Source - PRN

To:                   RNS
Date:               28 September 2016
From:              F&C UK Real Estate Investments Limited

  • NAV total return of 7.5 per cent for the year
  • Portfolio ungeared total return of 7.1 per cent for the year
  • Dividend of 5.0 pence per share for the year, giving a yield of 5.6 per cent on the year end share price
  • Dividend cover increased to 91.7 per cent as compared to 76.8 per cent for the previous year
  • The Company entered into two new loan agreements totalling £110 million.  Weighted average interest rate reduced to 3.3 per cent, from 5.8 per cent under the previous loan arrangements.

Chairman’s Statement

The UK commercial property market has been going through a period of adjustment with capital returns stabilising following six years of capital growth. The Group’s net asset value (‘NAV’) total return for the year was 7.5 per cent with a NAV as at 30 June 2016 of 99.2 pence per share, up from 97.0 pence per share at the prior year-end.

The share price total return for the year was -6.5 per cent with the shares trading at 88.5 pence per share at the year-end, a discount of 10.8 per cent to the NAV. The share price had generally been trading at a small premium until the last two months of the year as sentiment towards the sector shifted and property valuations began to level off. Following on from the initial drop in the share price, the result of the EU referendum on 23 June 2016 prompted a sharper reaction as investors responded to the climate of uncertainty following the leave vote. This was very close to the year-end and the Group’s share price has subsequently recovered. As at 26 September 2016, the share price was trading at a 3.2 per cent discount to the year-end NAV. 

Property Market and Portfolio

The UK commercial property market delivered a total return of 9.1 per cent as measured by the Investment Property Databank (‘IPD’) UK Quarterly Index for all assets in the year to June 2016. Performance moderated in the second half of the review period, as investors became more concerned about pricing, the slow pace of economic growth in the UK and abroad and the approach of the EU referendum. The referendum vote took place on 23 June, limiting the impact of the outcome during this reporting period.

In the year to June 2016, All Property performance was driven by a 4.7 per cent benchmark income return and 4.3 per cent benchmark capital growth. Industrials and offices out-performed retail with London out-performing the regions. The occupier market continued to see a broadening of rental growth beyond London and core South East. The strength of investment demand and yield compression that has driven the market over recent years moderated and investment activity was around 75 per cent of the equivalent period a year ago.

The end of the reporting period was marked by increased uncertainty in the capital markets, which translated into more mixed market sentiment and a wider range of transactional evidence than might ordinarily be expected. This was relevant to the valuation of the Company’s assets. The Company’s property valuers Cushman & Wakefield therefore issued the valuations for the quarter ended 30 June 2016 under a ‘Health Warning’, stating that the probability of their opinion of value exactly coinciding with the price achieved, were there to be a sale, had reduced, and that they would recommend that the valuation is kept under regular review and that specific market advice should be obtained in the event of disposal. The Board recognise the heightened risk inherent in the market at this time and the Manager continues to monitor the situation closely on behalf of the Board.

There has been market uncertainty and evidence of a pricing adjustment in the immediate aftermath of the Brexit vote, although this does appear to be moderating as transactional evidence to support pricing improves. Market indicators suggest some weakening of values since the end of June 2016 with the IPD Monthly Index pointing to capital falls of 2.8 per cent and 0.7 per cent over July and August respectively.  The Manager believes that the monthly data is relevant as a lead indicator for the September quarter Company valuation.

The Group’s property portfolio produced an ungeared return of 7.1 per cent over the year to June 2016, driven primarily by an income return of 5.6 per cent. Against a backdrop of economic and political uncertainty, and historic low yields, the Company has been cautious in its approach to the deployment of capital, evidenced by the fact that three sales and no purchases were undertaken over the year. Much like the wider market, the portfolio’s industrial and distribution assets were again the key contributors at the sector level, producing a total return in excess of both the IPD UK Quarterly Index and the market average for the sector for the period. Unsurprisingly, most of the top performing assets were from this sector, the majority being located within the South East. They delivered strong capital growth over the early part of the year, benefitting from both yield shift and underlying income growth. The portfolio’s Central London assets continued to make a valuable contribution, though the office sector in general struggled against its peers and remains a focus for near term asset management initiatives.

The portfolio offers an above market income yield, a void rate of only 4.2 per cent and income with an weighted average lease term of over 7 years, secured on an institutional grade portfolio.  With the capital cycle at its end and returns from UK real estate now likely to be income driven for the foreseeable future the Board believes that the portfolio is well placed to deliver on the Company objective of providing shareholders with an attractive income, together with the potential for income and capital growth.

Borrowings and Refinancing

The Group underwent a refinancing exercise during the year and secured a £90 million 11-year non-amortising term loan facility agreement with Canada Life Investments and a £20 million 5-year revolving credit facility agreement with Barclays Bank plc.

Under the new facilities, the Group drew down £110 million to finance the repayment of the term loan facility provided by Lloyds Bank plc, of which £102 million was drawn down, and was due for repayment in January 2017. There was no early repayment penalty in respect of the previous facility but the Group did terminate the interest rate hedging arrangements entered into in connection with this facility. The swap liability had already been accounted for in the NAV and the cost of termination amounted to £5.3 million. No further swap was required given the fixed nature of the new principal loan.

Following the refinancing, the Group's gearing level, net of cash, represents 29.1 per cent of investment properties at 30 June 2016. The weighted average interest rate (including amortisation of refinancing costs) on the Group's total current borrowings is 3.3 per cent. The rate on the Group's total borrowings has therefore fallen by 2.5 per cent from 5.8 per cent following the refinancing. The Company continues to maintain a prudent attitude to gearing.

The savings achieved following the refinancing have helped the level of dividend cover which was 91.7 per cent for the year, compared to 76.8 per cent for last year.

The Group had £11.9 million of cash available at 30 June 2016.


Three interim dividends of 1.25 pence per share were paid during the year with a fourth interim dividend of 1.25 pence per share to be paid on 30 September 2016. This gives a total dividend for the year ended 30 June 2016 of 5.0 pence per share, a yield of 5.6 per cent on the year-end share price. In the absence of unforeseen circumstances, it is the intention of the Group to continue to pay quarterly interim dividends at this rate.

Share Issues

The Group experienced continued market demand for its shares in the first half of the year and has issued 4.85 million Ordinary Shares at a premium to the published net asset value at the time of each issuance, raising proceeds of £4.8 million. As highlighted above, the share price has been trading at a discount to NAV in recent months and further share issues have therefore not been deemed appropriate by the Board.

At the year-end, there were 238,705,539 Ordinary Shares in issue.

Board Composition

As mentioned in our Interim Results announcement in February 2016, Quentin Spicer retired from the Board and did not offer himself for re-election at the Annual General Meeting in November 2015. I have taken on the role of Chairman following his departure. I would like to reiterate our sincerest thanks to Quentin for his commitment and strong leadership over the years.

We also highlighted the appointment of a new Non-Executive Director, Alexa Henderson with effect from 21 December 2015. Alexa brings with her a wealth of financial experience and she has taken on the role of Chair of the Audit Committee.


Investor sentiment has weakened following the UK’s vote to leave the EU. A period of uncertainty is in prospect, both with regard to the negotiation process and the likely tone of economic policy under a new administration. Monetary policy has already eased and market expectations are for a prolonged period of low interest rates.

Consensus expectations are that economic growth will be lower, particularly over the next year or so but that there will be no prolonged recession. This is unlikely to be good news for property values in the short term, however in this environment, income is likely to be the main driver of performance, which is in keeping with both the Manager’s strategy and the Company objective.

While nervousness in the investment markets does present some downside risk to near term values, the Manager reports that initial post Brexit demand is still evident across the majority of sectors and geographical areas with increased focus on defensive assets, longer leases and core locations.

Manager’s Review

The UK commercial property market delivered a total return of 9.1 per cent in the year to June 2016, as measured by the Investment Property Databank (‘IPD’) UK Quarterly Index. This compares with 15.7 per cent in the previous 12-month period. Performance was supported by an annual income return of 4.7 per cent, with capital values rising by 4.3 per cent. The income return varied from 3.0 per cent for West End offices to 5.8 per cent for regional industrials.

UK Economy

The UK economy continued to deliver solid growth with real GDP rising by 2.2 per cent in the year to June 2016. Employment reached record highs during the year and annual inflation, as measured by the CPI, helped by lower fuel and food prices was a modest 0.5 per cent. The Budget in March 2016 was notable for the increase in stamp duty, which adversely affected capital values during that quarter. Monetary policy was supportive, with official rates remaining at 0.5 per cent throughout the period. Gilt yields continued to fall finishing the period at 1.0 per cent. In February 2016, it was announced that a referendum on UK membership of the EU would take place on 23 June 2016. Uncertainty surrounding the outcome of this vote coupled with slower growth overseas contributed to some slowdown in the pace of economic growth in the later part of the review period.

UK Property Market

The year witnessed a moderation in investment activity to £57 billion from £77 billion in the previous year. While investors may have been influenced by wider economic and political developments, there was also concern at the level of pricing in some parts of the market, especially in London. Overseas buyers continued to drive parts of the market, although the volume of their net investment faded as the year under review drew to a close. Institutions were net sellers over the period with net disinvestment focused on the final three months of the reporting period. Investment into regional offices and retail warehousing proved relatively resilient but most segments recorded an annual decline. This was most pronounced for leisure and non-traditional property assets, which had seen both strong transactional volumes and relative performance in the prior period. Banks continued to wind down their problem loans but also were more willing to undertake new lending, competing alongside new entrants, for well-let standing investments.

Investors still favoured prime stock but a lack of availability and low yields led to a search for higher yielding assets. CBRE data indicates that for outside London the yield gap between prime and secondary remained broadly stable over the course of the year.

The year saw investors becoming more cautious with some thinning in the depth of demand, but there was still competition for quality stock that met investor requirements. This fed through to further modest yield compression. Quarterly IPD data showed initial yields at the all-property level moving in from 5.0 per cent to 4.8 per cent in the year to June 2016.

Performance by sector, as measured by IPD, followed the pattern of the previous yearly reporting period. Industrials and offices both out-performed with each delivering an 11.6 per cent total return. The performance of offices was helped by a strong performance in London and the South East. The regional office market delivered an 8.2 per cent annual total return. In retail, there was considerable polarisation with Central London shops out-performing, but standard retail outside London, shopping centres, retail warehousing and supermarkets all relatively weak, bringing the all-retail average down to 6.3 per cent.

Rental growth was 3.3 per cent at the all-property level, slightly less than the 3.8 per cent recorded in the previous year. This in part reflected the slowdown in the pace of rental growth for Central London offices. Despite this, rental growth in the City and West End still drove the market forward. Central London retail and South East industrials also saw rental growth exceeding 5 per cent annually. There were rental growth hotspots for offices in Bristol, Cambridge and Guildford. In contrast, rental growth remained negative for standard retail outside the South East, variety stores and supermarkets, underscoring the structural issues faced by those parts of the market.

This underlying rental growth translated into net income growth for the year to June 2016 of 3.0 per cent, improved from 1.7 per cent for the year to June 2015. This was the strongest June out-turn since 2008. Again, there was polarisation as income from West End retail and Midtown offices recorded rates above 10 per cent, while income growth was still negative for regional retail.

The property market delivered another year of strong performance in the year to June 2016 but the pace has slowed following two annual reporting periods where total returns were in the mid-teen range. The result of the UK referendum came towards the end of the period and this is expected to have a marked effect on the economy, economic policy and the property market. At the time of writing monthly data suggests an early easing of pricing as open-ended property funds seek to satisfy liquidity requirements and buyers apply a watching brief to the market place.


The Company’s property portfolio produced an ungeared total return of 7.1 per cent over the year to June 2016, driven primarily by an income return of 5.6 per cent, which was some way above the income return derived from the IPD UK Quarterly Index of 4.7 per cent. Pleasingly, gross income growth from standing investments was also well in excess of the Quarterly Index over the year, at 5.3 per cent, providing valuable support to dividend cover.  This reflected the Manager’s continued focus on driving performance from the existing portfolio at a time when market pricing has offered few attractive opportunities to acquire assets suitable to satisfy the Company objective.  At 30 June the value of the portfolio had increased to £339.2 million (after sales), compared to £337.5 million this time last year. Over the three years to June 2016 the portfolio has delivered an ungeared total return of 12.8 per cent per annum.

At the sector level the portfolio’s industrial and distribution assets continued their run of outperformance, producing a total return of 11.8 per cent, in excess of both the IPD Quarterly Index and the sector average for the period. This is the third year in a row that industrial holdings have led the portfolio’s returns. Performance has been driven by robust occupational demand and limited supply, complimented by successful asset management which has translated to income growth. The Fund’s industrial assets have also benefitted from a general market preference for modern, well-specified property located within the South East. Retail and offices both underperformed their respective peers, particularly in terms of capital growth, the latter by some distance, however both delivered meaningful yield premium, providing valuable dividend cover. 

The majority of top performing assets hailed from the industrial and distribution sectors. Despite the capital cycle having now run its course, this was not necessarily the case in the first half of the year and the majority of top performers were again those assets experiencing the strongest capital growth. While yield shift had a key part to play in this, these assets were also the beneficiary of underlying rental growth and/or associated income growth. Some of the addresses are familiar from last year, with Lakeside Road, Colnbrook, Hemel Gateway, Hemel Hempstead and Eastern Road, Bracknell all featuring in the top 5 performing assets.  Whilst Lakeside Road, Colnbrook was the key asset by weighted contribution to overall portfolio return, the two highest total returns over the period were from Chippenham Drive, Milton Keynes and 24 Haymarket, London delivering 31 per cent and 28 per cent respectively. The refurbishment of the vacant industrial unit at Milton Keynes is now complete and terms have been agreed to let the property at levels in excess of historic valuation expectations. The positive performance is therefore on account of delivering the project below the initial budget and attracting a tenant on competitive terms on a relatively short timetable, alongside the general continued improvement in sentiment towards the sector. At the time of writing this property accounts for over half of total portfolio void and the successful letting will make a telling improvement to portfolio yield.

Despite the continued depth of investment demand for central London property, particularly strong in the first half of the year, the performance of 24 Haymarket has primarily been driven by growth in the underlying rental tone derived from a competitive occupational market. This has been felt strongest on the restaurant element of the building. Similarly, the ground and basement retail unit at the portfolio’s largest asset at Berkeley Street, London is now set to offer an attractive improvement in rental income following agreement of the outstanding 2015 rent review. Despite the prevalence of South East industrial assets in the Company’s top performers, more recently we have seen a welcome return to asset specific fundamentals rather than sector preference driven yield shift, such that the top performers over the latter 6 months to June include representatives from a wider variety of sectors and geographies.

The above market income yield, low void rate (4.2 per cent for the Company versus 7.1 per cent for the IPD Quarterly Index), attractive and contractually backed weighted average income term of over 7 years, leave the Company well placed to benefit in today’s income driven environment. Property returns over anything other than the shortest time scales are income dominated and against this backdrop the portfolio is appropriately positioned to deliver on the Company objective.

Nevertheless, overall portfolio returns were below that of the Quarterly Index over 2016 pointing to some underlying challenges. Given the attractive annual income return and the absence of any significant transaction costs, asset level underperformance was predominantly a result of lower capital growth than for the wider market. This was particularly prevalent in the offices sector where the shorter unexpired lease terms, and expectations of associated capital expenditure has weighed more heavily on recent valuations. In the event that the upcoming lease events in this sector can be successfully negotiated then this ought not to represent an insurmountable challenge. With this in mind a number of lease events in the Central London and South Eastern office holdings are now close to early settlement. In some circumstances the goal is to mitigate leasing risk and in the case of the Central London market, there still selectively exists the opportunity to generate income growth.

Given the weight of money that has been targeting the sector over recent years, driving yields to historic lows, the Manager has been particularly discerning where new purchases are concerned. We are at a point in the capital cycle where it has been challenging to source new stock at a price which satisfies the Company objective and certainly the lack of recent purchases has been a conscious decision on the part of both the Manager and the Board. The burden of transaction costs are also particularly relevant in an income driven, lower returns environment and made even more of a consideration following the recent adjustment to Stamp Duty Land Tax rates. The current cash position and the flexibility of a revolving debt facility does however provide scope for opportunistic purchases that fulfil the necessary criteria and complement the existing portfolio.  The Manager remains vigilant in this regard, particularly given the recent vote to leave the European Union and corresponding potential for some near term market turbulence.

The priority instead has been to address the future of the smaller, more secondary or legacy regional assets. Three sales have been completed over the year (Bridge Street, Guildford, Northbrook Street, Newbury and Newcombe Drive, Swindon) realising £3.5 million. The sale of a fourth property at King William House, Hull has now completed post the financial year end, providing a further £2.6 million of net proceeds. Historically these assets provided both liquidity and attractive dividend cover; however, the rather compromised specification, upcoming requirement for capital expenditure, combined with reduced lease terms and occupational risk present at Swindon and Hull in particular, no longer satisfied the Manager’s strategy.  Given the recent re-pricing of risk, the timing of disposal now feels even more appropriate.


As highlighted in the Chairman’s Statement, the Company successfully refinanced its existing £115 million loan facility with Lloyds Bank plc, due for repayment in 2017, with a £90 million 11 year non-amortising term loan facility agreement with Canada Life Investments and a £20 million 5 year revolving credit facility agreement with Barclays Bank plc. The fixed interest rate that will be payable over the term of the loan with Canada Life Investments is at the all-in rate of 3.36 per cent per annum and the interest rate that will be payable in respect of the revolving credit facility with Barclays Bank plc is 1.45 per cent per annum over 3 month LIBOR.

In accordance with the Company policy to adopt a prudent approach to borrowing, net gearing at 30 June was 29.1 per cent, in line with the majority of the peer group and a level at which the Manager considers is appropriate. This figure includes the fully drawn revolving debt facility. The near term intention is to pay a proportion of this down on account of the favourable cash position of the Company, further bolstered by recent sales proceeds.  In the event that suitable investment opportunity is identified, this arrangement provides valuable flexibility to access the market.


The impact of the UK’s decision to leave the EU may well lead to slower economic growth and, in the short term at least, has the potential to lead to wider uncertainty and increased volatility in the capital markets.  Weakening sentiment does pose a threat to near term values with the impact of recent transactions, some of them from motivated sellers such as the UK open-ended funds, likely to become apparent in the third quarter valuations. There is little doubt that the weekly and monthly valuations in the weeks since the vote, while reflecting a range of outcomes, point towards a softening of values. City offices, properties with short leases, secondary and development led stock have been most affected in the immediate aftermath. Quality, well-let properties in established centres, particularly in the industrial and distribution sector have been more resilient. Sentiment towards alternative property assets remains robust with concerns persisting about the health of the secondary retail market.

Following a three-year run of capital appreciation across the majority of the market, the Manager considers that the portfolio is well placed to capitalise on the likelihood of income dominated returns over the foreseeable future.  The Fund’s defensive characteristics, including a yield premium and attractive duration of income, low void rate, and appropriate exposure to London and the South East in particular, leave the Company well placed to weather any near term correction in pricing. Despite historic low valuation yields the case for property still stands up to scrutiny, offering an attractive premium over gilts, with potential for at least some further income growth in selected markets. Against this backdrop, management of the income stream is more important than ever and this will be the primary focus of the Manager. In more turbulent markets, stock selection is paramount, and as has been demonstrated in recent quarters, the Company will continue its commitment to retaining a resilient asset base, disposing of smaller, non-core assets and using the favourable cash position to access the market on an opportunistic basis in search of new acquisitions.

The UK offers a large diverse economy and provides a transparent and mature property market, which has delivered solid risk adjusted performance over the long term alongside the opportunity to access a consistent, relatively high income return. These are all attractive characteristics in uncertain times.


F&C UK Real Estate Investments Limited

Consolidated Statement of Comprehensive Income

Year ended 30 June 2016

Year ended
30 June 2015
£‘000 £‘000
Rental income 19,562 18,932
Total revenue 19,562 18,932
Gains on investment properties 4,807 31,665
24,369 50,597
Investment management fee (2,084) (1,974)
Other expenses (1,883) (1,929)
Total expenditure (3,967) (3,903)
Net operating profit before finance costs 20,402 46,694
Net finance costs
Interest receivable 9 15
Finance costs (4,455) (5,955)
Gain on redemption of interest rate swap 1,485 -
(2,961) (5,940)
Net profit from ordinary activities before taxation 17,441 40,754
Taxation on profit on ordinary activities (264) (163)
Profit for the year 17,177 40,591
Other comprehensive income
Items that are or may be reclassified subsequently to profit or loss
Net change in fair value of swap reclassified to profit or loss
Movement in fair value of effective interest rate swap


Total other comprehensive income (192) 2,649
Total comprehensive income for the year, net of tax 16,985 43,240
Basic and diluted earnings per share 7.2p 17.5p

All items in the above statement derive from continuing operations.

All of the profit and other comprehensive income for the year is attributable to the owners of the Company.


F&C UK Real Estate Investments Limited

Consolidated Balance Sheet

30 June 2016
30 June 2015
Non-current assets
Investment properties 333,798 331,874
Current assets
Trade and other receivables 7,014 6,861
Cash and cash equivalents 11,931 4,656
18,945 11,517
Total assets 352,743 343,391
Non-current liabilities
Interest-bearing bank loans (108,845) (102,986)
Interest rate swap - (1,929)
(108,845) (104,915)
Current liabilities
Trade and other payables (6,872) (6,912)
Income tax payable (284) (77)
Interest rate swap - (4,658)
(7,156) (11,647)
Total liabilities (116,001) (116,562)
Net assets 236,742 226,829
Represented by:
Share capital 2,387 2,339
Special distributable reserve 175,367 170,620
Capital reserve 58,485 53,678
Other reserve - 192
Revenue reserve 503 -
Equity shareholders’ funds 236,742 226,829
Net asset value per share 99.2p 97.0p

F&C UK Real Estate Investments Limited

Consolidated Statement of Changes in Equity

For the year ended 30 June 2016

Share Capital

Special Distributable Reserve

Capital Reserve




At 1 July 2015






Profit for the year


Other comprehensive losses - - - (192) - (192)
Total comprehensive income for the year - - - (192) 17,177 16,985
Issue of ordinary shares 48 4,747 - - - 4,795
Dividends paid - - - - (11,867) (11,867)
Transfer in respect of gains on investment properties



At 30 June 2016







For the year ended 30 June 2015

Share Capital

Special Distributable Reserve

Capital Reserve




At 1 July 2014






Profit for the year


Other comprehensive gains - - - 2,649 - 2,649
Total comprehensive income for the year - - - 2,649 40,591 43,240
Issue of ordinary shares 30 2,608 - - - 2,638
Dividends paid - - - - (11,618) (11,618)
Transfer in respect of gains on investment properties - - 31,665 - (31,665) -
Transfer to revenue reserve - (2,692) - - 2,692 -

At 30 June 2015







F&C UK Real Estate Investments Limited

Consolidated Cash Flow Statement

Year ended
30 June 2016

Year ended
30 June 2015
£’000 £’000
Cash flows from operating activities
Net profit for the year before taxation 17,441 40,754
Adjustments for:
     Gains on investment properties (4,807) (31,665)
     Increase in operating trade and other receivables (153) (800)
     (Decrease)/increase in operating trade and other payables (40) 802
     Interest received (9) (15)
     Finance costs 4,455 5,955
     Gain on redemption of interest rate swap (1,485) -
15,402 15,031
     Taxation paid (58) (462)
Net cash inflow from operating activities 15,344 14,569
Cash flows from investing activities
Purchase of investment properties - (10,054)
Capital expenditure (636) (403)
Sale of investment properties 3,519 5,635
Interest received 9 15
Net cash inflow/(outflow) from investing activities 2,892 (4,807)
Cash flows from financing activities
Shares issued (net of costs) 4,795 2,638
Dividends paid (11,867) (11,618)
Bank loan interest paid (2,057) (1,202)
Interest on interest rate swap arrangement (2,561) (4,697)
Redemption of interest rate swap arrangement (5,294) -
Bank loan repaid – Lloyds Loan (102,000) (7,000)
Bank loan drawn down, net of costs – Canada Life Loan 88,503 -
Bank loan drawn down, net of costs – Barclays Loan 19,520 -
Net cash outflow from financing activities (10,961) (21,879)
Net increase/(decrease) in cash and cash equivalents 7,275 (12,117)
Opening cash and cash equivalents 4,656 16,773
Closing cash and cash equivalents 11,931 4,656

F&C UK Real Estate Investments Limited

Principal Risks and Risk Management

The Group’s assets consist of direct investments in UK commercial property.  Its principal risks are therefore related to the commercial property market in general, but also the particular circumstances of the properties in which it is invested and their tenants.  More detailed explanations of these risks and the way in which they are managed are contained under the headings of Credit Risk, Liquidity Risk, Interest Rate Risk and Market Price Risk.  The Manager also seeks to mitigate these risks through active asset management initiatives and carrying out due diligence work on potential tenants before entering into any new lease agreements. All of the properties in the portfolio are insured.

Other risks faced by the Group include the following:

  • Investment and strategic – poor investment processes and incorrect strategy, including sector and geographic allocations and use of gearing, could lead to poor returns for shareholders.
  • Regulatory – breach of regulatory rules could lead to suspension of the Company’s Stock Exchange listing, financial penalties or a qualified audit report.
  • Tax efficiency – changes to the management and control of the Group or changes in legislation could result in the Group no longer being a tax efficient investment vehicle for shareholders.
  • Financial – inadequate controls by the Manager or third party service providers could lead to misappropriation of assets. Inappropriate accounting policies or failure to comply with accounting standards could lead to misreporting or breaches of regulations.
  • Reporting – valuations of the investment property portfolio require significant judgement by valuers which could lead to a material impact on the net asset value.  Incomplete or inaccurate income recognition could have an adverse effect on the Group’s net asset value, earnings per share and dividend cover.
  • Operational – failure of the Manager’s accounting systems or disruption to the Manager’s business, or that of third party service providers, could lead to an inability to provide accurate reporting and monitoring, leading to a loss of shareholders’ confidence.

The Board seeks to mitigate and manage these risks through continual review, policy-setting and enforcement of contractual obligations. It also regularly monitors the investment environment and the management of the Group’s property portfolio, and applies the principles detailed in the internal control guidance issued by the Financial Reporting Council. 

Financial Instruments and Investment Property

The Group’s investment objective is to provide ordinary shareholders with an attractive level of income together with the potential for income and capital growth from investing in a diversified UK commercial property portfolio.

Consistent with that objective, the Group holds UK commercial property investments.  In addition, the Group’s financial instruments comprise cash, receivables, bank loans and payables.

The Group is exposed to various types of risk that are associated with financial instruments.  The most important types are credit risk, liquidity risk, interest rate risk and market price risk. There was no foreign currency risk as at 30 June 2016 or 30 June 2015 as assets and liabilities are maintained in Sterling.

Credit risk

Credit risk is the risk that an issuer or counterparty will be unable or unwilling to meet a commitment that it has entered into with the Group.

In the event of default by an occupational tenant, the Group will suffer a rental shortfall and incur additional costs, including legal expenses, in maintaining, insuring and re-letting the property until it is re-let. The Board receives regular reports on concentrations of risk and any tenants in arrears.  The Manager monitors such reports in order to anticipate, and minimise the impact of, defaults by occupational tenants.

The Group has a diversified tenant portfolio. The maximum credit risk from the rent receivables of the Group at 30 June 2016 is £597,000 (2015: £654,000). It is the practice of the Group to provide for rental debtors greater than three months overdue unless there is certainty of recovery. As at 30 June 2016 the provision was £17,000 (2015: £65,000). Of this amount £nil was subsequently written off and £5,000 has been recovered.

All of the cash is placed with financial institutions with a credit rating of A or above.  Bankruptcy or insolvency may cause the Group’s ability to access cash placed on deposit to be delayed or limited.  Should the credit quality or the financial position of the banks currently employed significantly deteriorate, the Manager would move the cash holdings to another financial institution.

The Group can also spread counterparty risk by placing cash balances with more than one financial institution.  The Directors consider the residual credit risk to be minimal.

Liquidity risk

Liquidity risk is the risk that the Group will encounter in realising assets or otherwise raising funds to meet financial commitments.  The Group’s investments comprise UK commercial property.

Property in which the Group invests is not traded in an organised public market and may be illiquid.  As a result, the Group may not be able to liquidate quickly its investments in these properties at an amount close to their fair value in order to meet its liquidity requirements.

The Group’s liquidity risk is managed on an ongoing basis by the Manager and monitored on a quarterly basis by the Board.

In certain circumstances, the terms of the Group’s bank loans entitle the lender to require early repayment, for example if covenants are breached, and in such circumstances the Group’s ability to maintain dividend levels and the net asset value attributable to the Ordinary Shares could be adversely affected. 

Interest rate risk

Some of the Group’s financial instruments are interest-bearing.  These are a mix of both fixed and variable rate instruments with differing maturities.  As a consequence, the Group is exposed to interest rate risk due to fluctuations in the prevailing market rate.

The Group’s exposure to interest rate risk relates primarily to the Group’s borrowings.  Interest rate risk on the £90 million Canada Life term loan is managed by fixing the interest rate on such at 3.36 per cent until maturity on 9 November 2026. 

In addition, tenant deposits are held in interest-bearing bank accounts and the interest rate on these accounts was 0.2 per cent at the year end.  Interest accrued on these accounts is paid to the tenant.

Market price risk

The Group’s strategy for the management of market price risk is driven by the investment policy. The management of market price risk is part of the investment management process and is typical of commercial property investment. The portfolio is managed with an awareness of the effects of adverse valuation movements through detailed and continuing analysis, with an objective of maximising overall returns to shareholders. Investments in property and property-related assets are inherently difficult to value due to the individual nature of each property. As a result, valuations are subject to substantial uncertainty. There is no assurance that the estimates resulting from the valuation process will reflect the actual sales price even where such sales occur shortly after the valuation date. Such risk is minimised through the appointment of external property valuers.

Directors’ Responsibilities in Respect of the Annual Report & Consolidated Accounts

In accordance with International Financial Reporting Standards as adopted by the EU and applicable law, we confirm that to the best of our knowledge:

  • the financial statements, prepared in accordance with IFRS as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole and comply with The Companies (Guernsey) Law, 2008; and
  • the Strategic Report and Report of the Directors include a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole together with a description of the principal risks and uncertainties that it faces.

On behalf of the Board

V Lall
27 September 2016


F&C UK Real Estate Investments Limited

Notes to the Consolidated Financial Statements
for the year ended 30 June 2016


1.         The audited results of the Group which were approved by the Board on 27 September 2016 have been prepared on the basis of International Financial Reporting Standards as adopted by the EU and the accounting policies set out in the statutory accounts of the Group for the year ended 30 June 2016.

2.         The fourth interim dividend of 1.25p will be paid on 30 September 2016 to shareholders on the register on 9 September 2016. The ex-dividend date was 8 September 2016.

3.         There were 238,705,539 Ordinary Shares in issue at 30 June 2016. The earnings per Ordinary Share are based on the net profit for the year of £17,177,000 and on 237,264,306 Ordinary Shares, being the weighted average number of shares in issue during the year.

4.         Three properties were sold during the year with net proceeds totalling £3.5 million.  No properties were purchased in the year.

5.         These are not full statutory accounts. The full audited accounts for the year ended 30 June 2016 will be sent to shareholders in September 2016, and will be available for inspection at Trafalgar Court, Les Banques, St. Peter Port, Guernsey, the registered office of the Company.  The full annual report and consolidated accounts will be available on the Company’s websites: or

6.         The Annual General Meeting will be held on 30 November 2016.

All enquiries to:
Peter Lowe
Scott Macrae
F&C Investment Business Limited
Tel: 0207 628 8000

The Company Secretary
Northern Trust International Fund Administration Services (Guernsey) Limited
PO BOX 255
Trafalgar Court
Les Banques
St Peter Port
Guernsey GY1 3QL
Tel: 01481 745001

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