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RNS Number : 9197U
Caledonian Trust PLC
31 March 2023
31 March 2023
Caledonian Trust plc
("Caledonian Trust", the "Company" or the "Group")
Unaudited interim results for the six months ended 31 December
2022
Caledonian Trust plc, the Edinburgh-based property investment
holding and development company, announces its unaudited interim
results for the six months ended 31 December 2022.
Enquiries:
Caledonian Trust plc
Douglas Lowe, Chairman and Chief Executive Officer Tel: 0131 220 0416
Mike Baynham, Finance Director Tel: 0131 220 0416
Allenby Capital Limited
(Nominated Adviser and Broker)
Nick Athanas Tel: 0203 328 5656
Alex Brearley
Dan Dearden-Williams
CHAIRMAN'S STATEMENT
Introduction
The Group made a pre-tax profit of GBP353,000 in the six months
to 31 December 2022 compared with a pre-tax loss of GBP196,000 for
the same period last year. The profit per share for the six months
to 31 December 2022 was 3.00p and the NAV per share as at 31
December 2022 was 200.3p compared with a loss per share of 1.66p
and a NAV per share of 206.7p last year. The Group's emphasis will
continue to be to secure, improve and realise the value in our
property portfolios.
Review of Activities
I provided a comprehensive review of activities in my December
statement accompanying our audited results for the year ended 30
June 2022.
On 24 February we released an announcement to the market,
stating that, as a result of strong interest, we had set a closing
date for indicative offers for St. Margaret's House ("SMH") on 23
February 2023 and had received non-binding proposals from three
separate parties. Careful consideration and analysis of each of the
proposals has led us to select a preferred bidder and enter into an
exclusivity agreement with them to enable them to undertake their
necessary due diligence and agree formal terms for the purchase by
the end of April 2023 with the intention that any such agreement
entered into would be conditional, inter alia, on the purchaser
obtaining the required amendments to the planning consent at SMH.
Whilst the Board is hopeful of a satisfactory outcome, there can be
no certainty that a sale of SMH will proceed, nor on its terms or
the timing of any sale.
A further announcement will be made when a formal sale agreement
has been entered into or the Company will otherwise provide an
update in relation to SMH in due course.
In the meantime, SMH continues to be fully let at a nominal
rent, presently just over GBP1.50/ft(2) of occupied space, to a
charity, Edinburgh Palette, who have reconfigured and sub-let all
the space to over 200 artists, artisans and galleries.
At Brunstane we completed the construction of the third phase of
development, comprising five new houses over 8,650ft(2) forming the
Steading Courtyard, at the beginning of July 2021 and this
development was completed in September 2022. We completed the sale
of three of the houses in October and November 2022 for an
aggregate GBP2m and a fourth in March 2023 for GBP725,000. Knight
Frank are marketing the remaining house at a fixed price of
GBP700,000. The application for 11 new houses (c.20,000ft(2) ),
"Upper Brunstane", in the Stackyard field to the east of the
steading was granted in November 2022. We intend to prepare the
site for development, take up the planning consent and secure the
requisite building warrant with a view to undertaking the
development as soon as appropriate. We have made an application to
modify the consent for "Plot 10", lying between Phase 3 and Upper
Brunstane, by replacing the single large (3,500ft(2) ) house with
two smaller houses of similar combined size which will complete the
small courtyard leading into Upper Brunstane.
At Wallyford we are currently finalising several minor but
important variations to the planning consent for six detached
houses and four semi-detached houses over 13,350ft(2) and we have
received detailed tender prices, but are reviewing when to start
construction in light of current conditions. The site lies within
400m of the East Coast mainline station, is near the A1/A720 City
Bypass junction and is contiguous with a completed development of
houses. To the south of Wallyford a very large development of new
houses is being built at St Clement's Wells on ground rising to the
south, affording extensive views over the Forth estuary to Fife.
Wallyford, no longer a mining village, is rapidly becoming another
leafy commuting Edinburgh suburb in the fertile East Lothian
coastal strip.
Economic Prospects
Winter came this Spring - a sudden icy blast. The economic
winter too has proved unseasonal, but is it, too, deferred?
Economic prospects, major world events excepted, depend upon
whether a long recession has been avoided or merely deferred, like
Winter.
The economic Winter has been unexceptionally mild and GDP is
0.8% higher than the OBR forecast in November 2023, having narrowly
avoided the forecast recession in December 2022, as output was
unchanged in Q4 2022 following the 0.2% contraction in Q3 2022.
After the Covid lockdown in late 2021 there was a robust recovery
of 4.2% in Q1 2022 followed by growth of 0.2% in Q2 resulting in
growth of 4.10% in 2022, but GDP is still 2.0% below the pre-Covid
level in 2019.
In 2023 the OBR expects GDP to contract 0.4% in Q1, to be nil in
Q2, but to rise 0.1% in each of Q3 and Q4, and to be -0.2% lower
overall in 2023. This forecast of -0.2% is 1.2 percentage points
higher than the OBR November forecast for 2023. A 0.5 percentage
point rise over the OBR's November 2022 forecast is forecast for
2024, but subsequent years are marked down 0.2, 0.3 and 0.4
percentage points respectively, resulting in the November 1.7
percentage point rise forecast changed to only 0.8% over five
years. The March forecast has reduced forecast growth and
effectively re-distributed it forward, such a change in timing
being convenient for the 2024 election.
While the OBR's forecast is that GDP will return to the
pre-Covid 2019 level in late 2024, real living standards - RHDI -
real household disposable income - per person does move in
proportion with GDP and is forecast to fall by 5.7% over the
financial years 2022-23 and 2023-24, the largest two-year fall on
record. In 2027-28 real living standards are expected to be 0.4%
lower than the pre-Covid level and are not expected to rise above
that level until 2029.
The UK's poor economic performance can be traced back to the
financial crisis of 2007/08 followed by an injudicious austerity
policy, then by Covid, and then quickly by the Ukraine war. Had the
growth rate experienced until 2007/08 continued at the same rate
until 2023, GDP per head would now have been 38.9% higher.
Moreover, the UK's economic recovery post Covid is strikingly poor,
as by 2025 the UK economy is forecast to have recovered only to the
pre-Covid level, whereas the EU area is forecast to have grown 6.0%
and the US 9.0%. From 1980 until the 2007/08 Great Recession the UK
enjoyed the highest annual real growth in GDP in the G7, but since
2016 it has had the second poorest performance of about 0.5%pa,
just above Japan's 0.3%.
Other commentators' forecasts are less optimistic than the OBR's
forecast of a cumulative growth of 1.6% by December 2024 and of
8.1% by December 2027 (6.2% by 2026). In contrast the mean of "new"
forecasts by economists surveyed in March by HMT is for a much
lower growth of 0.3% by end 2024. The NIESR's forecast of 6.4%
growth by 2027 is the highest of the other longer term forecasts.
The Bank's forecast until the end 2024 is even more pessimistic at
minus 1.0%, a pessimism that persists as it forecasts growth at
only 0.1% by end 2026, compared to 4.5%, NIESR, and 6.2%, OBR.
While the Bank's current forecast is pessimistic, it is
considerably better than its November 2022 forecast, only three
months ago, of a depression with a fall of 3.0% and a return to the
pre-depression output level only after 21 quarters. Now the Bank
forecasts a depression of less than 1.0% and a return to the
pre-depression level in 13 quarters.
The Bank's reduced pessimism is based on important reductions in
gas futures prices of over a third and, most significantly, in Bank
Rate, as implied by financial market interest rates (i.e. not
interest rates assumed or forecast by the Bank, but market" rates),
falling compared to their November report by 0.8 percentage points
to 4.4% in 2023, by 0.7 percentage points in 2024 to 3.7%, and by
0.3 percentage points in 2025 to 3.4%. Unlike the Bank, the OBR is
not constrained in its forecasts of future bank rate, forming their
own estimates rather than using the implied market rates. Over the
next three years its forecasts are based on interest rates of 0.25
percentage points lower than those of the Bank in February 2023.
Such lower interest rates would account for an important part of
the difference between the Bank and the OBR forecasts.
The implied interest rate used by the Bank and the forecast rate
used by the OBR are both likely to prove to be too high. The
interest rate rise (prior to the recent 0.25% rise) is
unprecedented - from 0.1% to 4.0% in 14 months. The cash cost of an
increase in interest from say 0.1% to 4.0% and from 4% to 7.9% is
the same. However, with low interest rates many organisations are
likely to have increased gearing, and if the gearing has been
increased so that the interest paid as a percentage of sales is the
same, then the effect of the same percentage point increase in
interest rates is quite different. If, for instance, interest costs
are 10% of revenue and the bank margin is 2.9%, then, with a gross
margin of 20%, a 3.9% percentage point rise in interest costs
results in a gross margin of 7%. If, however, in the higher
interest environment with the same interest cost of 10% of revenue
when the interest payable is 6.9% the gross margin is 20%, a 3.9%
percentage point rise in interest costs results in a gross margin
14.5%, a much lower reduction in gross margin. Thus, for the
same
interest cost as a proportion of sales, the same increase in
rate from a low base has much larger effect on profitability. Thus,
the effect of the same percentage point rises in interest costs
will have a larger impact on the economy than it would have had
from a higher base, and to the extent such an effect may be
unrecognised the extent of an interest rate rise required to bring
a given effect on the economy may be overstated. This effect will
only operate where low interest rates have induced higher gearing,
the likelihood of which will increase with the length of time low
interest rates have operated and been expected to continue to do
so, as has widely been the case in the UK.
There is another major uncertainty concerning the effect of
interest rate rises. There is a time lag before the full effect of
any interest rate rise becomes evident in the economy, typically
reaching its maximum only after a year, or even two, a phenomenon
dubbed by Milton Friedman as the "long and variable lags" of
interest rate policy. Some recent research suggests that, due to
the current more rapid transmission of central bank intentions, the
strongest impact may come after nine months. In that case, interest
rises from the late Spring may be exerting their full effect now,
but rate rises above 2.0% are now only six months old and the most
recent rise to 4.25% occurred only last week. Thus, even if rapid
transmission is now more likely, the majority of the full effect of
rate rises is yet to be reflected in the economy.
The Bank risks "overkill" if interest rates are raised in line
with the 4.4% for 2023 implied by the forward market interest rates
used by the MPC. Three months have already passed with interest
rates at 4% or 3.5%, the average of the remaining nine months would
have to 4.6% to reach the 4.4% level implied by the forward
markets.
A review of the causes of the high inflation suggests that not
only has the inflation rate just peaked, but it is likely to return
to "acceptable" levels. Firstly, commodity prices have fallen both
recently and over a year: the Economist all-items sterling index is
down 0.7% on the month and 11.2% on the year; the dollar indices
all-items are down 17.5%; food 16.4%; and non-food agriculturals
36.3%. Brent oil has fallen to $77.5, 21.9% lower than last year
and the price of gas, now $2.35 per MM Btu, is down from $5.41 last
year and from a peak price of $9.77. Secondly, the supply shortages
induced by the rapid recovery from Covid and the production
dislocation of Covid have reversed and, for example, there is now a
surplus, not a dire shortage, of "chips". Thirdly, supply chains
have adjusted and shipping rates returned to normal. Fourthly,
price rises caused by shortages of basic industrial imports caused
prices to rise throughout the economy "spilling" the rises
generally - interestingly even into second hand cars, for instance.
Fifthly, the flush of demand extended into the re-opening service
industries which, being short staffed, had a reduced supply
capability and so increased their prices, while, more generally,
the sudden demand for "labour" of all types raised wages. However,
prices in all sectors, including oil, have since stabilised with
the exception of wages where unemployment rates in the G7
countries, apart from Italy, are the lowest or close to the lowest
for 25 years. Clearly economies have adequate supplies of goods at
current prices but not of labour. Labour shortages are partly due
to a reduction in the labour force because of the large increase in
those employable not seeking employment, and, of course, a very low
rate of increased productivity augments such a shortage.
Unfortunately, until the supply shortages are resolved, demand must
be reduced if inflation is to be controlled. The delay in the
moderation of wages may be due to the lag effect of interest rate
rises, but the extent of the wage rises achieved or in
contemplation may be due to the increased political pressure for
rises after the particularly high inflation levels experienced by
those below the median wage, a pressure reinforced by the minimal
improvement in such living standards over many years.
A cardinal tenet of the models used by central banks to forecast
inflation is the level of employment and of vacancies: put more
simply, if the demand for labour is high, the price is unlikely to
fall. Fortunately, recent figures indicate a downturn in employment
and falling vacancies. As wage inflation is a lag indicator, the
effects of rising interest rates may now be being seen.
One dramatic effect of interest rate rises has just become
evident, being the reduced value Tier 1 equity, an early warning of
the possible wide effects on stability of large, sudden interest
rate rises on the banking sector over and above inflation.
Financial stability supersedes "normal" inflationary concerns and
ensuring stability may be a major determinant of future interest
rate changes. The rise in interest rates has caused a corresponding
drop in the value of all fixed interest securities, which form a
substantial part of many banks' assets. In the case of the Silicon
Valley Bank, the USA's 16(th) largest bank, they comprised so high
a proportion that SVB's Tier 1 equity fell from 12% to almost 0%.
This bank, and others have crashed as a consequence, throwing doubt
on the integrity of the whole banking sector. Even "strong" banks
like Bank of America's Tier 1 capital has halved to 6%, and Credit
Suisse has just been rescued by the Swiss National Bank and then
taken over for a relatively nominal amount by UBS. The crisis in
the banking sector would be worsened if rates were increased
further, but greatly ameliorated if the trend in rates was seen to
have peaked. This overriding consideration for stability will, at
least, moderate any further rate increase. I re-affirm my December
2022 statement that rates should peak at or about 4%, but decline
slowly to stabilise at around 3% over the next few years.
The failure of SVB, a bank outside the criterion of banks
considered "too big to fail", but with the rescue of its
depositors, has proved both that regulation must be extended and
the quality of the banks' executives must be improved or even
controlled. As I noted in my 2022 statement, of the many
depressions since the 14(th) century, financial policies or
irregularities have been responsible for a large proportion of
them. Recently many pension funds have had to be rescued when,
after securing their long-term bond holdings against equity
investments, the bond value fell leaving the security uncovered and
the consequent margin requirement unmet. These lacunae follow those
revealed in the Great Depression of widespread weak governance,
notably in the largest bank in the world, the RBS. These recent
financial crises originate because of a disregard of the basic
tenet of banking: when long-term lending is funded, even in part,
by short-term deposits, depositors must have confidence in the
liquidity of the bank. The Bank of England notes carried the
statement "... promise to pay the bearer on demand ...". True, but
what the Bank meant was, "provided not too many other people
require payment at the same time".
Writing in the FT, Martin Wolf put the position pithily: "The
marriage of risky and often illiquid assets with liabilities that
have to be safe and liquid within undercapitalised, profit-seeking
and bonus-paying institutions regulated by politically subservient
and often incompetent public sectors is a calamity waiting to
happen. Banking needs radical change."
Possibly, a more limited change in management might be
recommended also for the Bank whose timing of interest rate changes
both before the 2007 Recession and before the current inflationary
crisis has been suspect.
In Scotland, in contrast to previous forecasts, I close by
forecasting that the economic climate will improve significantly
over the next few years. The SNP has cracked: its aura of
integrity, its halo of purity, its selflessness in the common cause
and its solidarity are strewn publicly in pieces. In its place are
unedifying evidences of malfeasance, perverting the course of
justice, self-aggrandisement, undemocratic practices, the manifold
"sins" of all older parties. Thus, the cause of independence has
suffered a blow that may prove mortal. This benefit is complemented
by a possible "stay of execution" for the oil and gas sector,
Scotland's major non-state employer, and maybe assisted by a
possible reduction in the power of the Green alliance where a tiny
minority of MSPs has been responsible for obstructing economically
productive investments in Scotland at an economic and social cost
that far outweighs any measured benefit. Thus, I forecast
confidence in Scotland, its future and its economy will be greatly
improved, so lowering the cost of capital, increasing investment
and asset values and, most importantly, living standards.
Property Prospects
I reviewed property prospects comprehensively in my statement to
the year ended 30 June 2022 based on the forecasts made in the
autumn, but by December 2022 the forecast returns for 2022 had
deteriorated very considerably. The Investment Property Forum (IPF)
All Property return for 2022, previously forecast at 6.4%, is now
estimated at -2.3%, due almost entirely to forecast Capital Value
growth dropping from 2.3% to -6.4% and only the Retail Warehouse
sector is estimated to produce a positive return of 5.2%, although
down from 12.3%, but all other sectors are estimated to have
negative returns of from -1.9% (Shopping Centres) to -3.9% (City
Offices).
The MSCI(2) Monthly Property Index reported an even larger
negative return of -10.4% for 2022. The changes in capital value
reflect the spike in interest rates to over 5%, following the
economic and tax proposals made during the very brief period of Liz
Truss' leadership.
The IPF February forecast for 2023 forecasts a Total All
Property return of -0.6%, an improvement on the November forecast
of -2.4%. The only sector forecast to have a positive Total return
is Industrials (0.4%) and Offices are forecast to have a Total
return of -2.7% within which City Offices, with a -3.5% return, are
the worst performing sub-sector. All sectors, with the exception of
Industrials (2.9% gain), are forecast to have declines in rental
value of which Shopping Centres are forecast to have the greatest
fall of 2.8%, and Standard Retail 2.3% and City Offices 2.0%.
Capital value contraction is forecast as 5.5% with all sectors
falling in value. The IPF conducts its research in January (6
contributors) and February (11) and the figures quoted are averages
of these contributors. The January forecasts were for a Capital
Value growth of -6.6%, but the February forecasts were for a
Capital Value growth of -5.0%; reflecting a cautious return of
confidence following the establishment of the new Government.
Forecasts for later years are for a recovery to a Total return
of 7.2% in 2024 and of 8.0% in 2025. In 2024 average rental value
growth is only 1.0% but Shopping Centres and City Office sectors
are forecast to continue to decline in rental value. Shopping
Centres are forecast to decline also in Capital Value growth in
2024, but the Industrial sector is forecast to increase by 3.8%,
the largest rise in Capital Value, which averages 2.2%. In 2025 all
sectors are forecast to have higher Rental and Capital Value growth
than in 2024 to give an improved All property return of 8.0%. The
poor returns forecast for 2023 reduce the five year 2023/27
forecast Total return to 5.6% per annum.
The IPF forecasts are based on the mean of normally 20 forecasts
evenly divided into two groups - Property Advisors and Fund
Managers, whose individual forecasts are widely dispersed. Until
recently there has been little difference between the forecasts of
these two groups, but for 2023 there is a sharp distinction.
Whereas the nine Property Advisors mean forecast for total return
is -0.2%, the Fund Managers participating forecast was for -1.6%.
The total returns for subsequent years between the two groups of
forecasters had no similar disparities.
Colliers provide comprehensive forecasts which, interestingly,
as there is no averaging, normally have been very similar to the
IPF means. But currently, the Colliers forecasts are markedly
different to the IPF's forecasts, particularly for 2023 where the
total return is forecast as 5.3% in contrast to the IPF's -0.6%
with a corresponding difference of 5 percentage points for
Industrial and Office returns and 7.7 percentage points difference
in the Retail return (8.5% cf 0.8%). There is a similar disparity
in the five-year return forecast where Colliers forecast about a 3
percentage point increased return in all sectors. Exceptionally,
Colliers forecast Total return for Industrials is 10.5% whereas IPF
forecast 6.5%. In general, Colliers expect a higher growth in
rentals than the IPF, forecasting five-year rental growth of 4.3%pa
for Industrials (IPF 2.6%), 1.7% for Retail Warehouses (0.6%) and
Offices "averaging" 1.4% ("averaging" 0.7%). For Standard Retail
the forecasts agree: no increase in rental value over five
years!
Patently, returns as forecast by Colliers are greatly to be
desired, but consideration of the prospects for the individual
sectors gives little comfort. Most forecasters tend to project a
continuation of recent changes and very unusually are turning
points accurately forecast. Colliers forecasts, being less
pessimistic, may correctly be forecasting such an inversion!
However, both forecasts agree on the forecast for Standard
Retail: more of the same! They both forecast the Industrial /
Logistics sector as having the highest returns, based largely on
the expected continuing rise in online sales and the demand for
distribution facilities to meet demand. Online sales were 20.5% of
all retail sales in the three months before the Covid crisis in
late March 2020, rose considerably during that crisis, and in
January 2023 were 26.6% of all retail sales, having peaked at 37.8%
in January 2021. The average for the 12 months to January 2023 was
25.8%.
Online sales administration and the associated distribution
services appear to be becoming even more convenient and efficient.
However, several factors militate against a further expansion of
their proportion of retail sales: the "easiest", the low lying
fruit has been harvested; goods' returns are rising and are
probably increasingly expensive to resell, especially of "personal"
goods; working from home, while established, is declining; existing
retailers are adopting a hybrid system of online / collection /
in-store services; and retail services are becoming increasingly
"personal", for example, in areas of health and beauty, services
which cannot be delivered online! While online sales will continue
to expand, no significant change in their percentage of retail
sales seems likely. Although the retail sector is adjusting to the
extent of online sales, the total growth in retail sales will be
limited by low expected growth in Real Household Disposable
Income.
In 2022 there were 3,365 net store closures compared to 7,902 in
2021 and to a peak of 11,319 in 2020, but closures are expected to
increase slightly over the next two years before falling to 2,600
in 2025, in line with expected improvements then in the economy.
The 3,365 net closures in 2022 included net openings of 904 leisure
units and 430 convenience units and the net closure of 2,308
service units and 2,391 comparison units. The fastest declining
categories were Banks 676, Hairdressers 527 and Newsagents, Bookies
and Recruitment, each 268, and fastest growing categories were Fast
Food, Takeaways, Beauty Salons and Convenience Stores each
increasing by about 425, and "Bars" 347 units. The retail sector is
adapting quickly to changed economic circumstances, but, although
the rate of decline in shop units slows, returns to the retail
sector will be severely restricted, especially as the vacancy rate
of 18.2% remains above the pre-Covid level of 14.4%.
The office sector also faces reducing demand for its existing
premises, apart from the effect of the continuing slow growth in
the economy. Demand for existing offices has been significantly
diminished because of the changing work routines, especially "work
from home", which, however disadvantageous for some work
categories, seems likely to persist. Symptomatic of the change is
the recent announcement that Abrdn is closing its 100,000ft(2)
office in St. Andrews Square, Edinburgh and consolidating its
offices, and, anecdotally, it is reported that the Registers of
Scotland's 125,00ft(2) office in Edinburgh is currently only 20%
occupied. The office sector will suffer, not only from a reduced
demand but, from a different demand as a result of energy pricing
and ESG policies rendering much existing office stock outdated or
redundant and therefore effectively worthless. Thus, while values
will be high for the limited high-quality space, values will be
greatly impaired for all other space.
The industrial sector is the only main property sector where
demand continues to increase, a surprising volte-face from the
traditional position where it traded on low nearly static rents and
consistently high yields.
The prospects for Commercial Property are poor and depend
primarily on rental returns while capital values remain static. The
OBR, comparatively optimistic in economics prospects, forecasts
that "Commercial Property Prices" will decline 4.8% this year and
grow less than 0.5% pa for the next five years. The OBR forecasts
CPI to be 18.1% over the next five years, resulting in the real
value of Commercial Property falling by about 15%. The poor
performance of commercial property since 2007 will continue.
The anomalously high house price rises that I reported last
year, unsurprisingly, halted late last summer when monthly falls
became widely reported, the extent varying among surveys. In the
year to February 2023 rises were reported by Halifax 2.1%, Acadata
(E&W) 4.7%, Acadata (Scotland) 4.6% (January), Knight Frank
5.3% and ESPC 2.2%, but a fall was reported by Nationwide of 1.1%.
The divergence between Halifax and Nationwide is anomalous because
their figures are both derived from their own mortgages for
properties that are of similar values (10% approximately higher for
Halifax). The difference between these figures and Acadata figures
is also anomalous as both mortgage-based surveys are for a
"standardised" house product and include an upward Winter seasonal
adjustment. Acadata figures are actual figures including both cash
and mortgage sales, and therefore include more expensive properties
in the result. It seems likely more "expensive" properties have
been less affected by the more difficult mortgage market and have
continued to rise in value. Acadata report that, while overall
rises have continued, the rate of growth has slowed for six months,
and that prices in London have fallen.
Higher price rises continue to take place outside London and the
South-East: quite exceptionally in Blaenau Gwent prices have risen
30.3% - a narrow market! In Scotland where, in January, prices fell
0.9%, there was a noticeable difference between house types as flat
values fell 2.0%, terraces 1.6%, and semi-detached houses 0.6%,
while detached houses maintained their value. Acadata say,
"expensive detached properties tend to attract wealthy and more
resilient buyers who are less impacted by the rising cost of
mortgage finance".
The general decline in prices is reflected specifically in new
house sales in East Lothian (Wallyford) near one of the Company's
prospective development sites where, over the last few months,
prices generally have been reduced (or incentives given) equivalent
to 5% or occasionally to nearly 10% of the quoted price.
Recent surveyed price changes provide a background for forecasts
of changes in 2023. In January the Times newspaper summarised 13
forecasts from surveyors, economic research groups and the OBR, and
these ranged from -1%, Chestertons, to -10%, Savills. The OBR,
using fiscal not calendar years, forecast that prices would fall
4.6% in the year to April 2024 and would only grow about 1% by end
2027/28. This poor forecast is, however, higher than the equivalent
-7.8% OBR forecast in November 2022.
Comprehensive forecasts are given by Savills covering the next
five years. Mainstream UK prices are forecast to fall 10% in 2023
but rise 6.2% over the four years to 2027, but in London prices are
forecast to lose 1.7% over five years. Areas outside London and the
South-East have much improved five-year forecasts of over 10% for
Northern regions and Wales and of 9.5% for Scotland. In all cases
the greatest growth occurs in 2026 of 7.5% except in London and the
South-East and South-West. Prime UK prices are forecast not to have
as large price falls as the mainstream with English regional values
falling 6.5% in 2027 but rising by 9.9% over 5 years and Scottish
prime prices, while falling 5.0% in 2023, rise 12.7% over five
years, a better expected performance than Scottish
"mainstream".
The main determinants of the rate of change of house prices will
be how quickly interest rates fall and whether a recession occurs
that causes a severe rise in unemployment and a consequent increase
in "fire sales" and repossessions. On average the equity content of
mortgaged houses is now much greater than in previous downturns and
the resilience of mortgagors much higher due to MMR and other
financial controls. Thus, I expect any increase in forced sales to
be minimal. The forecast for interest rates is only for a gradual
fall to a level far above the abnormally low levels prevailing
since the 2008 Great Recession and this will moderate the
prospective rise in house prices.
I conclude that the current house price falls will not persist.
I forecast that, while over the short-term prices will fall, over
the next few years prices will be stable and then rise. In the long
term the major determinant of prices will revert to supply,
primarily land supply. The land supply is determined by centrally
set rules and regulations based on social and political objectives,
interpreted locally, which invariably restricts the supply of land,
raising its price. These supply restrictions are deeply entrenched
and closely guarded with considerable political influence and thus,
without equivocation, I repeat my previous forecast: "the key
determinant of the long-term housing market will be a shortage of
supply, resulting in higher prices".
Conclusion
The UK economy teeters on the cliff edge of a recession. Will
the delayed effect of the rise in interest rates push the economy
over that edge. Or, will the Bank, panicking that it has not raised
rates sufficiently to quell inflation, undermine the economy by
raising rates too far, causing the cliff to collapse, or, will a
standstill in rates prove ineffective in the short-term and lead to
even higher interest rate rises later, causing a landslide? My
conclusion is that a further rate rise above 4.25% would not be
optimal, as inflation is due to fall sharply as energy and food
inflation will drop out of the calculation as the base date
changes. The rise to 4% will allow the residual inflation to be
brought down and controlled at an acceptable level - say 2.5% to
3.5%. Many commentators consider that the 2.0% target rate of
inflation is not more beneficial than a slightly higher target rate
of inflation. Such higher target rates would allow a more rapid and
less behaviourally difficult adjustment to changing economic
circumstances and, in a recession, allow a greater range of cuts
before becoming progressively less effective, and so are more
advantageous than the current 2.0% target. A return to economic
stability would be very welcome, but an unexciting one as living
standards would continue to lag expectations which depend on
improved economic growth.
Higher economic growth than has occurred since 2007 is a
function of many independent changes, but would be severely limited
by recurring recessions. While wars, plagues and famine are often a
common, largely unavoidable (wars at times excepted) cause of
recession, economic or financial mismanagement has often been the
cause. Financial or economic mismanagement caused or accentuated
the post WWI recession, the Great Depression, Black Wednesday, the
Great Recession, the post-Covid recession and the recession now
threatening and, most recently, the UK pensions crisis and the
failure of the SVB and associated banks and Credit Suisse. To
remedy such unnecessary economic setbacks, change in regulation is
required. With a change in regulation perhaps a change in
regulators is required as evidenced by the Bank's decision to put
up interest rates on the eve of the Great Depression and then to
maintain low interest rates into the current "Great Inflation".
The obviation of unnecessary causes of stagnation or recession
by improved financial management would remove a recurring
impediment to growth for which the vitally important requirement is
improved productivity. Since 2015/16 UK productivity has increased
only by about 5.0% or 0.8% per year. Prior to 2008 productivity
improved by about 2.25% pa, about 1.5 percentage points above the
post 2008 level, and had it been maintained at the 2.25% pre-2008
level, would have resulted in current output being around 25%
higher than at present. In its analysis of productivity the NIESR
concludes:-
"The UK has one of the poorest productivity performances among
the OECD's 38 advanced economies and this has been made worse by
Covid-19. If policymakers return to the same economic structures
post-pandemic that failed to resolve the productivity problem
pre-pandemic, then the UK is set for another decade of a
low-growth, low-productivity and low-wage economy". Of this Martin
Wolf says "The biggest problem for the UK remains its dismal
underlying productivity growth". This is dramatically illustrated
by the NIESR's recent analysis of Public Sector productivity -
where it says: "inputs rising by 19% since 2019 and output by only
about half that".
The downturn in the economy delayed a possible sale of St.
Margaret's House but, being in one of the very few sectors where
demand is growing and supply is limited, prospects for its sale
have, in the Board's view, greatly improved.
The Steading phase of the Brunstane development has sold well
with three houses above the UK House Price Index level (HPI), one
at HPI level and the fifth remaining on the market. The market for
houses near the City Centre remains strong as this segment of the
market is less effected by finance affordability and availability.
We now have permission for the next 12 houses there at Upper
Brunstane which, even at current prices, provides a very attractive
development which we will undertake once all remaining regulatory
hurdles are cleared.
Our development at Wallyford, although sufficiently profitable
at current costs and prices, has been delayed to allow the pursuit
of opportunities likely to provide higher returns. The delay to our
Belford Road development is not caused by market conditions but by
the continuing delay in obtaining suitable non-material variations
to planning to meet changed insulation, servicing and building
control requirements and by the time being taken to obtain
desirable changes to the internal layout to meet market
requirements and to effect small changes to the facade to improve
the appearance of the building and an enhancement to the already
high amenity of the area.
The development opportunities in our existing portfolio have
continued to improve and I conclude, as previously, "In our
existing portfolio, most development properties are valued at cost,
usually based on existing use, and when these sites are developed
or sold, I expect their considerable upside will be realised. Some
investment properties also have considerable development value, as
we expect to realise eventually at St Margaret's".
I D LOWE
Chairman
30 March 2023
Consolidated income statement for the six months ended 31
December 2022
__________________________________________________________________________________
Note 6 months 6 months Year
ended ended ended
31 Dec 31 Dec 30 Jun
2022 2021 2022
GBP000 GBP000 GBP000
Revenue
Revenue from development property 1,990 - -
sales
Gross rental income from investment
properties 195 167 306
---------------- ---------------- -----------------
Total Revenue 2,185 167 306
Cost of development property (1,393) - -
sales
Property charges (35) (47) (90)
---------------- ---------------- -----------------
Cost of Sales (1,428) (47) (90)
---------------- ---------------- -----------------
Gross Profit 757 120 216
Administrative expenses (294) (254) (887)
Other income - - 8
---------------- ---------------- -----------------
Net operating profit/(loss)
before investment property
disposals and valuation movements 463 (134) (663)
---------------- ---------------- -----------------
Valuation gains on investment
properties 5 - - 190
Valuation losses on investment
properties 5 - - (690)
---------------- ---------------- -----------------
Net (losses) on investment
properties - - (500)
---------------- ---------------- -----------------
Operating profit/(loss) 463 (134) (1,163)
---------------- ---------------- -----------------
Financial expenses (110) (62) (139)
---------------- ---------------- -----------------
Profit/(loss) before taxation 353 (196) (1,302)
Income tax 6 - - -
Profit/(loss) and total comprehensive
income
for the financial period attributable
to equity
holders of the parent Company 353 (196) (1,302)
Earnings per share
Basic and diluted earnings
per share (pence) 7 3.00p (1.66p) (11.05p)
Consolidated statement of changes in equity as at 31 December
2022
__________________________________________________________________________________
Share Capital Share Retained Total
Capital redemption premium earnings
reserve account
GBP000 GBP000 GBP000 GBP000 GBP000
At 1 July 2022 2,357 175 2,745 17,976 23,253
Profit and total
comprehensive income
for the period - - - 353 353
At 31 December 2022 2,357 175 2,745 18,329 23,606
At 1 July 2021 2,357 175 2,745 19,278 24,555
Loss and total
comprehensive expenditure
for the period - - - (196) (196)
At 31 December 2021 2,357 175 2,745 19,082 24,359
At 1 July 2021 2,357 175 2,745 19,278 24,555
Loss and total
comprehensive expenditure
for the period - - - (1,302) (1,302)
At 30 June 2022 2,357 175 2,745 17,976 23,253
Consolidated balance sheet as at 31 December 2022
__________________________________________________________________________________
31 Dec 31 Dec 30 Jun
2022 2021 2022
Note GBP000 GBP000 GBP000
Non-current assets
Investment property 8 16,610 17,110 16,610
Plant and equipment 10 11 8
Investments 1 1 1
Total non-current assets 16,621 17,122 16,619
Current assets
Trading properties 9,840 9,896 10,672
Trade and other receivables 159 121 134
Cash and cash equivalents 2,367 2,322 1,317
Total current assets 12,366 12,339 12,123
Total assets 28,987 29,461 28,742
Current liabilities
Trade and other payables (1,001) (722) (1,109)
Interest bearing loans and
borrowings (360) (360) (360)
Total current liabilities (1,361) (1,082) (1,469)
Non-current liabilities
Interest bearing loans and
borrowing (4,020) (4,020) (4,020)
Total liabilities (5,381) (5,102) (5,489)
Net assets 23,606 24,359 23,253
Equity
Issued share capital 10 2,357 2,357 2,357
Capital redemption reserve 175 175 175
Share premium account 2,745 2,745 2,745
Retained earnings 18,329 19,082 17,976
----------------- ----------------- --------------
Total equity attributable
to equity
holders of the parent Company 23,606 24,359 23,253
NET ASSET VALUE PER SHARE 200.3p 206.7p 197.3p
Consolidated cash flow statement for the six months ended 31
December 2022
__________________________________________________________________________________
6 months 6 months Year
ended ended ended
31 Dec 31 Dec 30 Jun
2022 2021 2022
GBP000 GBP000 GBP000
Cash flows from operating
activities
Profit/(loss) for the period 353 (196) (1,302)
Adjustments for:
Net loss/(gain) on revaluation
of investment properties - - 500
Depreciation and Loss on sale
of fixed assets - - 5
Net finance expense 110 62 139
Operating cash flows before
movements 463 (134) (658)
in working capital
Decrease/(increase) in trading
properties 832 (583) (1,359)
(Increase)/decrease in trade
and other receivables (25) 14 1
(Decrease)/increase in trade
and other payables (218) 73 574
Cash generated from/(absorbed
by) operations 1,052 (630) (1,442)
Interest paid - (60) (251)
Net cash inflow/(outflow)
from operating activities 1,052 (690) (1,693)
Investment activities
Proceeds from sale of investment - - -
properties
Proceeds from sale of fixed - - -
assets
Acquisition of plant and equipment (2) (8) (10)
Cash flows (absorbed by)
investing activities (2) (8) (10)
Net increase/(decrease) in
cash and cash equivalents 1,050 (698) (1,703)
Cash and cash equivalents
at beginning of period 1,317 3,020 3,020
Cash and cash equivalents
at end of period 2,367 2,322 1,317
================= ================= ==============
Notes to the interim statement
1 This interim statement for the six-month period to 31 December
2022 is unaudited and was approved by the directors on 30 March
2023. Caledonian Trust PLC (the "Company") is a company
incorporated in England and domiciled in the United Kingdom. The
information set out does not constitute statutory accounts within
the meaning of Section 434 of the Companies Act 2006.
2 Going concern basis
The Group and parent Company finance their day to day working
capital requirements through related party loans and bank and other
funding for specific development projects. The directors have
assessed the group cash flow forecasts and expect that current
rental streams and property sales in the normal course of business
will provide sufficient cash inflows to allow the Group to continue
to trade. In addition, the related party lender has indicated its
willingness to continue to provide financial support and not to
demand repayment of its principal loan during 2023.
Accordingly, the directors continue to adopt the going concern
basis in preparing this interim statement.
3 Basis of preparation
The consolidated interim financial statements of the Company for
the six months ended 31 December 2022 are in respect of the Company
and its subsidiaries, together referred to as the "Group". The
financial information set out in this announcement for the year
ended 30 June 2022 does not constitute the Group's statutory
accounts for that period within the meaning of Section 434 of the
Companies Act 2006. Statutory accounts for the year ended 30 June
2022 are available on the Company's website at
www.caledoniantrust.com and have been delivered to the Registrar of
Companies. The accounts for the year ended 30 June 2022 have been
prepared in accordance with UK-adopted International Accounting
Standards. The auditors have reported on those financial
statements; their reports were (i) unqualified, (ii) did not
include references to any matters to which the auditors drew
attention by way of emphasis without qualifying their reports, and
(iii) did not contain statements under Section 498 (2) or (3) of
the Companies Act 2006.
The financial information set out in this announcement has been
prepared in accordance with International Accounting Standard IAS34
"Interim Financial Reporting". The financial information is
presented in sterling and rounded to the nearest thousand.
The interim financial statements have been prepared based
UK-adopted International Accounting Standards that are expected to
exist at the date on which the Group prepares its financial
statements for the year ending 30 June 2023. To the extent that
IFRS at 30 June 2023 do not reflect the assumptions made in
preparing the interim statements, those financial statements may be
subject to change.
In the process of applying the Group's accounting policies,
management necessarily makes judgements and estimates that have a
significant effect on the amounts recognised in the interim
statement. Changes in the assumptions underlying the estimates
could result in a significant impact to the financial information.
The most critical of these accounting judgement and estimation
areas are included in the Group's 2022 consolidated financial
statements and the main areas of judgement and estimation are
similar to those disclosed in the financial statements for the year
ended 30 June 2022.
Notes to the interim statement (continued)
4 Accounting policies
The accounting policies used in preparing these financial
statements are the same as those set out and used in preparing the
Group's audited financial statements for the year ended 30 June
2022 .
5 Valuation (losses)/gains on investment properties
31 Dec 31 Dec 30 Jun
2022 2021 2022
GBP000 GBP000 GBP000
Valuation gains in investment
properties - - 190
Valuation losses on investment
properties after transaction
costs - - (690)
Net valuation (losses)/gains
on investment properties - - (500)
6 Income tax
Taxation for the six months ended 31 December 2022 is based on
the effective rate of taxation which is estimated to apply to the
year ending 30 June 2023. Due to the tax losses incurred there is
no tax charge for the period.
In the case of deferred tax in relation to investment property
revaluation surpluses, the base cost used is historical book cost
and includes allowances or deductions which may be available to
reduce the actual tax liability which would crystallise in the
event of a disposal of the asset. At 31 December 2022 there is a
deferred tax asset which is not recognised in these accounts.
Notes to the interim statement (continued)
7 Profit or loss per share
Basic profit or loss per share is calculated by dividing the
profit or loss attributable to ordinary
shareholders by the weighted average number of ordinary shares
outstanding during the period as follows:
6 months 6 months Year
ended ended ended
31 Dec 31 Dec 30 Jun
2022 2021 2022
GBP000 GBP000 GBP000
Profit/(loss) for financial
period 353 (196) (1,302)
No. No. No.
Weighted average no. of
shares:
For basic and diluted profit
or
loss per share 11,783,577 11,783,577 11,783,577
Earnings per share 3.00p (1.66p) (11.05p)
Earnings per share 3.00p (1.66p) (11.05p)
8 Investment Properties
31 Dec 31 Dec 30 Jun
2022 2021 2022
GBP000 GBP000 GBP000
Valuation
Opening valuation 16,610 17,110 17,110
Revaluation in period - - (500)
Closing valuation 16,610 17,110 16,610
The fair value of investment property at 31 December 2022 was
determined by the directors' taking cognisance of the independent
valuation by Montagu Evans, Chartered Surveyors as at 30 June 2022
having made adjustments for changes in leases and market
conditions.
Notes to the interim statement (continued)
9 Financial instruments
Fair values
Fair values versus carrying amounts
The fair values of financial assets and liabilities, together
with the carrying amounts shown in the balance sheet, are as
follows:
31 Dec 2022 31 Dec 2021 30 Jun 2022
Fair Carrying Fair Carrying Fair Carrying
value amount value amount value amount
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
Trade and other
receivables 144 144 86 86 103 103
Cash and cash
equivalents 2,367 2,367 2,322 2,322 1,317 1,317
2,511 2,511 2,408 2,408 1,420 1,420
------- --------- ------- --------- ------- ---------
Loans from related
parties 4,380 4,380 4,380 4,380 4,380 4,380
Trade and other
payables 992 992 722 722 1,100 1,100
5,372 5,372 5,102 5,102 5,480 5,480
======= ========= ======= ========= ======= =========
Estimation of fair values
The following methods and assumptions were used to estimate the
fair values shown above:
Trade and other receivables/payables - the fair value of
receivables and payables with a remaining life of less than one
year is deemed to be the same as the book value.
Cash and cash equivalents - the fair value is deemed to be the
same as the carrying amount due to the short maturity of these
instruments.
Other loans - the fair value is calculated by discounting the
expected future cashflows at prevailing interest rates.
Notes to the interim statement (continued)
10 Issued share capital
31 Dec 2022 31 Dec 2021 30 Jun 2022
No. No. No.
000 GBP000 000 GBP000 000 GBP000
Issued and
Fully paid
Ordinary shares
of 20p each 11,784 2,357 11,784 2,357 11,784 2,357
11 Seasonality
Investment property sales by the Group are not seasonal and
sales of completed houses on development sites are driven more by
completion of construction projects than by season.
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END
IR DFLBXXXLLBBX
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