Canary Wharf Group - Interim Results
RNS Number:6168W
Canary Wharf Group PLC
17 March 2004
17 March 2004
ANNOUNCEMENT OF RESULTS
SIX MONTHS ENDED 31 DECEMBER 2003
HIGHLIGHTS
Notes Unaudited Unaudited Change
Six months Six months
ended 31 ended 31
December December
2003 2002
--------- --------- --------
£m £m %
Turnover - rents and service
charges 163.1 120.8 35.0
Exceptional items:
- amortisation of investment in own
shares - (2.8)
- bid costs (10.7) -
Operating profit 105.7 78.4 34.8
Exceptional items:
- deferred consideration on
sale of subsidiary undertaking - 2.9
- net profit on sale of property 69.8 -
Profit before interest
including exceptional items 175.5 81.3
Net interest payable
excluding exceptional items (116.2) (76.3)
Exceptional item:
- charges relating to
repayment of securitised
debt (56.5) -
Profit for the financial
period before taxation 2.8 5.0
Profit for the financial
period before taxation
excluding exceptional items 0.2 4.9
(Loss)/profit for the
financial period after
taxation (0.3) 4.9
Special dividend - (372.8)
Basic earnings per share (0.1)p 0.8p
Diluted earnings per share (0.5)p 0.8p
Unaudited Restated Change
at 31 Audited
December at 30
2003 June
2003
--------- --------- --------
£m £m %
Investment properties (1) 4,175.4 4,182.8
Properties under construction and
properties held for
development (2) 487.0 1,133.0
Net debt (2,972.4) (3,680.9)
Other net liabilities (24.7) (127.2)
--------- ---------
Net assets 1,665.3 1,507.7 10.5
Net assets at net book value
after adding back deferred
tax provision 1,716.3 1,555.6
Properties under construction and
properties held for
development (3)
- at Market Value 614.5 1,581.0
- at present value of Net
Realisable Value 996.6 2,305.1
Net Asset Value per share
based on Market Value
excluding deferred tax (4) £3.15 £3.12 1.0
Fully diluted Net Asset Value per
share based
on Market Value excluding
deferred tax (4) £3.15 £3.12 1.0
(1) The interim results include adjustment for revaluation of
investment properties. The net revaluation surplus, after UITF 28 adjustments,
was £157.2 million including £176.5 million attributable to properties completed
in the period.
(2) Properties under construction and properties held for development
stated at cost.
(3) Refer to 'Business Review - Valuations' of the announcement for
an explanation of the basis of valuation.
(4) Refer to 'Business Review - Balance Sheet' of the announcement
for an explanation of the basis of calculation.
AT 31 DECEMBER 2003:
* The group's investment portfolio totalling 8.8 million sq ft was 86.7%
let.
* Two buildings were under construction totalling 1.0 million sq ft of
which 65.9% let after allowing for the exercise of options to sub-let space
back to the group.
* The surplus on revaluation of the three investment properties completed
in the period was £176.5 million.
* The Market Value of the property portfolio was £5,104.8 million against
£5,811.5 million at 30 June 2003, an increase of 1.2% disregarding additions
and disposals in the period and UITF 28 adjustments.*
* Net asset value, after adding back the provision for deferred tax, was
£1,716.3 million at 31 December 2003 compared with £1,555.6 million at 30
June 2003.
* Adjusted net asset value per share (based on Market Value) was £3.15
against £3.12 at 30 June 2003.**
* Refer to 'Business Review - Valuations' of the announcement for an explanation
of the basis of valuation.
** Refer to 'Business Review - Balance Sheet' of the announcement for an
explanation of the basis of calculation.
DURING THE PERIOD:
* The disposal of two properties for proceeds of £1,112 million generated
net proceeds of £237 million and a profit of £69.8 million.
* The proceeds from the disposal of property contributed to a reduction in
net debt from £3,680.9 million at 30 June 2003 to £2,972.4 million at 31
December 2003.
* Construction was completed on three properties, comprising 25-30 Bank
Street (1,023,300 sq ft fully let to Lehman Brothers subject to a leaseback
of 100,800 sq ft for 5 years and 102,100 sq ft for 10 years), 10 Upper Bank
Street (1,000,400 sq ft fully let to Clifford Chance subject to the
leaseback of 52,500 sq ft for 5 years and 52,100 sq ft for 10 years) and the
Jubilee Place Retail Centre (89,900 sq ft let to various tenants including
Marks & Spencer).
* In September 2003 a finance lease in a gross amount of £753.5 million
was entered into in respect of 1 Churchill Place generating net proceeds of
£299 million.
RECENT EVENTS:
* In January 2004 the group repaid £901.3 million of notes from its second
securitisation including £25 million of notes held by the group.
CONTACTS:
Wendy Timmons
Head of Corporate Communications
Canary Wharf Group plc
Telephone: 020 7418 2000
A copy of the Interim Statement will be sent to shareholders and copies will be
made available to the public on request to the Company Secretary at the
registered office, One Canada Square, Canary Wharf, London E14 5AB.
The information in this announcement, which was approved by the board of
directors on 16 March 2003, does not comprise statutory accounts within the
meaning of the Companies Act 1985.
CHAIRMAN'S AND CHIEF EXECUTIVE'S STATEMENT
Introduction
As you will be aware, Canary Wharf Group plc is in the midst of a bid process.
This is expected to be resolved in the near future and the process is the
subject of announcements by the Independent Committee of Directors which
comments separately on such matters.
We are pleased to report, however, that the underlying business of Canary Wharf
is doing well and we are making important progress in several key areas.
Leasing
In September 2003 we announced that terms had been agreed with Reuters for the
lease of approximately 283,000 sq ft of space in 30 The South Colonnade. The
formal exchange of contracts has now been completed. Reuters will take over the
entire building in the Spring of 2005.
Following agreement on heads of terms in September 2003, formal contracts were
also exchanged with BP's Integrated Supply and Trading Division (BP IST) for the
lease of part of 20 Canada Square. The lease agreement is for 140,500 sq ft on
floors 1, 2 & 3 and part of floor 4 of the building. BP IST also have an option
to take additional space in this building.
In December 2003 we leased 18,000 sq ft to Goldenberg, Hehmeyer & Co in 50 Bank
Street and in September 2003 13,500 sq ft was leased to the European Medical
Evaluation Agency, an existing tenant in 7 Westferry Circus.
Our latest retail offering of 89,900 sq ft in Jubilee Place mall opened on 18
September 2003. It is now fully let and contains 38 units anchored by Marks and
Spencer and is home to a wide variety of new fashion shops.
The Reuters and BP transactions are confirmation that there is an improvement in
the level of leasing activity at Canary Wharf. In our view headline rent levels
have stabilised although inducement packages in both the City and Canary Wharf
continue to reflect the current over supply in the market. We remain optimistic
about improvement in the London market and more particularly the attractiveness
of Canary Wharf to tenants.
Disposal of Completed Buildings
In December 2003, shareholders approved the sale to The Royal Bank of Scotland
for £1.1 billion of 25 Canada Square, occupied by Citibank, and 5 Canada Square,
leased to CSFB and partly occupied by Bank of America. Such disposals are part
of the company's strategy to selectively sell completed buildings and use the
resulting proceeds to reduce debt and strengthen the balance sheet.
Disposal of Takeover Properties
As part of the transaction with Reuters the freeholds of Reuters' current
headquarters at 85 Fleet St and St Brides House were acquired at an approximate
price of £32.5 million. Following the freehold acquisitions and after an
extensive marketing campaign we have recently agreed to sell these properties to
UBS for a total consideration of £30 million. The sale of these properties was
envisaged as part of the overall inducement package agreed with Reuters and the
price achieved was well within the level estimated at the time of the initial
agreement with Reuters.
Reduction of Overhead
We are well into a planned reduction in construction personnel. From a peak of
580 the number of construction employees will be reduced to about 200 by mid
2004. Further reductions will occur as the construction programme currently
under way is completed. Along with these reductions, reductions in the level of
corporate overheads are also underway.
Financial Review
Turnover increased from £120.8 million for the six months ended 31 December 2002
to £163.1 million for the six months ended 31 December 2003, a rise of 35.0%,
driven by the recognition of rent on recently completed buildings. Net property
income (gross profit) increased by £34.3 million to £131.8 million over the same
period.
In December 2003 the group concluded the sale of 5 Canada Square and 25 Canada
Square for £1,111.9 million which generated additional liquidity for the group
of approximately £237 million and an exceptional profit on disposal of £69.8
million. In conjunction with the sale of these two buildings the group repaid
£901.3 million of notes from its second securitisation in January 2004
(including £25.0 million of notes held by the group). As a result of this
repayment of debt, £44.1 million of prepayment fees and breakage costs relating
to hedging instruments were incurred and prior year deferred financing costs of
£12.4 million were written off. These charges were accrued at 31 December 2003
and charged to the profit and loss account as an exceptional item.
Excluding exceptional items, the group recorded a profit before tax of £0.2
million for the six months ended 31 December 2003, a reduction in profit before
tax of £4.7 million against the comparable period last year, which was primarily
attributable to the fact that net interest payable, before the exceptional
charge referred to above, increased by £39.9 million in comparison with the
increase of £34.3 million in net property income. After exceptional items the
group recorded a profit before tax for the six months ended 31 December 2003 of
£2.8 million in comparison with £5.0 million for the six months ended 31
December 2002. The profit for the period of £2.8 million reflects the
exceptional profits and charges relating to the sale of 5 Canada Square and 25
Canada Square as well as costs totalling £10.7 million in respect of the
potential acquisition of the group by a third party.
Net assets increased from £1,507.7 million (as restated - see Business Review)
at 30 June 2003 to £1,665.3 million at 31 December 2003. The increase of £157.6
million was primarily attributable to the revaluation of newly completed
properties by £176.5 million offset by a reduction in the carrying value of the
group's other investment properties by £19.3 million, resulting in a total
revaluation surplus of £157.2 million.
Capital Structure
At 31 December 2003 net debt stood at £2,972.4 million in comparison with
£3,680.9 million at 30 June 2003, a fall of £708.5 million. The reduction in net
debt was primarily driven by two transactions in the period. In September 2003
the group entered into a finance lease transaction in relation to 1 Churchill
Place which generated additional liquidity for the group of £299 million as well
as providing £205 million for the completion of the building. As noted above,
the sale of 5 Canada Square and 25 Canada Square in December 2003 generated
additional liquidity of approximately £237 million. The group had free cash at
31 December 2003 of £665.5 million.
Construction
During the six months to 31 December 2003, 25-30 Bank Street, the 1.02 million
sq ft building let to Lehman Brothers, and 10 Upper Bank Street, a 1.0 million
sq ft building let to Clifford Chance, were both completed. The Jubilee Place
mall also opened on schedule in September 2003. This retail mall is now linked
to the five office buildings on Heron Quays and also to the remainder of the
retail premises via a new underground link to the Jubilee Line Station. A new
link from the Jubilee Line station leading to the Canada Square shopping mall is
expected to open in April 2004 at the same time as the opening of the eastern
entrance to the Jubilee Line station.
The remaining building currently under construction is the 1.0 million sq ft
Barclays headquarters building at 1 Churchill Place which is on track for
completion in July 2004, along with 24,000 sq ft of retail space at Churchill
Place. When completed the Barclays building will bring the completed Canary
Wharf estate to a total of 14.1 million sq ft of which the group will own 9.9
million sq ft.
Central London Office Market Overview
Supply
Overall, Central London office supply rose only marginally in the final quarter
of 2003 to approximately 27.5 million sq ft. Looking at the individual
sub-markets, the availability in the City market now amounts to 15 million sq
ft, representing a vacancy rate of 13.7%. In Docklands availability rose to 2.2
million sq ft, bringing the vacancy rate to 12.1%. Availability in the West End
increased less than the other sub-markets, recording a vacancy rate of 11.6% or
10.3 million sq ft. At Canary Wharf, the current vacancy rate of space that is
directly in the control of the group has reduced to 11.7% or 1.03 million sq ft.
Following completion of the Barclays building in July 2004, in the absence of
further lettings, the vacancy rate could increase to 14.1% or 1.39 million sq
ft.
At the end of 2003 almost 25% of supply across Central London was in new space.
Although the delivery of new accommodation to the market through the development
pipeline has now started to slow, with far fewer speculative completions
expected in 2004 than experienced over the last few years, availability levels
are still likely to reach their peak in mid 2004.
Take-up and Demand
The limited number of large unit transactions over the course of the year
inevitably impacted on total take-up levels. Take-up across Central London
totalled 8.6 million sq ft during 2003, the lowest annual total in over a
decade, which itself was significantly below the 20 year average of 11.6 million
sq ft.
Whilst in the short-term it appears that only those with an absolute need to
move are doing so, increased levels of recorded demand, in combination with
recent improved financial and economic indicators, underpin increasing optimism
in the market for the medium-term.
At Canary Wharf in particular, with the improvement in the financial markets we
are seeing further evidence of occupiers expanding. Barclays Capital has
acquired 100,000 sq ft from Credit Suisse First Boston in 10 The South
Colonnade. Additionally, Credit Suisse First Boston have taken off the market
the 250,000 sq ft of surplus floor space they were marketing at 5 Canada Square.
Rents
Given the continued lack of transactional evidence at the top end of the market,
it has become increasingly difficult to place a precise value on prime rents in
the City and West End. At the end of the fourth quarter Knight Frank quoted
prime rents in the City at £45 per sq ft, down from £55 per sq ft at the end of
2002, with further softening expected into 2004. Rental values in the West End
have also continued to soften over the course of 2003, standing at £62.50 per sq
ft at the end of the year.
At Canary Wharf, as stated above, we have successfully closed a number of
transactions during the past 6 months. On single floor, sub 20,000 sq ft
lettings, the headline rents achieved on the EMEA and Goldenberg, Hehmeyer & Co
lettings were £37 per sq ft and £40 per sq ft respectively. The Reuters
transaction, which was signed on a phase 1 building completed in 1991, achieved
a headline rent of £35 per sq ft. The BP IST transaction in 20 Canada Square, a
newly constructed building completed in January 2003, achieved a headline rent
of £38 per sq ft. At Canary Wharf we have seen total inducements range from
30-36 months on 15 year leases and 24-28 months on 10 year leases. This is
consistent with the City where it is now believed that rent free periods in the
City have reached their maximum at circa 33-36 months on a standard 20,000 sq ft
unit and a 15 year lease.
We are also pleased to report that the outstanding Daily Telegraph rent review
has been settled by mutual agreement at a net effective rent of £38.20 per sq
ft.
Conclusion
The past six months have continued to be a difficult and unsettling time for all
staff. We would like to express our thanks to staff for their continuing
commitment, which has been reflected in the progress made in our core
activities. Through their efforts the Company is well placed to take advantage
of any improvement in market conditions and shareholders are in a strong
position from which to consider any proposal arising out of the bid process.
------------------------------- -------------------------------------
Sir Martin Jacomb George Iacobescu
ACTING CHAIRMAN CHIEF EXECUTIVE OFFICER
BUSINESS REVIEW
Property Portfolio
As at 31 December 2003, the investment properties in the group's ownership
(totalling 8.8 million sq ft net in 21 buildings) were 86.7% let and a further
two buildings (totalling 1.0 million sq ft net) were under construction, of
which 65.9% is covered by agreements for lease after allowing for the exercise
of options to sub-let space referred to in the table in Note 14.
During the six month period to 31 December 2003 the group completed construction
of three properties all of which were retained as investment properties. 25-30
Bank Street is a 1,023,300 sq ft building which was let in its entirety to
Lehman Brothers subject to the lease-back of 100,800 sq ft for 5 years and
102,100 sq ft for 10 years. 10 Upper Bank Street is a 1,000,400 sq ft building
which was let in its entirety to Clifford Chance subject to options to lease
back 52,500 sq ft for 5 years and 52,100 sq ft for 10 years. As a result of this
lease to Clifford Chance the group acquired a sub-leasehold interest in 200/202
Aldersgate Street (Note 11). Jubilee Place Retail Centre is an 89,900 sq ft
retail building, which is 99.4% let to tenants, including Marks & Spencer,
French Connection and Reiss.
In December 2003 the group disposed of 5 Canada Square and 25 Canada Square. 5
Canada Square is a 515,100 sq ft building let in its entirety to CSFB and 25
Canada Square is a 1,223,500 sq ft building which was let in its entirety to
Citigroup. The consideration for the disposal was £1,111.9 million in comparison
with a market value at 30 June 2003 of £1,017.0 million. The sale of the
buildings generated a profit on disposal of £69.8 million after allowing for the
write-off of unamortised lease incentives accounted for in accordance with
Urgent Issues Task Force Abstract 28 (Lease Incentives) ('UITF 28') and expenses
of sale. The profit on disposal has been treated as an exceptional item in the
profit and loss account for the six months ended 31 December 2003.
The group's properties are under lease to high quality tenants which provide a
diversified income stream. At 31 December 2003 the weighted average unexpired
lease term for the total office portfolio (built and under construction) was
approximately 22.0 years (or 18.7 years assuming exercise of all outstanding
break options and those sub-let options which could be for the remaining term of
the leases). Of the square footage under lease 69% does not expire or cannot be
terminated by tenants during the next ten years.
The group has achieved a number of lettings since 30 June 2003. On 23 September
2003 an agreement with the European Medicines Evaluation Agency ('EMEA') was
entered into to lease 13,500 sq ft at 7 Westferry Circus. This space was
previously subject to a sub-lease from CSFB. The new lease, which is subject to
a 21 month rent-free period, will run concurrently with EMEA's existing leases,
due to expire in December 2014.
On 12 December 2003 an agreement for lease was concluded with Goldenberg
Hehmeyer & Co to lease the 18,000 sq ft third floor in 50 Bank Street. The lease
is for a 15 year term with a break at year 10.
On 9 February 2004 the group announced that it had signed agreements for lease
for the pre-let to Reuters of approximately 283,000 sq ft of space in the
building at 30 The South Colonnade, presently let to London Underground Limited
('LUL') until April 2004. Reuters will take the entire building in May 2005 as
their headquarters. Reuters will lease 239,000 sq ft on a 15 year lease and an
additional 44,000 sq ft on a separate lease with a break exercisable at year 5,
upon payment of a 1.5 year rental penalty, and a further break at year 10. After
LUL vacate the building the group will, at its own expense, carry out upgrades
to the value of £3 million.
As part of this transaction the group has granted to Reuters a rent-free period
of approximately 12 months equal to the value of the Category A works and in
addition has agreed to take over three of Reuters' leasehold properties. These
properties are expected to represent an exposure equivalent to approximately 2.5
years rent-free at 30 The South Colonnade. The group also acquired the freeholds
of Reuters' current headquarters at 85 Fleet Street and St Bride's House for a
combined consideration of approximately £32.5 million subject to a short lease
back of the headquarters building at a rent of approximately £1.6 million per
annum. On 5 March 2004 the two properties were sold for a combined consideration
of £30.0 million generating a loss on disposal after stamp duty and other
expenses of £2.6 million. The sale of these properties was envisaged as part of
the overall inducement package agreed with Reuters and the price achieved was
well within the level estimated at the time of the initial agreement with
Reuters. The loss will be treated as a lease incentive and accounted for in
accordance with UITF 28.
On 26 February 2004 the group announced that it had agreed to lease 140,500 sq
ft to BP's Integrated Supply and Trading division ('BP-IST') in 20 Canada Square
on a 20 year term with a tenant only break at years 10 and 15 at a rent of £38
per sq ft. There is a rent free period of 24 months and a Category A fitout
allowance of £48.75 per sq ft. BP-IST have an option on an additional 30,800 sq
ft exercisable up until 1 April 2004. If exercised BP-IST will acquire a break
right only exercisable at the end of year 5 of the term, upon payment of a one
year rental penalty. In addition should BP-IST exercise this option it will
acquire an additional option of 40,900 sq ft exercisable up until 1 September
2004. Subject to BP-IST exercising both of these options, it will acquire an
additional option on 47,000 sq ft exercisable until 1 November 2004.
Following the completion of the three properties referred to above, two
properties remained under construction at 31 December 2003 which, upon
completion, it is intended will be held as investment properties. These
comprised the following:
Property Address Approx. Net Expected Status
Internal Completion
Area (sq Date
ft)
---------------- -------- ---------- ------------------
1 Churchill
Place (BP1) 1,010,000 July 2004 Agreed to be leased to
Barclays subject to option
to lease back 65,300 sq ft
for 5 years, 129,500 sq ft
for 10 years and 133,700
sq ft for 15 years.
Churchill
Place Retail
Centre (RT4) 24,400 July 2004 Unlet
--------
1,034,400
========
As well as the properties under construction referred to above, the group is
continuing substructure works on the remaining sites on Canary Wharf as a
preliminary to development. In connection with this work, buildings DS3 (650,000
sq ft) and BP2 (200,000 sq ft) are being constructed to street level.
Uncommitted development sites on the original Canary Wharf site could
accommodate a total of 1.5 million sq ft. In addition development sites at North
Quay and Riverside which are adjacent to the existing completed parts of the
estate allow development of 2.1 million sq ft net based on existing planning
applications. Applications have been made to modify and increase the permitted
density to 4.2 million sq ft, but construction of new buildings will only
commence as and when market conditions allow.
Valuations
The net assets of the group, as stated in its consolidated balance sheet as at
31 December 2003, were £1,665.3 million. In arriving at this total:
(i) properties held as investments were carried at £4,175.4 million, which
represents the Market Value of those properties of £4,490.3 million at
that date as determined by the group's external valuers, FPDSavills or
CB Richard Ellis, less an adjustment of £314.9 million for tenant
incentives as required by UITF 28.
(ii) properties under construction and properties held for development, shown
as fixed assets, were carried at £250.6 million and £236.4 million
respectively, representing their cost to the group.
The surplus arising on the revaluations at 31 December 2003 of £157.2 million
comprises the following:
(i) a surplus of £176.5 million on the completed properties transferred to
investment properties; and
(ii) a reduction of £19.3 million in respect of investment properties held
throughout the period. This represents an uplift in their Market Value
of £12.9 million offset by a reduction of £32.2 million arising from the
treatment of rent-free incentives which are deducted from the valuations
in the Interim Statement. A deduction for the rent-free incentives was
not made at 30 June 2003. The previous application of UITF 28 has
resulted in potential double counting between the inclusion in the
balance sheet of investment properties at Market Value and accrued
rental income in respect of rent-free periods. In order to avoid this,
the amount accrued as rental income has been deducted from the carrying
value of investment properties and the group's auditors concur with this
change in approach. Had this approach been adopted at 30 June 2003, the
carrying value of investment properties would have been reduced by £39.0
million to £4,143.8 million. Of the £39.0 million, £20.2 million related
to 5 and 25 Canada Square which has been deducted in calculating the
profit on disposal of these buildings of £69.8 million.
As well as valuing the investment properties, FPDSavills or CB Richard Ellis
have valued all properties under construction, comprising those properties set
out in the table above. The Market Value of properties under construction at 31
December 2003 was £374.5 million in comparison with a carrying value for
accounts purposes of £250.6 million. In valuing the properties under
construction, the valuers have allowed for estimated costs to complete including
fit-out. In addition they have allowed for letting, disposal and marketing
costs.
As regards properties held for development, the valuers have provided a joint
opinion as at 31 December 2003 that the Market Value was £240.0 million in
comparison with a carrying value for accounts purposes of £236.4 million. In
valuing the properties held for development, the valuers have allowed for
estimated costs to complete, including an allowance for fit-out. In addition
they have allowed for letting, disposal, marketing and financing costs. The
Market Value of £240.0 million represents a reduction of 6.8% excluding
additions from the Market Value at 30 June 2003, which reflects a longer
development horizon and consequently a larger allowance for developer's profit.
Excluding additions in the six months to 31 December 2003, and allowing for the
disposal of 5 Canada Square and 25 Canada Square, the valuation of the property
portfolio on the basis of Market Value (and prior to any adjustments for UITF
28) increased by £60.9 million or 1.2%.
As noted in the Property Portfolio section, there are a number of properties
which are subject to sub-let options. These options are summarised in the table
in Note 14 and are taken into account in the valuations.
At the same time as providing their opinion of the Market Value of properties
under construction or held for development, the valuers were also instructed to
give their opinion of the present value of the Net Realisable Value of such
properties. Net Realisable Value is defined in SSAP 9 (Stocks and Long-term
Contracts) as 'the actual or estimated selling price (net of trade but before
settlement discounts) less: (a) all further costs to completion; and (b) all
costs to be incurred in marketing, selling and distributing'. This same
definition of Net Realisable Value is reproduced in Practice Statement 21 of the
RICS Manual 'Valuations of Trading Stock and Work in Progress, including Land
and Buildings'. The Net Realisable Value of the group's properties under
construction and properties held for development comprises an assessment of the
total value to the group, arising from owning and developing those properties,
being the aggregate of:
(a) the Market Value of the land;
(b) developer's profit;
(c) the effect on value of EZAs; and
(d) finance holding costs on the site value (and other minor items)
arising from the fact that the land is already in the ownership of the
group.
Thus, Net Realisable Value allows consideration to be given to the enhancement
in value to the group arising from (b), (c) and (d) which do not form part of
the Market Value of the properties' existing state.
The approach adopted by the valuers in arriving at the present value of the Net
Realisable Value at 31 December 2003 was consistent with that adopted at 30 June
2003. At 31 December 2003 the valuers adopted a discount rate of 6.8%, which
represents a notional cost of borrowing equal to 2% above the 10-year gilt rate.
This compares with a rate adopted at the previous year end of 6.15%.
On the basis outlined above, the valuers' opinion of the present value of the
Net Realisable Value of the properties under construction at 31 December 2003
was £399.6 million. Their joint opinion of the present value of the Net
Realisable Value of properties held for development at that date was £597.0
million in comparison with £620.0 million at 30 June 2003, a reduction of 5.6%
after additions, reflecting an increase in the discount rate.
The carrying value of the group's properties for accounts purposes in comparison
with the supplementary valuations provided by the external valuers is summarised
in the table below:
31 December 2003 30 June 2003
-------------------- --------------------
------- -------- -------- ------- -------- ---------
Carrying Market Present Carrying Market Present
Value Value Value Value Value Value
in of Net in of Net
Existing Realisable Existing Realisable
State Value State Value
------- -------- -------- ------- -------- ---------
£m £m £m £m £m £m
Investment
properties 4,175.4 (1) 4,490.3(2) 4,490.3 (4) 4,182.8(1) 4,230.5(2) 4,230.5(4)
Properties
under
construction 250.6 374.5 (3) 399.6 909.2 1,336.0 (3) 1,685.1
Properties
held for
development 236.4 240.0 597.0(5) 223.8 245.0 620.0 (5)
------- -------- -------- ------- -------- ---------
Total 4,662.4 5,104.8 5,486.9 5,315.8 5,811.5 6,535.6
======= ======== ======== ======= ======== =========
Notes:
(1) The carrying value of investment properties represents Market Value less
an adjustment for UITF 28. This adjustment has not been made to the
columns headed Market Value in Existing State or the Present Value of Net
Realisable Value.
(2) Stated at Market Value in existing state before adjustment for UITF 28.
The UITF 28 adjustment attributable to investment properties at 31
December 2003 was £314.9 million (30 June 2003 - £47.7 million).
(3) Stated at Market Value in existing state before adjustment for UITF 28.
At 30 June 2003, the UITF 28 adjustment attributable to properties under
construction which reached practical completion subsequent to the year
end was £179.0 million.
(4) Investment properties stated at Market Value excluding adjustment for
UITF 28 and any potential value attributable to EZAs.
(5) Interests in Heron Quays West included at Market Value of £15.0
million.
Taxation
Property development is carried out by the group's development companies each of
which is a trading company for tax purposes. The trading companies realise
development profits for tax purposes on the sale of each property either to a
group property investment company (which profit is eliminated in the
consolidated accounts) or to a third party. This profit is broadly equivalent to
the difference between the Market Value of the property on the date of sale and
the cost to the group of constructing the building. If the group property
development company does not sell the property immediately on completion, until
it does so the property is treated as trading stock for the purposes of its own
financial statements but will be shown as an investment property in the
consolidated balance sheet, unless it is intended to sell the property to a
third party when it will be shown as trading stock.
On the transfer of completed properties to a group investment company, the group
becomes eligible to claim EZAs. For properties held within the group, the EZAs
are available as an initial allowance of up to 100% in the year the qualifying
expenditure is incurred by the investment company, or up to 25% as a writing
down allowance if claimed in subsequent accounting periods. For group investment
companies purchasing properties directly from the group property development
companies, the expenditure which qualifies for EZAs is based on the property's
Market Value at the time of its transfer to the group property investment
company, less a disallowance for the value of land and other non-qualifying
expenditure. EZAs can be claimed by the group, when required, to shelter taxable
profits as they arise including trading profits in the property development
companies on the transfer of completed buildings once the accumulated trading
losses have been fully utilised. The group may claim any remaining available
EZAs to shelter future operating profits when necessary.
In arriving at a Market Value of the properties in the consolidated balance
sheet, the value of all completed properties is included in investment
properties. This Market Value, summarised in the table above, ignores any
potential value attributable to EZAs. The Group also instructed its valuers to
assess the Market Values of the properties inclusive of EZAs and has been
advised that the uplift in the Market Value of the group's properties
attributable to EZAs is in the region of £351.6 million (30 June 2003 - £525.0
million). The reduced uplift in value at 31 December 2003 in comparison with
that at 30 June 2003 is largely attributable to the sale of 5 Canada Square and
25 Canada Square in December 2003 and the completion of a finance lease
transaction on 1 Churchill Place in September 2003 (Note 10). This was offset by
the benefit of revaluing properties which reached completion in the period.
The uplift in value in comparison with Market Value represents the valuers'
assessment of the additional amount that a third party purchaser would pay for
the property recognising that a purchaser would pay more for a building that
attracts EZAs compared to a building that does not. However, this amount does
not reflect the value of the EZAs to the group for two reasons.
Firstly, a disposal of any property may trigger a clawback of any EZAs
previously claimed by the group which would generate a tax liability. A deferred
tax liability has been provided in respect of this and is disclosed in Note 11.
Secondly, if the group were to utilise the EZAs available by way of internal
sales of properties, claims for EZAs would be made to shelter the group's
taxable profits and thereby mitigate the payment of corporation tax. The value
of the EZAs to the group would then be by reference to the net present value of
the tax savings. The claiming of EZAs will give rise to a deferred tax liability
and so result in no net tax benefit being recognised in the profit and loss
ac |