Final Results

21st Jan 2009 07:00



21 January 2009

INVISTA EUROPEAN REAL ESTATE TRUST SICAF 

FULL YEAR RESULTS FOR 12 MONTHS ENDED 30 sEPTEMBER 2008

The Invista European Real Estate Trust SICAF (the "Company"/"Group") has today announced its results for the year ended 30 September 2008.

Financial highlights

Property assets of €687.4 million (30 September 2007: €724.3 million) comprising 51 properties across seven continental European countries. The like for like fall during the three months from June-September 2008 was 5.7% or a decrease of 9.5% for the full financial year

Net Asset Value per share of €2.34 (30 September 2007: €3.11) reflecting a decrease of €0.77 (24.6%) over the year 

Loss before tax of €63.2 million (30 September 2007: profit €10.2 million) principally due to downwards property re-valuations

Operational and strategic highlights

Net rental and other income increased to €45.4 million (€31.8 million 30 September 2007) reflecting the larger property portfolio and a near full year's rent

Following the period end, the Company agreed a three year extension to its existing senior debt facility with Bank of Scotland providing certainty of cost and period of debt funding. The Board intends to refinance the debt to reduce its cost as financial markets improve

Two French properties sold post year end for €55.8 million at 0.36% above the September 2008 valuation

Vacancy across the portfolio remains low at 3.8% with good progress made in letting up void accommodation.

Commenting, Tom Chandos, Chairman of the Invista European Real Estate Trust, said:

"The Company will not be immune from the current market dislocation, however it is now on a firmer footing having removed the uncertainty over the refinancing and the completion of the recent sales. The unprecedented events in the global financial markets in the last few months will mean property valuations remain under pressure in the short term; however, government intervention in the banking market should begin to ease liquidity in the debt markets over time. The Company will continue to work diligently through the agreed strategy of effecting asset disposals, reducing borrowings, preserving income and adding value to assets with the aim of returning long term value to shareholders."

For further information:

Tony Smedley / Chris Ludlam 

Invista Real Estate Investment Management  +44 (0) 20 7153 9345

Stephanie Highett / Dido Laurimore

Financial Dynamics +44 (0) 20 7831 3113

  

Invista European Real Estate Trust Company Summary

As at 30 September 2008, Invista European Real Estate Trust SICAF (the "Company")  and its subsidiaries (together the "Group") held a diversified real estate portfolio comprising 51 commercial properties across seven Continental European countries and were committed to acquire one further property. The combined aggregate value of these properties was €697.9 million (€687.4 million of which were owned1).

The Company's objective is to provide shareholders with an attractive level of income return together with the potential for income and capital growth through investing in diversified commercial real estate in Continental Europe. The geographical focus of the Group remains the Western European countries due to the relative stability, transparency and liquidity of these markets.

Net Asset Value2 per share decreased by €0.77 to €2.34

Loss per share of €0.55

The Group has declared and paid total dividends amounting to € 0.089 per share

Net Asset Value total return of -19.9%

	30 September  2008	30 September  2007
Net Asset Value ("NAV")2	€267.7m	€355.1m
NAV per share 2	€2.34	€3.11
NAV per share 2,3	186p	216p
Share price	51.75p	199.75p
Share price discount to NAV	72.2%	7.5%
NAV total return 4	-19.9%	11.8%
Total Group assets less current liabilities 5	€713.2m	€780.3m

Sources: Invista Real Estate Investment Management; Datastream 

  

Performance Summary 

Property performance

	30 September 2008 Total €'m	30 September 2007 Total €'m
Value of Property Assets 1	687.4	724.3
Current annualised rental income including rental guarantees	50.7	48.4
Estimated open market rental value	49.9	48.3

Summary consolidated income statement 

	Year ended 30 September 2008 €'m	Year ended 30 September 2007 €'m
Net rental and other income	45.4	31.8
Net valuation (loss)/gains on investment property	(65.9)	23.1
Expenses	(14.6)	(16.5)
Net finance costs	(26.4)	(15.8)
(Loss)/profit before tax	(61.5)	22.6
Taxation	(1.7)	(12.4)
(Loss)/profit for the year	(63.2)	10.2

Earnings and dividends

	Year ended 30 September 2008	Year ended 30 September 2007
Earnings per share (euro)	(0.55)	0.12
Dividends declared per share (euro)	0.0887	0.1377
Dividend yield on 30 September share price 2	13.6%	6.2%

Bank borrowings 

	Year ended 30 September 2008	Year ended 30 September 2007
Borrowings €'m 3	445.5	427.5
Borrowings as % of total assets less current liabilities 3	62.5%	54.8%
Borrowing as % of market value of property assets 3	64.8%	59.0%
Loan covenant of borrowings as % of market value of property assets	70.0%	70.0%

Estimated annualised total expense ratio 

	Year ended 30 September 2008	Year ended 30 September 2007
As % of total assets less current liabilities 4	2.11%	1.64%
As % of shareholders' funds 4	6.07%	3.88%

Direct property valuation includes €55.8m in respect of two assets in Lyon, France sold in October 2008

Share price converted to euro at exchange rate of €:£ of 1.2582 prevailing at 30 September 2008 and 1.4359 as at 30 September 2007

As at 30 September 2008, borrowings include €32.5m in respect of two assets in Lyon, France sold in October 2008.

The Total Expense Ratio ('TER') for the year to 30 September 2008 excludes exceptional costs of €1.7m relating to abortive transactions in the year ended 30 September 2008 and €5.4m relating to the issuing costs and performance fees in the year ended 30 September 2007. 

  Chairman's Statement

This is a challenging environment marked by a high degree of stock market volatility as investors grapple with the combined effect of government intervention and a weakening economic environment. Real estate has traditionally exhibited more defensive characteristics in times of high stock market volatility however in this cycle it is clear that the asset class has been significantly affected by the withdrawal of debt and credit from the market. More usually a property market downturn has been driven by property factors such as over-development or rapid rental growth. However none of these characteristics caused this downturn or have been exhibited thus far during this cycle.

The independent property valuations of the Company's portfolio as at 30 September 2008 showed a like for like fall in value of 5.7% during the quarter June-September 2008 which contributed towards a full financial year decrease of 9.5%. This decrease followed a period of relatively stable valuation performance in 2007, which to a large extent reflected the long leases and good quality tenants in the portfolio. The lack of liquidity in the market has however accelerated asset value declines. In the short term it is therefore inevitable that property values will continue to decrease as the markets adjust to the less favourable outlook. Despite this, we remain optimistic about the quality of our current portfolio and its long term prospects.

Results

The Company's second financial year following its listing on 20 December 2006 has again been an active period. The gradual slowdown in the property markets of Continental Europe has heightened the efforts of our Investment Manager to preserve income through applying active management techniques to the properties in the portfolio. The priority for the second half of the year has, however, been on securing long term refinancing and realising asset sales, and both of these activities have been successfully achieved after the year end. 

During the financial year, the Group's audited Net Asset Value adjusted to add back deferred tax decreased by €0.77 per share to €2.34 or by 24.8%. Reducing property valuations during the year was the greatest contributor towards this outcome and revaluations of the interest rate swap also caused some volatility in NAV. The net rental yield on valuation did however remain relatively high at 6.70% as at 30 September 2008 and is expected to rise further as valuations decline. Including the interim dividend totalling €0.089 per share, the Group's total NAV return per share over the period was -8.6% in Sterling and -19.9% in Euro terms. This compares with an annualised total NAV return of 15.1% in Sterling as at 30 September 2007.Over the 12 month period the positive effect of Euro appreciation resulted in gains in Sterling of 14.1%. The Group has not hedged currency.

The Board is in discussions with the Investment Manager with respect to an adjustment to the investment management fee. Further details will be announced subject to regulatory requirements.

Property Portfolio

The portfolio discipline of the Investment Manager has been to construct the property portfolio using a bottom up approach, identifying good quality assets in the most established and mature markets of Western Europe, which were let on longer leases to financially sound tenants. In more testing economic times, the quality of the portfolio and its diversity means that the Company is less exposed to possible relative under performance of certain sectors, industries, regions or countries. 

In an environment where preserving cash is becoming increasingly important our Investment Manager is continually monitoring the activity and performance of our clients - the tenants occupying the properties in the portfolio. There is no current evidence of increased tenant defaults or rent arrears although it is anticipated that tenants will become more focused on occupational cost during 2009-10. Vacancy across the portfolio remains low at 3.8% and good progress has been made during the year in letting up void accommodation. Against the background of the slowing economy however the financial strength of our tenants will be carefully monitored to ensure income performance is maintained. 

Two properties were sold in October 2008 post the year end in Lyon, France for a total consideration of €55.8m, 0.36% above the 30 September 2008 valuation. The fully let properties comprised three office buildings leased to IBM, Scotts and BASF in Ecully and an office building of 6,372 sqm let on a long term basis to Merial. 

  

Borrowings

I am pleased to report that following the reporting period, the Company has agreed terms with its existing lender, the Bank of Scotland, for a three year extension of its existing senior debt facility. The Company has drawn down facilities of €410 million, representing 65% LTV, for a three year term expiring on 31 December 2011 at a margin of 2.75% per annum over three month EURIBOR. All debt is fully hedged against changes in European interest rates until January 2013 at a weighted average swap rate of 4.055%. 

In an environment where there is precious little new debt available, we are pleased to have been able to secure an extension of the entire facility with the Bank of Scotland and remove an issue which we believe had weighed heavily on the Company during 2008. 

Whilst this facility will provide the Company with certainty of debt funding and a fixed cost of financing for a further three years, the debt is extremely expensive and constrains the amount of free cash flow generated post interest payments. It is the Board's intention to refinance this debt to a lower cost of longer term financing once financial markets improve but in the meantime further sales will be used to reduce debt. 

Dividends 

In such turbulent markets it is important for the Company to preserve cash with a view to de-leveraging during 2009 using surplus cash flow and proceeds from sales. Post the year end the Board therefore decided to suspend dividends in respect of the second interim dividend for the financial year ended 30 September 2008 and for the entire financial year ending 30 September 2009. The Board will review this dividend policy regularly in light of the health of the financial markets, the volume of cash flow and progress on implementing the de-gearing strategy. 

Market Outlook

Economic growth slowed across the Eurozone during 2008 and prospects for 2009-2010 are for flat or even slightly negative GDP growth("Economic Forecast, Autumn 2008" European Commission). Against this more challenging background, the Investment Manager believes that leasing activity in Europe will weaken in 2009, leading to rental declines in some markets. Total returns are expected to fall below long-term average levels and are likely to be materially lower than in the past few years.

The Investment Manager also expects property market performance to become increasingly divergent between countries, regions and sectors, with the more volatile Spanish, Irish and Scandinavian markets at the weaker end of the spectrum. Against this, the more stable economies of Belgium, France, Germany and the Netherlands are still expected to benefit from constrained supply and therefore experience less downward pressure on rental levels. However, significant downward pressure on prices will be in evidence for the whole of 2009. 

We expect market conditions to remain challenging for the foreseeable future. The Company will not be immune from the current market dislocation, however it is now on a firmer footing having removed the uncertainty over the refinancing and with the completion of the recent sales. The unprecedented events in the global financial markets in the last few months will mean property valuations remain under pressure in the short term; however government intervention in the banking market should begin to ease liquidity in the debt markets over time. The Company will continue to work diligently through the agreed strategy of effecting asset disposals, reducing borrowings, preserving income and adding value to assets with the aim of returning long term value to shareholders. 

I would like to thank the Board for their continued support and contribution in these challenging times. 

Tom Chandos, Chairman

20 January 2009

  Investment Manager's Report

Introduction

Operating conditions in the European property market are difficult and are expected to remain so in 2009. The severe lack of new credit in the capital markets substantially reduced investment activity and was the major factor causing property values to weaken considerably during the year. This restriction has now led to greater levels of economic uncertainty for 2009 and an expectation of falling growth in some European countries, although we expect our tactical decision to invest in mature, relatively transparent and less volatile geographic markets will remain of long term benefit to the Group.

As a consequence the Company experienced a fall in the value of the underlying property portfolio by 9.5% in the year ended 30 September 2008. This was however in line with expectations and we anticipate further value falls in 2009.

Performance 

During the last financial year, the adjusted Net Asset Value ('NAV') decreased by €0.77 per share to €2.34 (186p), a fall of 24.6% in Euro terms. Including the first interim dividend the total NAV return on a sterling basis over the last 12 months has been -8.6%. This compares with an increase of 15.1% in the previous year. The decrease in NAV was largely caused by falling property valuations which gained momentum towards the end of the period, the last quarter recording a 5.7% fall. It is difficult to predict future valuation falls across seven markets and three sectors in which the Company is invested but we anticipate at least a further average 15% decrease in property values over the course of 2009. 

Operationally the property assets however continue to perform well with a relatively high income return, low vacancy and limited tenant default. The net initial yield on valuation as at 30 September 2008 was 6.70% (7.25% gross initial yield) and vacancy remained low at 3.8%. The like for like income growth during the year was 3.4% and going forward, in an environment where capital performance is weak, we will continue our work to preserve the income performance of the properties.

Objective and Strategy

The European commercial property market has moved into a phase where rental growth and total returns are expected to be below the long term average. In this more challenging environment we expect property market performance to become increasingly divergent across country, region and sector. However, by remaining tactically overweight in large, liquid and transparent property markets such as Belgium, France, Germany and the Netherlands, the Company remains better positioned to protect income and capital.

We favour those countries and sectors which have historically displayed 'low-beta' performance characteristics, where for instance rental growth has been less cyclically volatile and vacancy rates remain in line with long-term averages. By contrast, property markets in weaker economies characterised by higher rent volatility are expected to underperform as rents begin to experience downward pressure. We will continue to implement value accretive asset management initiatives in order to enhance the income profile of the Group's property portfolio, such as lengthening leases, reducing vacancy and increasing the overall net income to the Group. 

The Market

There has been substantial turmoil in the property and capital markets during the period and the Group has not been immune from its effects. Concerns about the performance of sub-prime mortgages led rapidly to a capital markets downturn, causing a credit market crisis and the need for significant government funded re-capitalisation. In this environment property, being a very capital intensive industry began to suffer price falls as investment demand became limited to equity funded purchasers only. Current market conditions are unusual in that property market pricing falls have to date been capital market driven and not property market driven. This is unlike the last property market cycle in 2000 when over development was the main driver of a property correction. Supply risks in most markets currently appear to be well contained in this phase of the property cycle. 

The Portfolio 

As at 30 September 2008, the Company owned a portfolio of 52 assets (including the conditionally committed asset at Girona in Spain) which was valued at €697.9 million reflecting an average lot size of €13.4 million. The valuation is carried out on a quarterly basis by DTZ Debenham Tie Leung in accordance with the guidance issued by the Royal Institution of Chartered Surveyors. This valuation compares with a property portfolio value of €736.3 million and 47 assets as at 30 September 2007. The valuation has decreased by 9.5% on a like for like basis over the year. In December 2007, the Group completed the purchase of five office assets located in and around central Brussels for a total of €32 million. The portfolio was acquired based on a business plan of active management including leasing vacancy, undertaking selective capital improvements and re-gearing leases. One of the properties is conditionally committed to be sold at above valuation and 34% of the vacancy has been leased since purchase. 

Top 10 properties by value*- Table 1

Address	Sector	%
Heusenstamm, Frankfurt, Germany	Office	11.4%
Riesa, Germany	Retail	7.9%
Ecully, Lyon, France	Office	4.7%
Cergy, Paris, France	Office	4.5%
Lutterberg, Germany	Logistics	4.4%
Madrid, Spain	Logistics	3.7%
Monteux, France	Logistics	3.1%
Villeurbanne, Lyon, France	Office	3.0%
Grenoble, France	Office	3.0%
Marseille, France	Logistics	2.9%
Total		48.5%

·; Percentage of aggregate asset value plus cash (including one committed asset) as at 30September 2008 prior to the sale of two properties in Lyon, France in October 2008

  Top 10 tenants by income**- Table 2

Tenant	%
Norbert Dentressangle	19.0%
Deutsche Telekom	10.9%
DHL Exel Supply Chain	7.1%
Tech Data	3.7%
Valeo	3.6%
Bax Global	3.4%
Merial	3.0%
Carrefour	2.8%
AVA Marktkauf	2.4%
Real SB-Warenhaus GmbH	2.1%
Total	57.9%

 

Table 1 above shows the Company's ten largest properties by value calculated as a proportion of the open market value of the portfolio as at 30 September 2008 including cash. These assets account for 48.5% by value of the portfolio which has remained largely unchanged during the year (48.7% as at September 2007). The largest property in the portfolio is located near Frankfurt, Germany and is fully let to Deutsche Telekom with over 12 years remaining on the lease. The largest retail property is located in Riesa, Germany (between Leipzig and Dresden) and accounts for 7.9% of the portfolio value. The property is a 50,263 sqm retail park anchored by Real, Toom and MediMax with significant potential for reconfiguration of the retail units and possible adjacent development.

As at 30 September 2008 the Group's portfolio generated a gross income of €50.7 million per annum (net €49.8 million) from 196 individual leases and 175 tenants with 6.3 years weighted average lease length to expiry and 4.2 years until the next break. The portfolio produced a net initial yield of 6.70% on valuation (gross initial yield of 7.25%). The credit rating of the tenants within the portfolio is 69/100 which is classified as "low to medium risk" (source: Experian July 2008). This has improved slightly during the year from 68/100 as at December 2007.

Table 2 above shows the Group's ten largest tenants by income, calculated as a proportion of the gross annual rental income receivable by the group as at 30 September 2008. The French logistics business Norbert Dentressangle generated 19.0% of the portfolio's rental income compared with 14.3% last year. This increase was as a result of their acquisition of the Copal Logistics and Christian Salvesen businesses both of whom were existing tenants in the portfolio. Norbert Dentressangle has a low-medium risk rating of 75/100 (source: Experian, July 2008). Norbert Dentressangle occupies a total of 12 assets, mainly located in France with one asset in The Netherlands as a result of the acquisition of Christian Salvesen, with varying lease terms and durations. The weighted average unexpired lease term of the properties occupied by Norbert Dentressangle is currently 4.6 years (1.7 years to first break) in comparison with last year which was 4.5 years (2.7 years to first break). Post year end we have negotiated the termination of two leases to Norbert Dentressangle which will result in a reduction in their weighting to 17.4%. There are operational advantages in having Norbert Dentressangle as tenant in a number of the Group's properties however we will continue to seek to reduce the Company's weighting to this tenant over time. 

Our second largest tenant, Deutsche Telekom, accounts for 10.9% of the portfolio income (9.9% as of 30 September 2007) and has a low risk rating of 91/100 (source: Experian, July 2008). Our third largest tenant, DHL (owned by Deutsche Post), occupies two properties in the portfolio and has a low-medium risk rating of 79/100 (source: Experian, July 2008).

  

Expiry Dates of Lease Contracts

Year	Percentage of income subject to lease expiry in the year
2009	4.4
2010	3.6
2011	8.7
2012	8.1
2013	10.9
2014	4.1
2015	25.9
2016	7.6
2017	6.3
2018	6.8
2019 +	13.6

Years correspond to the financial year of the Company

Break Dates of Lease Contracts

Year	Percentage of income subject to lease break in the year
2009	20.5
2010	12.7
2011	15.9
2012	16.8
2013	6.2
2014	4.2
2015	2.9
2016	2.5
2017	2.5
2018	2.2
2019 +	13.6

Years correspond to the financial year of the Company

The tables above show the income expiry profile of the properties in the Company's portfolio. The percentages are calculated as a proportion of the Group's gross annual rental income (receivable as at 30 September 2008) which expires within the stated period. The weighted average lease length until expiry of the portfolio is 6.3 years compared with 6.8 years in 2007. 

The table showing the lease break analysis warrants further explanation. It is apparent from the table that a large proportion of the income is subject to a lease break event in the next four years however this is largely a feature of the traditional 3/6/9 year lease structure used in France, our largest market. To that extent therefore this profile is not unusual. We are however working hard to limit any risks attached to this through advancing lease negotiations and approaching tenants to discuss operational strategy ahead of due dates. For example, we are already engaged in negotiations with tenants in respect of over 75% of the income which is subject to a lease break in the next 12 months. Furthermore, we believe occupiers are less likely in the current weak economic environment to incur the very significant costs of undertaking a move unless there are other factors influencing their decision such as occupying space at a rent which is above market level. We nevertheless maintain the active strategy to negotiate lease extensions with tenants in an environment where occupational costs are expected to come under increasing pressure. 

The table below shows the Group's weighting to each property sector. The percentages are calculated as a proportion of the open market value of the properties (including the committed asset in Girona, Spain) within the portfolio as at 30 September 2008. 

Sector Weightings

Sector	%
Logistics	50.5
Offices	35.8
Retail	13.7

As at 30 September 2008, the Company's portfolio was weighted positively towards the logistics sector. This is consistent with the Investment Manager's strategy of owning relatively high yielding assets to provide additional support to the income characteristics of the Company. The intention is to reduce the weighting from the logistics sector over time in order to benefit from medium term upside in other sectors - particularly offices in a recovery phase from 2010 onwards. 

The graph below shows the Group's weighting to each country in Continental Europe in which it is invested. The percentages are calculated as a proportion of the open market value of the properties within the Group as at 30 September 2008.

 Country Weightings

Country	%
France	49.4
Germany	32.3
Belgium	6.8
Spain	5.4
Netherlands	3.4
Czech Republic	1.6
Poland	1.2

As at 30 September 2008, the portfolio was positively weighted towards the French and German markets. This is in line with the Group's strategy to target the largest and most liquid markets in Western Europe as they have well established occupational and investment markets. Such markets are considered to have 'low beta' characteristics and do not exhibit the high growth, high volatility of some of the less stable markets such as Spain, Ireland and parts of Central and Eastern Europe. The Group has limited exposure to those higher volatility markets and as such is benefiting from the strategic decision to remain positively weighted in Western Europe. 

  

Disposals

During the period the Company conditionally committed to sell two office properties in Lyon, France for a total consideration of €55.8 million. The fully let properties comprised three office buildings leased to IBM, Scotts and BASF and an office building of 6,372 sqm, let on a long term basis to Merial. The transaction completed after the year end on 22 October 2008 at a price which reflected 0.36% above the 30 September 2008 valuation. These sales represented an excellent result for the Group and enabled net sale proceeds (post repayment of debt and transaction costs) of €16.1 million to be retained by the Company.

We are currently engaged in negotiations with respect to the sale of additional assets. However execution risk remains high in this environment as a result of the challenges of purchasers securing appropriate debt financing. We will continue to realise assets where we have concerns about future performance and/or business plan objectives have been met. Surplus proceeds from sales are likely to be used to further reduce the level of debt in the Company.

  

Finance 

As at 30 September 2008, the Company had drawn down €445.5 million of senior debt in respect of its €460.0 million facility with the Bank of Scotland; in addition the Company had available cash balances (excluding tenant deposits) of €24.6 million. The Company's gross Loan To Value ("LTV") (gross debt divided by market value of properties) at that date was 64.8% against a gross LTV covenant of 70%. Following the disposal of the two assets in Lyon, France in October 2008, drawn down debt reduced to €412.9 million against an equivalent portfolio value of €631.6 million on the basis of the 30 September 2008 valuation. 

Following the reporting period, the Company agreed terms with its existing lender, the Bank of Scotland, for an extension of its existing senior debt facility. The extension is in respect of €416.5 million senior debt for a three year term expiring on 31 December 2011 and the margin is 2.75% per annum over three month EURIBOR. All debt is hedged against changes in European interest rates until January 2013 at a weighted average swap rate of 4.05% therefore giving a fixed interest rate cost of 6.80% pa. The facility is subject to an upfront arrangement fee of 1.5% of the facility amount and an exit fee payable on expiry of the loan term or subsequent refinancing date of between 1.5 to 3.0% of the facility amount. The terms provide for an interest cover covenant of 1.30x and an LTV covenant of 75% in year 1 and 65% in years 2 and 3. The refinancing completed on 28 November 2008 and drawn down debt at that time was €410.0 million with the remainder reserved for part funding the outstanding committed asset at Girona in Spain.

This extension will provide the Company with certainty of debt funding and a fixed cost of financing for a further three years. The financing cost is however higher than anticipated and it is the Board's intention to refinance the debt to a lower cost of longer term financing once financial markets improve. We will also be working hard to achieve sales and reduce operational costs during 2009 so as to preserve as much cash as possible with which to de-leverage.

Asset Management

Good progress continues to be made on the implementation of active management initiatives. The discipline of working through asset level business plans is of even greater importance in an economic slowdown. Successes during the year include pre-leasing a large development site in south west Paris, leasing a total of 23,963 sqm of accommodation of which 9,478 sqm (40%) was previously vacant and reducing the overall portfolio vacancy to a low level of 3.8%. We have also placed great emphasis on maintaining covenant strength of our tenants which has helped generate strong like for like income growth of 3.4%.  

We are also seeking to minimise capital expenditure as far as possible so as to preserve cash flow. Where capital expenditure is required, priority will be given to existing development commitments and any works needed to comply with local regulations. 

Looking forward, we expect income performance to remain relatively strong, although we will monitor tenant covenant strength and the ability of our tenants to meet their payment obligations. Vacancy is expected to rise slightly to 5.0% over the next six months however transactional activity already in hand should ensure this reduces again during the year. Much of the short term income risk relates to logistics assets where occupiers tend to operate on short term distribution contracts and are therefore reluctant to sign long leases on the premises they occupy. 

Against the background of a worsening European economy, we would expect occupiers to become more selective about the quality of the properties they occupy, the rent they pay and the duration of their occupational leases. The Company benefits from a long weighted average lease lengths which should provide an effective hedge against significant changes to the income performance of the Company. To date, the Group has not experienced any material change in the activity of the main tenants in the portfolio, the leasing potential of its properties or the level of arrears. This is encouraging, although the situation will be monitored closely because of potential downside risks to the economic outlook and the likelihood that tenants will be seeking to reduce occupational overheads. 

Office 

We have been successful in achieving lettings ahead of business plan in two of the office properties in Belgium. In Rue du Luxembourg (located opposite the European Parliament) income has been increased by 4.2% and lease security improved by regearing leases that expired during 2008. In addition the office property in Waterloo Business Park is now fully let, having been only one third let at the time of acquisition in December 2007. The weighted average lease length in that property is now 8.3 years. 

In France we continue efforts to lease vacant space in the office building in Cergy, West Paris, however the occupational markets remain challenging in this location. We are also working with the existing tenants to rationalise their use of available space. In the South of France we undertook a successful lease surrender and renewal in Grenoble with Sun Microsystems and Euromaster and now have a stabilised 6/9 year lease on the majority of the accommodation. A marketing campaign is underway to lease the remaining area. 

Logistics 

The logistics properties in the portfolio generate an income return which is accretive to cash flow providing a net initial yield on valuation of 7.11% whereas the portfolio level net initial yield is 6.70%. We work very closely with our largest tenant, Norbert Dentressangle, who is the tenant at 11 our assets across France. 

Logistics assets are less specialist in construction than retail or office buildings and providing they are in good locations are generally attractive to a wider range of occupiers. We do not therefore tend to suffer long void periods in our logistics portfolio. The current void rate is below our portfolio average at only 1.5%.

In addition, a number of the logistics properties in the portfolio benefit from significant land reserves - notably the sites in Trappes (south west Paris) and Entraigues (near Avignon), France. The site in Trappes is an excellent case study where planning consent was obtained post acquisition authorising the construction of a new 16,558sqm unit which was subsequently pre-leased to national retailer Nature et Decouvertes (who were rated low risk by Experian at 95/100 in July 2008) on the basis of a long term lease at a prime rental level. A similar strategy is being investigated at the site in Entraigues as well as a potential change of use in one of the older logistics warehouses where, subject to planning consent, there could be significant value appreciation from conversion to retail warehousing.

We continue to work on a feasibility study to determine the cost/benefit of installing solar panels on the roofs of our logistics properties as an efficient way of producing electricity, particularly in those warehouses located in Southern France and Spain. The power generated by the panels may be used by the unit itself and/or sold to the local electricity grid. Installation costs have fallen since we began this study and this strategy may now make a more compelling business case than previously. 

There have also been active negotiations to reduce vacancy at four warehouses in Amiens, France from 21,500 sqm to 9,440 sqm - with ongoing discussions to lease the remainder. Such initiatives should improve both the cash flow and valuation of these assets.

Retail

Approximately 14% of the portfolio is invested in German retail, let to tenants including OBI, Real, Toom and AVA Marktkauf. German leases tend to be of longer duration but they do provide opportunities for active management as lease breaks and expiries arise. Together with a local specialist firm, we are in the process of undertaking a feasibility study for reconfiguring the 50,263 sqm retail park owned by the Company in Riesa, Germany. The property has significant potential for repositioning through lease re-negotiation with the anchor stores, changing the layout of the existing units, improving access and building upon surplus land. We will be unlikely to pursue such a substantial re-development project in this economic environment although it is important that we explore all angles by which to generate long term value from the scheme. 

 

Prospects

This is a difficult time for the global economy and the property market, like most other asset classes, is being affected. Further declines in property values are inevitable and we are therefore focusing on active asset management, preserving the income performance of the properties, actively managing cash flow and continuing the programme of asset sales to raise equity with which to de-leverage. We will also be working hard to re-set the financing to a lower cost longer term facility.

We remain positive about the long term prospects for the Company which was created to provide long term income and capital performance from a diversified commercial property portfolio in Continental Europe. We are operating in challenging times which will mean relatively weak performance in the short term, although our markets will become more attractive later in the economic cycle as yields are expected to peak at above long run average levels and rents begin to rise. In the short term however the focus will be on stabilising the Company so as to provide the best possible conditions for future recovery. 

Tony Smedley, Head of Central European Funds, Invista Real Estate Investment Management

20 January 2009

  CONSOLIDATED INCOME STATEMENT

 

	Notes	30 September 2008 €’000	30 September 2007 €’000
Rental income		47,283	33,491
Property operating expenses	4	(2,188)	(1,708)
Net rental and related income		45,095	31,783
Net change in the value of investment property	10	(65,927)	23,071
Other income		271	56
Expenses
Investment management fees	5	(7,362)	(5,916)
Performance fees	5	-	(2,201)
Professional fees	6	(2,079)	(2,404)
Abortive fees	6	(1,656)	(646)
Administrative fees	7	(2,747)	(1,694)
Directors’ fees		(222)	(158)
Issuing fees		-	(2,591)
Other expenses		(458)	(888)
Total expenses		(14,524)	(16,498)
Net operating (loss)/profit		(35,085)	38,412
Finance income		3,442	2,807
Finance expenses		(29,862)	(18,579)
Net finance costs	8	(26,420)	(15,772)
(Loss) /Profit before tax		(61,505)	22,640
Deferred taxation	9	4,651	(10,481)
French restructuring income tax		(4,319)	-
Other taxation	9	(2,026)	(1,959)
Total taxation	9	(1,694)	(12,440)
(Loss) / profit for the year attributable to the equity holders of the Company		(63,199)	10,200
Basic and diluted (loss)/earnings per share (euro)	19	(0.55)	0.12

The accompanying notes 1 to 28 form an integral part of these consolidated financial statements.

  CONSOLIDATED BALANCE SHEET

 

	Notes	30 September 2008 €'000	30 September 2007 €'000
Assets
Investment property	10	631,569	724,270
Deferred tax assets	16	1,447	727
Total non-current assets		633,016	724,997
Trade and other receivables	11	17,163	14,985
Derivative financial instruments	12	8,990	7,619
Cash and cash equivalents	13	29,915	68,687
Non-current assets classified as held for sale	27	57,559	-
Total current assets		113,627	91,291
Total assets		746,643	816,288
Share capital		142,829	142,829
Reserves		157,608	175,696
Retained earnings		(52,264)	10,192
Total equity attributable to equity holders of the Company	14	248,173	328,717
Liabilities
Interest-bearing loans and borrowings	15	-	424,500
Deferred tax liabilities	16	18,506	27,098
Total non-current liabilities		18,506	451,598
Interest-bearing loans and borrowings	15	411,715	-
Trade and other payables	17	22,522	31,861
Current taxation payable		8,740	4,112
Liabilities directly associated with non-current assets classified held for sale	27	36,987	-
Total current liabilities		479,964	35,973
Total liabilities		498,470	487,571
Total equity and liabilities		746,643	816,288
Net Asset Value per share (euro)	18	2.17	2.88

The financial statements were approved by the Board of Directors on 20 January 2009 and signed on its behalf by:

Tom Chandos Robert DeNormandie

Chairman Chairman of Audit Committee

The accompanying notes 1 to 28 form an integral part of these consolidated financial statements

  

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

	Share capital	Share premium	Hedging  reserve	Restricted reserves	Currency translation adjustment	Retained  earnings	Total equity
	€'000	€'000	€'000	€'000	€'000	€'000	€'000
Balance as at 30 September 2006	6,921	-	854	-	-	(8)	7,767
					-
Effective portion of changes in fair value of cash flow hedges, net of tax	-	-	4,526	-	-	-	4,526
Restricted reserve	-	-	-	101	-	-	101
Total income and expense recognised directly in equity	-	-	4,526	101	-	-	4,627
Profit for the year	-	-	-	-	-	10,200	10,200
Total recognised income and expense	-	-	4,526	101	-	10,200	14,827
Issue of shares	135,908	182,480	-	-	-	-	318,388
Issuing fees	-	(6,662)	-	-	-	-	(6,662)
Dividends to equity holders		(5,603)	-	-	-	-	(5,603)
Balance as at 30 September 2007	142,829	170,215	5,380	101	-	10,192	328,717
Effective portion of changes in fair value of cash flow hedges	-	-	3,610	-	-	-	3,610
Translation differences	-	-	-	-	743		743
Restricted reserve	-	-	-	(787)	-	-	(787)
Total income and expense recognised directly in equity	-		3,610	(787)	743		3,566
Loss for the year	-	-	-	-	-	(63,199)	(63,199)
Total recognised income and expense	-		3,610	(787)	743	(63,199)	(59,633)
Issuing fees	-	(749)	-	-	-	-	(749)
Dividends to equity holders	-	(20,162)	-	-	-	-	(20,162)
Balance as at 30 September 2008	142,829	149,304	8,990	(686)	743	(53,007)	248,173

The accompanying notes 1 to 28 form an integral part of these consolidated financial statements

  

CONSOLIDATED STATEMENT OF CASH FLOWS

	30 September 2008	30 September 2007
	€’000	€’000
Operating Activities
(Loss)/profit for the year before taxation	(61,505)	22,640
Adjustments for:
Net change in value of investment property	65,927	(23,071)
Net finance costs	26,420	14,732
Unrealised foreign currency exchange	192	(67)
Operating profit before changes in working capital and provisions	31,034	14,234
Increase in trade and other receivables	(2,950)	(10,476)
(Decrease)/increase in trade and other payables	(7,658)	26,804
Cash generated from operations	20,426	30,562
Interest paid	(25,989)	(11,815)
Interest received	3,413	2,807
Tax paid	(1,433)	(1,340)
Cash flows from/(to) operating activities	(3,583)	20,214
Investing Activities
Acquisition of investment properties	(29,472)	(491,348)
Cash flows from/(to) investing activities	(29,472)	(491,348)
Financing Activities
Proceeds on issue of shares	-	318,388
Dividends	(20,162)	(5,603)
Issuing fees	(749)	(6,662)
Repayment of shareholder loans	-	(50,218)
Draw down of interest-bearing loans	17,945	280,614
Finance costs paid on arrangement of long term loan	(1,840)	(955)
Cash flows from/(to) financing activities	(4,806)	535,564
Net (decrease) / increase in cash and cash equivalents for the year	(37,861)	64,430
Opening cash and cash equivalents	68,687	4,257
Closing cash and cash equivalents	30,826	68,687
Cash directly associated with non-current assets held for sale	(911)	-
Closing cash and cash equivalents	29,915	68,687

The accompanying notes 1 to 28 form an integral part of these consolidated financial statements

COMPANY INCOME STATEMENT

	Notes	30 September 2008 €’000	30 September 2007 €’000
Expenses
Investment management fees	5	(2,465)	(2,516)
Performance fees	5	-	(2,201)
Professional fees	6	(823)	(268)
Abortive fees		(1,592)	(270)
Administrative fees	7	(831)	(539)
Directors’ fees		(223)	(158)
Issuing fees		-	(2,591)
Other expenses		-	(269)
Total expenses		(5,934)	(8,812)
Net operating loss		(5,934)	(8,812)
Finance income		4,845	4,907
Finance expenses		(919)	(2,038)
Net finance income/(cost)	8	3,926	2,870
Loss for the year before tax		(2,008)	(5,942)
Taxation		(124)	(147)
Loss for the year attributable to the equity holders of the Company		(2,132)	(6,089)
Basic and diluted earnings per share (euro)		(0.02)	(0.05)

All items in the above statement are derived from continuing operations.

The accompanying notes 1 to 28 form an integral part of these consolidated financial statements

  COMPANY BALANCE SHEET

 

	Notes	30 September 2008 €’000	30 September 2007 €’000
Assets
Investment in subsidiaries		292,277	276,005
Non-current assets		292,277	276,005
Amount due from subsidiaries		8,173	10,610
Trade and other receivables	11	66	1,747
Derivative financial instruments	12	8,990	7,619
Cash and cash equivalents	13	2,653	30,471
Current assets		19,882	50,447
Total assets		312,159	326,452
Share capital		142,829	142,829
Reserves		158,294	175,595
Retained earnings		(15,352)	(13,220)
Total equity attributable to equity holders of the Company	14	285,771	305,204
Liabilities
Loans from subsidiaries		14,100	-
Deferred tax liabilities	16	-	2,238
Non-current liabilities		14,100	2,238
Amount due from subsidiaries		9,739	12,462
Trade and other payables	17	2,549	6,548
Current liabilities		12,288	19,010
Total liabilities		26,388	21,248
Total equity and liabilities		312,159	326,452
Net Asset Value per Share (euro)		2.50	2.67

The financial statements were approved by the Board of Directors on 20 January 2009 and signed on its behalf by:

Tom Chandos Robert DeNormandie

Chairman Chairman of Audit Committee

The accompanying notes 1 to 28 form an integral part of these consolidated financial statements

  

COMPANY STATEMENT OF CHANGES IN EQUITY

	Share capital	Share premium	Hedging  reserve	Retained  earnings	Total equity
	€'000	€'000	€'000	€'000	€'000
Balance as at 30 September 2006	6,921	-	854	(7,131)	644
Effective portion of changes in fair value of cash flow hedges, net of tax	-	-	4,526	-	4,526
Total income and expense recognised directly in equity	-	-	4,526	-	4,526
Loss for the year	-	-	-	(6,089)	(6,089)
Total recognised income and expense	-	-	4,526	(6,089)	(1,563)
Issue of shares	135,908	182,480	-	-	318,388
Issuing fees	-	(6,662)	-	-	(6,662)
Dividends to equity holders	-	(5,603)	-	-	(5,603)
Balance as at 30 September 2007	142,829	170,215	5,380	(13,220)	305,204
Effective portion of changes in fair value of cash flow hedges	-	-	3,610	-	3,610
Total income and expense recognised directly in equity	-	-	3,610	-	3,610
Loss for the year	-	-	-	(2,132)	(2,132)
Total recognised income and expense		-	3,610	(2,132)	1,478
Issue of shares	-	-	-	-	-
Issuing fees	-	(749)	-	-	(749)
Dividends to equity holders	-	(20,162)	-	-	(20,162)
Balance as at 30 September 2008	142,829	149,304	8,990	(15,352)	285,771

The accompanying notes 1 to 28 form an integral part of these consolidated financial statements

  

COMPANY STATEMENT OF CASH FLOWS

For the Year ended 30 September 2008

	30 September 2008	30 September 2007
	€'000	€'000
Operating Activities
Loss for the year before taxation	(2,008)	(5,942)
Adjustments for:
Net finance cost Unrealised foreign currency exchange	(3,926) 83	(3,460) (67)
Operating profit before changes in working capital and provisions	(5,851)	(9,469)
Increase in trade and other receivables	3,776	(10,761)
Increase in trade and other payables	(6,261)	14,860
Cash generated from operations	(8,336)	(5,370)
Interest paid	(300)	(112)
Interest received	2,252	4,907
Tax paid	(124)	(21)
Cash flows from operating activities	(6,508)	(596)
Investing Activities
Acquisition of subsidiary properties	(14,499)	(224,437)
Cash flows from investing activities	(14,499)	(224,437)
Financing Activities
Proceeds on issue of shares Dividends Issuing fees	- (20,162) (749)	318,388 (5,603) (6,662)
Loan relating to Subsidiaries / Shareholders	14,100	(50,218)
Finance costs paid on arrangement of long term loan	-	(461)
Cash flows from financing activities	(6,811)	255,444
Net increase in cash and cash equivalents for the year	(27,818)	30,411
Opening cash and cash equivalents	30,471	60
Closing cash and cash equivalents	2,653	30,471

The accompanying notes 1 to 28 form an integral part of these consolidated financial statements

  NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 30 SEPTEMBER 2008

1. Significant accounting policies

Statement of compliance

Invista European Real Estate Trust SICAF ("the Company") was incorporated as a "société anonyme" under the laws of Luxembourg on 6 June 2005. On 17 November 2006 the Company was converted into an investment company with fixed capital "société d'investissement à capital fixe" ("SICAF"). Through its subsidiaries (together "the Group") its main activity is to evaluate, make and actively manage direct and indirect investments in real estate in Continental European countries. During the year ended 30 September 2008 the Group has increased its investment portfolio through acquisitions in Belgium.

The Company is a public limited liability company incorporated for an unlimited term. The registered office of the Company is established at 25B, Boulevard Royal, L-2449 Luxembourg.

These consolidated financial statements have been approved for issue by the Board of Directors on [20 January 2009] and have been prepared in accordance with International Financial Reporting Standard (IFRS) and interpretations adopted by the International Accounting Standards Board (IASB), as adopted by the European Union (EU).

Information pertaining to the Company is included to the extent required by the London Stock Exchange listing rules. This information should not deem to represent statutory annual accounts, which are separately prepared under Luxembourg General Accepted Accounting Principles.

Basis of measurement

·; Derivative financial instruments measured at fair value

·; Investment properties measured at fair value

 

Basis of preparation

These consolidated financial statements are presented in euro, which is the Company's functional currency. All financial information presented in euro has been rounded to the nearest thousand.

The financial statements have been prepared on the going concern basis which the Directors of the Company believe to be appropriate for the following principal reasons: 

As at 30 September 2008, the Company had drawn down debt of €445.5 million against a senior debt facility of €460.0 million with Bank of Scotland which was due to expire on 31 December 2008. On 28 November 2008, this facility was extended until 31 December 2011 for an amount of €416.5 million.

The LTV covenant was increased from 70.0% to of 75.0% which prevails until 31 December 2009. On 28 November 2008, the LTV for the investment property portfolio ("portfolio") was 65.0% based on the 30 September 2008 valuation. During the period to 30 September 2008 (and as at the date the latest test of the covenants being the date of the senior debt refinancing with Bank of Scotland on 28 November 2008), the Company was in compliance with all of its debt servicing and loan-to-value covenants. If the composition of the Group's portfolio remained unchanged and there was no reduction in debt, a 5% reduction in the value of the portfolio would equate to an increase of 3.4% in its LTV ratio.

The Company has stated its intention to reduce Group debt through the application of sale proceeds arising from the implementation of an active disposal programme as well as surplus cashflow from operations.

Detailed cash flow models are maintained and regularly reviewed to ensure that the Company can continue to meet its liabilities as they fall due, including interest payments on loan facilities.

Certain capital expenditure can be deferred until cash flow permits.

  

Use of estimates and judgements

The preparation of financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected.

In particular, information about significant areas of estimation uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amounts recognised in the financial statements is included in the note 3 'Determination of fair values'.

Basis of consolidation

The consolidated financial statements comprise the accounts of the Company and all of its subsidiaries drawn up to 30 September each year. Subsidiaries are those entities over which the Company has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. Subsidiaries are fully consolidated from the date on which control is transferred to the Company. They are de-consolidated from the date control ceases.

The Group's acquisitions of subsidiaries are primarily accounted for as acquisitions of assets as the subsidiaries are special purpose vehicles established for the sole purpose of holdings companies. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition.

The assets and liabilities of the subsidiaries and their results are fully reflected in the consolidated financial statements. Intercompany transactions, balances and unrealised gains on transactions between group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Company.

Investment property

Investment property is property that is held to earn rental income together with potential for capital growth. Investment property comprises freehold land, freehold buildings and land held under operating leases.

Investment property is initially recognised on completion of contracts at cost, including related transaction costs associated with the investment property. After initial recognition, investment properties are measured at fair value, with unrealised gains and losses recognised in the Consolidated Income Statement (see note 2).

Property acquisitions are recognised in the Balance Sheet at their contractual value where unconditional commitments have been entered into prior to the Balance Sheet date.

A property interest under an operating lease is classified and accounted for as an investment property on a property-by property basis when the Group holds it to earn rentals or for capital appreciation or both. Any such property interest under an operating lease classified as an investment property is carried at fair value. 

This accounting policy is also applied for assets held for sale.

  

Investment in subsidiaries (Company only)

Investments in subsidiaries of the Company are held at cost, or at realisable value where a permanent impairment in value has arisen.

Financial Instruments

Non derivative financial instruments

Non-derivative financial instruments comprise trade and other receivables, cash and cash equivalents, loans and borrowings, and trade and other payables.

Non-derivative financial instruments are recognised initially at fair value plus, for instruments not at fair value through the Consolidated Income Statement, any directly attributable transaction costs. 

Subsequent to initial recognition non-derivative financial instruments are measured as described below.

Cash and cash equivalents

Cash and cash equivalents include cash in hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less, and bank overdrafts. Bank overdrafts that are repayable on demand and that form an integral part of the group's cash management are included as a component of cash and cash equivalents for the purpose of the cash flow statement.

Loans and borrowings

Borrowings are recognised initially at fair value of the consideration received, less attributable transaction costs. Subsequent to initial recognition, interest bearing borrowings are stated at amortised cost with any difference between cost and redemption value being recognised in the income statement over the period of the borrowings on an effective interest basis.

Financing costs incurred in obtaining a debt facility are capitalised and amortised over the period of the facility using the effective interest rate method.

Other

Other non-derivative financial instruments are measured at amortised cost using the effective interest method, less any impairment loss.

Derivative financial instruments

The Group uses derivative financial instruments to hedge its exposure to interest rate risks arising from, financing activities. 

Derivatives are initially recognised at fair value; attributable transaction costs are recognised in the Consolidated Income Statement when incurred. Subsequent to initial recognition, derivative financial instruments are measured and stated at fair value, and changes therein are accounted for as described below:

Cash flow hedges

Changes in the fair value of the derivative hedging instrument designated as a cash flow hedge are recognised directly in equity to the extent that the hedge is effective. To the extent that the hedge is ineffective, changes in fair value are recognised in the Consolidated Income Statement.

If the hedging instrument no longer meets the criteria for hedge accounting, expires or is sold, terminated or exercised, then hedge accounting is discontinued prospectively. The cumulative gain or loss previously recognised in equity remains there until the forecast transaction occurs. When the hedged item is a non-financial asset, the amount recognised in equity is transferred to the carrying amount of the asset when it is recognised. In other cases the amount recognised in equity is transferred to the Consolidated Income Statement in the same period that the hedged item affects profit or loss.

Share capital

Ordinary shares are classified as equity. External costs directly attributable to the issue of new shares, other than on a business combination, are shown as a deduction, net of tax, in equity from the proceeds. Share issue costs incurred directly in connection with a business combination are included in the cost of acquisition. Dividends are recognised in the period in which they are paid.

The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Company. 

Issuing fees

Costs relating to issue of new shares are deducted from the share premium account.

Impairment

Financial assets

A financial asset is assessed at each reporting date to determine whether there is any objective evidence that it is impaired. A financial asset is considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset.

An impairment loss in respect of a financial asset measured at amortised cost is calculated as the difference between its carrying amount, and the present value of the estimated future cash flows discounted at the original effective interest rate.

Individually significant financial assets are tested for impairment on an individual basis. The remaining financial assets are assessed collectively in groups that share similar credit risk characteristics. All impairment losses are recognised in the Consolidated Income Statement.

An impairment loss is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognised. For financial assets measured at amortised cost, the reversal is recognised in the Consolidated Income Statement.

Non-financial assets

The carrying amounts of the Group's non-financial assets, other than investment property, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset's recoverable amount is estimated.

The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to that asset.

For the purpose of impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the "cash-generating unit").

An impairment loss is recognised if the carrying amount of an asset or its cash-generating unit exceeds its estimated recoverable amount. Impairment losses are recognised in the Consolidated Income Statement. 

  

Revenue

Rental income

Rental income from investment properties is accounted for on a straight-line basis over the term of the ongoing leases and is shown gross of any income tax. Any material premiums or rent-free periods are spread evenly over the lease term.

Finance income and expenses

Finance income comprises interest income on funds invested and gains on hedging instruments that are recognised in the Consolidated Income Statement. Interest income is recognised on an accruals basis.

Finance expenses comprise interest expense on borrowings, and losses on hedging instruments that are recognised in the Consolidated Income Statement. 

Expenses

Operating Expenses

All expenses are accounted for on an accruals basis. The Group's investment management and administration fees and all other expenses are charged through the Consolidated Income Statement.

Attributable transaction costs incurred in establishing the Group's credit facilities are deducted from the fair value of borrowings on initial recognition and are amortised over the lifetime of the facilities through the Consolidated Income Statement.

Taxation

According to the Luxembourg regulations regarding SICAF companies the Group is not subject to capital gains taxes in Luxembourg. It is, however, liable to an annual subscription of 0.05% (taxe d'abonnement) of its total net assets, payable quarterly, and assessed on the last day of each quarter.

Real estate revenues, or capital gains derived thereon, may be subject to taxes by assessment, withholding or otherwise in the countries where the real estate is situated.

The subsidiaries of the Group are subject to taxation in the countries in which they operate. Current taxation is provided for at the current applicable rates on the respective taxable profits.

Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. 

Deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the Balance Sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. 

Deferred income tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised.

Deferred income tax is provided on temporary differences arising on investments in subsidiaries, except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future.

Other financial assets and liabilities

The carrying amounts of financial assets and liabilities with a maturity of less than one year (including trade and other receivables, cash and cash equivalents, trade and other payables and provisions) are assumed to approximate their fair values because of the short period to maturity. All other financial assets and liabilities are discounted to determine their fair value.

Non-derivative financial liabilities

Fair value, which is determined for disclosure purposes, is calculated based on the present value of future principal and interest cash flow, discounted at the market rate of interest at the reporting date. As 30 September 2008, the Group's non-derivative financial liabilities with maturity of greater than twelve months relate to non-current loans and borrowings. 

Earnings per share

The Group presents earnings per share (EPS) data for its ordinary shares. EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares outstanding during the period. 

Capital management

The objective of the Company is to provide shareholders with an attractive level of income return together with the potential for income and capital growth through investing in commercial real estate in continental Europe. Investment decisions are made following a process of submission through an Investment Committee operated by the Investment Manager and the Board of Directors of the Company

2. New standards and interpretations not yet adopted

3. Determination of fair values

A number of the Group's accounting policies and disclosures require the determination of fair value, for both financial and non financial assets and liabilities. Fair values have been determined for measurement and / or disclosure purposes based on the following methods. When applicable, further information about the assumptions made in determining fair values is disclosed in the notes specific to that asset or liability.

Investment property

Fair value is based on the open market valuations of the properties as provided by an independent expert, DTZ Debenham Tie Leung, in accordance with the guidance issued by the Royal Institution of Chartered Surveyors (the "RICS"). Market valuations are carried out on a quarterly basis.

The fair values are based on market values, being the estimated amount for which a property could be exchanged on the date of the valuation between a willing buyer and a willing seller in an arm's length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion.

In the absence of current prices in an active market, the valuations are prepared by considering the aggregate of the estimated cash flows expected to be received from renting out the property. A yield that reflects the specific risks inherent in the net cash flows is then applied to the net annual cash flows to arrive at the property valuation.

Valuations reflect, when appropriate the type of tenants actually in occupation or responsible for meeting lease commitments or likely to be in occupation after letting vacant accommodation, and the market's general perception of their creditworthiness, the allocation of maintenance and insurance responsibilities between the Group and the lessee and the remaining economic life of the property. When rent reviews or lease renewals are pending with anticipated reversionary increases, it is assumed that all notices, and when appropriate counter-notices, have been served validly and within the appropriate time.

Derivatives

The fair value of the Group's derivatives is the estimated amount that the Group would receive or pay to terminate the derivative at the balance sheet date, taking into account current interest rates and the current creditworthiness of the derivative counterparties.

4. Property operating expenses

	30 September 2008 €'000	30 September 2007 €'000
Insurance	111	349
Property management fees	719	352
Property service charge	310	135
Property maintenance	314	185
Property tax	544	254
Other miscellaneous expenses	190	433
Total	2,188	1,708

5. Investment management and performance fees

The Investment Manager is entitled to a base fee and a performance fee together with reasonable expenses incurred by it in the performance of its duties. The base fee payable is calculated as at each quarter end date by the Company based on 0.95% per annum of gross assets prorated from the date of acquisition.

The base fee from 1 October 2006 to 17 November 2006 was calculated at a rate of 1.00% per annum of gross assets pro rated from the acquisition date of the assets. This rate was changed to 0.95% per annum, from 17 November 2006. 

In addition, and subject to the conditions below, the Investment Manager is entitled to an annual performance fee where the total NAV per share during the relevant financial period exceeds an annual rate of 10.0% (the "performance hurdle"). Where the performance hurdle is met, a performance fee will be payable in an amount equal to 15.0% of any aggregate total return over and above the performance hurdle. The performance hurdle is calculated on a three year rolling basis. This requires that the annualised total return over the period from listing on 20 December 2006 to the end of the relevant financial period in the first three year period, and on a rolling three year basis thereafter, is equal to or greater than 10.0% per annum. The performance fee can be paid in each of the first two years on the to-date performance.

As the conditions for receipt of a performance fee were not met during the year, no charge has been recognised in the Consolidated Income Statement (2007: €2,201,062).

6. Professional and abortive fees

Included in professional fees are auditors' remuneration of €536,384 (2007: €481,000) for the year ended 30 September 2008 and other professional and audit fees of €368,966 for the prior years not accrued.

 

The abortive fees represent costs relating to aborted transactions.

  7 Administrative fees

	30 September 2008 €'000	30 September 2007 €'000
Group
Accounting and administrative fees	1,217	1,096
Investment property valuation fees	169	258
Custodian, registrar and other fees	1,361	340
Total	2,747	1,694
Company
Accounting and administrative fees	22	306
Investment property valuation fees	130	-
Custodian, registrar and other fees	679	233
Total	831	539

8. Net finance costs

	30 September 2008 €’000	30 September 2007 €’000
Group
Finance income
Interest income on bank deposits	768	2,742
Swap interest income	2,674	65
Total finance income	3,442	2,807
Finance expenses
Amortisation on loan related transaction costs	(4,153)	(2,878)
Interest expense on bank loans	(25,989)	(14,850)
Interest expenses on shareholder loans	-	(112)
Swap interest expenses	(29)	-
Other finance charges	309	(739)
Total finance expenses	(29,862)	(18,579)
Net finance cost	(26,420)	(15,772)
Company
Finance income
Interest income	1,953	2,937
Amortisation on loan related transaction costs recharged to subsidiaries	2,892	1,970
Total finance income	4,845	4,907
Finance expenses
Interest expenses on shareholder loans	(421)	(112)
Other finance charges	(498)	(1,925)
Total finance expenses	(919)	(2,037)
Net finance income	3,926	2,870

Amortisation of transaction costs incurred in relation to bank loans are further disclosed in note 15. Such costs are amortised till the maturity date of the bank loans (31 December 2008).

  

9. Taxation

	30 September 2008 €'000	30 September 2007 €'000
Current tax income expense
French restructuring income tax	(4,319)	-
Other taxes	(2,026)	(1,959)
Total current tax expense	(6,345)	(1,959)
Deferred tax income/(expense)
Change in unrecognised temporary difference	4,651	(10,481)
Total tax income/(expense)	(1,694)	(12,440)

A charge of €4.3 million was paid during the year for a tax liability in respect of restructuring of finance leases in a number of French property owning companies. A corresponding net tax benefit of approximately €4.0 million will be recognised in local entity statutory accounts but which cannot be recognised in the consolidated NAV given the Group's accounting policies which must comply with IFRS.

	30 September 2008 €'000	30 September 2007 €'000
Reconciliation of effective tax rate
(Loss)/profit for year	(63,199)	10,200
Total income tax	1,694	12,440
(Loss)/profit excluding income tax	(61,505)	22,640
Income tax gain/(expense) using the Company's domestic tax rate, which is 28.45%	17,498	(6,909)
Tax adjustments	144	539
Minimum taxable net margin	(69)	(252)
Differences in tax rates	(1,227)	(857)
Tax losses arising/used in the year	(5,386)	80
Permanent differences	(4,158)	(1,147)
Short term differences	(359)	103
Differences due to IFRS and tax reporting	(8,724)	(3,379)
Differences due to consolidation	1,052	-
Other taxes	(465)	(618)
Total	(1,694)	(12,440)

  

10. Investment properties

	30 September 2008 €'000	30 September 2007 €'000
At beginning of year	724,270	210,590
Acquisitions of investment property and related costs	29,026	490,609
Net change in value of investment properties	(65,927)	23,071
Investment property classified as held for sale	(55,800)	-
At end of year	631,569	724,270

At 30 September 2008, all properties of the portfolio were subject to registered mortgages in order to secure bank loans. 

The carrying amount of investment property is the market value of the property, as determined by DTZ Debenham Tie Leung, a registered independent appraiser having appropriate recognised professional qualifications, and experience in the location and category of the properties being valued. Market values were determined having regards to recent market transactions for similar properties in the same location as the Group's investment property and/or considering the aggregate of the estimated cash flows expected to be received from renting out the property.

Investment property comprises a number of commercial properties that are leased to third parties. 

As at 30 September 2008 the Group was conditionally contracted to acquire an investment property in Girona (Spain) (see note 24)

Of the property operating expenses included in note 4, €76,778 is related to an investment property that did not generate income during the year.

11. Trade and other receivables

	30 September 2008 €'000	30 September 2007 €'000
Group
Rent receivable	9,225	9,177
VAT receivable	2,428	2,374
Swap interest receivables	723	-
Security deposits	73	466
Prepayments	994	413
Other receivables	2,446	2,555
Service charge advances	1,274	-
Total	17,163	14,985
Company
VAT receivables	-	344
Prepayments	66	105
Other receivables	-	1,298
Total	66	1,747

Of the €9.2m rent receivables included in the table above, €4.7m are receivables related to period after 30 September 2008 (see deferred income in note 17).

  

Trade and other receivables are analysed as follows: 

	30 September 2008 €'000	30 September 2007 €'000
Not past due	12,592	13,082
past due 30-120 days	594	1,179
past due 120 days-one year	1,387	715
More than one year	2,590	9
	17,163	14,985

12. Derivatives financial instruments

The financial derivatives relate to euro interest-rate swaps, to hedge the interest rate risks arising from the floating rate borrowings (see note 15). As at 30 September 2008 the fair value of the interest-rate swaps was €8,990,291 (2007 €7,618,726). The notional amount of the interest-rate swaps amounted to €445,472,247 (2007: €427,527,250).

Hedge accounting has been applied to the interest rate swaps, with the effective portion of changes in its fair value recognised in the consolidated statement of changes in equity (See note 26 for discontinuing of hedge accounting).

The weighted average swap rate on Group debt was 4.053% per annum (2007: 4.035%).

13. Cash and cash equivalents

	30 September 2008 €'000	30 September 2007 €'000
Group
Bank balances	28,415	68,687
Term deposits	1,500	-
Total	29,915	68,687
Company
Bank balances	1,153	30,471
Term deposits	1,500	-
Total	2,653	30,471

The cash balance mentioned above includes tenants deposits of an amount of €5.6m (2007: €5.9m).

As at the balance sheet date, an amount of €29.9m has been pledged in favour of Bank of Scotland (BOS) under the terms of account pledge agreements. These are related to loan agreements concluded by subsidiaries of the Company and BOS for the purposes of financing acquisitions of investment property. No restrictions on the utilisation of these pledged bank accounts have been imposed.

14. Issued capital and reserves

Share capital 

The Company has an issued share capital of €142,829,093.75 consisting of 114,263,275 shares with a par value of €1.25 per share, all of which have been fully paid up.

The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Company. All shares rank equally with regard to the Company's residual assets.

No shares have been issued during the year ended 30 September 2008.

Authorised capital

The Company has an authorised capital of €938,463,133.75 consisting of 750,770,507 shares of a par value of €1.25 per share.

Dividends

On 29 November 2007 a dividend of €0.089 per share was declared giving a total dividend of €10,026,317.

On 6 June 2008. a further dividend of €0.089 per share was declared giving a total dividend of €10,135,610.

Hedging reserve

The hedging reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments related to the hedge of variability in cash flows arising from interest rate risk, net of deferred tax.

Restricted reserve

A legal reserve subject to profit of the Subsidiaries and the Company has been allocated in the different jurisdictions where applicable. This reserve is not available for dividend distributions. 

15. Interest bearing loans and borrowings

The Company contracted a debt facility with Bank of Scotland for €450.0,million in July 2005. Amounts drawn down under the agreement are secured against the Group's investment properties. 

At listing on 20 December 2006 the facility was decreased to €420.0 million in order to reduce loan to value gearing and the maturity was extended to 31 December 2008.

In April 2007 the facility was increased to €460.0 million, in part to finance and secure the acquisition of the portfolio of 27 logistics properties located in France.

As at 30 September 2008, the Company had €445.5 million of outstanding indebtedness. The Company's loan to value ("LTV") (gross debt divided by market value of properties) at that date was 64.8% against a covenant of 70%. Following the disposal of two real estate assets in Lyon, France in October 2008, and a refinancing of the debt facility with the Bank of Scotland in November 2008, drawn down debt reduced to €410.0 million against an equivalent portfolio value of €631.6 million on the basis of the 30 September 2008 valuation. This equates to a LTV of 65.0%.

On 28 November 2008, the Company finalised an agreement with the Bank of Scotland to extend its existing debt facility for a further three years to 31 December 2011. The extension is in respect of a €416.5 million senior debt facility and the margin is 2.75% pa over three month EURIBOR. The facility was subject to an upfront arrangement fee of 1.5% of the facility amount and an exit fee payable on expiry of the loan term or subsequent refinancing date of between 1.5 to 3.0% of the facility amount. The terms provide for an interest cover covenant of 1.30x and a LTV covenant of 75% until and including 31 December 2009 and 65% thereafter.

This extension will provide the Company with certainty of debt funding and a fixed cost of financing for a further three years. It is the Board's intention to refinance this debt to a lower cost of longer term financing once financial markets improve.

  

	30 September 2008 €'000		30 September 2007 €'000
Current
Bank loans		445,472		427,527
Less finance costs incurred		(12,044)		(9,891)
Amortised in years		10,810		6,835
Balance to amortise		(1,234)		(3,056)
Liability to property vendor		-		29
Net bank loans		444,238		424,500

Transaction costs incurred in arranging the above loans are initially deducted from the above loan balance and are being amortized over the period of the loan. Amortisation of transaction costs recognised as finance costs amounted to €4,152,609 (€392,087 relating to non-current assets classified as held for sale) for the year ended 30 September 2008. The finance costs include debt arrangement, structuring and utilisation fees paid in arranging the debt facility.

All borrowings are denominated in euro.

Of the above loan amount of €32.5m, less transaction fees of €0.1m, are classified as held for sale (see note 27).

The weighted average interest rate at 30 September 2008 on the bank borrowings was 6.16 per cent.

The interest rate risk with regards to the bank loan is hedged by floating to fixed interest rate swaps (see note 12).

The loan is collateralised by all properties of the portfolio included under "Investment property" account (see Note 10)

Terms and debt repayment schedule

30 September 2008						30 September 2007
	Currency	Nominal interest Rate	Date of maturity	Face Value €'000	Carrying Amount €'000	Face Value €'000	Carrying Amount €'000
Secured bank loan	Euro	3M Euribor + 1.2%	31/12/2008	412,848	412,848	427,527	427,527

The above totals exclude the liabilities related to non-current assets held for sale and the balance of unamortised transaction costs of €1,133,000. This amount is arrived at by deducting the transaction fees related to the assets held for sale of €101,000 from the total balance of unamortised transaction costs of €1,234,000. This totals to €411,715,000 as per the balance sheet.

  

16. Deferred tax assets and liabilities

Deferred tax assets and liabilities are attributable to the following:

	Assets 2008 €'000	Assets 2007 €'000	Liabilities 2008 €'000	Liabilities 2007 €'000	Net 2008 €'000	Net 2007 €'000
Investment properties	1,447	727	(18,506)	(24,860)	(17,059)	(24,133)
Interest-rate swaps	-	-	-	(2,238)	-	(2,238)
Net tax assets/(liabilities)	1,447	727	(18,506)	(27,098)	(17,059)	(26,371)

Movement in temporary differences during the year

	Balance at 30 September 2007 €’000	Reclassifedto property held for sale€’000	Recognised in profit or loss €’000	Recognised in equity €’000	Balance at 30 September 2008 €’000
Investment property	(24,133)	3,014	4,060	-	(17,059)
Investment property classified as held for sale	-	(3,014)	591	-	(2,423)
Interest rate swaps	(2,238)	-	-	2,238	-

 

The deferred tax assets of the Group, amounting to €1,446,908 are recognised as in the opinion of the Directors the loss made in the year ended 30 September 2008 is expected to be compensated by future profits.

Recognised deferred tax assets/(liabilities)

	30 September 2008 €'000	30 September 2007 €'000
Tax losses	66	(212)
Short term timing differences	(58)	(87)
Deferred tax on derivatives	-	(2,238)
Inherent gains	(17,067)	(23,834)
Total	(17,059)	(26,371)

Unrecognised deferred tax assets

	30 September 2008 €'000	30 September 2007 €'000
Tax losses	10,232	-
Short term timing differences	25	-
Inherent gains	74	-
Total	10,331	-

17. Trade and other payables

	30 September 2008 €'000	30 September 2007 €'000
Group
Accounts payable	2,652	4,094
Accruals and other creditors	3,991	12,151
Deferred income less than 1 year	4,888	5,491
Interest payable on bank loans	5,373	4,430
Tenant deposits	5,618	5,695
Total	22,522	31,861

Company
Accounts payable	783	365
Accruals and other creditors	333	3,326
Deferred income less than 1 year	-	2,649
Taxes payable	1,433	208
Total	2,549	6,548

The trade and other payables indicated in the table above equal their contractual amounts and are payable in less than 6 months except for tenants deposits, which are due at the termination of the related lease contracts. 

18. Net asset value per ordinary share

The net asset value per ordinary share is based on the net assets of €248,172,928 (2007: €328,716,823) and 114,263,275 ordinary shares (2007: 114,263,275) in issue at the Balance Sheet date.

19. Earnings per ordinary share

The calculation of basic earnings per share at 30 September 2008 was based on the loss attributable to ordinary shareholders of €63,198,829 (2007: profit of €10,199,164), and a weighted average number of ordinary shares outstanding of 114,263,275 (2007: 86,940,035), calculated as follows: 

Weighted average number of ordinary shares

	2008	2007
Balance at beginning of the period	114,263,275	692,151
Issue of new ordinary shares during the year	-	114,263,275
Weighted average number of ordinary shares per year	114,263,275	86,940,035

 

20. Financial instruments

Financial risk factors

The Group is exposed by its operations to financial risks, including effects from change in market prices and interest rates. The Group holds cash and liquid resources as well as having debtors and creditors that arise directly from its operations. The Group has entered into interest-rate swaps which are used to manage the exposure to interest rate risks but does not have any other derivative instruments. The main risks arising from the Group's financial instruments and properties are market price risk, credit risk, liquidity risk and interest rate risk. Market risk embodies the potential for both losses and gains and includes price risks, interest rate risk and currency risk. The nature and extent of the investments and the financial instruments outstanding at the balance sheet date and the risk management policies employed by the Group are discussed below.

Market price risk

Rental income and the market value for properties are generally affected by overall conditions in the local economy, such as changes in gross domestic product, employment trends, inflation and changes in interest rates. Changes in gross domestic product may also impact employment levels, which in turn may impact the demand for premises. Furthermore, movements in interest rates may also affect the cost of financing for real estate companies. Both rental income and property values may also be affected by other factors specific to the real estate market, such as competition from other property owners, the perceptions of prospective tenants of the attractiveness, convenience and safety of properties, the inability to collect rents because of bankruptcy or the insolvency of tenants or otherwise, the periodic need to renovate, repair and re-lease space and the costs thereof, the costs of maintenance and insurance, and increased operating costs.

The Investment Manager also analyses portfolio and investment risks under the following categories:

Criteria  Risk control 

Rental income	Ongoing review of vacancy - at least on a quarterly basis
Term of rental agreements	Ongoing review and at least on a quarterly basis
Quality of tenants	Analysed on a semi - annual basis by means of the credit rating performed by Experian
Sector diversification	Quarterly, formal comparison with strategy and review with the board of Directors
Geographic diversification	Quarterly, formal comparison with strategy and review with the board of Directors
Sizes of individual properties	Quarterly monitoring of the proportion of individual properties in the portfolio in accordance with Stock Exchange regulations
Payments in arrears	Ongoing review, supported by quarterly review of property management reports

By monitoring assets under these categories using the risk controls outlined, and by diversifying the portfolio in different property sectors, countries, regions and tenant industries the Group expects to lower the risk profile of the portfolio. 

Interest rate risk

 The Group's exposure to market risk for changes in interest rates relates primarily to the Group's variable-rate borrowings (see note 15). The Group has exposure to the effects of fluctuations of market interest rates on its financial position and cash flows and interest costs may increase as a result of such changes. This may reduce profits or create losses in the event unexpected movements in interest rates arise. The Group adopts a policy of ensuring that all of its exposure to changes in interest rates on borrowings is on a fixed rate basis. Interest rate swaps, denominated in euro, have been entered into to achieve this. The net fair value of the interest rate swaps at 30 September 2008 is €8,990,291 (2007: €7,618,726) The following table indicates the periods in which the cash flows associated with the interest rate swaps are expected to occur and how they will impact the future income statements:

 

As at 30 September 2008	Carrying amount  €'000	Expected Cash Flows to be received €'000	6 months or less €'000	6-12 months €'000	1 - 2 years €'000	2 - 5 years €'000	More than 5 years €'000
Interest rate swap	8,990	9,404	2,117	379	321	6,587	-

As at 30 September 2007	Carrying amount  €'000	Expected Cash Flows to be received €'000	6 months or less €'000	6-12 months €'000	1 - 2 years €'000	2 - 5 years €'000	More than 5 years €'000
Interest rate swap	7,619	8,404	1,269	540	795	4,733	1,067

Cash flow sensitivity analysis for variable rate instruments

A change of 100 basis points in interest rates at the reporting date would have increased (decreased) equity and profit or loss by the amounts shown below. This analysis assumes that all other variables remain constant. The analysis is performed on the same basis for the year ended 30 September 2007.

	Profit or loss
	100 bp Increase €'000	100 bp decrease €'000
Cash and cash equivalents	+299	-299
Weighted average floating secured bank loan	-	-

Currency risk

The Group's exposure to foreign exchange risk is minimal. There are only a small number of transactions which are not in the Group's reporting currency.

The Group has two subsidiaries which have another functional currency than euro. Currency translation differences are directly booked in equity.

 

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 income shortfall and incur additional costs, including legal expenses, in maintaining, insuring and re-letting the property. The Investment Manager reviews reports prepared by Experian, or other sources, to assess the credit quality of the Group's tenants and aims to ensure there are no excessive concentrations of risk and that the impact of any default by a tenant is minimized.

Investments, other than those in property, are held only in liquid securities and only with counterparties that have a credit rating equal to or better than the Group. Transactions involving derivatives are with the counterparty Bank of Scotland Treasury. The Group does not expect any counterparty to fail to meet its obligations.

Credit risk for tenants 

The Group's income would be adversely affected if a significant number of tenants were unable to pay rent or its properties could not be rented on favourable terms. Certain significant expenditure associated with each equity investment in real estate is generally not reduced when circumstances cause a reduction in income from properties. 

  

Credit risk management for tenants and property managers 

Receivables from tenants are the main credit risk for the group. A credit evaluation is performed on the financial condition of prospective new tenants and a deposit is taken depending on the credit worthiness of the tenant. 

Credit risk management for financial instruments 

The credit risk on liquid funds and on interest rate hedges is limited because the counterparty is a bank with a high credit rating assigned by international credit rating agencies. 

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 continental European commercial property. Property and property related assets are inherently difficult to value due to the individual nature of each asset. As a result, valuations are subject to 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. Investments in property are relatively illiquid. However, the Group has endeavored to mitigate this risk by investing in properties let to good quality tenants with the potential for income and capital growth.

Group

As at 30 September 2008		Total €'000	6 months or less €'000	6 months to 1 year €'000	1 - 5 years €'000
Cash and cash equivalents		29,915	29,915	-	-
Weighted average floating secured bank loan		(411,715)	(411,715)	-	-
Total		(381,800)	(381,800)	-	-
As at 30 September 2007
Cash and cash equivalents		68,687	68,687	-	-
Weighted average floating secured bank loan		(424,500)	-	-	(424,500)
Total		(355,813)	68,687	-	(424,500)

Company

As at 30 September 2008		Total €'000	6 months or less €'000	6 months to 1 year €'000	1 - 5 years €'000
Cash and cash equivalents		2,653	2,653	-	-
Amount due from subsidiaries
Current assets		8,173	8,173	-	-
Non-current liabilities		14,100	5,000	5,100	4,000
Current liabilities		9,739	9,739	-	-
Total		34,665	25,565	5,100	4,000
As at 30 September 2007
Cash and cash equivalents		30,471	30,471	-	-
Total		30,471	30,471	-	-

The maturity date of the interest bearing loans in the table above is 31 December 2008. On 28 November 2008 the Company finalized an agreement with the Bank of Scotland to extend it for a further 3 years to 31 December 2011, as described in note 15.

The contractual cash flows for loans and borrowings presented in the above table reflect only the expected principal cash flows. Given that these loans and borrowings bear floating interest rates based on the benchmark rate of EURIBOR, the Directors deem that an estimate of the associated interest cash flows based on prevailing interest rates at the balance sheet date, does not provide additional meaningful information on the liquidity risk.

Fair value determination

Investment property

The portfolio is valued on a quarterly basis by DTZ, an independent valuer. DTZ undertake the process by operating within the guidelines issued by the Royal Institution of Chartered Surveyors and reach an estimation of fair value having regard to comparable transactions and discounted cash flow projections. Such projections are based on estimates of future cash flows from the terms of any existing lease(s) and other contracts and (where possible) from external evidence such as current market rents for similar properties in the same location and condition and using discount rates that reflect current market assessments of the uncertainty in the amount and timing of the cash flows.

If information on current or recent market prices based on recent transactions is not available, the independent valuer uses the cash flow approach to value the investment properties.

The Directors have reviewed the above valuation, have accepted the underlying assumptions as being appropriate in the current market conditions and have adopted it in the presentation of the consolidated financial statements. 

Interest rate swap

An interest rate swap can be viewed as a series of cash flows occurring at known future dates. The value of the swap is the present value of these cash flows. To calculate the present value of each cash flow, both the future cash flows and an appropriate discount factor for each period on which a cash flow occurs are estimated. Future cash flows are calculated from a forward interest rate curve constructed using market prices for similar interest rate instruments independently sourced from mid-market broker quotes for the relevant market. The discount factor is the factor by which the future cash flow must be adjusted to obtain the present value. Discount factors are derived from an assessment of interest rates in the future and are calculated using forward rates such as EURIBOR. Interest rates used for calculating discount factors are independently sourced from mid-market broker quotes for the relevant market at the valuation date

21. Operating leases

The Group leases out its investment property under operating leases. The future minimum lease receipts under non-cancellable leases are as follows:

	30 September 2008 €'000	30 September 2007 €'000
Less than one year	44,878	46,108
Between one and five years	122,209	112,970
More than five years	64,211	80,471
Total	231,298	239,549

The Investment Manager's report contained in this annual report and accounts provides further description of the contingent rent recognised and the leasing arrangements 

22. Related party transactions

The Company and the Group has related party transactions with its subsidiaries, shareholders and directors.

Directors of the Company and its subsidiaries were paid a total of €222,498 (2007:€157,681) in directors' fees during the year.

Invista Real Estate Investment Management Limited (Invista REIM) acts as the Investment Manager of the Group. Invista REIM has received an investment management fee of €7,361,692 (2007:€5,915,948).

As disclosed in note 5, the conditions for payment of a performance fee to the Investment Manager were not met during the year. Thus during the financial year no payment for performance fees was made (2007: €2,201,062).

As disclosed in note 15, the Group has obtained a credit facility from the Bank of Scotland and has entered into interest swap transactions with Bank of Scotland Treasury.

The Company also operates an inter-group trading account facility with its subsidiaries whereby it may receive income on behalf of its subsidiaries or pay expenses on their behalf. These balances are non-interest bearing and are settled on demand.

23. Segment reporting

Geographical segments

Segment information is presented in respect of the Group's geographical segments. This primary format is based on the Group's management and internal reporting structure. The Group's business is investing in commercial properties. All the existing properties are located in the continental European region

Business segments

Business segment reporting has not been prepared because the Group invest predominantly in one business segment which is property investment of commercial properties.

30 September 2008	France €'000	Germany €'000	Other  Europe €'000	Total €'000
Gross rental income	23,765	15,859	7,659	47,283
Property operating expenses	(854)	(857)	(477)	(2,188)
Segment net rental income	22,911	15,002	7,182	45,095
Change in value of investment properties	(34,477)	(22,612)	(8,838)	(65,927)
Finance income	1,452	999	991	3,442
Finance expenses	(16,356)	(9,419)	(4,087)	(29,862)
Other net expenses	(4,793)	(1,662)	(7,798)	(14,253)
Profit before tax	(31,263)	(17,692)	(12,550)	(61,505)
Taxation	(131)	2,568	(4,131)	(1,694)
Profit after tax	(31,394)	(15,124)	(16,681)	(63,199)

30 September 2008	France €'000	Germany €'000	Other  Europe €'000	Total €'000
Assets and Liabilities
Segment assets	375,695	234,237	136,711	746,643
Segment liabilities (excluding equity components)	(253,608)	(144,655)	(100,197)	(498,460)

  

30 September 2007	France €'000	Germany €'000	Other  Europe €'000	Total €'000
Gross rental income	17,183	12,522	3,786	33,491
Property operating expenses	(874)	(570)	(264)	(1,708)
Segment net rental income	16,309	11,952	3,522	31,783
Change in value of investment properties	7,741	7,187	8,143	23,071
Finance income	322	81	2,404	2,807
Finance expenses	(12,209)	(6,077)	(293)	(18,579)
Other net expenses	(3,954)	(2,649)	(9,839)	(16,442)
Profit before tax	8,209	10,494	3,937	22,640
Taxation	(7,529)	(1,442)	(3,469)	(12,440)
Profit after tax	680	9,052	468	10,200

30 September 2007	France €'000	Germany €'000	Other Europe €'000	Total €'000
Assets and Liabilities
Segment assets	425,336	266,041	124,911	816,288
Segment liabilities (excluding equity components)	(263,945)	(149,770)	(73,856)	(487,571)

24. Commitments

As at 30 September 2008 the Group was conditionally contracted to acquire an investment property in Girona (Spain) for an estimated total gross cost of €10.8 million.

25. Contingencies

Certain subsidiaries of the Group are involved in litigation resulting from operating activities. These legal disputes and claims for damages are routine resulting from the normal course of business. None of these legal disputes and claims are expected to have a material effect on the balance sheet, profits or liquidity of the Group.

26. Events after the balance sheet date

Future property values

Property prices have continued to decline since the Balance Sheet date which is expected to have a material impact on the carrying value of the Company's investment property portfolio. If the value of the Company's portfolio were to fall more than 13.4%, this could cause the Company to breach its LTV bank covenant in the course of 2009 should it be unsuccessful in reducing levels of debt. There can be no certainty in relation to the actions that may be taken by the Company's lender in the event of a future breach of covenants.

Refinancing

On 28 November 2008, the Company finalised an agreement with Bank of Scotland to extend its existing debt facility for a further three years to 31 December 2011. The extension is in respect of a €416.5 million senior debt facility and the margin is 2.75% pa over three month EURIBOR. The facility was subject to an upfront arrangement fee of 1.5% of the facility amount and an exit fee payable on expiry of the loan term or subsequent refinancing date of between 1.5 to 3.0% of the facility amount. The terms provide for an interest cover covenant of 1.30 and an LTV covenant of 75% until 31 December 2009 and 65% thereafter.

Hedge accounting

Due to the difference in the maturity of the extended loan facility (2011) and the related hedging contracts/derivative financial instruments (2013), the hedge accounting relationship is discontinued with effect from 1 October 2008, since the derivative financial instruments no longer meet the hedging criteria.

Future movements in the valuations of the derivative financial instruments will be included in the income statement. The related reserve of €9.0m, which has been credited to the reserves as at 30 September 2008 will be amortised to the income statements over the life of the new credit facility.

Subsequent sale

On 21 October 2008, assets in Lyon (France) were sold for €55.8m. The related interest bearing loan of €32.5 has been repaid (see note 15).

The Board of the Directors approved the annual report and accounts for the year 30 September 2008 on [20 January 2009].

27. Non-Current assets held for sale

Two assets located in Lyon, France, in the portfolio were sold on 21 October 2008

Assets classified as held for sale	30 September 2008 €'000
Investment properties	55,800
Trade and other receivables	848
Cash and cash equivalents	911
Total	57,559

Liabilities classified as held for sale
Deferred tax liabilities	2,423
Loans and borrowings	32,422
Trade and other payables	1,858
Current tax payable	284
Total	36,987

  

28. List of the fully consolidated subsidiaries

Subsidiary		Domicile	Ownership interest 30 September 2008
Invista European Real Estate Holdings S.à r.l.,		Luxembourg	100%
Invista European Real Estate Finance S.à.r.l.		Luxembourg	100%
Invista European RE Heusenstamm Propco S.à.r.l.		Luxembourg	100%
Invista European RE Marseille Propco S.à.r.l.		Luxembourg	100%
Invista European RE Solingen Propco S.à.r.l.		Luxembourg	100%
Invista European RE Nanteuil Propco S.à.r.l.		Luxembourg	100%
Invista European RE Monheim Propco S.à.r.l.		Luxembourg	100%
Invista European RE Lutterberg Propco S.à.r.l.		Luxembourg	100%
Invista European RE Lutterberg Logistics GmbH		Germany	100%
Invista European RE Villeurbanne Holdco S.à r.l.		Luxembourg	100%
Invista European RE Delta Holdco S.à r.l.		Luxembourg	100%
Invista European RE Delta Propco S.à r.l.		Luxembourg	100%
Invista European RE Delta Propco II S.à r.l.		France	100%
Invista European RE Grodzisk Sp.zo.o.		Poland	100%
Invista European RE Riesapark Propco S.à r.l.		Luxembourg	100%
Invista European RE Roth Propco S.àr.l.		Luxembourg	100%
Invista European RE Monbonnot Holdco 1 S.àr.l		Luxembourg	100%
Invista European RE Monbonnot Holdco 2 S.àr.l		France	100%
Invista European RE Germany GmbH		Germany	100%
Invista RE Dutch Holdings B.V.		The Netherlands	100%
Canal Business Park N.V.		Belgium	100%
Centaurus Logistics S.A.		Luxembourg	100%
Invista European RE Pocking Propco S.àr.l.		Luxembourg	100%
Invista European RE Sun Propco SARL		France	100%
Invista European RE Nova Propco SARL		France	100%
Invista European Real Estate Spanish Propco S.L.		Spain	100%
Invista European Bel-Air RE Holdings S.àr.l.		Luxembourg	100%
Invista European Bel-Air France S.A.S.		France	100%
Compagnie Francesca SARL		France	100%
Fonciere Vauclusienne Fova SARL		France	100%
Jerry SCI		France	100%
Anjoly Affretement Stockage (Anjolyas) SARL		France	100%
Juleo SCI	France		100%
Cabrimmo SARL	France		100%
Malabar Societe de Manutention Logistique SARL	France		100%
Cemga Logistics SARL	France		99%
Les Merisiers SARL	France		99%
Mirasud SARL	France		100%
Compagnie Fonciere de Fos Coffos SARL	France		100%
Nelson SARL	France		100%
Compagnie frigorifique et immobilere Cofrinor	France		100%
Montowest SARL	France		100%
Pole Logistique Vanclusien Poloval SARL	France		100%
Societe du Pole Nord SAS	France		100%
Compagnie Vauclusienne Covadis EURL	France		100%
Prolog SARL DBA Czech SRO Hades Logistics BV Atena Logistics BV Finimmagri SA KP IH SA KP RR SA	France Czech Republic The Netherlands The Netherlands Belgium Belgium Belgium		100% 100% 100% 100% 100% 100% 100%
KP HH SA	Belgium		100%
Assets held for sale	Country		Ownership-interest  30 September 2008
Invista European RE Lyon Propco S.à.r.l	Luxembourg		100%
Invista European RE Villeurbanne Propco S.àr.l.	Luxembourg		100%
Invista European RE Villeurbanne Propco II S.àr.l.	France		100%

  Independant Auditor's Report to the shareholders of the Company

REPORT OF THE REVISEUR D'ENTREPRISES

We have audited the accompanying consolidated financial statements of Invista European Real Estate Trust SICAF (the Company) and its subsidiaries (the Group), which comprise the consolidated balance sheet of the Group and the balance sheet of the Company as at 30 September 2008 and the consolidated income statements, the consolidated statement of changes in equity and the consolidated statements of cash flows of the Group as well as the income statement, the statement of changes in equity and the cash flow statement of the Company for the year then ended, and a summary of significant accounting policies and other explanatory notes.

Board of Directors of the SICAF responsibility for the consolidated financial statements

The Board of Directors of the SICAF is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with Luxembourg legal and regulatory requirements relating to the preparation of the consolidated financial statements. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

Responsibility of the Réviseur d'Entreprises

Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing as adopted by the Institut des Réviseurs d'Entreprises. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the judgement of the Réviseur d'Entreprises, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the Réviseur d'Entreprises considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. 

An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the Board of Directors of the SICAF, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements give a true and fair view of the financial position of Invista European Real Estate Trust SICAF and its subsidiaries, and of the results of their operations and changes in their net assets for the year then ended in accordance with the Luxembourg legal and regulatory requirements relating to the preparation of the consolidated financial statements.

Emphasis of matter

Without qualifying our opinion, we draw attention to notes 1 and 26 in the consolidated financial statements. Property prices have continued to decline since the Balance Sheet date which is expected to have a material impact on the carrying value of the Company's investment property portfolio. In the absence of any debt reduction whether by means of assets sales or otherwise, the Company could face a banking LTV covenant breach in the course of 2009, if the Company were to experience a fall of more than 13.4% in its portfolio valuation. Given the current volatile and uncertain environment in the commercial property market, it is difficult to ascertain whether the Company will breach its banking LTV covenant and what the reaction of the Company's lender will be in the event of a future breach. The Investment Manager is currently marketing a number of properties for sale in order for the Company to reduce its bank debt. Although potential sales are at an advanced stage, sales completion cannot be determined at this date. 

Consequently, these conditions indicate the existence of a material uncertainty which may cast significant doubt about the Company's ability to continue as a going concern.

  

Other matter

Supplementary information included in the annual report has been reviewed in the context of our mandate but has not been subject to specific audit procedures carried out in accordance with the standards described above. Consequently, we express no opinion on such information. However, we have no observation to make concerning such information in the context of the consolidated financial statements taken as a whole.

Luxembourg, 20 January, 2009 KPMG Audit S.à r.l.

Réviseurs d'Entreprises

D.G. Robertson

 

Glossary

Adjusted gross assets is the aggregate value of all of the assets of the Group, including net distributable but undistributed income, less current liabilities of the Group (excluding from current liabilities any proportion of monies borrowed for investment whether or not treated under accounting rules as current liabilities), as shown in the consolidated accounts of the Group. 

Earnings per share (EPS) is the profit after taxation divided by the weighted average number of shares in issue during the period. 

Net equivalent yield is the time weighted average yield between the Net initial yield and the Reversionary yield.

Estimated rental value (ERV) is the Group's external valuers' reasonable opinion as to the open market rent which, on the date of valuation, could reasonably be expected to be obtained on a new letting or rent review of a property.

Gearing is the Group's net debt as a percentage of adjusted net assets.

Gross rental income or gross rent is the annualised rental income receivable in the period, prior to payment of non-recoverable expenditure such as ground rents and property outgoings. 

Gross initial yield (GIY) is the Gross rent expressed as a percentage of the net valuation of property portfolio.

Group is Invista European Real Estate Trust SICAF and its subsidiaries.

Internal rate of return (IRR) for an investment is the discount rate that makes the net present value of the investment's income stream total to zero.

Listing fees are related to the Initial Public Offering of the Company and admission to listing on the main market of the London Stock Exchange of the Company's shares on 20 December 2006.

Listing rules are rules made by the UK Listing Authority under section 74 of the UK Financial Services and Markets Act 2000.

Net asset value (NAV) are shareholders' funds, plus the surplus of the open market value over the book value of both development and trading properties, adjusted to add back deferred tax.

Net initial yield (NIY) is the Net rental income expressed as a percentage of the gross valuation of property portfolio.

Net rental income or net rent is the annualised rental income receivable in the period after payment of non-recoverable expenditure items such as ground rents and property outgoings.

Potential rent is the rent achievable if all the remaining vacant space is let at the Estimated rental value and added to the current Gross rental income.

Regulated market is a market referred to in article 1, point 13 of the Council Directive 93/22 EEC on investment services in the securities field, as amended.

Reversionary yield is the anticipated yield, which the Net initial yield will rise to once the rent reaches the Estimated rental value.

ENDFR BMMTTMMTTTBL

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