Chairman's Statement

2016 was a positive and progressive year for UKCPT, and this momentum has continued into 2017. Despite a year of political surprises and associated uncertainty, the business is in a robust position and I am pleased to report that the shift in strategy adopted a couple of years ago of reducing the portfolio's retail weighting and increasing its industrial exposure has begun to bear fruit, with encouraging relative performance. Our financial position remains strong and, over the course of the year, our portfolio initiatives have added value and driven income to support an attractive level of dividend for shareholders. Furthermore, I am pleased to note that we have an overwhelmingly supportive shareholder base, as evidenced by the successful passing of the Company's continuation vote, held in November 2016.

The Company's portfolio produced a total return of 4.4% in the year, well ahead of the IPD benchmark of 3.6%. As expected, the property market continued to slow during the year, particularly in the third quarter as the ramifications of the UK's EU referendum result were digested. Against this backdrop, we achieved an above benchmark return through the successful implementation of a number of asset management initiatives across the Company's £1.28 billion portfolio, as well as through net asset value ("NAV") enhancing sales at Arlington Street, London and Sunbury, Surrey. Just after the year end we announced that we had completed a further NAV accretive disposal, with the sale of an office asset at 13 Great Marlborough Street, London followed shortly thereafter with the recycling of capital into the purchase of a higher yielding opportunity at Burton upon Trent. This acquisition of a pre-let development, due to be completed later this year, secures longer term income in our favoured industrial sector.

This positive portfolio activity underpinned a NAV total return for the year of 3.8%. While this, as for the property sector, was a slightly lower return than seen in previous years, it nonetheless demonstrates the strong defensive qualities of UKCPT, as well as being a positive reflection of the portfolio restructuring that has taken place over the past couple of years. This strong performance was delivered despite pressures on the property sector following a write down in values when the government increased stamp duty in the first half of 2016 and market uncertainties resulting from the EU referendum, including the temporary "gating" of open ended property funds due to unprecedented redemption requests.

The total return to shareholders in 2016 was also 3.8%, with the year-end share price reflecting a 2% discount to the period end NAV. This total return compares favourably to the FTSE All-Share REIT Index of minus 7.0%, and again demonstrates the relative attractiveness of UKCPT, which has a portfolio of 42, well-let properties, with low voids and an excellent history of prompt rent collection, and which is diversified by geography and sector. This, combined with a strong balance sheet, cash resources for further investment, low gearing and low long term borrowing rates, provides excellent foundations for attractive shareholder returns and compares favourably with many other quoted property companies.

Borrowings and Cash

UKCPT is financially well placed. As at 31 December 2016, the Company had low net gearing of 11.4% with a blended rate of interest of 2.89% and a weighted average debt maturity of six years and cash resources of £105 million. Following the transactions in early 2017 as outlined earlier, future capital expenditure and dividend commitments, £75 million is currently available for investment. The Company also has access to a £50 million revolving credit facility which remains undrawn and, therefore, has significant firepower to deploy in portfolio and acquisition opportunities in-line with the Company's investment policy. Additionally, in an environment where the prospect for further capital growth is under pressure, the Company's low gearing is a sensible defensive strategy.

Dividends

UKCPT declared and paid its shareholders an attractive dividend in 2016 as follows:

A fourth interim dividend of 0.92p was paid on 28 February 2017. This annual dividend reflects a yield of 4.4% on the year end share price of 84.5p. It compares favourably to the yield on the FTSE All-Share REIT Index of 3.7% as well as the FTSE All-Share Index yield of 3.5% and the 10 year gilt yield of 1.2%. UKCPT continues to offer investors a sustainable income return underpinned by its well let and diverse portfolio of prime properties.

Continuation Vote

UKCPT's discount control policy provides that if the market price of its ordinary shares is more than 5 per cent below the published NAV for a continuous period of at least 90 dealing days, following the second anniversary of the Company's most recent continuation vote in relation to the discount control policy, an extraordinary general meeting ("EGM") has to be convened. On 11 October 2016, with the discount to published NAV having been more than 5 per cent for more than 90 continuous days, an EGM was convened for 9 November 2016. This continuation vote was passed resoundingly with 99.99% of shareholders voting being in favour of continuation, on 76% turnout.

The Company is not now required to have a continuation vote in relation to its discount control policy for another two years. This vote does not change the current policy on share buybacks, which is set out in the annual report.

Base Erosion and Profit Shifting ("BEPS")

The Board has noted the announcement in the 2016 Autumn Statement relating to BEPS, including the ramifications for non UK resident property companies and the proposed restriction on interest deductions. Although legislation has not yet been finalised, the proposals as currently drafted are likely to mean that additional tax will have to be paid on the Company's net rental profits in the medium term. Therefore, the Board is exploring how shareholder value can be protected as far as practicable, including the possibility of joining the UK REIT regime.

Board Succession

Last year's annual report noted the Board's intention regarding a phased and orderly succession of its Directors. Therefore John Robertson, who has served on the Board since the launch of the Company in 2006, will retire in December 2017. Mr Robertson has been a major contributor to the Company over his tenure. His breadth and depth of knowledge, integrity and valuable insights will be very much missed. We wish him well on his retirement. Through its Nominations Committee, the Board has instigated a process to appoint a new Director to replace Mr John Robertson on his departure.

It is also my intention to stand down from the Board at the AGM in 2019. In due course a replacement Director will be appointed, with the Board as a whole deciding on a new Chairman nearer the time.

These changes, whilst continuing to refresh the Board, additionally respond to the Company's changing circumstances but without a sudden loss of invaluable knowledge and collective experience.

Investment Manager

The Board note the recent announcement relating to a proposed merger between Standard Life and Aberdeen Asset Management. It is too early to comment on the potential implications for the Company of the proposed merger and we will monitor the progress of the transaction closely.

Outlook

The political and therefore the economic outlook for 2017 is expected to be dominated by the Article 50 process for the UK to exit the European Union. Additionally, the possibility of changes in the political landscape elsewhere in the world is expected to command the headlines. Notwithstanding the strength of the UK economy since the EU referendum, and the Bank of England’s recent upgrade of its GDP growth forecast for 2017 to 2%, the same as that achieved in 2016, there will continue to be uncertainty at home and abroad. Against this background, commercial UK real estate has many significant benefits as an asset class, not least its ability to produce an attractive and sustainable income stream against a backdrop of limited speculative development, generally low supply and modest gearing levels compared to previous cycles. These should help reduce potential volatility and there also remains a significant gap between the attractive and stable yields currently being earned on real estate and the returns from other mainstream asset classes.

UKCPT is well placed not only in terms of the quality of its property portfolio but also its sound financial base. It has a strong exposure to the favoured industrial sector and limited exposure to potentially underperforming sectors, such as City of London offices, where only 2.2% of the portfolio (by capital value) is located. The Company offers an attractive and sustainable dividend yield, based on rental income from a portfolio with a strong tenant base as ranked by IPD. This is particularly relevant in an environment where interest rates are forecast to remain historically low, particularly in the UK, for sometime to come. The strong balance sheet and low gearing should help minimise volatility in an environment where property values are under pressure. It will also allow the Manager to invest further in the portfolio in order to extract latent value and to act quickly and flexibly should suitable opportunities arise.

I therefore believe that UKCPT is well positioned to meet the challenges ahead. The Board and the Manager together have an unerring focus on continuing to deliver value for shareholders.

Andrew Wilson

Chairman

19 April 2017

Strategic Overview

The purpose of the Strategic Overview is to provide shareholders with details of the Company's strategy and business model, as well as the principal risks and uncertainties faced by the Company.

Investment Strategy

The Company's investment strategy is set out in its investment objective and policy below.

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

Investment risks to the Group are managed by investing in a diversified portfolio of freehold and long leasehold UK commercial properties. The Group invests in income producing assets in four commercial property sectors: office, retail, industrial and leisure. The Group has not set any maximum geographic exposures within the UK nor any maximum weighting limits in the principal property sectors. No single property shall, however, exceed at the time of acquisition 15 per cent of the gross assets of the Group.

The Group is currently permitted to invest up to 15 per cent of its total assets in indirect property funds including in other listed investment companies. The Group is permitted to invest cash, held by it for working capital purposes and awaiting investment, in cash deposits, gilts and money market funds.

At an EGM of the Company on 28 April 2011 the shareholders of the Company approved a revised gearing policy of the Group amended to read as follows: "Gearing, calculated as borrowings as a percentage of the Group's gross assets, may not exceed 65 per cent. The Board intends that borrowings of the Group at the time of draw down will not exceed 25 per cent of the Total Assets of the Group. The Board receives recommendations on gearing levels from the Investment Manager and is responsible for setting the gearing range within which the Investment Manager may operate".

The Group's performance in meeting its objective is measured against key performance indicators as set out below. A review of the Group's returns during the year, the position of the Group at the end of the year, and the outlook for the coming year is contained in the Chairman's Statement and the Investment Manager Review.

Board

The Board of Directors is responsible for the overall stewardship of the Company, including investment and dividend policies, corporate strategy, corporate governance, and risk management. Biographical details of the Directors, all of whom are non- executive, can be found in the annual report and indicate their range of property, investment, commercial and professional experience. The Company has no executive Directors or employees.

Management of Assets and Shareholder Value

The Board has contractually delegated the management of the investment portfolio and other services to Standard Life Investments (Corporate Funds) Limited.

The Company invests in properties which the Investment Manager believes will generate a combination of long-term growth in income and capital for shareholders. Investment decisions are based on analysis of, amongst other things, prospects for future capital growth, sector and geographic prospects, tenant covenant strength, lease length and initial yield. In the year to 31 December 2016 the company generated operating cash flows of £49.4m (2015: £53.6m).

Investment risks are spread through investing in a range of geographical areas and sectors, and through letting properties to low risk tenants. At each Board meeting, the Board receives a detailed portfolio, financial, risk and shareholder presentation from the Investment Manager together with a comprehensive analysis of the performance of the portfolio during the reporting period.

The Board and the Investment Manager recognise the importance of managing the premium/discount of share price to net asset value in enhancing shareholder value. One aspect of this involves appropriate communication to gauge investor sentiment. The Investment Manager meets with current and potential new shareholders, and with stockbroking analysts who cover the investment company sector, on a regular basis. In addition, communication of quarterly portfolio information is provided through the Company's website, www.ukcpt.co.uk, and the Company also utilises a public relations agency to manage its profile among investors.

Borrowings

As at 31 December 2016 the Group had total borrowing facilities drawn of £250 million, representing a gross gearing level of 18.2% (net gearing of 11.4%) of the year end total assets with a blended fixed interest rate of 2.89% per annum.

Key Performance Indicators

The Company's benchmark is the MSCI Investment Property Databank (IPD) Monthly and Quarterly Funds. This benchmark incorporates all monthly and quarterly valued property funds and the Board believes this is the most appropriate measure to compare the performance of a quarterly valued property investment Company with a balanced portfolio.

The Board uses a number of performance measures to assess the Company's success in meeting its objectives. The key performance indicators are as follows:

·     Net asset value and share price total return against the IPD benchmark and other selected comparators.

·     Premium/Discount of share price to net asset value.

·     Dividend per share and dividend yield.

·     Ongoing Charges.

These indicators for the year ended 31 December 2016 are set out in the Performance Summary.

In addition the Board considers specific property KPIs such as void rates, rent collection levels and weighted average lease length on a regular basis.

Principal Risks and Risk Uncertainties

The Board has established a Risk Committee to ensure that proper consideration of risk is undertaken in all aspects of the Company's business on a regular basis. The Risk Committee meets quarterly, comprises all members of the Board and is chaired by John Robertson. The duties of the Risk Committee include the consideration of matters relating to the risk profile of the Company, including an assessment of risk appetite, risk tolerance and risk strategy, and the regular review of principal risks, seeking assurance that these risks are appropriately rated and ensuring that appropriate risk mitigation is in place. The Committee also reviews emerging risks.

The Board confirms that, through the operation of the Risk Committee, it frequently carries out a robust assessment of the principal risks facing the Company. These risks and how they are mitigated are set out below.

The Company'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 to the particular circumstances of the properties in which it is invested and their tenants. The Manager seeks to mitigate these risks through continual review of the portfolio utilising research produced by the Manager's in-house research team, detailed reports on the performance of the portfolio, setting of annual asset plans for each asset in the portfolio and also through asset management initiatives. All of the properties in the portfolio are insured, providing protection against risks to the properties and also protection in case of injury to third parties in relation to the properties.

The Board has also identified a number of key specific risks that are reviewed at each quarterly Risk Committee Meeting. These are as follows:

Company objectives

The Company and its objectives become unattractive to investors which may lead to a persistent discount and a continuation vote which may threaten the future solvency and liquidity of the Group.

This risk is mitigated through regular performance reviews of the Company's portfolio, contact with shareholders, a regular review of share price performance and the level of discount at which the shares trade to and regular meetings with the Company's broker to discuss these points and address any issues that arise.

The discount control policy of the Company provides that if the market price of the ordinary shares is more than 5 per cent below the published net asset value (as last calculated, adjusted downwards for the amount of any dividend declared by the Company upon the shares going ex-dividend) for a continuous period of 90 dealing days or more, following the second anniversary of the Company's most recent continuation vote in relation to the discount control policy, the Board will convene an EGM to consider an ordinary resolution for the continuation of the Company. This situation arose in the 90 day period up to 11 October 2016 and, as a result, the Board convened an EGM which was held on 9 November 2016 and, at which, the continuation of the Company was approved with 76% of shareholders voting and, of those who voted, 99.99% voting for the continuation of the Company.

Dividend cover

Dividend cover falls to a level whereby the Company becomes unattractive to investors, for example due to tenant failure or inability to let properties.

This risk is mitigated through regular review of forecast dividend cover, regular contact with shareholders and regular review of tenant mix, risk and profile. Due diligence work on potential tenants is undertaken before entering into new lease agreements and tenants are kept under constant review through regular contact and various reports both from managing agents and from the Manager's own reporting processes. Contingency plans are put in place at units that have tenants that are believed to be in financial trouble.

The potential introduction of new base erosion and profit shifting regulation ('BEPS') has been recognised by the Board as a potential future risk to dividend cover. This risk is considered in more detail in the taxation section below.

Company indebtedness

The Company is unable to service or repay its  debts, threatening the future solvency and liquidity of the Group.

This risk is mitigated by two factors. First of all the Investment Policy of the Company limits gearing to 25 per cent of total assets at the time of draw down. This low gearing limit means it is expected that, barring any unforeseen circumstances, the Group will have adequate assets to service and repay the debt if required. Secondly, the underlying assets themselves are mainly invested in a diversified, prime UK commercial property portfolio underpinned by a strong tenant base. This means that, even in a significant economic downturn, the Board is confident that the assets will still be of sufficient value and generate sufficient income to meet future liabilities.

Taxation

The tax structure of the Group is not optimised or is affected by legislative change, impacting performance and dividend cover.

The Group is currently structured in a tax efficient way which results in rental income the Group generates being offset by expenses and internal loan interest. The terms of the internal loan notes, namely interest rates and loan to value ratios, are crucial in preserving the tax efficiency of the Group. These loan notes were refinanced in September 2016 via a rigorous process to ensure they represent commercially available terms. The result of this loan note refinancing is that the Company is expected to generate future taxable profits. As the Company has over £50 million of unutilised tax losses and it is anticipated that these losses will now be utilised, the Company has recognised a deferred tax asset in the financial statements of £6.5 million. This asset will be written off over the time period in which the losses are utilised or are no longer able to be offset against future profits.

Linked to the above is the announcement in the Autumn Statement relating to base erosion and profit shifting ("BEPS"). The proposals in the Autumn Statement, if implemented, would mean the Group would only be able to deduct interest up to the amount payable on its external borrowings thereby significantly increasing the amount of tax that would be payable once the tax losses have been fully utilised. This would have a material impact on dividend cover. The Board is considering various methods to mitigate the impact of BEPS including a REIT conversion.

Macroeconomic environment

Uncertainty or change in the macroeconomic environment results in property becoming an undesirable asset class, causing a decline in property values.

This risk is managed through regular reporting from, and discussion with, the Manager and other advisors. Macroeconomic conditions form part of the decision making process for purchases and sales of properties and for sector allocation decisions.

Macroeconomic uncertainty increased during 2016, following the UK's decision to leave the EU and the US presidential election. The Board continues to monitor closely the effect of this on property values and also the impact of any resultant regulatory changes that may impact the Company.

Other risks faced by the Company include the following:

Economic - inflation or deflation, economic recessions and movements in interest rates could affect property valuations, and its bank borrowings.

Strategic - incorrect strategy, including sector and property allocation and use of gearing, could lead to poor returns for shareholders.

Regulatory - breach of regulatory rules could lead to suspension of the Company's London Stock Exchange Listing, financial penalties or a qualified audit report.

Management and control - changes that cause the management and control of the Company to be exercised in the United Kingdom could lead to the Company becoming liable to United Kingdom taxation on income and capital gains.

Financial - inadequate controls by the Investment 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.

Operational - failure of the Investment Manager's accounting systems or disruption to the Investment 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.

An additional operational risk is failure by the Investment Manager, or other third party provider, to implement appropriate policies and procedures to manage information and cyber security risk, leading to financial loss and business disruption for the Company.

The Board seeks to mitigate and manage these risks through the operation of the Risk Committee, policy setting and enforcement of contractual obligations. It also regularly monitors the investment environment and the management of the Company's property portfolio and levels of gearing, and applies the principles detailed in the UK Corporate Governance Code. Details of the Company's internal controls are described in more detail in the Annual Report.

Viability Statement

The Board considers viability as part of its ongoing programme of monitoring risk. The Board considers five years to be a reasonable time horizon over which to review the continuing viability of the Company, although it does have regard to viability over the longer term, in particular to key points outside this time frame, such as the due dates for the repayment of long-term debt.

The Board has considered the nature of the Company’s assets and liabilities and associated cash flows and has determined that five years is the maximum timescale over which the performance of the Company can be forecast with a material degree of accuracy and so is an appropriate period over which to consider the Company’s viability.

The Board has also carried out a robust assessment of the principal risks faced by the Company, as detailed in this Strategic Review, including periodic continuation votes. The main risks which the Board consider will affect the business model, future performance, solvency, and liquidity are ongoing discounts leading to continuation votes, tenant failure leading to a fall in dividend cover, company indebtedness, taxation and macroeconomic uncertainty. The Board takes any potential risks to the ongoing success of the Company, and its ability to perform, very seriously and works hard to ensure that risks are consistent with the Company’s risk appetite at all times.

In assessing the Company's viability, the Board has carried out thorough reviews of the following:

·    Detailed NAV, cash resources and income forecasts, prepared by the Company's Manager, for a five year 

       period under both normal and stressed conditions;

·     The Company's ability to pay its operational expenses, bank interest, tax and dividends over a five year period;

·     Future debt repayment dates and debt covenants, in particular those in relation to LTV and interest cover;

·     Demand for the Company's shares and levels of premium or discount at which the shares trade to NAV; and

·    The valuation and liquidity of the Company's property portfolio, the Manager's portfolio strategy for the 

              future and the market outlook.

Based on the results of the analysis outlined above, the Board has a reasonable expectation, assuming the periodic continuation vote in 2020 is passed, that the Company will be able to continue in operation and meet its liabilities as they fall due over the five year period of its assessment.

Sustainable Real Estate Investment Policy

The Investment Manager acquires, develops and manages properties on behalf of the Company. It is recognised that these activities have both direct and indirect environmental and social impacts. The Board has adopted the Investment Manager's own Sustainable Real Estate Investments Policy and associated Environmental Management Systems and is committed to environmental management in all phases of an asset's cycle - from acquisition through demolition, redevelopment and operational management to disposal. The focus is on energy conservation, mitigating greenhouse gases emissions, maximising waste recycling and water conservation. To facilitate this, the Manager works in partnership with contractors, suppliers, tenants and consultants to minimise those impacts, seeking continuous improvements in environmental performance and conducting regular reviews.

The Company was awarded a Green Star ranking from the Global Real Estate Sustainability Benchmark 2016. A Green Star is awarded to entities that perform well in both categories of the GRESB Assessment: Management & Policy and Implementation & Measurement. Our approach to monitoring and improving the sustainability performance of the assets held by the Company has been highly successful. Energy consumption and greenhouse gas emissions for managed assets in the Company reduced by 6% and 11% respectively in 2015/16 compared with the year before. The Company also achieved its zero waste to landfill target, recovering value from all waste produced.

In conjunction with these environmental principles the Company has a health and safety policy which demonstrates commitment to providing safe and secure buildings that promote a healthy working/ customer experience that supports a healthy lifestyle. The Company, through the Manager, manages and controls health and safety risks systematically as any other critical business activity using technologically advanced systems and environmentally protective materials and equipment. The aim is to achieve a health and safety performance the Company can be proud of and allow the Company to earn the confidence and trust of tenants, customers, employees, shareholders and society at large.

Bribery & Ethical Policy

It is the Company's Policy to prohibit and expressly forbid the offering, giving or receiving of a bribe in any circumstances. This includes those instances where it may be perceived that a payment, given or received, may be a bribe. The Company has adopted an Anti-Bribery and Corruption Policy to ensure robust compliance with The UK Bribery Act 2010. The Company has made relevant enquiries of its Manager and has received assurances that appropriate anti-bribery and corruption policies have been formulated and communicated to its employees. In addition the Board has adopted an ethical policy which highlights the need for ethical considerations to be considered in the acquisition and management of both new and existing properties.

Approval of Strategic Report

The Strategic Report of the Company comprises the following: Financial and Property Highlights, Performance Summary, Chairman's Statement, Strategic Overview, and Investment Manager Review. The Strategic Report was approved by the Board on 19 April 2017.

Andrew Wilson                                               Ken McCullagh

Director                                                               Director

Investment Manager Review

Over the 12 months ending December 2016, All Property recorded a 3.6% total return as measured by MSCI/IPD's Balanced Monthly & Quarterly Index. Compared to the 12.7% recorded for 2015 and, following a number of years of strong growth, this reduction was generally anticipated, albeit perhaps accelerated as a result of the EU Referendum result. This lower return represents a transition from a capital growth cycle to one where income dominates - a move away from strong London and South East office returns to a market where industrial stock and long-dated leases are king.

Investment volumes over the year, though down from a £70 billion peak in 2015, remained healthy at £50 billion; it was interesting to see this split more or less evenly between the first and second halves of the year, either side of the EU Referendum. Overseas investment boosted the total, accounting for 43%, with many of those investors attracted by both cheaper sterling and the relative safe haven status of the UK.

Despite the UK government unexpectedly raising Stamp Duty Land Tax in the March 2016 Budget, effectively reducing commercial values by 1%, the first half of the year saw capital maintained - the outcome of the EU Referendum on 23 June was too close to the half year valuation point for the Industry's valuers to gauge any impact and so their 30 June 2016 figures were caveated with an "uncertainty" clause. The market then fell in the third quarter by 2.5%, valuations largely remaining caveated for uncertainty, only to recover by 1.1% in the final quarter. Overall there was a 1.2% market capital decline in 2016, a year in which the income element of total return remained stable at 4.9%. As for the equity markets, the FTSE All-Share and the FTSE 100 total returns were 16.8% and 19.0% respectively over the calendar year whilst listed real estate equities produced a negative total return of 8.5%.

Review by Sector

Retail - polarised

Retail remained the laggard of the sectors, recording a total return of 1.6% in the 12 months to the end of December 2016. Retail capital growth continued to be weak with values falling by 3.5% over the year and, whilst rents were fairly stable, retail rental growth continued to be considerably weaker than the other two major sectors at 0.5%. This was well below office rental growth at 3.2% and industrial at 3.9%.

Christmas trading was broadly reasonable with most sectors recording an increase in sales compared to last year. There were increases in clothing and footwear (albeit from subdued levels previously), personal goods, food and beverage and leisure and department stores. In contrast, household goods sales were down on the previous year. However, despite the improvement in the value of sales (£ taken), the quantity of goods bought fell which could be down to price increases feeding through via the weakness of sterling and also less discounting in the sector. Consumer confidence remains at relatively low levels and the forward looking indicators for consumer spending, together with actual figures for the three months to the end of February 2017 showing non-food sales at a five year low, suggest that retailers face a more challenging environment in the year ahead. The pressures include higher import prices impacting margins and more forceful cost pressures from the National Living Wage, increased business rates, particularly in London and parts of the South East, higher inflation and, potentially, interest rate increases.

Office - Investment activity rebounds in Central London

In the UK office market, Central London offices experienced the most noticeable slowdown in 2016 compared to the double digit growth the sector delivered in the previous year. Total office returns of 2.4% were recorded over 2016 reflecting pessimistic sentiment following the Referendum vote to leave the EU on top of forecasts which, in the first half of the year, were already switching off any yield price improvement. Through the year, overall, office capital values reduced by 1.6%. Inner London recorded the highest rental growth at 5.2% followed by the South West of the UK and the West End. Yorkshire & Humberside and Scotland witnessed the lowest performance across office segments with the city of Aberdeen a key element behind Scotland's weaker office performance as a result of its uncertain and dominant oil industry.

The Referendum uncertainty also dampened occupier activity in the office markets, particularly in terms of the outlook for Central London with announcements, and much media speculation, that some of the large investment bank occupiers may start to move a proportion of their investment bankers outside the UK. Generally across Central London and the South East office markets, occupiers have been cautious lately and hence take-up has been below the long term average. Rental incentives have also reportedly started to increase to entice occupiers.

Despite this slowdown in growth, office investment accounted for 43% of overall investment activity in 2016. Central London, where activity rebounded in the final quarter from the low levels witnessed in the third quarter, had the largest share of the overall investment pie at 27% (the same level as 2015). Overseas investors, the majority from the US, Hong Kong, China, Canada and Singapore, continued to account for a significant share of Central London activity in 2016 at close to 70% of all investment in the capital. Office investment outside Central London accounted for 16% of overall activity (up slightly on the 14% share in 2015).

Industrial - Strong returns in the Industrial sector

The industrial sector continues to demonstrate its strength in the current environment. According to the MSCI/IPD Balanced Monthly & Quarterly Index, the industrial sector delivered a total return of 7.3% with capital values having risen by 2.0% on a 12 month basis to the end of December 2016. In comparison, values for assets in the retail and office sectors fell by 3.5% and 1.6% over the same time frame. Industrial rents rose by 3.9% and significantly outperformed all property as a whole.

The sector fundamentals continue to look attractive with demand, driven by retailers' stronger online sales growth

requiring more distribution space, having reduced supply earlier than expected, leading to higher rental growth

expectations. As building costs increase, supply should be kept under control which will act to balance take-up in the year ahead.  For the wider industrial sector, the pace of manufacturing and industrial activity has held up well due to the weaker pound translating into significantly more letting activity and government incentives to support the sector in the event of the UK leaving the EU.

Portfolio Performance

As identified in our review of the market, real estate returns were lower for 2016 than in recent years. Against this backdrop it is pleasing to report that the Company's real estate portfolio outperformed its IPD benchmark, generating a total return of 4.4% for the year against 3.6% for its benchmark. An income return of 4.8% countered a decline in capital growth of 0.3%. At 31 December 2016 the portfolio was externally valued by CBRE at £1.28 billion.

The dominant driver of performance was the Company's South East industrial portfolio - both from the tailwind impact of being intentionally overweight in the sector, by 10.8%, following the 2015 repositioning exercise, and from out-performance from the portfolio's specific properties against other industrials in the benchmark. Profit from the Company's two office sales also boosted performance whilst a dampener on what would otherwise have been far stronger outperformance came from the Company's shopping centre portfolio which, particularly at Swindon following the loss of the Company's only BHS store, created a material drag.

Projecting forward to a period of slowing capital growth across the whole market, the more prime nature of the Company's portfolio should stand it in good stead to deliver sustainable income, better protect capital, and, with

cash resources available, acquire new stock fit for the economic environment.

The table below sets out the components of total return of the Company and of the benchmark in each sector for the year to 31 December 2016:

Source: IPD, Standard Life Investments

Industrial

In common with the wider market, the Industrial sector was the Company's strongest performer in 2016, boosted by a series of positive asset management leasing initiatives and profit from the sale of Dolphin House, situated on its Dolphin Industrial Estate in Sunbury, being allocated to the industrial return.

The Company has a good mix of prime UK "big box" distribution warehouses and multi-let industrial estates, the latter focused on the four points of the compass in and around London. This dynamic portfolio delivered a total sector return of 10.8%, outperforming the benchmark of 7.3% for the year. In the final quarter of the year the 160,000 sq ft industrial unit formerly occupied by B&Q at Ventura Park, Radlett (north M25), fell vacant, increasing overall portfolio vacancy to 3.7%, still well below the benchmark vacancy rate of 6.9%. Agents report good interest from distribution operators looking to lease the building.

Office

The Company's well located portfolio of office investments provided a total return of 5.1% against the benchmark of 2.4% for 2016. City of London exposure, of most concern from potential Brexit fallout, was limited to one asset. Whilst this asset accounted for only around 2% of the Company's whole portfolio and it outperformed its IPD City

of London office benchmark, assisted by leases agreed during the period increasing several rental levels in the holding from £31 psf to circa £53  psf, it remained an overall detractor. In contrast the Company's West End of London office assets, namely Craven House in Soho, 13 and 15 Great Marlborough Street, and 6 Arlington Street in St James's, significantly outperformed their IPD benchmark at 2.6%, aided by profit on the Q2 sale of 6 Arlington Street. The regional office holdings in Bristol, Newcastle and Birmingham also helped drive performance.

Retail

The IPD retail sector, with the exception of Central London, underperformed the market in 2016. The Company has a marginal underweight retail position compared to its benchmark but its exposure is still significant at 37% of total portfolio value. Overall total return for the Company's retail stock was -1.2% against 1.6% for the benchmark.

It is worth delving a little deeper into the generators of this performance and highlighting three very different sub-sectors, or types, of stock held, particularly as when the shopping centres in Swindon and Shrewsbury are excluded from the calculations the overall retail performance in 2016 increases demonstrably from -1.2% to +4.2%.

The Company's largest exposure, 59% of the retail total, is to a set of well let principally prime retail parks most of which are classified as "Bulky" - so called as town planners allocate these to the sale of bulky retail goods; many commentators feel these bulky parks are more resilient to competition from online retailing compared to their "Fashion" retail park peers. Collectively, these provided the Company with a healthy 5.3% income return.

The second sub-sector, accounting for 14% of our retail exposure, is that of regional shop units, where the Company has a small prime portfolio of assets in good locations in Manchester, Edinburgh and Exeter. Through positive asset management action in these prime locations this sub-sector delivered an excellent total return of 16.0% for the Company compared to 1.4% for the benchmark.

The third sub-sector is shopping centres, where the Company's holdings in Swindon and Shrewsbury account for 20% of its retail exposure. Whilst this is only 7% of the total portfolio the value of these assets dropped by 20% through the year, with the largest impact felt at Swindon mainly due to the loss of BHS as an anchor tenant at The Parade Shopping Centre.

The ongoing short term strategy for these shopping centres is to maintain and, where possible, improve the net operating income at each centre.

In Shrewsbury, at the Charles Darwin Centre, work on the refurbishment of the main mall has recently completed, transforming the appeal of this area to shoppers and retailers. This, together with the creation of a new anchor unit for Primark, also recently completed and handed over for them to carry out their shop fit, will, aside from improving net operating income in its own right, significantly improve the attractiveness of this shopping centre for other tenants. We expect this will create a snowball of interest, further improving net operating income in what is the Company's largest current void. Already, new lettings to Smiggle, New Look Menswear and Costa Coffee can be directly attributed to the imminent introduction of Primark and, with their opening in summer 2017, we are analysing the wider strategic options for this asset.

Leisure/Other

The Company's leisure investments - Cineworld, Glasgow, The Rotunda, Kingston-upon-Thames and Regent Circus, Swindon experienced mixed fortunes in 2016. The cinema in Glasgow outperformed the benchmark, primarily as a result of the value created by extending Cineworld's lease length from 20 to 35 years.

This strong result was, however, offset by some stubborn vacancies amongst the food units and the out of favour supermarket component in Swindon, together with the performance of the anchor Odeon cinema at Kingston-upon-Thames where, despite continuing to deliver a healthy yield from a well located and popular asset, the rent is not expected to grow. Collectively during the year the Company's leisure assets returned 3.9% against the benchmark of 7.2%.

Investment Activity

Sales

In line with the Company's strategy to sell assets expected to underperform in the short to medium term or where non-accretive capital expenditure requirement has the potential to undermine future performance, the Company sold its mixed-use West End asset, 6 Arlington Street, London, W1 and Dolphin House, an office in Sunbury-on-Thames, for a combined price of £45.6 million prior to the UK Referendum on EU membership, representing an aggregate 14% premium to the 31 March 2016 market value.

Sales momentum continued into early January 2017 when the Company took advantage of a special opportunity to sell one of its West End Soho office properties, 13 Great Marlborough Street, to the owner of the adjoining property. The disposal price of £30.5 million, ahead of the year end valuation, equated to a yield of 3.3%. The building is wholly leased to Sony and, with less than two years remaining, the sale removed short term letting risk and the need for potentially significant capital expenditure.

Purchases

No purchases were made during the year. However, shortly after the year end in early February, the Company completed the forward purchase of a pre-let 258,370 sq ft distribution warehouse development reflecting a yield on capital of 5.8%. Located beside Burton upon Trent, equidistant between Nottingham and Birmingham on the  A38 dual carriageway between the M1 and M6 motorways, from which 87% of the UK population can be accessed within a legally continuous 4.5 hour HGV drive time, the tenant, Palletforce Limited, has committed to a 15 year lease at £5.58 psf, or £1.4 million per annum. The lease includes RPI inflation linked rent increases of between 1% and 3% per annum, compounded and payable 5 yearly. Having purchased the land, the balance of the total consideration of circa £22.2 million is payable on completion of the asset, scheduled for summer 2017 - a purchase in line with UKCPT's strategy to focus its portfolio on assets that deliver a higher and sustainable income.

The acquisition is in line with UKCPT's strategy to focus its portfolio on assets that deliver a higher and sustainable income, and it is being funded by the proceeds from the £30.5 million sale of 13 Great Marlborough Street, at a 3.3% net initial yield, as mentioned above.

Asset Management Activity

During the year the Company continued its drive  to strengthen income streams, extend lease lengths and add value to the portfolio. Over £6.5 million of annual income was generated after rent free periods and incentives through 44 new leases and 25 lease renewals.

It was good to witness the majority of the seven open market rent reviews within the portfolio generating rental increases this year. The most notable uplift took place at the Wembley distribution facility, Hannah Close, Neasden, let to Marks & Spencer where the rent jumped by 18% to £2.1 million per annum. Overall rent reviews achieved approximately 1% in excess of expected rental value with an increase to rental income of over £527,000 per annum.

There were nine instances of stepped or fixed increases in rent across the portfolio during the year, all of which helped to improve rents by 33%, adding over £435,000 per annum.

With uncertainty in the economy it was pleasing to see the Company's continuing low void position at 31 December 2016 of 3.7% (of ERV), comfortably below the IPD benchmark void rate of 6.9%.

The Company is pleased to report that on average 99% of rent was collected within 21 days of each quarterly payment date during 2016 with a modest 0.4% of annual rent (£274,287) written off as bad debt for the year.

At Junction 27, Leeds, Dean House, trading as Betta Living, was placed into Administration in November 2016. However, following this tenant failure, new occupier tension emerged over this prime retail park unit which culminated in Carpetright agreeing an Assignment of the Dean House lease, paying the Administrator a premium and an increased rent to the Company.

As steady progress is made towards the delivery of Primark in Shrewsbury (handed over to Primark in early March 2017 with the opening scheduled for summer 2017), three lease renewals completed at the Charles Darwin Shopping Centre, with Claire's, Grape Tree and Body Shop securing £136,500 per annum of rental income, 11% ahead of ERV. Fashion retailer, Yours, also relocated and upsized in the Centre to facilitate the introduction of Costa Coffee.

In Edinburgh, following the successful letting to Joules in the first half of the year (£320,000 per annum for 10 years) and completion of the lease to Clydesdale Bank Plc (£750,000 per annum for 20 years) in October, contracts were exchanged with Intergen UK Ltd at 81 George Street. Once refurbishment works to the second floor office suite have completed, £325,000 per annum will be secured on a new 10 year lease and Intergen will relocate from the third floor, releasing this for refurbishment in a City starved of prime Grade A city centre office stock. This ongoing active rejuvenation of the property has increased its value, added income and improved the average weighted unexpired lease length.

Just off Carnaby Street at Craven House, Soho, the company renewed the lease with the building's occupier, Molinare TV & Film Ltd, the postproduction supplier of drama and feature films including Sherlock and Netflix's The Crown. The new rent of £1,027,250 per annum is an increase of 37% on the previous rent passing.

Within the Retail Warehouse sector at St George's Retail Park, Leicester, lease renewals took place with Pets at Home and Aldi securing £487,000 per annum (in line with ERV), on new long term leases of 10 and 15 years, respectively. As part of the transaction the units were 'right-sized' for the occupiers and re-clad.

In addition, contracts exchanged with Wren Kitchens and Tapi Carpets to occupy 20,000 sq ft of a new 25,000 sq ft development to be built at the reconfigured entrance to the Retail Park. The reconfigured works will assist access and egress to the park and when the new 10 year leases complete they will generate £489,500 per annum after lease incentives. Following the year end, in March, the final smaller unit of 5,000 sq ft has been pre-let to Laura Ashley on a term of 10 years adding a further £110,000 annual rent.

At the start of the year we let the one vacant floor at Eldon House in the City of London to Proclinical, a life sciences recruitment firm, at an annual rent of £266,000 per annum after lease incentives. The letting secured £52 psf per annum, well above the average rental level of £31 psf per annum payable at the time of acquisition. We also regeared Triglyph Property Consultants' lease, increasing rent from £41,000 per annum to £81,000 per annum, in line with market rent.

In the second part of the year we agreed a 10 year term certain with an existing tenant Stace LLP at an improved level of rent £340,369 per annum, including additional floor space, up from the £189,898 per annum payable under the original lease. Again, this transaction secured £53 psf per annum, up from £32.50 psf per annum payable at the time of acquisition in late 2015.

Two new lettings completed with International Logistic Group (ILG) at Gatwick Gate, Crawley, generating £360,375 per annum, which was 9% ahead of ERV have added value and removed a short term lease expiry spike in the property.

In the regions, a new eight year lease of the entire office at 1 Rivergate, Bristol, was signed with the current sub-tenant, OVO Energy Ltd, which will commence in April 2018 on expiry of the current lease to BT. An increased rent of £1,720,000 per annum will be generated, up from the previous rent of £1,540,000 per annum.

Our focus on extending lease length and improving income was delivered in Glasgow with the extension of Cineworld's lease from 20 years to an exceptionally long 35 years on its flagship cinema and also with the introduction of 1.5% per annum fixed rental increases, compounded and captured within the lease every five years. The rent passing was also increased from £1,460,000 per annum to £1,545,000 per annum.

A 10 year lease renewal took place with Turley Associates Ltd within 9 Colmore Row, a regional office building located next to Snow Hill railway station in Birmingham, at £105,150 per annum, an increase of 15% over the previous rent passing.

Market Outlook

Despite the uncertainty associated with the political wrangling, UK real estate continues to provide an elevated yield compared to other assets. Furthermore, lending to the sector is at a lower level than the Financial Crisis of 2007/08 and liquidity remains reasonable. In an environment where the economic fundamentals are expected to soften further and with uncertainty remaining high, we expect lower returns from property than has been the case over the last few years.

The steady secure income component generated by the asset class is likely to be the key driver of returns. From a sector perspective, we expect Central London office s to be the most negatively impacted sector in the near term, given the linkages to European markets via cross border trading. We expect industrial, and the best retail assets, to be comparatively resilient with potentially some growth, while long income assets should provide most resilience and our strategy is therefore aligned with this outlook.

Portfolio Strategy

Your Company aims to deliver an attractive level of income, together with the potential for capital and income growth, through investment in a diversified UK commercial property portfolio. Our strategy to achieve this combines investment, divestment, and asset management, including disciplined investment in existing stock where accretive.

UKCPT is in the fortunate position, having planned and executed a number of sales throughout the past year, of having a generous cash position of £75 million (31 December 2016) available for investment into opportunities which fit the Company's investment policy. This cash available for investment is after allowing for dividend and capital expenditure commitments and, if opportunities arise, the Company has a further £50 million of capital available to be drawn down tactically from its revolving credit facility.

When looking at opportunities to deploy these resources, we have increased our focus on long- term secure income, often found in alternative sectors, which we will look to access provided that they have the potential to be accretive to recurring dividend cover.

Importantly we are also open to exploiting pricing opportunity in the market, across most sectors, with a large team and the resource to react quickly. As the intricacies of the UK leaving the EU unfold, we expect there to be more buying opportunities as the property market waxes and wanes.

Turning to asset management it is noticeable, when compared with the benchmark, that the Company's portfolio has a low vacancy rate (3.7%). Whilst we are very pleased with the continuance of this low rate, we aim to augment net operating income through a focused strategy on asset management and leasing activity across the portfolio whilst seeking to protect shareholders from the risk of new vacancy by negotiating lease extensions with existing tenants.

As the property market seems firmly positioned in a period where the fundamental attributes of property reassert themselves, where income and income growth will drive returns, we believe the Company is well positioned to meet its objective of providing shareholders with an attractive level of income, together with the potential for capital and income growth from investment in a diversified portfolio of UK commercial property.

Will Fulton

Fund Manager

Standard Life Investments

19 April 2017

Directors' Responsibility Statement

The Directors are responsible for preparing the Annual Report and the Group financial statements in accordance with applicable Guernsey law and those International Financial Reporting Standards ("IFRS") as have been adopted by the European Union. They are also responsible for ensuring that the Annual Report includes information required by the Rules of the UK Listing Authority.

The Directors are required to prepare Group financial statements for each financial year which give a true and fair view of the financial position of the Group and the financial performance and cash flows of the Group for that period. In preparing those Group financial statements the Directors are required to:

·     select suitable accounting policies in accordance with IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors and then apply them consistently;

·     present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;

·     provide additional disclosures when compliance with the specific requirements in IFRS is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Group's financial position and financial performance;

·     state that the Group has complied with IFRS, subject to any material departures disclosed and explained in the financial statements; and

·     prepare the financial statements on a going concern basis unless it is inappropriate to presume that the Group will continue in business.

The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Group and enable them to ensure that the Group financial statements comply with the Companies (Guernsey) Law 2008. They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The Directors are also responsible for ensuring that the Group complies with the provisions of the Listing Rules and the Disclosure Rules and Transparency Rules of the UK Listing Authority which, with regard to corporate governance, require the Group to disclose how it has applied the principles, and complied with the provisions, of the UK Corporate Governance Code applicable to the Group.

We confirm that to the best of our knowledge:

• the Group financial statements, prepared in accordance with the IFRS, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group and comply with the Companies Law;
• that in the opinion of the Board, the Annual Report and Accounts taken as a whole, is fair, balanced and understandable and it provides the information necessary to assess the Group’s position, performance, business model and strategy; and
• the Strategic Report includes a fair review of the progression and performance of the business and the position of the Group together with a description of the principal risks and uncertainties that it faces.

On behalf of the Board

Andrew Wilson

Director

19 April 2017

Consolidated Statement of Comprehensive Income

For the year ended 31 december 2016

All of the profit and total comprehensive income for the year is attributable to the owners of the Company. All items in the above statement derive from continuing operations. The accompanying notes are an integral part of this statement. Additional EPRA performance measures are contained later within EPRA Performance Measures.