire did pass, eventually, as
all empires do, crushed by Napoleon in 1806, having grown weaker
due to the political imbalances that had developed over the
centuries between the constituent members. The structure of the
Empire was determined in the Reichstag in 1653 when the strong
elector of Prussia thwarted the then Emperor's attempt at
centralisation, including a tax system that would have transferred
funds from richer areas to poorer areas. Over the long successful
period of the Empire two members, Prussia and Austria, outgrew all
others and fell outside the "loose" control of the Empire, whose
authority was weakened. It was those remains of Empire which fell
to Napoleon in 1806, who dissolved it.
For the EU the history and development of the Empire contains an
ominous, if very unlikely, precedent, but one to be guarded against
- an insurance not against arson but a chance fire. The pivotal
point in the development of the EU has not been the rapid growth in
members, mostly smaller states or those sheltering from historic
eastern threats, but the change in the power status within the EU,
when a seemingly impenetrable wall was breached. Physically, the
wall collapsed in Berlin in November 1989, but, politically, the
wall between the existing Germanic states was eliminated on 3
October 1990 when East Germany (GDR) was amalgamated into West
Germany (FRG), as an "enlarged continuation of the Federal Republic
of Germany", so adding an area geographically similar to that of
Brandenburg-Prussia as it existed during the Empire. Post the 2000
amalgamation Germany suffered a long period of high unemployment
and low economic growth causing budget deficits that breached the
fiscal rules of the EU's stability and Growth Pact. Cavalierly,
Germany abandoned any attempt to adhere to the Pact and in November
joined with France to suspend the sanctions mechanism of the Pact,
overriding the resistance of many smaller states which claimed the
EMU's largest members should be exemplars.
A union of the two great powers varied the terms of the binding
disciplinary pact. In very different circumstances following the
financial crisis, it could be argued less leeway was afforded the
smaller nations of Ireland, Portugal and Greece. Recent evidence
has shown the pre-eminent position Germany now holds in determining
most monetary and much political and social policy in the EU, a
production by the same company of the same play on a different
stage, that, at a different time contributed to the overshadowing
and weakening of the Empire. Even without such an unlikely and
distant precedent it is incumbent on the EU nations that wish to
secure the solidarity of the EU that its policies are highly
controlled, emphasising the centre, allow little latitude, make
entry difficult, or reasonably so, but make an exit even more
difficult. Big nations must be bound into the norms of the club,
supranationally. These carefully cultured norms were threatened by
the decision of the UK to leave the EU and any weakness might
threaten it further, a threat especially to France, given France's
increasing dependency and Germany's increasing independency.
Unsurprising, therefore, that a very senior French official leads
the negotiations and is uncompromisingly robust.
The analogy is often made between the EU and a Club - you join
the club, sometimes with difficulty, as the UK experienced with de
Gaulle's "black ball", but then you are free to resign, to leave.
The EU is more like a long-term Hire Purchase agreement: you sign
up to it, you pay instalments and you get the great benefit of it
but you cannot trade it for anything else and you cannot change or
easily abandon the agreement: the contract is highly asymmetric.
You can decide irrevocably to break the agreement but you only have
two years to reach any settlement, for which the EU has little
incentive. It is alleged that during the Japanese reconstruct after
WWII the Japanese hosts, having solicitously enquired about their
visiting American guests' return travelling arrangements, would
invoke all manner of cultural guises to delay serious negotiations
until it was almost, but not quite, too late! Time pressure gained
negotiating advantage. Similarly once the UK invoked Article 50 its
position becomes ever more weakened, an advantage which is and will
continue to be fully exploited by the EU. The pro-EU FT columnist
Philip Stephens says "it makes perfect sense for Michel Barnier"
... "to allow the pressure of time to build up before agreeing to
move on from discussions about past financial obligations on the
rights of EU citizens to talking in detail about the shape of the
future relationship".
The EU have used their asymmetric time clock advantage to great
effect. The UK has made concessions on the financial "settlement"
that are far removed from those that were originally promulgated.
Indeed when we invited the EU to "whistle for it" they got it! This
asymmetry will have a great influence in the trade negotiations due
to start early in 2018.
The long-term benefits of free trade are widely recognised but
are not normally implemented, a disparity particularly apparent in
some sectors, notably agriculture where highly protectionist
policies applied: politics outweighs economics. The EU endorses
free trade within the EU, but practises highly protectionist
policies within the EU in very many service areas, and outwith the
EU it is highly protectionist, despite a long-term economic
advantage. Indeed, historically the EU and the predecessor
organisations were more protectionist than the UK, a nation with a
long-established international trading history. Thus, the political
necessity for the EU to reach a "free trade" deal with the UK is
largely absent. Unfortunately for the UK the practical economic
requirements of the EU to reach such a deal with the UK are also
limited, as the economic benefits of free trade are largely
indefinable, take place over a long period, may involve transition
costs and disbenefits and often disadvantage specific sections of
the economy. In agriculture, where 50% of income derives from
subsidy, free trade could provide a long-term economic boost but a
larger political and social cost.
Politics is much more important than economics in the EU27
because of the asymmetry of size. The EU comprises 27 nations with
an economy about 10 times the size of the UK's. If protectionism is
equally damaging then each EU individual's welfare is reduced by
only 1/10 of the UK's! If all economies grow at 2.25% and the
economic contractions caused by any trade disturbance was 2.5% then
the UK would sink into recession but the EU growth would drop from
2.25% to 2.00% - a small change, statistically insignificant. The
economics, the politics, the culture, and the over-riding ambitions
of "ever closer union" will not lead the trade talks, any more than
the financial settlement talks did, to a position that the
promoters or voters for "leave" expected or even now do expect!
An extreme position is unlikely. Of course there will be
agreement on mutually important areas such as aircraft movements,
security, travel arrangements, diplomacy, health, and the "nuts and
bolts" of co-operating non antagonistic neighbours. Equally there
will be no enhanced trading position, almost a return to a status
quo ante by securing a "Norway" option, i.e. membership of EEA
(conditional on being admitted first to EFTA) but with special
trading rights. It is most unlikely that either the UK will reapply
to re-join the EU, or get unfettered EU market access from outside
the single market. An enhanced WTO deal seems the most likely
outcome, but any such arrangement could not be negotiated and
implemented in the available timescale, which is unlikely to be
extended, but could be implemented following a transition period
for practical and logistical adjustments to meet the already agreed
policy. All possible outcomes will have a deleterious effect on the
UK economy in the short term due to investment delay and in the
long-term, depending on the trading terms agreed with the EU27 and
the consequent balance between trade destruction and trade creation
caused by leaving the EU.
The extent of the damage to the growth of the UK economy could
vary significantly, and is subject to wide and inter-related
variables, and reliable forecasts are unavailable. The forecasts
made before and in the immediate post-referendum outcome were very
unfavourable and the initial reaction to the referendum vote
appeared to justify the projections 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".
While such exaggerated fears proved entirely misplaced, the
medium term effect, say over five years, is independent of this
short-term recovery and is likely to be significant. In October
2016 Ernst & Young forecast that a Brexit reversion to WTO
rules would result in a 4% reduction in GDP by 2030, compared to
continued membership of the single market. In November 2017 they
revised their 2016 forecast of 0.8% growth of the economy in 2017
up to 1.5% and revised other forecasts, including for 2016, by
about 0.2% points so that by 2020 the upward revision totalled 1.3
percentage points. Even if revisions in subsequent years to 2030
were as little as 0.1 percentage points, then the forecast damage
to the UK economy by 2030 is less than 2% spread over many
years.
Influences of forecast damage to the UK economy from leaving the
EU can be deduced from the OBR figures, provided these are adjusted
for the change in the rate of productivity increase that the OBR
have recently introduced into their forecasts. In November 2015 OBR
forecast growth of 2.2% in 2017 and 2.1% in subsequent years. In
November 2017 they forecast growth of 1.5% in 2017, 1.4% in 2018,
1.3% in 2019 and 2020 and 1.3% in 2021. However, much of the
decrease of growth now predicted is due to an assessed change in
the rate of productivity growth resulting in a 0.45% lower growth
per annum than in the OBR November 2015 forecast. Adding back this
0.45% results in the growth rate being about 0.25% points lower in
each of the next five years, a trend which, if continued, would
result in the UK economy suffering a fall of about 2.5% over 10
years as a result of leaving the UK - "Brexit" on terms assumed by
the OBR but unspecified!
The estimated loss of GDP from leaving the EU is very damaging,
but much greater losses have occurred. In the Great Recession of
2008 real GDP dropped by 5% over two years, in contrast to a lesser
potential loss of 2.0% over several years. A much greater thief of
actual GDP growth, compared to potential GDP, has been the
significant reduction in productivity. In the eight years before
the 2008 recession productivity rose 19% or about 2.35% per annum
following a 20% rise in the previous eight years, but since 2008
productivity has risen less than 0.2% per annum. The ONS estimates
that output per hour is currently 21% below an extrapolation of the
pre-crisis trend. By the beginning of 2023 the OBR, assuming an
improvement in productivity to about 1% per annum, estimates that
output per hour in 2023 will be 27% below its pre-crisis trend.
"Productivity" is much less tangible than images of queued ports
and extensive bonded warehouses and factory closures and so 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.
A sustained fall in productivity has not historically followed a
recession, but productivity has normally surpassed the previous
peak. Within eight years after the 1961 and 1950 recessions
productivity was over 19% above the preceding peak, and following
the 1973 and 1979 recessions it was over 12% above the
pre-recession peak.
Prior to its recent change the OBR forecast a return to previous
growth in productivity, in line with accepted economic thinking,
exemplified by two common explanations. The first, advocated by
Lord King, former Bank of England Governor, was that as there was
no reason to believe the productive potential of the economy had
changed, growth in output per unit labour would return to the
pre-recession (1997-2007) level. Similarly, but more colourfully,
Adam Posen, an MPC member, has argued that the level of potential
productivity could not have fallen "because no-one woke up one
morning to find their left arm had fallen off" and that one should
not "reason backwards from a period of growth shortfall ..... that
growth potential has fallen". Wisely, the OBR say "it seems
sensible to place more weight on recent trends" and there are many
examples of countries experiencing varying growth in productivity,
including the US, as the UK may now be. In economics nothing is
immutable, and productivity changes do not depend on the number of
arms, but how they are used!
In assessing productivity growth an overriding concern is
mensuration. Are the right things being measured and how does one
measure convenience and access, especially in a service economy -
the ease and convenience of computers in phones, emails, and the
advent of advanced delivery systems? In pre-politically correct
days such difficulties were colourfully illustrated - about the man
that reduced national income by marrying the housekeeper, so
eliminating what is termed "accountable employment"! The advantages
of computer technology in all applications are undoubted, but like
all innovations brings disadvantages, offsetting and underreported,
as, for example, an academic study that Finnish public sector
workers waste, on average, four hours per week troubleshooting
computer problems - an estimated productivity loss of 10%.
Similarly in the introduction of IT systems, apocryphal and
anecdotal reports abound of disruption, of high capital
requirements, of time investment, of aborted systems and the
transition of productivity gains from the technology originator,
say utility providers, to the productivity losses by the users, the
consumers. There are widespread horrifying failures in IT in
banking, central and local government, defence and the NHS,
spectacularly abandoning a programme in which GBP10bn had already
been spent! A poignant current illustration is the continued
failure of the Scottish Agricultural support computer systems.
These failures are of "big systems". The cumulative costs at the
other end of the spectrum - the users of these systems - is more
easily, and amusingly, illustrated. Lucy Kellaway, the FT
columnist, one familiar with IT, describes returning to work after
a vacation and embarking on the menial duty of claiming her
expenses, GBP92.29 "I started the job at 3.30 pm and by 5.00 pm was
close to tears. At times I had to interrupt other people for help,
disturbing them by shouts of "I hate [expletive] this [ expletive ]
expenses system" .... "I could not get it to work in Chrome; it
kept telling me to disable my pop-up blocker but, as I do not know
what that is, I could not oblige. Then every time I tried to fill
in its baffling boxes, it replied "invalid value ....." and so on.
She continues "You have to print out the report, photocopy all
receipts then work out how to scan them all together and email them
...." As well as such trials and tribulations, distractions at work
from computers and smart phones via emails and social media and
"browsing" damage productivity. The US Chamber of Commerce
Foundation finds that people typically spend one hour of their
workday on social media - rising to 1.8 hours for millennials and
that traffic to shopping sites surges between 2 pm and 6 pm on
weekdays.
Is it just a coincidence that productivity growth in advanced
economics averaged 1.0% from 1970 to 2007 and global annual
smartphone shipments were small, say 0.1bn, but productivity growth
post 2007 was negative while global smartphone shipments ballooned
to 1.5bn? If there is not a correlation, is there a common
underlying cause producing both phenomena? The global financial
crisis - it's over! Low interest rates, low inflation? Or is it
just coincidence? Dan Nixon of the Bank of England has reviewed
evidence that shows smartphone users touch their device between
twice a minute to once every seven minutes.
"Economic prospects" will resume after you have returned from
checking your notification.
Interruptions are not new: a knock on the door, the twice daily
post and the telephone ringing have provided these for many years,
but the constant news feed on the web, the social network "hum" and
the barrage of emails represent a quantum change.
Working while receiving emails and telephone calls reduces the
IQ by about ten points relative to an uninterrupted period, a
reduction in cognitive ability equivalent to losing a night's sleep
and twice as debilitating as using marijuana. One study showed that
it takes half an hour to regain the previous understanding of the
task in hand and, much more sinisterly, those interrupted by these
external stimuli become "addicted" to the interruption and are much
more likely to self-interrupt during a task in hand. The more you
do it, the more you do it!
"All things are poison ... and nothing is without poison ...
"only the dose makes the poison", so said Paracelsus, and so
suggests a paper by Aral of MIT in relation to smartphone and
associated technologies. He points out that the introduction of
these technologies contributed vastly to the productivity surge in
the late 1990s and early 2000s as they were used to enhance output.
However, once a critical network mass had been reached, the
benefits were increasingly masked by the universal availability:
important time saving calls have been swallowed in a morass of
distracting chit-chat: as Paracelsus said: "the dose is the
poison".
John Kay the FT columnist argues that in any treatment the
"dose" as in medical treatment not only has to be appropriate but
for optimal effect it has to be delivered as part of the overall
treatment: for "flu" take the pills but keep warm, drink lots of
liquids and go to bed ...! He concludes that to gain full advantage
of modern computer and IT technology not only do the machines and
their capabilities have to be available, i.e. the hardware and the
software, but the necessary changes in behaviour and routine have
to be engaged by their users. Kay observes from his university
teaching that, while the simple clerical administration and
communication within the university has changed, the delivery of
the university teaching programmes, all capable of modification, is
hardly changed: the new toys affect the mechanics of the system but
not the established routines. Essentially, treatment that comes
with a machine or in a pill or an injection is easily adopted, but
innovation that manages a process better is not: ready acceptance
of the gimmick, the silver bullet or the better machine contrasts
with innate reluctance to change behaviour or the process.
Unsurprisingly the Bank advances more tangible hypotheses for
the poor growth of productivity. In "Hypothesis I", "cyclicity",
the Bank states productivity "often deteriorates in the initial
stages of a recession" as output falls faster than employment and,
during the last recession, this tendency was more marked, resulting
in a greater productivity fall. Such productivity falls may occur
for many reasons. Management are slow to react; some operations
require minimum staffing levels; management expect an imminent
recovery in demand; the costs of firing and rehiring are too great;
and staff get redirected to sales/business development which do not
quality as "output". However, the Bank concedes Hypothesis I is not
well supported by the change in productivity during the recent
growth in the economy and, moreover, the Bank surveys show "little
evidence of spare capacity". The fall in productivity owes little
to cyclical changes.
Hypothesis II examines non-cyclical factors, including capital
and resource allocation. Capital is less available and borrowing
costs are higher during a recession and investment is reduced in
labour-saving devices, in product innovation and development and in
their introduction and in intangibles such as patents and brands,
all factors reducing or pre-empting growth in labour productivity.
Further, working capital may be restricted leading to less
efficient working practices. Resources normally transfer from lower
return to higher return enterprises. The rate of transfer
accelerates normally in recessions as liquidations rise, but in the
most recent recession they were relatively lower, whereas the
number of loss-making firms was relatively higher. In essence, more
firms struggled on due to forbearance, the banks' reluctance to
admit to the extent of their own financial distress and to low
interest rates. The Bank estimates that, of the 15 percentage
points shortfall at the time of the study only 3 - 4 percentage
points might be ascribed to "capital" and 3-5 percentage points to
resource allocation and survival.
The OBR accepts that low productivity will persist: "and as
various explanations pointing to a temporary slowdown become less
compelling - it seems sensible to place more weight on recent
trends as a guide to the next few years. But huge uncertainty
remains around the diagnosis for recent weakness and the prognosis
for the future. On average, we have revised trend productivity
growth down by 0.7 percentage points a year. It now rises from 0.9
per cent this year to 1.2 per cent in 2022. This reduces potential
output in 2021-22 by 3.0 per cent. The ONS estimates that output
per hour is currently 21 per cent below an extrapolation of its
pre-crisis trend. By the beginning of 2023 we expect this to have
risen to 27 per cent." The effect of the loss of productivity
growth far exceeds all estimates of economic damage from any
prospective, but yet of uncertain extent, loss of economic growth
resulting from leaving the EU.
UK Economic prospects will benefit from the current buoyant
state of the EU, USA and World economies all of which are expected
to experience higher growth than the UK. The Bank expects world
growth to be around 3.0% in 2018 and Eurozone (EZ) growth to be
2.1%. The Economist Poll of forecasters also expects EZ growth of
2.1%, USA growth of 2.4% and continuing strong growth of over 6.0%
in China and India. In spite of the strong growth of the UK's
trading partners. UK growth is expected to be below long-term
averages, due as stated above partly by the consequences of leaving
the EU and the uncertainty of these consequences, but more
importantly, partly by the slow rate of growth of productivity.
The OBR, due to a reassessment of productivity, have recently
downgraded its forecast of growth over the next five years to only
1.4% per annum, with growth reduced in 2017 to 1.5% from its
earlier forecast in March 2017 of 2.0% and smaller reductions in
subsequent years to a low of 1.3% in 2019 and 2020. In general,
other forecasters are more optimistic than the OBR and even the
Bank's forecasts are over 1.6% for the next four years while the
Ernst and Young Item Club forecast is just under 2.0%. These higher
forecasts may not take full account of the continuation of the low
growth in productivity forecast very recently by the OBR.
The essence of all the forecasts is very favourable: no
recession is forecast; no cataclysm associated with leaving the EU
is expected; and the main constraint on higher growth is the low
rate of increase in productivity. For this malaise there is no one
cause and no one solution, but unfortunately many of the causes may
lie in deep cultural tenets, not subject to economic motivation or
management.
The Scottish economy has performed significantly less well than
the UK's, due probably to two main factors: the recession in the
North Sea oil and gas industry; and the political differences in
Scotland compared to the rest of the UK. In 2016 Scottish growth
was only 0.4% and is broadly expected to rise to about 1.2% this
year. The Ernst and Young Item Club forecast is for Scottish growth
to be below the UK growth by about 0.5 percentage points for the
next few years. The spot oil price has recovered from the sub $40
price in early 2016, due largely to OPEC and Russian supply
restriction, to over $60, a price that with the cost reductions
effected allows most of the North Sea to "lift" oil profitably, but
it will not support further large-scale exploration and
development. Moreover, as the 5 year futures Brent price remains in
a $51 to $62 range, there seems little prospect of a North Sea
revival. A managed decline, provided supply is limited by the newly
formed cartel and the US shale industry does not expand further,
seems the most likely outcome.
Political damage to the Scottish economy appears to be abating.
Certainly anecdotal evidence cites increased interest in investment
since a second referendum became progressively less likely and as
the power of the SNP appears to have peaked some time before the UK
elections in which they lost so many seats. Regrettably, in
contrast to the UK and probably in a response to falling support,
the Scottish Government policies have been increasingly socialist,
policies which may deliver short term social benefits but long term
will result in lower living standards. But a week is a long time in
politics and the horizon is never beyond the next vote.
Scotland is far from uniform, as the economic crisis in the
north east exemplifies. However, as London and South East is to the
UK so is Edinburgh to Scotland. The ONS Regional GVA figures show
that in 2015 (the latest available), whereas the UK had a growth in
GVA of 2.1%, and Scotland had a lower growth of 1.8%, the lowest
"NUTS" region growth in the UK, except for Northern Ireland (1.4%),
and the City of Edinburgh had a GVA growth of 4.5%, higher than
London's 1.5% per head. Edinburgh's total growth in GVA was 5.8%,
the highest in the UK.
The economic dynamics in Edinburgh are palpable, particularly in
tourism and related services, TMT and education. It is axiomatic
that high growth economies do not spread growth evenly over
geographic areas, activities or technologies and that, to ensure
growth overall, growth "hot spots" should be encouraged and
resources moved to support such growth. Per contra any attempt to
dilute, spread or even out such growth will result in diminished
performance. Scotland's growth opportunity lies in supporting the
dynamics of its most actively growing economies and regions not in
one of attempting to redistribute growth and support secularly
declining areas and industries.
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 to 6.3% in 2012 and fell steadily
to 5.4% in 2015 and have just fallen in August 2017 to 5.3%.
Yield changes within components of the All Property Index have
been small. Yields rose 0.75 percentage points to 8.50% in
Secondary Shopping Centres but fell 1.25 percentage points to 7.0%
in Secondary Industrial Estates and by about 0.5 percentage points
in Prime Distribution Units and Prime Industrial Estates to about
4.5%. The lowest yield 4.0% occurred in Prime Shops, City Offices
and, most interestingly, in Central London University RPI Student
leases. London City and Major Provincial City office yields fell
0.25 percentage points to 4.0% and 5.0% respectively. Student
leases are notable in that even regional properties are at 5.50% or
lower.
The peak All Property yield of 7.8% in February 2009 was 4.6
percentage points higher than the 10-year Gilt, then the widest
"yield gap" since the series began in 1972 and 1.4 percentage
points wider than the previous record yield gap in February 1999.
The 2012 yield of 6.3% marked a record yield gap of 4.8 percentage
points, due largely to the then exceptionally low 1.5% Gilt yield.
The yield gap fell to a low of 3.3% in 2014 but has risen a little
each year and is now 4.1%, a rise due largely to the current
10-year Gilt yield of 1.30%.
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%, 5.0% and 4.6% in the four years to
2016 and by 2.6% this year to a level 4% above the previous peak
attained in 2008, just before the Great Recession.
Rent rises in the individual sectors were 2.4% Shops, 9.1%
Industrials, 0.4% Offices, 1.0% Shopping Centres and -0.3% Retail
Warehouses, these two last sectors having the lowest growth in 2016
and in 2015. Retail Warehouse rents have declined by 0.1% per annum
in the five years before this year's larger fall. Since the
depression began nine years ago, the All Property Rent Index has
risen by 4%; Shops by 5%; Offices by 8% and Industrials by 18%, 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 29%; Offices 34%; Shops 19%; and
Industrials 28%.
Property returns as measured by IPD were 10.5% in the year to
October 2017, a much better return than the 2.9% in 2016 when
capital values dropped following the "Leave" vote in the
referendum, with capital values falling by 2.0% in July 2016 due,
primarily, to large falls in London offices. The last property boom
ended in 2007 and by December 2008, a month when the index fell a
record 5.3%, the index had fallen 26.6%. In the nine years since
then the total return has been 115.3% or nearly 9% per annum. Since
just before the boom ended the return has been 58.0% or only just
over 4% per annum.
Last year forecasts for the full 2016 year and for 2017 and
beyond had a notable inflexion point, depending which side of the
June Referendum date they were made. In August 2015, the IPF Survey
Report forecast overall returns of 9.2% in 2016, modified to 7.1%
in May 2016 but downgraded in August 2016 to -0.4%, due primarily
to a fall in capital values of 5.3%. The forecast then for 2017 was
downgraded to 0.6%, but has been raised progressively to 8.2% in
November 2017. Forecasts for 2018 to 2021 have all fallen slightly
between February 2017 and November 2017, a fall which may be due in
part to the outcome of the snap 8 June 2017 election. The November
forecasts show a 4% return in 2018, with increases each year up to
5.9% in 2021. Capital returns increase the total return to 8.2% in
2017 but are slightly negative in 2018 and 2019 but turn positive
in 2020 and 2021 to give an average return from 2017 to 2021 of
5.4% of which 5.0% in income. Stability is forecast.
Colliers provide the most comprehensive surveyors' forecast,
giving detailed consideration to each sector. The near-term
forecast for 2017 is an All Property return of 7.7% and of 4.1% for
2018 similar to IPF, but Colliers has a higher forecast of 5.9% for
2018 - 2021. This higher forecast derives from a forecast of higher
Retail returns of 5.7% per annum, compared to 4.6%, higher Office
returns of 5.3% compared to 3.9% and higher Industrial returns of
7.4% compared to 6.0%. Colliers forecast about 2% per annum capital
growth in Offices and Industrials, and virtually none for Retail
(0.3%), but IPF forecasts almost no capital growth in the four
years to 2021. Colliers forecasts long-term rental growth of about
1.0% in the Retail and Office Sectors and 2.5% for Industrials, but
IPF forecasts All Property rental growth of less than 1.0%. The
difference in the two forecasts results primarily from differing
forecasts of capital growth.
Colliers continue to forecast a difference between the South
East and the rest of the UK, particularly for "Standard" Retails
where Central London rents are expected to grow by almost 15% in
the next five years as opposed to about 1% elsewhere. For Offices,
while they expect Central London rents to fall by up to 1% in 2018,
growth will be almost 1.0% pa in 2018 - 2021 and other offices in
London and the South East will grow by about 1.5% following recent
quarterly increases of 4.4% and 5.1% in the South East and the
South respectively. Rents in the "Rest of the UK" will increase
only slightly except where specific local conditions apply - for
instance rents increased in Yorkshire by 3.7% in the last quarter,
but are unchanged in the "Big Six" provincial markets where
Edinburgh and Glasgow rents are unchanged at GBP31 and GBP30
respectively, although Scottish rents overall declined, presumably
due to fall in the Aberdeen market. Industrial rents in London and
the South East are expected to rise by 4.5% and 3.5% (UK average
2.5%) respectively this year and continue to outperform other areas
in 2018 - 2021.
Forecasters are notoriously unable to detect pivotal points such
as the unexpected Referendum vote which was largely responsible for
the marked reduction in the IPF forecast property returns between
March 2016 and August 2016, a downgrade which has since been slowly
upgraded. Current forecasts are for a recovery in 2017, a fall in
returns in 2018 and for a small continuing improvement thereafter -
a trend analysis following the reaction to the Referendum. However,
economic growth is forecast by the OBR at 1.4% in 2018 and steady
thereafter, no recession is premised, and the response of the
economy to leaving the EU appears much less disruptive than
previously feared. The effect on the economy of leaving the EU will
be small, as I argued above, but the perception is of much greater
change and this perception will influence current analysis and
decisions. Cautious investors will "wait and see" and act at
present as though the outcome would be more unfavourable -
behaviour that principally alters the timing of investments. The
low recent rate of productivity growth, previously thought to be
temporary, is now considered endemic, at least by the OBR, and will
reduce economic growth and demand for property and be more
influential than the changed trading patterns as yet to be
established on leaving the EU. Notwithstanding this risk, I
consider the forecasters over compensate for the effects of leaving
the EU and therefore, in general, I think that returns over the
2017 - 2021 period will be above those currently forecast.
This time last year forecasts for house prices in 2017 were
muted. HMT's "Average of Forecasts" was for a rise of 2.2%, and the
OBR forecast 4.0%, forecasts in line with current 2017 estimates of
2.8%, by the HMT survey and 4.4% by the OBR. Increases in house
prices in the twelve months to the end of October 2017 are reported
as: 4.5% Halifax; 2.5% Nationwide; 0.8% UKHPI (September); and 0.8%
Acadata, or 2.8% excluding London and the South East. The UKHPI and
Acadata indices include 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 UKHPI and Acadata
indices are reduced compared to those indices excluding cash
buyers.
Early in 2017 Acadata reported prices (England and Wales) were
rising 5% - 6% with monthly increases of over 0.5% per month for
over 6 months, but since April 2017 monthly changes have been
negative. There is a large disparity between the regions reported
by Acadata. For the three months centred on September the average
house price in Greater London fell 2.4% but rose 4.6% in the North
West, the first occasion in which the North West has led the rise
in house prices for a very long time. The "rippling" out of house
prices has not affected the North East where prices are only 0.8%
above last year, although Wales after a long period of low growth
now shows a 2.6% rise.
The market in Scotland, like North West of England and South
West of England, other areas distal to London and the South East
has experienced a rapid growth of 5.6%, in spite of the lower
economic growth in Scotland than in the UK. Within Scotland there
are bigger differences than within the UK as prices have increased
by an astonishing 17.4% in Stirling, although primarily because of
new build expensive houses in Bridge of Allan, by 11% in the
Scottish Borders and by 8.8%, 6.3% and 5.2% in the main Scottish
cities Edinburgh, Glasgow and Aberdeen, where in Aberdeen the
previous steep falls in house prices have reversed.
In Edinburgh price increases of about 9.0% are reported by both
Acadata and UKHPI, figures consistent with anecdotal reports of
very high prices being achieved for city centre high specification
flats, with prices at or over GBP500/ft(2) . The ESPC report New
Town flats rising an astounding 26.9% and have less central areas
such as Abbeyhill/Meadowbank rising 13.9%.
The OBR expect house prices to rise by 4.4% in 2018 and 13.3%
over the next four years. HMT expect prices to rise 2.0% in 2018
and then by about 8.4% over the following three years. Forecasts of
nil or 1% for 2018 are given by JLL, Knight Frank and Savills and
RICS is "positive" over the next 12 months except for London and
the South East.
Savills provide house price forecasts, carefully distinguishing
them as second-hand, for up to five years for both Mainstream and
Prime markets. The forecasts are conservative "we've seen the UK's
credit rating downgrade, the pound weakened and the economy
subdued. Inflation has cut people's earning ... we expect to return
to growth in 2019 - 2020 as employment growth, wage growth and GDP
recover". The Mainstream UK market is forecast to have 1% growth in
2017 and to grow by only 14% over five years. Scottish prices will
rise by only 1.5% next year but increase 17% over five years,
almost equal to the 17 1/2 % increase of the three leading English
regions North West, North East and Yorkshire and Humberside. London
is expected to grow only by 7%. According to Savills almost all
Prime markets will perform poorly in 2018. However, Central London
prices are expected to grow 20% over five years, but suburban and
outer London only by about 11%. Scotland's Prime market is expected
to perform in line with other regions with prices rising only 14%
over five years, 3 percentage points less than the Mainstream
market.
The Halifax index peaked at the GBP199,600 recorded in August
2007. The equivalent inflation-adjusted price in October 2017 would
have been 32.5% higher, or GBP264,496 but the current October 2017
Halifax index price is GBP223,271 - some way off! If house prices
rise at about 3.9% and inflation is 2.0%, then ten more years will
elapse before the August 2007 peak is regained in real terms. House
prices are difficult to forecast and historically errors have been
large, especially around the timing of reversals or shocks. I
repeat what I have said previously. "... the key determinant of the
long-term housing market will be a shortage in supply, resulting in
higher prices".
Future Progress
The Group aims to accelerate the rate at which it takes
advantage of a housing market in which prices are increasing
rapidly in Edinburgh and its environs. We will curtail investment
in projects that require long-term planning work. We will emphasise
the completion and realisation of previously postponed development
opportunities which can be built most profitably. 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.
Our developments require a stable and liquid housing market, but
we do not depend on any increase in prices for the successful
development of most of our sites, as almost all of these sites were
purchased unconditionally, for prices not far above their existing
use value and before the 2007 house price peak. A major component
of the Group's site development value lies in securing planning
permission, and in its extent, and it is relatively independent of
changes in house values. For development or trading properties,
unlike investment properties, no change is made to the Group's
balance sheet even when improved development values have been
obtained. Naturally, however, the balance sheet will reflect such
enhanced value when the properties are developed or sold.
The policy of the Group will continue to be considered and
conservative, but responsive to market conditions. The closing
mid-market share price on 21 December 2017 was 157.5p, a small
discount to the NAV of 161.7p as at 30 June 2017. As was the case
last year 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 briefly to nearly the normal trend level, has been poor,
while unusually, there has been no rebound or "catch up" of above
average growth after the recession. Recently growth in the UK has
been hampered by fear of the consequence of leaving the EU and by
the poor growth in productivity. These trends are likely to
persist, although the most deleterious effects of leaving the UK
will fade over a few years. Unfortunately, the low growth of
productivity is either part of a very long cycle or a secular
trend.
The continuing restrictive fiscal policies have contributed to a
delay in returning to the pre-recession growth level and the long
depression and credit controls have damaged the economy's
productivity and it long-term supply capability. The opportunity to
expand demand and to invest in capital projects at low interest
cost has been neglected, also contributing to the virtual
stagnation of productivity growth. Fortunately, while fiscal
stimulus has been limited monetary stimulus is being continued even
when inflation targets are breached. Moreover, 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 long delay in the recovery
of many economies in the EZ is a clear example of the consequences
of such misplaced emphasis.
The management of the economy, the inflation target, the fiscal
balance, the previous and varied "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 drastic short-term consequences of
leaving the EU. The accuracy of past economic management of
economic forecasting does not give confidence in the likely
accuracy of forecasts of the consequences of leaving the EU.
Forecasts for the final relationship between the UK and the EZ
and for the economic consequences require to be considered in the
knowledge of the uncertainties of such forecasts. My forecast is
that the economic penalty for withdrawing from the EU will be
measurable but manageable. Far greater damage to economic growth is
being caused by the opportunity cost of lower productivity growth,
a level around 1% per year on a continuing basis. Productivity
growth would be improved by cultural and social change, by changes
in political governance, by improved economic and capital analysis
and by more rigorous management. Political choices in monopoly
control social policies, transport policy, green policy and most
fashionably "correct" areas are often inimical to economic growth
but may represent democratically acceptable choices. The political
choice to leave the EU is but one of many that may not be
economically optimal - perhaps economists should accept that at the
margin sometimes other priorities are preferred. But there is an
economic cost.
I D Lowe
Chairman
22 December 2017
Consolidated income statement for the year ended 30 June
2017
2017 2016
Note GBP000 GBP000
Revenue
Revenue from development property sales 145 438
Gross rental income from investment properties 410 351
Total Revenue 5 555 789
Cost of development property sales (108) (391)
Property charges (232) (241)
------------------ -------------------
Cost of Sales (340) (632)
------------------ -------------------
Gross Profit 215 157
Administrative expenses (611) (635)
Other income 15 15
------------------ -------------------
Net operating loss before investment
property
disposals and valuation movements 5 (381) (463)
------------------ -------------------
Gain on sale of investment properties 10 259 99
Valuation gains on investment properties 1,200 675
Valuation losses on investment properties 10 (25) (185)
------------------ -------------------
Net gains on investment properties 1,434 589
------------------ -------------------
Operating profit 1,053 126
------------------ -------------------
Financial income 7 1 1
Financial expenses 7 (14) (22)
------------------ -------------------
Net financing costs (13) (21)
------------------ -------------------
Profit before taxation 1,040 105
Income tax 8 - -
Profit and total comprehensive income
for the financial year attributable to
equity holders of the parent Company 1,040 105
================== ===================
Profit per share
Basic and diluted profit per share (pence) 9 8.83p 0.89p
The notes on pages 39 - 59 form an integral part of these
financial statements.
Consolidated balance sheet as at 30 June 2017
2017 2016
Note GBP000 GBP000
Non-current assets
Investment property 10 12,080 10,905
Plant and equipment 11 10 15
Investments 12 1 1
--------- ---------
Total non-current assets 12,091 10,921
--------- ---------
Current assets
Trading properties 13 11,633 11,166
Trade and other receivables 14 396 153
Cash and cash equivalents 15 55 103
--------- ---------
Total current assets 12,084 11,422
Total assets 24,175 22,343
--------- ---------
Current liabilities
Trade and other payables 16 (835) (698)
Interest bearing loans and
borrowings 17 (360) -
--------- ---------
Total current liabilities 17 (1,195) (698)
Non-current liabilities (3,925) (3,630)
Interest bearing loans and
borrowings
--------- ---------
Total liabilities (5,120) (4,328)
--------- ---------
Net assets 19,055 18,015
========= =========
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 13,778 12,738
--------- ---------
Total equity attributable
to equity holders of the
parent Company 19,055 18,015
========= =========
NET ASSET VALUE PER SHARE 161.71p 152.88p
The financial statements were approved by the board of directors
on 22 December 2017 and signed on its behalf by:
ID Lowe
Director
The notes on pages 39 - 59 form an integral part of these
financial statements.
Consolidated statement of changes in equity as at 30 June
2017
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 and total
comprehensive income
for the year - - - 105 105
______ ______ ______ ______ ______
At 30 June 2016 2,357 175 2,745 12,738 18,015
Profit and total
comprehensive income
for the year - - - 1,040 1,040
______ ______ ______ ______ ______
At 30 June 2017 2,357 175 2,745 13,778 19,055
====== ====== ====== ====== ======
Consolidated cash flow statement for the year ended 30 June
2017
2017 2016
GBP000 GBP000
Cash flows from operating activities
Profit for the year 1,040 105
Adjustments for :
Gain on sale of investment property (259) (99)
Net gains on revaluation of investment properties (1,175) (490)
Depreciation 7 11
Net finance expense 13 22
_______ _______
Operating cash flows before movements
in working capital (374) (451)
(Increase)/Decrease in trading
properties (468) 252
(Increase) in trade and other
receivables (243) (57)
Increase in trade and other payables 124 30
_______ _______
Cash absorbed by the operations (961) (226)
Interest received 1 1
_______ _______
Net cash outflow from operating
activities (960) (225)
_______ _______
Investing activities
Proceeds from sale of investment
property 266 199
Acquisition of property, plant
and equipment (9) (2)
_______ _______
Cash flows generated from investing
activities 257 197
_______ _______
Increase in borrowings 655 -
_______ _______
Cash flows generated from financing 655 -
activities
_______ _______
Net decrease in cash and cash equivalents (48) (28)
Cash and cash equivalents at
beginning of year 103 131
_______ _______
Cash and cash equivalents at
end of year 55 103
Notes to the consolidated financial statements as at 30 June
2017
1 Reporting entity
Caledonian Trust PLC is a public company incorporated and
domiciled in the United Kingdom. The consolidated financial
statements of the Company for the year ended 30 June 2017 comprise
the Company and its subsidiaries as listed in note 8 in the parent
Company's financial statements (together referred to as "the
Group"). The Group's principal activities are the holding of
property for both investment and development purposes. The
registered office is St Ann's Wharf, 112 Quayside, Newcastle upon
Tyne, NE99 1SB and the principal place of business is 61a North
Castle Street, Edinburgh EH2 3LJ.
2 Statement of Compliance
The Group financial statements have been prepared and approved
by the directors in accordance with International Financial
Reporting Standards and its interpretation as adopted by the EU
("Adopted IFRSs"). The Company has elected to prepare its parent
Company financial statements in accordance with IFRS; these are
presented on pages 60 to 78.
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 22. The
financial position of the Group, its cash flows, liquidity position
and borrowing facilities are described in Note 18 to the
consolidated financial statements.
In addition, note 18 to the financial statements includes the
Group's objectives, policies and processes for managing its
capital; its financial risk management objectives; details of its
financial instruments and hedging activities; and its exposures to
credit risk and liquidity risk.
The Group and parent Company finance their day to day working
capital requirements through related party loans (see note 24). The
related party lender has indicated its willingness to continue to
provide financial support and not to demand repayment of its loan
during 2018.
3 Basis of preparation (continued)
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:
Estimates
-- Valuation of investment properties (note 10)
The fair value has been calculated by the directors taking
account of third party valuations provided by external independent
valuers as at 30 June 2016 and adjusted for market movements in the
period to 30 June 2017. The independent valuations were based upon
assumptions including future rental income, anticipated void cost
and the appropriate discount rate or yield. The directors and
independent valuers also take into consideration market evidence
for comparable properties in respect of both transaction prices and
rental agreements.
-- Valuation of trading properties (note 13)
Trading properties are carried at the lower of cost and net
realisable value. The net realisable value of such properties is
based on the amount the Group is likely to achieve in a sale to a
third party. This is then dependent on availability of planning
consent and demand for sites which is influenced by the housing and
property markets.
Judgements
-- Deferred Tax (note 20)
The Group's deferred tax asset relates to tax losses being
carried forward and to differences between the carrying value of
investment properties and their original tax base. A decision has
been taken not to recognise the asset on the basis of the
uncertainty that surrounds the availability of future taxable
profits.
4 Accounting policies
The accounting policies below have been applied consistently to
all periods presented in these consolidated financial
statements.
Basis of consolidation
The financial statements incorporate the financial statements of
the parent Company and all its subsidiaries. Subsidiaries are
entities controlled by the Group. Control exists when the Group has
the power to determine the financial and operating policies of an
entity so as to obtain benefits from its activities. The financial
statements of subsidiaries are included in the consolidated
financial statements from the date that control commences until the
date it ceases.
Turnover
Turnover is the amount derived from ordinary activities, stated
after any discounts, other sales taxes and net of VAT.
Revenue
Rental income from properties leased out under operating leases
is recognised in the income statement on a straight line basis over
the term of the lease. Costs of obtaining a lease and lease
incentives granted are recognised as an integral part of total
rental income and spread over the period from commencement of the
lease to the earliest termination date on a straight line
basis.
Revenue from the sale of trading properties is recognised in the
income statement on the date at which the significant risks and
rewards of ownership are transferred to the buyer with proceeds and
costs shown on a gross basis.
Other income
Other income comprises income from agricultural land and other
miscellaneous income.
Finance income and expenses
Finance income and expenses comprise interest payable on bank
loans and other borrowings. All borrowing costs are recognised in
the income statement using the effective interest rate method.
Interest income represents income on bank deposits using the
effective interest rate method.
Taxation
Income tax on the profit or loss for the year comprises current
and deferred tax. Income tax is recognised in the income statement
except to the extent that it relates to items recognised directly
in equity, in which case the charge / credit is recognised in
equity. Current tax is the expected tax payable on taxable income
for the current year, using tax rates enacted or substantively
enacted at the reporting date, adjusted for prior years under and
over provisions.
Deferred tax is provided using the balance sheet liability
method in respect of all temporary differences between the values
at which assets and liabilities are recorded in the financial
statements and their cost base for taxation purposes. Deferred tax
includes current tax losses which can be offset against future
capital gains. As the carrying value of the Group's investment
properties is expected to be recovered through eventual sale rather
than rentals, the tax base is calculated as the cost of the asset
plus indexation. Indexation is taken into account to reduce any
liability but does not create a deferred tax asset. A deferred tax
asset is recognised only to the extent that it is probable that
future taxable profits will be available against which the asset
can be utilised.
4 Accounting policies (continued)
Investment properties
Investment properties are properties owned by the Group which
are held either for long term rental growth or for capital
appreciation or both. Properties transferred from trading
properties to investment properties are revalued to fair value at
the date on which the properties are transferred. When the Group
begins to redevelop an existing investment property for continued
future use as investment property, the property remains an
investment property, which is measured based on the fair value
model, and is not reclassified as property, plant and equipment
during the redevelopment.
The cost of investment property includes the initial purchase
price plus associated professional fees and historically also
includes borrowing costs directly attributable to the acquisition.
Subsequent expenditure on investment properties is only capitalised
to the extent that future economic benefits will be realised.
Investment property is measured at fair value at each balance
sheet date. External independent professional valuations are
prepared at least once every three years. The fair values are based
on market values, being the estimated amount for which a property
could be exchanged on the date of valuation between a willing buyer
and a willing seller in an arms-length transaction after proper
marketing wherein the parties had each acted knowledgeably,
prudently and without compulsion.
Any gain or loss arising from a change in fair value is
recognised in the income statement.
Purchases and sales of investment properties
Purchases and sales of investment properties are recognised in
the financial statements at completion which is the date at which
the significant risks and rewards of ownership are transferred to
the buyer.
Plant and other equipment
Plant and other equipment are stated at cost, less accumulated
depreciation and any provision for impairment. Depreciation is
provided on all plant and other equipment at varying rates
calculated to write off cost to the expected current residual value
by equal annual instalments over their estimated useful economic
lives. The principal rates employed are:
Plant and other equipment - 20.0 per cent
Fixtures and fittings - 33.3 per cent
Motor vehicles - 33.3 per cent
Trading properties
Trading properties held for short term sale or with a view to
subsequent disposal in the near future are stated at the lower of
cost or net realisable value. Cost is calculated by reference to
invoice price plus directly attributable professional fees. Net
realisable value is based on estimated selling price less estimated
cost of disposal.
4 Accounting policies (continued)
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 the income statement. 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.
Standards and interpretations in issue but not yet effective
The following Adopted IFRSs have been issued but have not been
applied by the Group in these financial statements:
IFRS 9 Financial Instruments (effective 1 January 2018)
IFRS 15 Revenue from Contracts with customers (effective 1
January 2018)
IFRS 16 Leases (effective 1 January 2019)
The Group has yet to assess the full impact of these new
standards. Initial indications are that they will not significantly
impact the financial statements of the Group.
4 Accounting policies (continued)
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 2017 2016
GBP000 GBP000
Revenue comprises:-
Rental income 410 351
Sale of properties 145 438
Interest 1 1
Other income 15 15
------- -------
571 805
======= =======
All revenue is derived from the United Kingdom
2017 2016
GBP000 GBP000
The operating profit is stated after charging:-
Depreciation 7 11
Amounts received by auditors and their associates
in respect of:
- Audit of these financial statements (Group
and Company) 13 12
- Audit of financial statements of subsidiaries
pursuant to 7 6
legislation
======= =======
6 Employees and employee benefits 2017 2016
GBP000 GBP000
Employee remuneration
Wages and salaries 338 373
Social security costs 35 39
Other pension costs 27 30
_______ _______
400 442
====== =======
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 4 3
Other 2 3
_______ _______
8 8
====== =======
2017 2016
Remuneration of directors GBP000 GBP000
Directors' emoluments 197 228
Company contributions to money purchase
pension schemes 25 25
====== ======
Director Salary and Benefits Pension 2017 2016
Fees Contributions Total Total
GBP000 GBP000 GBP000 GBP000 GBP000
ID Lowe 63 4 - 67 92
MJ Baynham 119 3 25 147 153
RJ Pearson 8 - - 8 8
______ ______ ______ ______ ______
190 7 25 222 253
Key management personnel are the directors, as listed above.
2017 2016
Retirement benefits are accruing to the following
number of
directors under:
Money purchase schemes 2 2
====== ======
7 Finance income and finance expenses
2017 2016
GBP000 GBP000
Finance income
Interest receivable:
- on bank balances 1 1
=== ===
Finance expenses
Interest payable:
- Other loan interest 14 22
==== ====
8 Income tax
There was no tax charge/(credit) in the current or preceding
year.
2017 2016
GBP000 GBP000
Profit before tax 1,040 105
===== =====
Current tax at 19.75% (2016
: 20%) 205 21
Effects of:
Expenses not deductible
for tax purposes 15 9
Indexation on chargeable
gains (51) (20)
Losses carried forward 63 88
Revaluation of property
not taxable (232) (98)
______ ______
Total tax charge - -
===== =====
A reduction in the UK corporation tax rate from 20% to 19% was
effective from 1 April 2017 and a further reduction to 18%
(effective from 1 April 2020) was substantively enacted on 26
October 2015. This will reduce the company's future current tax
charge accordingly. An additional reduction to 17% (effective 1
April 2020) was substantively enacted on 6 September 2016. This
will reduce the company's future current tax charge
accordingly.
In the case of deferred tax in relation to investment property
revaluation surpluses, the base cost used is historical book cost
and includes allowances or deductions which may be available to
reduce the actual tax liability which would crystallise in the
event of a disposal of the asset (see note 20).
9 Profit per share
Basic profit per share is calculated by dividing the profit
attributable to ordinary shareholders by the weighted average
number of ordinary shares outstanding during the period as
follows:
2017 2016
GBP000 GBP000
Profit for financial period 1,040 105
====== ======
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 8.83 p 0.89 p
Diluted profit per share 8.83 p 0.89 p
The diluted figure per share is the same as the basic figure
per share as there are no dilutive shares.
10 Investment properties
2017 2016
GBP000 GBP000
Valuation
At 30 June 2016 10,905 10,515
Sold in year - (100)
Revaluation in year 1,175 490
________ ________
Valuation at 30 June 2017 12,080 10,905
======== ========
The carrying value of investment property is the fair value
at the balance sheet date at directors' valuation and based
on valuations by Montagu Evans, Chartered Surveyors, and
for one property, by Rettie & Co, a firm of property specialists,
as at 30 June 2016. The external valuers are not connected
with the Company.
The 2016 fair values were prepared in accordance with the
RICS Valuation - Professional Standards (January 2014, revised
April 2015) published by the Royal Institution of Chartered
Surveyors (RICS). The valuations are arrived at by reference
to market evidence of transaction prices and completed lettings
for similar properties. The properties were valued individually
and not as part of a portfolio and no allowance was made
for expenses of realisation or for any tax which might arise.
They assumed a willing buyer and a willing seller in an
arm's length transaction, after proper marketing and where
the parties had each acted knowledgeably, prudently and
without compulsion. The valuations reflected usual deductions
in respect of purchaser's costs, SDLT and LBTT as applicable
at the valuation date. Local comparable data was also adjusted
to reflect the individual circumstances and unique characteristics
of the valuation subjects and the 2017 directors' valuations
reflect changes in lettings and progress on the potential
for redevelopment of certain properties.
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 2018 and
beyond.
The historical cost of investment properties held at 30
June 2017 is GBP9,521,406 (2016: 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 (2016: GBP476,000).
11 Plant and equipment
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
========== ============== =========== ========
Motor Fixtures Other
Vehicles and fittings equipment Total
GBP000 GBP000 GBP000 GBP000
Cost
At 30 June 2016 18 14 67 99
Additions in year - 2 - 2
---------- -------------- ----------- --------
At 30 June 2017 18 16 67 101
---------- -------------- ----------- --------
Depreciation
At 30 June 2016 16 14 54 84
Charge for year 2 1 4 7
At 30 June 2017 18 15 58 91
---------- -------------- ----------- --------
Net book value
At 30 June 2017 - 1 9 10
========== ============== =========== ========
12 Investments
2017 2016
GBP000 GBP000
Available for sale financial assets 1 1
====== ======
13 Trading properties
2017 2016
GBP000 GBP000
At start of year 11,166 11,418
Additions 575 139
Sold in year (108) (391)
_________ _________
At end of year 11,633 11,166
======== ========
14 Trade and other receivables 2017 2016
GBP000 GBP000
Amounts falling due within one year
Other debtors 370 67
Prepayments and accrued income 26 86
_______ _______
396 153
====== ======
The Group's exposure to credit risks and impairment losses
relating to trade receivables is given in note 18.
15 Cash and cash equivalents 2017 2016
GBP000 GBP000
Cash 55 103
====== ======
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
2017 2016
GBP000 GBP000
Trade creditors 33 34
Other creditors including taxation 15 24
Accruals and deferred income 787 640
_______ _______
Accruals and other creditors 835 698
====== ======
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
2017 2016
GBP000 GBP000
Unsecured development loan 360 -
======= ========
Non-current liabilities
Unsecured loans 3,925 3,630
======= =======
17 Other interest bearing loans and borrowings (continued)
Terms and debt repayment schedule
Terms and conditions of outstanding loans were as follows:
2017 2016
Nominal interest Fair Carrying Fair Carrying
Currency rate value amount value amount
GBP000 GBP000 GBP000 GBP000
Unsecured loan GBP Base +3% 3,825 3,825 3,530 3,530
Unsecured development GBP Base 360 360 - -
loan
Unsecured loan GBP Base + 3% 100 100 100 100
4,285 4,285 3,630 3,630
The unsecured loan of GBP3,825,000 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.
The short term unsecured development loan of GBP360,000 is
repayable after the disposal of two properties, expected to be by
30 June 2018. Interest is charged at Bank of Scotland base
rate.
The unsecured loan of GBP100,000 is not repayable before 1 July
2018. Interest is charged at a margin of 3% over Bank of Scotland
base rate.
The weighted average interest rate of the floating rate
borrowings was 3.3% (2016: 3.5%). As set out above, a lender varied
its right to the margin of interest above base rate until further
notice and so the rate of interest charged in the year is 0.27%
(2016: 0.5%).
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:
2017 2016
Fair value Carrying Fair value Carrying
amount amount
GBP000 GBP000 GBP000 GBP000
Trade and other receivables 370 370 145 145
Cash and cash equivalents 55 55 103 103
------------ ---------- -------------------- ---------
425 425 248 248
------------ ---------- -------------------- ---------
Loans from related parties 4,285 4,285 3,630 3,630
Trade and other payables 835 835 698 698
------------ ---------- -------------------- ---------
5,120 5,120 4,328 4,328
------------ ---------- -------------------- ---------
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.
18 Financial instruments (continued)
The Board's policy is to maintain a strong capital base so as to
cover all liabilities and to maintain the business and to sustain
its development.
The Board of Directors also monitors the level of dividends to
ordinary shareholders.
There were no changes in the Group's approach to capital
management during the year.
Neither the Company nor any of its subsidiaries are subject to
externally imposed capital requirements.
The Group's principal financial instruments comprise cash and
short term deposits. The main purpose of these financial
instruments is to finance the Group's operations.
As the Group operates wholly within the United Kingdom, there is
currently no exposure to currency risk.
The main risks arising from the Group's financial instruments
are interest rate risks and liquidity risks. The board reviews and
agrees policies for managing each of these risks, which are
summarised below:
Credit risk
Credit risk is the risk of financial loss to the Group if
a customer or counterparty to a financial instrument fails
to meet its contractual obligations and arises principally
from the Group's receivables from customers, cash held at
banks and its available for sale financial assets.
Trade receivables
The Group's exposure to credit risk is influenced mainly
by the individual characteristics of each tenant. The majority
of rental payments are received in advance which reduces
the Group's exposure to credit risk on trade receivables.
Other receivables
Other receivables consist of amounts due from tenants and
purchasers of investment property along with a balance due
from a company in which the Group holds a minority investment.
Available for sale financial assets
The Group does not actively trade in available for sale
financial assets.
Bank facilities
At the year end the Company had no bank loan facilities
available (2016: 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
2017 2016
GBP000 GBP000
Available for sale investments 1 1
Other receivables 370 67
Cash and cash equivalents 55 103
________ ________
426 171
======= =======
18 Financial instruments (continued)
Credit risk (continued)
The Group made an allowance for impairment on trade receivables
of GBP33,000 (2016: Nil) based on specific experience
with three tenants. As at 30 June 2017, trade receivables
of GBP30,000 were past due but not impaired. These are
long standing tenants of the Group and the indications
are that they will meet their payment obligations for
trade receivables which are recognised in the balance
sheet that are past due and unprovided. The ageing analysis
of these trade receivables is as follows: 2017 2016
Number of days past due date GBP000 GBP000
Less than 30 days 1 9
Between 30 and 60 days 5 1
Between 60 and 90 days - 3
Over 90 days 24 36
________ ________
30 49
======= =======
Credit risk for trade receivables at the reporting date
was all in relation to property tenants in United Kingdom.
The Group's exposure is spread across a number of customers
and sums past due relate to 6 tenants (2016: 8 tenants).
One tenant accounts for 67% (2016: 67%) of the trade
receivables past due by more than 90 days.
Liquidity risk
Liquidity risk is the risk that the Group will not be
able to meet its financial obligations as they fall due.
The Group's approach to managing liquidity is to ensure,
as far as possible, that it will always have sufficient
liquidity to meet its liabilities when due without incurring
unacceptable losses or risking damage to the Group's
reputation. Whilst the directors cannot envisage all
possible circumstances, the directors believe that, taking
account of reasonably foreseeable adverse movements in
rental income, interest or property values, the Group
has sufficient resources available to enable it to do
so.
The Group's exposure to liquidity risk is given below
Carrying Contractual 6 months 6-12 months 2-5
30 June 2017 GBP'000 amount cash flows or less years
------------------------- -------- ----------- -------- ----------- ----------
Unsecured loan 3,825 3,858 28 5 3,825
Unsecured development
loan 360 361 1 360 -
100
Unsecured loan 111 9 - 102
Trade and other payables 835 835 835 - -
------------------------- -------- ----------- -------- ----------- ----------
Carrying Contractual 6 months 6-12 2-5
30 June 2016 GBP'000 amount cash flows or less months years
------------------------- -------- ----------- -------- ------- ----------
Unsecured loan 3,530 3,548 9 9 3,530
Unsecured loan 100 107 2 2 103
Trade and other payables 698 698 698 - -
------------------------- -------- ----------- -------- ------- ----------
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:
2017 2016
GBP000 GBP000
Unsecured loan 3,825 3,530
Unsecured loan 360 -
Unsecured loan 100 100
======= =======
A 1% movement in interest rates would be expected to change
the Group's annual net interest charge by GBP48,850 (2016:
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:
2017 2016
GBP000 GBP000
Less than one year 201 221
Between one and five years 181 418
Greater than five years 167 216
_____ _____
549 855
===== =====
The amounts recognised in income and costs for operating leases
are shown on the face of the income statement. Leases are generally
repairing leases.
20 Deferred tax
At 30 June 2017, the Group has a potential deferred tax asset of
GBP929,000 (2016: GBP971,000) of which GBP27,000 (2016: GBP74,000)
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 GBP902,000 (2016:
GBP897,000). 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 17
15 16 at 17%
at 18% at 18%
GBP000 GBP000 GBP000 GBP000 GBP000
Investment
properties 153 (79) 74 (47) 27
Tax losses 818 79 897 5 902
_____ ______ _____ ______ _____
Total 971 - 971 (42) 929
_____ ______ _____ ______ _____
21 Issued share capital 30 June 2017 30 June 2016
No GBP000 No. GBP000
Authorised share capital
Ordinary shares of 20p
each 20,000,000 4,000 20,000,000 4,000
======== ======= ======== =======
Issued and
fully paid
Ordinary shares of 20p
each 11,783,577 2,357 11,783,577 2,357
======== ======= ======== =======
Holders of ordinary shares are entitled to dividends declared
from time to time, to one vote per ordinary share and a share of
any distribution of the Company's assets.
22 Capital and reserves
The capital redemption reserve arose in prior years on redemption
of share capital. The reserve is not distributable.
The share premium account is used to record the issue of
share capital above par value. This reserve is not distributable.
23 Ultimate controlling party
The ultimate controlling party is Mr ID Lowe.
24 Related parties
Transactions with key management personnel
Transactions with key management personnel consist of
compensation for services provided to the Company. Details are
given in note 6.
Lowe Dalkeith Farm, a business wholly owned by ID Lowe, used
land at one of the Group's investment properties as grazings for
its farming operation. No rent was charged as the cost of
maintaining the land without livestock would exceed the grazing
rent.
Other related party transactions
The parent Company has a related party relationship with its
subsidiaries.
The Group and Company has an unsecured loan due to Leafrealm
Limited, a company of which ID Lowe is the controlling shareholder.
The balance due to this party at 30 June 2017 was GBP3,825,000
(2016: 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 GBP9,967 (2016:
GBP17,698).
The Group and Company also has an unsecured development loan due
to Leafrealm Limited, a company of which ID Lowe is the controlling
shareholder. The balance due to this party at 30 June 2017 was
GBP360,000 (2016: GBPNil) with interest payable at base rate.
Interest charged in the year amounted to GBP414 (2016: GBPNil).
24 Related parties (continued)
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 2017 was GBP99,999 (2016:
GBP99,999) with interest payable at 3% over Bank of Scotland base
rate per annum. Interest charged in the year amounted to GBP3,274
(2016: GBP4,382). The loan is not due to be repaid before 1 July
2018.
Contracting work on certain of the Group's development and
investment property sites has been undertaken by Leafrealm Land
Limited, a company under the control of ID Lowe. The value of the
work done by Leafrealm Land Limited charged in the accounts for the
year to 30 June 2017 amounts to GBP61,897 (2016: GBP44,627) at
rates which do not exceed normal commercial rates. The balance
payable to Leafrealm Land Limited in respect of invoices for this
work at 30 June 2017 was GBP106,524 (2016: GBPNil).
For a full listing of investments and subsidiary undertakings
please see Note 8 of the parent Company financial statements.
-ENDS-
This information is provided by RNS
The company news service from the London Stock Exchange
END
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