To:                   RNS
Date:                21 September 2017
From:               F&C UK Real Estate Investments Limited
LEI:                  2138001XRCB89W6XTR23

(Classified Regulated Information, under DTR Annex 1 section 1.1)

·     Share price total return* of 26.8 per cent for the year

·     Portfolio ungeared total return* of 6.6 per cent for the year

·     NAV total return* of 6.1 per cent for the year

·     Dividend of 5.0 pence per share for the year, giving a yield* of 4.7 per cent on the year-end share price

·     Dividend cover* increased to 94.4 per cent for the year

* See Alternative Performance Measures

Chairman’s Statement

The Group’s net asset value (‘NAV’) total return* for the year was 6.1 per cent with a NAV per share as at 30 June 2017 of 100.1 pence, up from 99.2 pence per share at the prior year-end.

The share price total return* for the year was 26.8 per cent with the shares trading at 106.8 pence per share at the year-end, a premium* of 6.7 per cent to the NAV. The increase in the share price for the year can primarily be explained by the fact that the share price at the previous year-end was trading at a 10.8 per cent discount, reflecting the initial fall experienced following the result of the EU referendum on 23 June 2016. Despite the move to a discount, the strength of the closed-ended sector was demonstrated as many open-ended funds were forced into short term selling of property to finance redemptions. In many cases, this was followed by the suspension of redemptions until the market stabilised. The share price rebounded relatively quickly following the initial shock and has been trading at a gradually increasing premium over the year.

Property Market and Portfolio

The UK commercial market delivered a total return of 5.6 per cent as measured by the MSCI Investment Property Databank (‘IPD’) UK Quarterly Index for all assets in the year to 30 June 2017. The first quarter of the year witnessed a price correction following the EU Referendum result, however, the subsequent three quarters saw a re-balancing and by the year-end, capital values had recorded a modest 0.9 per cent annual growth. Performance was driven by strength in investment demand for industrial property and alternative assets such as student accommodation, healthcare and self-storage, coupled with overseas buying of London property. All the standard segments of the IPD Index delivered positive benchmark total returns for the year.

In the year to 30 June 2017, All Property performance was driven by a 4.7 per cent income return. Open market rental value growth was 1.9 per cent for the year, led by industrials, but the structural weakness of regional retail persisted with rental growth for this sector negative. After a fall in investment volumes around the time of the EU Referendum, activity has seen some recovery, driven by overseas buyers and local authorities.

The Group’s property portfolio produced an ungeared return* of 6.6 per cent over the year to June, outperforming the IPD Quarterly Index. Performance was driven primarily by an above market income return of 5.9 per cent. Unsurprisingly given the positive sentiment for the Industrial sector over the year, the portfolio’s industrial and distribution assets, being exclusively located within the South East, were again the key contributors to performance, producing a total return comfortably in excess of both the IPD UK Quarterly Index and the market average in the sector for the period. Encouragingly, the portfolio’s retail assets also outperformed their peers, though at a lower overall level of return. The portfolio’s office assets offered poorer performance over the period and although the Central London assets performed broadly in line with their peers, they contributed negatively at the portfolio level.

The portfolio offers an above market income yield, a predominantly fully let portfolio with a void rate of 5.6 per cent and contractual income with an average weighted lease term of approximately 7 years. As demonstrated by the present portfolio composition, the overall strategy is to retain an overweight position to Industrial and Warehouse property.

The Company continues its cautious approach to the deployment of capital, with the primary focus having been on the disposal of non core and secondary assets at a time of low yields and discernible structural change in certain retail submarkets. Nevertheless, a number of buying opportunities are currently being actively considered with the Company’s favourable cash position allowing for a planned and cautious approach to acquisitions.

Borrowings and Refinancing

The Group currently has in place a secured £90 million non-amortising term loan facility with Canada Life Investments, repayable in November 2026 and a £20 million 5-year revolving credit facility agreement with Barclays Bank plc, £16 million of which was drawn down at the year-end. This facility is available until November 2020.

The Group’s gearing* level, net of cash, represented 28.3 per cent of investment properties at 30 June 2017. The weighted average interest rate (including amortisation of refinancing costs) on the Group’s total current borrowings was 3.2 per cent. The Company continues to maintain a prudent attitude to gearing.

The Group had £16.6 million of cash available and an undrawn facility of £4 million at 30 June 2017.

Dividends and Dividend Cover

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 29 September 2017. This gives a total dividend for the year ended 30 June 2017 of 5.0 pence per share, a yield* of 4.7 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.

The level of dividend cover* for the year was 94.4 per cent, compared to 91.7 per cent for the previous year. The improvement in the level of cover can primarily be attributed to a reduction in the finance costs following the refinancing exercise in November 2015.

Share Issues

The Group has experienced continued market demand for its shares and issued 2 million Ordinary Shares early in 2017 at a premium to the published net asset value at the time of each issuance, raising proceeds of £2.0 million. There continues to be demand for the shares, however, the Company currently has a significant amount of cash and further share issuances will only be made if it is considered to be in the interest of shareholders.

At the year-end, there were 240,705,539 Ordinary Shares in issue.

Responsible Property Investment

The Company has taken measures to strengthen its approach to responsible property investment. An outline of the main actions is included in the Manager’s Review.

Outlook

The outlook continues to be dominated by Brexit, with considerable uncertainty still remaining about the likely outcome of negotiations and the nature of the exit process. The UK general election occurred towards the end of the reporting period and, although the property market appears to have been little affected at the headline level, the result has added to the uncertainty, particularly surrounding business investment. Economic growth has disappointed recently and the extent to which fiscal austerity will be pursued is also unclear. Monetary policy was eased further in the wake of the Brexit vote but the timing and extent of policy normalisation will be a factor affecting the property market outlook.

In an environment of relatively lower growth and increased economic and political uncertainty, property’s income return should prove an attractive defensive characteristic to investors. The Board believes that the existing portfolio remains well placed to continue to deliver on the Company objective.

Vikram Lall
Chairman

* See Alternative Performance Measures

Manager’s Review

Property Market

The UK commercial property market delivered a total return of 5.6 per cent in the year to June 2017, as measured by the MSCI Investment Property Databank (“IPD”) all Quarterly and Monthly Funds Index for all-property. Performance was driven by an annual income return of 4.7 per cent, with capital values rising by 0.9 per cent.

The first months of the review period witnessed a fall in capital values as the market absorbed the shock of the EU referendum result. Property has since seen a re-balancing with capital value growth returning to recover the ground lost during the early months of the financial year. The income return was largely unaffected during this period.

The UK economy has continued to see growth, although the pace slackened in the second half of the period. Inflation has moved higher, in part reflecting the depreciation of sterling in the aftermath of the vote. Monetary policy was eased in August 2016 in response to the referendum result, with the bank rate reduced to 0.25 per cent. Gilt yields finished the reporting year higher than at the start, but with ten-year yields at 1.28 per cent, they remain at very low levels by historic standards. The Brexit decision has dominated the political sphere over the past year, with Article 50 invoked in March 2017 and negotiations commencing in June 2017. The Government called a snap election in June which failed to produce an overall majority and has widened the debate not just on Brexit but on fiscal policy and the UK’s austerity programme generally.

Property investment activity suffered during the immediate aftermath of the vote but has since recovered, helped by strong investment flows from overseas and also by purchases from local authorities taking advantage of low borrowing costs. Although there were some price reductions, most notably from the open ended vehicles that attempted to satisfy redemptions, these were on the whole fairly minor and available for only a brief window. Most deals proceeded and there was no flight of capital from the UK. Institutions were net sellers of property, but this was primarily in the first half of the reporting period. The open-ended retail funds struggled with liquidity issues in the immediate aftermath of the vote, but all have since re-opened and modest net inflows resumed towards the end of the reporting period. The year to June 2017 saw £52 billion invested in property versus £59 billion in the previous year. Investment in offices and town centre retail assets was lower but the year saw growth in investment in industrials and logistics, and alternative assets. The banks have remained cautious in their new lending to property, both for standing investments and development.

The year saw considerable equity invested in the market, but investors were generally cautious and favouring long-term secure income. There was some yield compression evident, particularly in the industrial market and some specialist markets such as healthcare and leisure, but shopping centres and retail parks, especially at the secondary end, fell from favour, with yields softening.

Total return performance by segment saw some changes following the Brexit vote. Industrials and distribution property was seen as being relatively immune from Brexit and beneficiaries of both technological change and a structural change in retailing. As a result, they pulled further ahead of offices and retail to deliver a total return of 12.0 per cent. Offices delivered a 3.4 per cent return. The gap between London offices and the regions narrowed, with Rest of UK offices overtaking the City on an annual basis in terms of total returns. For retail, total returns were 3.3 per cent. As in previous years, a strong Central London shops market boosted the South East numbers but standard retail elsewhere under-performed the all-property average and shopping centres and retail warehousing were particularly weak.

Open market rental growth was 1.9 per cent at the all-property level, representing a deceleration from the pace seen in the previous reporting period. At the market level, although retail property and regional offices recorded some moderation in rental growth, the main factor was a sharp deterioration in rental growth for Central London offices, although it did remain positive. In contrast, industrials saw some improvement in rental growth year on year and were the major driver behind rental growth performance.

Gross income growth for the year to June 2017 was 2.7 per cent, with offices and alternatives performing well but all the main sectors seeing positive growth. This compares with 3.0 per cent in the previous year.

The property market appears to have stabilised following the referendum result but considerable uncertainty remains and both investors and occupiers are cautious. The yield premium against gilts remains attractive and an all-property annual income return of 4.7 per cent may look appealing when compared against other assets.

Portfolio

The Company’s property portfolio produced an ungeared total return* of 6.6 per cent over the year to June 2017 versus the IPD Quarterly index of 5.6 per cent. This outperformance was driven primarily by an income return* of 5.9 per cent, which was an improvement on 2016, and some way above the income return derived from the IPD Quarterly Index of 4.7 per cent. Capital growth was marginally below that of the Quarterly Index at 0.6 per cent. Portfolio turnover and thereby the burden of associated transaction costs were low, as were non recoverable costs linked to property voids, which is key in a relatively low returns environment. Over the three years to June 2017 the portfolio has delivered an ungeared total return* of 10.0 per cent per annum.

At 30 June 2017 the value of the portfolio was £335.4 million. No assets were acquired over the year apart from some additional car parking space at Lochside Way, Edinburgh Park. This reflects 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 of an appropriate quality to satisfy the Company objective. On the other hand a sales programme has been undertaken to dispose of the secondary and non-core holdings to take advantage of investor appetite. A majority of these assets have been from the high street retail sector with a further three assets sold over the year at net premium to valuation.

At the sector level the portfolio’s industrial and distribution warehouse assets continued their run of outperformance, producing a total return* of 16.5 per cent, in excess of both the IPD Quarterly Index and the sector average for the period. This is the fourth year in a row that industrial holdings have led the portfolio’s returns, being primarily located in the core South East where limited supply and good levels of demand have driven performance. The portfolio’s Retail sector outperformed its peer group over the year but Offices again underperformed, despite a generous yield advantage, on account of below market capital growth.

Unsurprisingly the majority of the best performing assets were in the industrial and logistics sector, driven by a combination of both capital and income growth. Some of the addresses are familiar from last year, Lakeside Road, Colnbrook; Hemel Gateway, Hemel Hempstead and the two assets in Eastleigh, Hampshire all featuring in the top 5 performing assets. Chippenham Drive, Milton Keynes was the best performing asset over the year by weighted contribution following the refurbishment in 2016 that came in below budget, and the successful onward letting at, what was then, a new benchmark level of rent for refurbished stock in the locality. Following the expiration of the tenant’s rent free incentive the property is now income producing and offers a meaningful contribution to the dividend.

The portfolio’s overweight position to retail warehousing acted as a brake on performance over the year, despite the sector experiencing an improvement in sentiment towards the end of the period as investors saw relative value against an earlier pick up in pricing elsewhere. Pleasingly the portfolio’s assets within this sub-sector outperformed their peers over the year, a position mirrored by the portfolio’s South East retail holdings.

Challenges remain, in particular within the underperforming Offices sector. Despite a substantial yield advantage, negative capital growth associated with shorter unexpired lease terms, and risks associated with near term capital expenditure has weighed more heavily on some of the Company’s assets than for the market as a whole. While this has led to poorer performance over recent quarters, this should provide a more sustainable base from which to approach lease events and asset management projects in order to enhance value. As an example of the work being undertaken in this regard since the period end, the lease on the office property at 15 London Road, Redhill has been re-geared to the Department for Work & Pensions to extend the term for a further five years at no capital cost. This has de-risked the asset in the short term and extended the income due without interruption.

Following on from a sustained period of outperformance the portfolio’s London assets at 24 Haymarket and 14 Berkeley Street, in Central London, are now performing below the overall quarterly return for the IPD Index, and therefore someway below the overall portfolio return. The lower yielding nature of the assets was supported by rental growth in the period to mid-2016 but this has since moderated somewhat. Both assets are multi-let, mixed use properties which offer underlying reversion in the rents particularly on the retail element. Given the point in the London capital cycle, the key to their success moving forward will be the ability to capture this improvement in rents receivable through either active management (Berkeley Street) or the rent review mechanism (24 Haymarket). The portfolio retains a relatively low weighting to central London of less than 10 per cent of assets.

Despite the volatility in capital values triggered by the vote to leave the European Union and the corresponding market uncertainty created by well publicised redemptions from the open ended funds, the story remains very much about income, with real estate’s contractually backed rental income set to be the key driver of returns moving forward. The portfolio’s above market yield, low void rate of 5.6 per cent and weighted unexpired lease term of c.7 years, secured primarily to low risk corporate tenants are all good defensive characteristics, and leave the portfolio well placed to deliver on the Company objective. The portfolio offers a relatively high exposure to Industrial and Logistics property at over 30 per cent of total assets and to the wider South East (60 per cent of assets by value), sectors and geographies supported by robust supply side characteristics backed by strong tenant demand.

Considerable weight of money has been targeting the sector over the last 6 months, initially from opportunistic buyers in the wake of Brexit and followed by yield driven investors, UK Institutions and Overseas buyers, particularly for central London trophy assets. The market remains very competitive which has had the effect of driving yields to historic lows. Against this backdrop the Manager has been particularly selective in identifying new acquisition targets at sustainable pricing. The cash position and the flexibility afforded by the revolving debt facility provides a good footing from which to approach the market. Since the period end the Company has agreed terms to purchase a freehold, single let distribution unit located in the South East for a sum of c.£10 million at a yield of c.5.2 per cent.

The more immediate priority has been to continue the success of last year’s planned sales programme (three small sales were completed over the previous period raising £3.5 million) to address the more secondary and non-core tail of legacy assets, selling into what has been a market relatively receptive to risk. A further three assets, all from the high street retail sub-sector, have been sold over the year to June 2017, realising £7.5 million in net proceeds at a premium to valuation.

Borrowings

The Company refinanced in 2015 to secure a new £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 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.

The Company continues to adopt a prudent approach to borrowing, with net gearing* of 28.3 per cent at 30 June 2017.

Responsible Property Investment Update

The principles of Responsible Property Investment (RPI), through which environmental, social and governance (ESG) factors are integrated into investment processes and asset ownership activities, have continued to gain significant traction and momentum in the UK property market. In particular, the emergence of new regulations which target the energy performance of existing buildings, together with the ratification and coming into force of the Paris Agreement on Climate Change during 2016, have been key stimulants of investor engagement on the topic. Increasingly, investment decision-making is influenced by these factors, in terms of capital allocation strategies and commercial property transactions.

The Company has taken measures to strengthen its approach to RPI during 2016 and 2017, most notably through the actions of its Managers, which have included:

•         Formalising an ESG Committee with representation from across its investment management teams, with the purpose of leading on, monitoring and overseeing the Property Managers’ approach to RPI.

•         Establishing a new RPI Strategy for its corporate and investment activities, which is reflective of strengthening market expectations with respect to ESG factors, and which has the mutual goals of: ensuring portfolio resilience; driving environmental improvements; and engaging with our stakeholders.

•         Putting in place comprehensive RPI requirements for asset and property managers to ensure continued attendance to ESG factors across the property investment lifecycle.

•         Introducing Responsible Property Management Guidelines to support property managers in identifying and capturing opportunities for improving the ESG performance and attributes of assets, covering factors such as energy efficiency, water conservation, health and well-being, waste management and procurement.

•         Implementing a system for the classification of all assets under management according to their energy performance risk and energy consumption characteristics, which the Company is using as a basis for prioritising actions and determining the frequency of its comprehensive ESG monitoring activities at the property level.

•         Installing a market-leading RPI Appraisal system, which is now applied to all acquisitions made by the Company. We are also in the process of applying the Appraisal system to all assets under management, a process which will be completed by Q4 2017.

•         Preparing Guidelines for Sustainable Development & Refurbishment which is to be applied to all significant capital projects undertaken on the portfolio.

•         Delivering training to its fund, investment, asset and property management teams to ensure that they are cognisant of the evolving RPI agenda, aware of the expectations which the Company places upon them in relation to ESG factors, and knowledgeable about what needs to be done to implement the new RPI Strategy.

•         In carrying out the above, the Property Managers appointed a specialist RPI consulting and training firm, Hillbreak, which will continue to support and advise by taking an independent role on the Property Managers’ ESG Committee.

The Company and its Property Managers will remain vigilant of the evolving nature of the RPI agenda and will continue to develop its approach to ESG factors so that it remains on track to realising its RPI goals, whilst ensuring that these remain relevant.

Outlook

The Manager believes that the property portfolio is appropriately placed to deliver solid performance over the coming years led by a defendable top quartile (IPD Quarterly Index) income return. The intention is to continue to dispose of the smaller, and non-core assets, whilst looking for new investment opportunities which will complement the existing portfolio composition. We will remain selective in our acquisition strategy given that a significant weight of money continues to compete for quality commercial property assets.

Brexit will inevitably be a major factor influencing investors for several years. There remains considerable uncertainty about the outcome of negotiations, the timetable for withdrawal and the impact on the economy. The consensus economic outlook is for sustained but fairly modest economic growth and some moderation in inflation. In this environment, we would expect investors to continue to favour core products and prioritise the longevity of a secure income stream. The other major uncertainty is the likely path of interest rates. Sentiment is moving towards a likely upward move, although the timing and speed of change is unclear. The scope for further yield compression to drive performance may be limited, and we would expect income to be the major driver of performance over the coming years.

Peter Lowe

BMO Rep Property Management Limited

* See Alternative Performance Measures

F&C UK Real Estate Investments Limited
Consolidated Statement of Comprehensive Income

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

F&C UK Real Estate Investments Limited
Consolidated Statement of Changes in Equity
For the year ended 30 June 2017

For the year ended 30 June 2016

F&C UK Real Estate Investments Limited
Consolidated Statement of Cash Flows

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:

·     Market – the Group’s assets comprise of direct investments in UK commercial property and it is therefore exposed to movements and changes in the market.

·     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.

·     Credit – an issuer or counterparty could be unable or unwilling to meet a commitment that it has entered into with the Group.  This may cause the Group’s access to cash to be delayed or limited.

·     Operational – failure of the Manager’s accounting systems or disruption to the Manager’s business, or that of third party service providers through error, fraud, cyber   attack or business continuity failure could lead to an inability to provide accurate reporting and monitoring, leading to a loss of shareholders’ confidence.

·     Environmental – inadequate attendance to environmental factors by the Manager, including those of a regulatory and market nature and particularly those relating to energy performance, flood risk and environmental liabilities, leading to the reputational damage of the Company, reduced liquidity in the portfolio, and/or negative asset value impacts.

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. 

The Manager 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. 

Principal risks encountered during the year

·     Valuation Accuracy - There was concern over the accuracy of property valuations following the Brexit vote. A caveat on the accuracy of the valuations was included in the June 2016 external valuations and whilst this was subsequently removed for future valuations, a degree of uncertainty still exists.

·     Discount/Premium to Net Asset Value - The share price went through a period of instability and fell significantly to a discount of 22 per cent following the Brexit vote. The share price recovered reasonably quickly and has subsequently settled at a small premium.

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, interest-bearing loans and payables that arise directly from its operations.

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 2017 or 30 June 2016 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 2017 is £502,000 (2016: £597,000). 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 2017 the provision was £136,000 (2016: £17,000). Of this amount £99,000 was subsequently written off and £10,000 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 order to mitigate liquidity risk the Group aims to have sufficient cash balances (including the expected proceeds of any property sales) to meet its obligations for a period of at least twelve months.

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 nil 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.

F&C UK Real Estate Investments Limited

Going Concern

In assessing the going concern basis of accounting the Directors have had regard to the guidance issued by the Financial Reporting Council. They have reviewed detailed cash flow, income and expense projections in order to assess the Company’s ability to pay its operational expenses, bank interest and dividends. The Directors have examined significant areas of possible financial risk including cash and cash requirements and the debt covenants, in particular those relating to loan to value and interest cover. The Directors have not identified any material uncertainties which cast significant doubt on the Company’s ability to continue as a going concern for a period of not less than 12 months from the date of the approval of the financial statements. The Board believes it is appropriate to adopt the going concern basis in preparing the financial statements.

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 (as amended);

·     the Strategic Report includes 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;

·     the Annual Report and financial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Group’s position and performance, business model and strategy; and

·     the financial statements and Directors’ Report includes details of related party transactions.

On behalf of the Board

V Lall
Chairman
20 September 2017

F&C UK Real Estate Investments Limited
Notes to the Consolidated Financial Statements
for the year ended 30 June 2017

1.         The audited results of the Group which were approved by the Board on 20 September 2017 have been prepared on the basis of International Financial Reporting Standards as adopted by the EU, interpretations issued by the IFRS Interpretations Committee, applicable legal and regulatory requirements of the Companies (Guernsey) Law, 2008 (as amended) and the Listing Rules of the UK Listing Authority as well as the accounting policies set out in the statutory accounts of the Group for the year ended 30 June 2017.

2.         The fourth interim dividend of 1.25p will be paid on 29 September 2017 to shareholders on the register on 8 September 2017. The ex-dividend date was 7 September 2017.

3.         There were 240,705,539 Ordinary Shares in issue at 30 June 2017. The earnings per Ordinary Share are based on the net profit for the year of £14,101,000 and on 239,568,005 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 £7.5 million.  No properties were purchased in the year apart from some additional car parking space at Lochside Way, Edinburgh Park.

5.         These are not full statutory accounts. The full audited accounts for the year ended 30 June 2017 will be sent to shareholders in September 2017, 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: fcre.co.uk or fcre.gg

6.         The Annual General Meeting will be held on 22 November 2017.

Alternative Performance Measures

The Company uses the following Alternative Performance Measures (‘APMs’). APMs do not have a standard meaning prescribed by GAAP and therefore may not be comparable to similar measures presented by other entities.

Discount or Premium – The share price of an Investment Company is derived from buyers and sellers trading their shares on the stock market. If the share price is lower than the NAV per share, the shares are trading at a discount. This usually indicates that there are more sellers than buyers. Shares trading at a price above the NAV per share, are said to be at a premium.

Dividend Cover – The percentage by which Profits for the year (less Gains/losses on investment properties) cover the dividend paid.

A reconciliation of dividend cover is shown below:

Dividend Yield – The annualised dividend divided by the share price at the year-end.

Net Gearing – Borrowings less net current assets divided by value of investment properties.

Ongoing Charges – All operating costs incurred by the Company, expressed as a proportion of its average Net Assets over the reporting year.  The costs of buying and selling investments and derivatives are excluded, as are interest costs, taxation, non-recurring property costs and the costs of buying back or issuing Ordinary Shares.

Portfolio (Property) Capital Return – The change in property value during the period after taking account of property purchase and sales and capital expenditure, calculated on a quarterly time-weighted basis.

Portfolio (Property) Income Return – The income derived from a property during the period as a percentage of the property value, taking account of direct property expenditure, calculated on a quarterly time-weighted basis.

Portfolio (Property) Total Return – Combining the Portfolio Capital Return and Portfolio Income Return over the period, calculated on a quarterly time-weighted basis.

Total Return – The return to shareholders calculated on a per share basis by adding dividends paid in the period to the increase or decrease in the Share Price or NAV. The dividends are assumed to have been reinvested in the form of Ordinary Shares or Net Assets, respectively, on the date on which they were quoted ex-dividend.

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