Half Yearly Report

2 August 2011 

CAPITAL SHOPPING CENTRES GROUP PLC

INTERIM REPORT FOR THE HALF YEAR ENDED 30 JUNE 2011

(1) Please refer to glossary for definition of terms

(2) 30 June 2011 income data includes Trafford Centre results for the 5 month period since completion

SOUND OPERATING PERFORMANCE AND PROGRESS WITH 2011 PRIORITIES

Sound operating performance in challenging retail environment:

·; occupancy remains high at 97 per cent

·; continuing footfall growth, up 3 per cent for the third consecutive year

·; 80 long term lettings secured £5m additional rent, in aggregate at 98 per cent of ERV

·; short term lets are a continuing feature of the market given economic conditions

Progress on CSC's three priorities for 2011:

·; growth in like-for-like net rental income - up 6 per cent mostly reflecting 2010 letting activity

·; progress with active management projects through planning, letting and construction. Major extensions moving towards planning consents

·; The Trafford Centre performing strongly post acquisition - footfall up 8 per cent - and integrated into Group's overall activities

Financial performance:

·; underlying earnings increased 53 per cent from £43 million to £66 million with net rental income growing from £135 million to £178 million including 5 months of Trafford Centre operations

·; underlying earnings per share increased 14 per cent to 8.0 pence

·; total financial return including dividends 3 per cent

·; robust financial position with debt to assets ratio unchanged at 48 per cent, interest cover improved to 1.7 times

Valuation performance:

·; 1.2 per cent like-for-like valuation increase (IPD 1.1 per cent increase) reflecting 11bp yield shift

·; Trafford Centre valuation unchanged

David Fischel, Chief Executive Officer of Capital Shopping Centres Group PLC, commented:

"With 6 per cent growth in like-for-like net rental income and increased footfall at our centres, CSC has delivered a sound operating performance in the first half of 2011. The Trafford Centre has proved an excellent addition and the Group has a range of active management projects and extensions in the pipeline to deliver future growth. Although the economic environment remains challenging, large centres such as those owned by CSC with a strong catering and leisure component are continuing to outperform".

Enquiries:

A presentation to analysts and investors will take place at The Brewery, Chiswell Street, London EC1Y 4SD at 09.30BST on 2 August 2011. The presentation will also be available to international analysts and investors through a live audio call and webcast. The presentation and the full press release will be available for download from our website www.capital-shopping-centres.co.uk.

NOTES TO EDITORS

OPERATING AND FINANCIAL REVIEW

OPERATING REVIEW

Introduction

Capital Shopping Centres has delivered a sound operating performance in the first half. We have made good progress on our three priorities for 2011:

·; like-for-like net rental income has grown 6.1 per cent, an increase from the 2.1 per cent recorded in 2010, as the effect of two years of intensive letting activity is now being seen in the income statement.

·; value has been created from a range of active management projects which have delivered strong returns at relatively low risk with further projects in the pipeline at most CSC centres, while more substantial extension projects have moved from the feasibility stage to detailed planning.

·; The Trafford Centre has proved an excellent addition. The Trafford Centre management team has taken on increased responsibilities for other centres within the Group and has made a positive start on taking forward opportunities for these assets.

Over some 40 years of developing, owning and managing regional shopping centres in the UK, CSC has focused on the highest quality centres with the best long term potential - strong catchment and demographics, exceptional accessibility, compelling retail, leisure and catering mix - with a view to generating sustained growth in like-for-like net rental income.

Our centres have evolved to reflect latest design and city planning concepts and adapted to continuous change in consumer preferences and retailers' requirements.

As a result CSC's shopping centres suffered less and recovered quicker from the 2008/09 downturn than secondary centres, emerging with high occupancy and a refreshed combination of on-trend UK brands and exciting international retailers.

Chart 1 illustrates changes in like-for-like net rental income since 2001. To view Chart 1, please paste the following URL into the address bar of your browser:

http://www.rns-pdf.londonstockexchange.com/rns/5170L_-2011-8-1.pdf  

After the setback in the UK's economic recovery in the last quarter of 2010, it became clear during the first half of 2011 that national growth for the period would be weak at best which has been confirmed by reported GDP growth of 0.5 per cent for the first quarter and 0.2 per cent for the second. This has inevitably affected the occupier market and has slowed the pace of improvement in the terms of lettings.

Established retailers have been facing the combined effect of reduced household incomes, product cost inflation and the challenge of online retailing and have therefore been carefully analysing their space requirements, with a structural shift towards top destinations offering a broader leisure experience as well as the full range of comparison retail offer. A number of retailers have recently set out plans to reduce their overall space requirement while focusing their attentions more on flagship locations.

Dynamic retailers realise that in order to achieve the best growth throughout their multi-channel offer, they need their brand and full range to be showcased where footfall is strongest. International retailers entering the UK have also tended to establish their brands in the most prime destinations, particularly large regional shopping centres near and within the top cities.

Consumer confidence has been low throughout the period, reflecting a reduction in real wages, job insecurity and further house price weakness. The dent made by austerity measures and petrol prices in household disposable incomes is driving consumers to seek more value for their money, in the broader sense of overall experience as well as product. With the ability to research and buy online, customers are knowledgeable about product and price and do not need to travel to a shop unless they get something else - convenience, physical comparison, a social experience, a good day out.

With four of the UK's top six out of town shopping centres, including The Trafford Centre, Manchester acquired earlier this year, and ten of the UK's top 25 shopping centres, CSC's portfolio is focused on those centres which are best placed to gain from this structural change.

Footfall in CSC's centres in the first six months of 2011 has shown further growth in line with the consistent increases experienced over the last three years, a demonstration of the defensive nature of the business with the visit to a prime retail destination a core recreational activity.

The pipeline of new shopping centre space was dramatically curtailed by the property market downturn of 2008 and 2009 with only a limited number of openings in 2011. A characteristic of the industry is a long lead time for bringing new space on stream. As a result, 2012 will be the first year with no significant new openings since the start of the shopping centre industry some forty years ago, with a further low level of committed openings anticipated in 2013 and beyond. This lack of supply is a positive factor for existing owners of top quality assets such as CSC.

Property investment market background

Robust levels of demand for prime shopping centres coupled with limited stock availability provide considerable support to valuations. Unlike prime Central London assets, prime regional shopping centre valuations are still well below peak levels. With top quality assets rarely coming to market, downward pressure on yields remains a positive factor for valuations, particularly given the current low level of interest rates. Against this backdrop and in the absence of prime product, certain of the stronger secondary shopping centres recently brought to the market have attracted encouraging interest.

Property valuations

The strongest valuation performance came from Metrocentre, reflecting steps taken to manage pro-actively the forthcoming lease expiry profile and Manchester Arndale where underlying rental levels have improved. The Trafford Centre valuation is unchanged since the acquisition at the end of January 2011.

ERV in aggregate is unchanged in the period, as rental value growth in some locations, driven by active management or particular sectors such as catering, has been offset by market-wide reductions in some less prime pitches. The Group's independent valuers calculate the ERV of each centre unit by unit on the basis of the evidence of lettings, applying their judgement to determine the reversion.

Operating performance:

Despite a difficult trading environment, CSC has delivered a sound operating performance.

·; Like-for-like net rental income is up 6 per cent or £8 million compared to the same period of 2010 reflecting lettings undertaken throughout 2010 and further openings at Cardiff.

·; Occupancy has remained high at 97 per cent (31 March 2011 - 97 per cent, 31 December 2010 - 98 per cent). The slight increase in vacancy reflects a number of tenant failures around the June quarter date and the seasonal effect following Christmas.

·; Footfall in CSC's centres is estimated to be up 3 per cent year-on-year for the third consecutive year, while Experian data indicates UK retail footfall overall has fallen by around 1 per cent.

·; 80 long term lettings have been achieved in the period for £18 million annual rent, an increase of £5 million over previous rent for those units and in aggregate around 2 per cent below ERV. A number of positive deals on larger units in bigger centres have enhanced the overall terms achieved in the period, with the average of other deals remaining in the range of 90 per cent to 95 per cent of ERV.

Long term lettings in the period include 18 new retailers to CSC centres including 4 international brands. We continue to see competitive demand for space in CSC's centres for larger units suitable for flagship stores and well located smaller units for catering outlets. CSC has a strong track record of creative active management and professional project execution to deliver appropriately configured space to meet retailers' requirements. Specific examples of income-enhancing new flagship stores are mentioned by centre below.

·; A strong growth area for CSC has been the increase in requirements for catering space. Catering operators now account for 8 per cent of CSC's total rent and some 370 units out of CSC's 2,400. With current deals being struck at higher levels, the aggregate rent of catering units across all CSC centres now averages £43 per square foot.

·; At 30 June 2011 CSC had 240 short-term leases which represented 3 per cent of passing rent, 5 per cent of ERV and 3 per cent of space (31 December 2010 - 202 leases, 2 per cent of passing rent, 7 per cent of ERV, 4 per cent of space). This remains a challenging area, with the slower progress than anticipated in achieving long term re-lettings closer to ERV reflecting economic conditions in the period.

·; Retailer sales in CSC centres increased by an estimated 3 per cent in total out-performing the benchmark on a like-for-like basis. National statistics have continued to confirm the evident weak retail market conditions with the BRC like-for-like non-food index indicating declines of 1.1 and 0.6 per cent respectively for the first and second quarters.

·; Estimated occupancy cost ratio (rent to retailer turnover) of 13.3 per cent excluding anchor stores remains unchanged from 2010. Estimates including The Trafford Centre and St. David's Cardiff for the first time indicate a slightly higher ratio of 13.7 per cent.

·; After 2010's low level of retailer failures, the first half of 2011 has seen a return to a more typical level. The impact on CSC's first half year results has been small at 2.0 per cent of rent roll with £1.1 million of debt and incentives written off (first half 2010 1.4 per cent and £1.7 million. Tenants occupying 61 units and accounting for 2.0 per cent of rent entered administration in the first half (2010 - 41 units and 1.4 per cent of rent). At the time of writing over half the units affected in 2011 are currently trading.

Chart 2 illustrates the valuers' assessment of reversion to ERV across the enlarged Group. To view Chart 2, please paste the following URL into the address bar of your browser:

http://www.rns-pdf.londonstockexchange.com/rns/5170L_-2011-8-1.pdf 

o Annual property income has increased from £297 million to £382 million in the period. The acquisition of The Trafford Centre added £85 million. Letting activity and ending of rent free periods of £8 million was offset by expiries and tenant failures.

o The reversion of 19 per cent of current rent is spread across the Group with two thirds of the upside concentrated in the top five centres by value.

o The largest component of the uplift (£43 million) is anticipated to arise on re-letting of expiries, around a third of which relates to short-term leases. The uplift relating to vacancies has increased marginally in the period due to tenant failures.

o The valuers' expectation is for two thirds of the reversion to be captured within three years, 80 per cent within five.

Major assets - activity and value creation

Following the acquisition of The Trafford Centre, 64 per cent of CSC's asset valuation and 62 per cent of its annual property income are attributable to CSC's 5 pre-eminent out-of-town regional shopping centres including 4 of the UK's top 6. A further 21 per cent of CSC's asset valuation is attributable to the premier in-town shopping centres of 5 of the UK's top cities and the remaining 15 per cent comprises 4 other centres in the UK's top 50.

Charts 3 and 4 illustrate the percentage breakdown of asset valuation and annual property income by centre. To view Charts 3 and 4, please paste the following URL into the address bar of your browser:

http://www.rns-pdf.londonstockexchange.com/rns/5170L_-2011-8-1.pdf 

A key area of focus for 2011 is value creation through continued enhancement of all CSC's centres as retail and leisure destinations by progressing development and active management opportunities. Reference was made in the Annual Report to three large opportunities for around £500 million of capital expenditure and £128 million of smaller active management projects. The latter tend to be focused on specific retailer needs and as such are characterised by relatively attractive returns at low risk. Updates for the projects are given below and, for illustration, the six examples at Lakeside, Metrocentre, Braehead, Eldon Square, Newcastle and Glades, Bromley account for £39 million of capital expenditure and are expected to generate an average stabilised initial yield on cost of 10 per cent.

The Trafford Centre:Market value - £1,650 million, annual property income £85 million

The Trafford Centre is one of the most successful retail and leisure destinations in the UK. It is located approximately six miles west of Manchester in the North West of England, immediately adjoining the M60 motorway. Anchored by Selfridges, Debenhams, John Lewis and Marks & Spencer, The Trafford Centre opened to the public in 1998 and annual visitor numbers have grown consistently since then. It is CSC's largest asset by value and income, representing a quarter of the Group's total. Approximately 5 million people live within 45 minutes' drive time and an estimated 35 million customer visits are made each year.

The Trafford Centre has continued its strong performance since acquisition by CSC on 28 January 2011 with notable progress made in further developing its retail and leisure mix:

·; Footfall has increased by 8 per cent year-on-year with an estimated 6 per cent increase in retailer sales

·; Occupancy has decreased marginally to 96 per cent.

·; New stores have been opened by Thomas Sabo, Boux Avenue and Ted Baker with another new brand to the Centre, Banana Republic, due to open next month. The Circle 360 Champagne Bar opened in July, successfully bringing one of Manchester's most popular venues to The Trafford Centre, and Lego Land's second ride has further increased its popularity.

·; M&S and Debenhams have both opened their extended stores showcasing new ranges and Dune's new concept flagship store follows later this month.

·; Annual property income is £85 million and ERV is £105 million.

CSC has plans to invest around £50 million in revenue-enhancing active management projects at The Trafford Centre, including £30 million at Barton Square. An application to part-enclose the central courtyard of Barton Square with a glass roof has been approved and permission has been renewed for the reconfiguration and enclosure for recycling use of two service yards on the south side of the Centre.

The Trafford Centre management team have taken additional responsibility for three other CSC centres - Manchester Arndale and Cribb's Causeway, Bristol, the two assets jointly owned by CSC and the Prudential, and Braehead, Glasgow. The Trafford Centre team are making good progress on taking forward the opportunities for these assets.

Lakeside: Market value - £1,071 million, annual property income £58 million

Lakeside is a prime regional shopping centre occupying a strong position on the eastern perimeter of London's M25 orbital motorway at the heart of Europe's largest aggregation of retail space with an estimated 25 million customer visits made each year.

Lakeside has had a strong start to 2011, the key features of which are:

·; Footfall has increased by 6 per cent year-on-year with an estimated 1 per cent increase in retailer sales

·; Occupancy is 99 per cent.

·; 16 long term lettings have been completed, with unsatisfied demand from MSU, catering, leisure and lifestyle operators.

·; New stores have been opened by, for example, Boux Avenue, La Senza and Confetti & Lace.

·; Annual property income up 1 per cent to £58 million, ERV up 2 per cent to £65 million.

Active management projects totalling £11 million are underway:

·; Three new flagship stores totalling 100,000 sq. ft. for Forever 21, Top Shop/Top Man and BHS: planning permission has been received for a "roof box" to create a new 35,000 sq. ft. store for Forever 21 in the existing Top Shop/Top Man unit. Top Shop/Top Man will relocate to a new 31,500 sq. ft. store created from Clinton Cards' unit and the upper level of BHS. A fully refitted, new concept BHS will occupy the lower level of its existing store and Clinton Cards is relocating to a new, smaller unit better suited to its business model.

·; New 8,000 sq. ft. fashion anchor for Brompton Walk: 5 units are being amalgamated to create a flagship store opening later this month for Choice, the high end multi-brand retailer, which has upsized four times in its 20 years at Lakeside.

A planning application is expected to be lodged in late 2011 for a 360,000 sq. ft. extension:

·; 160,000 sq. ft. department store

·; around 40 new shops and restaurants

·; fully integrated transport hub

·; investment of around £140 to £160 million, anticipated stabilised initial yield on cost 7 to 8.5 per cent

Metrocentre: Market value - £871 million, annual property income £52 million

Metrocentre is the largest covered shopping and leisure centre in Europe and the leading shopping centre in the UK in terms of tenant mix, transport links and catering offer. With 2.1 million sq. ft. of retail space and 9,250 free car parking spaces, it is the premier regional shopping centre destination for north east England attracting an estimated 23 million customer visits a year.

Significant activity in the first half of 2011 includes:

·; 12 long term lettings and renewals have been completed, in aggregate £3 million new rent marginally ahead of ERV.

·; The above includes progress with Metrocentre's key 2011/2012 expiry cycle. A further £15 million of rent expires in the remainder of 2011 and 2012, a total of 23 per cent of Metrocentre's rent roll reduced by pro-active management from 54 per cent two years ago. While deals are taking longer to complete as retailers carefully review their space requirements in the current challenging environment, there are a further £2 million of renewals in advanced negotiations, generally at terms a few percentage points below ERV.

·; Primark are fitting out their new 60,000 sq. ft. flagship store for an October 2011 opening, creating a strong new anchor for the yellow and blue malls.

·; Planning permission received for "MetrOasis", a 15,000 sq. ft. terrace of new retail and catering of which 75 per cent by income is under offer. Sited between Metrocentre and the retail park, this will improve linkages between the two locations.

Braehead: Market value - £577 million, annual property income £30 million

With around half of Scotland's population within its catchment and an estimated 18 million customer visits per year, the Braehead shopping centre and retail park are at the heart of the successful regeneration area led by CSC which also includes the Xscape leisure destination, Ikea, business parks, new homes, flagship car dealerships and a major garden centre. There is considerable opportunity for Braehead to fulfil its role as a strategic centre and CSC continues to work constructively with the local authority on a master plan for the area which should lead over time to increased economic and social activity.

Following the opening in May of H&M's new flagship store and the first full year of the new Primark, footfall at Braehead is up over 5 per cent year-on-year. Hollister and another major US brand are currently fitting out for openings in early September. The first of the new restaurants, Filling Station, is now open on the former non-income producing "Fun Ice" and the other units are being fitted out for openings later this month. This project demonstrated the strength of appetite by catering operators, with competitive demand increasing the rent achieved for the final unit by more than 15 per cent.

Nottingham: Market value - £333 million, annual property income £19 million

The Victoria Centre, opened in 1972 and now 981,000 sq. ft., is the strongest retail destination in Nottingham, the UK's sixth-ranked city by shopping population. Anchored by John Lewis and House of Fraser and currently 96 per cent occupied, an estimated 23 million shoppers visit the centre each year.

Following a highly positive response to the public consultation exercise, a detailed planning application was submitted in June 2011 for a proposed 500,000 sq. ft. extension to the Victoria Centre, providing:

·; an additional department store, 39 shops and enhanced leisure & catering facilities with a cinema and restaurants

·; a new bus station, health club and offices

·; improved pedestrian linkages running north/south and east/west through the city

·; 500 construction jobs and an estimated 2,200 new jobs on an ongoing basis

The outline timetable is for detailed planning consent to be granted by the end of 2011, enabling works in 2012 and construction from 2013 to 2015 with an opening for Christmas 2015. The capital expenditure of £225 to £250 million is expected to generate ERV of around £17 to £18 million, equivalent to a stabilised initial return on cost of 7 to 8 per cent.

Other centres: Recently completed or projects in progress to create value at other centres include:

·; The major extension to St David's, Cardiff, which opened in September 2009, is now 90 per cent committed by income. Since Christmas new commitments have been secured for a first shopping centre store for Cath Kidson, a UK first store for Baci Lingerie and two of the four remaining MSUs. More than half of all stores at St David's are the retailers' first in Wales.

·; In Newcastle, Next moved in May from Northumberland Street into Eldon Square, creating a major store with full line merchandise and are delighted with their relocation.

·; In Bromley, design work is underway and a detailed planning application will be submitted later this month for 5 new restaurants in Queen's Gardens, The Glades.

International

On 4 January 2011, CSC completed its transaction with Equity One, a US retail REIT, restructuring its £150 million ($250 million) net investment in Californian property. In exchange for its direct interest, CSC has received 4.1 million shares in Equity One and 11.4 million redeemable units in a new joint venture, in aggregate providing an effective 12 per cent interest in Equity One valued at £179 million based on a share price of $18.64.

Equity One has a market capitalisation of $2.3 billion and its annualised dividend is currently $0.88 per share with underlying FFO for 2010 of $1.08 per share. Equity One owns, develops and manages neighbourhood shopping centres anchored by supermarket chains. At 31 March 2011, the company had 177 shopping centres (20.1m sq. ft.) and 25 other properties/development sites. The top 4 geographies, totalling 60 per cent of rent, were South Florida, the San Francisco Bay area, Atlanta and North East, USA.

CSC's interests in India comprise a 25 per cent interest in the shopping centre developer, Prozone, and a 9.9 per cent interest in the listed Indian retailer, Provogue, our joint venture partner in Prozone.

Prozone's first shopping centre, Aurangabad, is now well established with over 60 per cent occupancy and a number of further tenants fitting out. Footfall has been growing consistently since the launch in the last quarter of 2010. Prozone is well underway with preparations for commencing further development projects in Coimbatore, Nagpur and Indore. As Prozone's business has become more established, CSC's results have now incorporated third party direct property valuations producing an encouraging £9 million surplus on CSC's interest.

CSC's shareholding in Provogue amounts to 11.4 million shares (9.9 percent) which at 30 June 2011 stood at R37 per share. The share price has come under pressure in the period as India has gone out of favour with international investors and small market capitalisation stocks, particularly real estate-related, have been neglected by investors.

Dividends

The Directors have declared an interim dividend of 5.0 pence (2010 - 5.0 pence) per share payable on 22 November 2011 to shareholders on the register on 14 October 2010. This dividend will be a property income distribution ("PID") subject to applicable withholding tax.

With effect from December 2010, the rules governing UK REITs were amended such that scrip dividends are now eligible to be classified as a PID. This removes one of the major barriers to CSC offering a scrip alternative. Further, of relevance given CSC's large South African shareholder base, recent changes in the South Africa tax regime are affecting the way that ordinary and PID dividends are taxed in the hands of South African shareholders in a manner positive for likely take up of scrip dividends. We are currently reviewing the options available to the company with a view to offering a scrip alternative for the 2011 dividends, which would result in the requirement to convene an EGM.

Prospects

CSC is a market-leading business based on the most prime retail assets with strong asset management skills to respond to market changes.

The results for the first half of 2011 demonstrate a continuation of recovery by CSC, although a more cautious occupier market is reflecting challenging macro-economic conditions.

Our three priorities for 2011 remain:

·; Growth in like-for-like net rental income: after a very strong first half result, the quieter letting market implies a lower increase in the second half of the year.

·; Creation of value from the range of active management projects and more substantial extension projects detailed above, with planning permissions and retailer negotiations providing continuing evidence of progress

·; The Trafford Centre: we look for continued strong performance from this pre-eminent retail and leisure destination and to further access the broader benefits to the Group from this acquisition.

FINANCIAL REVIEW

FINANCING STRATEGY AND FINANCIAL MANAGEMENT

In 2011 the Group's financial management has focused on achieving the successful integration of The Trafford Centre and continuing to address the appropriate financial management and medium term funding structure for the Group. Initial work has started on identifying options for re-financing the Group's Revolving Credit Facility ("RCF") which matures in 2013 and the first significant asset specific debt maturities in 2015.

Notable financial highlights for the period include:

·; Underlying earnings up by 53 per cent

·; NAV per share at 391 pence; total return for the six months of 3 per cent

·; Trafford Centre acquisition completed. Integration work progressing as planned

·; Debt to assets ratio at 48 per cent in target range of 40-50 per cent and interest cover for the six months of 170 per cent exceeds target minimum of 160 per cent

Acquisition of The Trafford Centre and associated Capital Raising

The Group successfully completed the acquisition of The Trafford Centre on 28 January 2011 and therefore these financial statements include the impact of the acquisition for the first time. Details of the opening balance sheet are provided in Note 20. The Income Statement includes the results of The Trafford Centre for the period from 28 January 2011 to 30 June 2011. Further details of the contribution in the period are given in the Underlying Profit Statement.

As part of the acquisition in January 2011 Peel subscribed £43.7 million for 12.3 million ordinary shares and £23.7 million for convertible bonds with a nominal value of £26.7 million converting into 6.7 million ordinary shares at a conversion price of 400 pence, giving a total cash inflow of £67.4 million.

RESULTS FOR THE PERIOD ENDED 30 JUNE 2011

The results for the six months ended 30 June 2011 reflect operational improvements achieved, in particular improved letting terms, since the end of 2009. This is most clearly illustrated by the 6 per cent growth in like-for-like net rental income in the period, a strong performance especially given the general retail environment remains challenging. This growth in like-for-like rental income was the main factor in driving the 14 per cent growth over 2010 underlying earnings per share.

Income statement

The Group recorded a profit for the period of £193 million, compared to the £291 million achieved for the comparable prior year period which included £73 million from the discontinued operations, Capco and C&C US.

The 2011 results include a £58 million gain on property valuations and a £22 million non-cash gain on the movement in the fair value of derivative financial instruments. The 2010 profit included a £348 million gain on property valuations, which was partially offset by a £89 million adverse movement in the fair value of derivative financial instruments.

Underlying earnings which excludes valuation and exceptional items, increased by £23 million to £66 million, as shown in Chart 5. To view Chart 5, please paste the following URL into the address bar of your browser:

http://www.rns-pdf.londonstockexchange.com/rns/5170L_-2011-8-1.pdf 

The growth in underlying earnings per share takes into account the issue of the 167 million new shares in connection with the Trafford Centre acquisition, resulting in an increase of 14 per cent from 7.0 pence per share in 2010 to 8.0 pence per share in the current period.

The Group's net rental income which increased by 32 per cent to £178 million in the period, benefitted from the £35 million five month contribution from The Trafford Centre. As noted above the Group's existing centres achieved an excellent 6 per cent growth in like-for-like net rental income. More detail on the rental performance is included in the Business Review.

Underlying net finance costs, which exclude exceptional items, increased by £16 million in 2011, with the benefit of the interest rate swap amendments undertaken in January 2011 offsetting the £19 million five month cost of the Trafford Centre CMBS notes.

Administration expenses, excluding the £16 million exceptional costs, increased from £11 million in 2010 to £12 million in 2011 largely due to inclusion of the Trafford Centre. Administration costs remain under tight control.

Exceptional costs in the period include finance costs of £34 million incurred in January 2011 on interest rate swap amendment costs. Expenses relating to the acquisition, including financial advice costs in relation to the Simon Property Group's proposal, amounted to £16 million in the period. These costs are classified as exceptional administration costs.

As the fair value of the Trafford Centre net assets acquired of £757 million exceeded the £703 million fair value of the consideration, based on the Group's share price on 28 January 2011 of 376 pence per share, negative goodwill of £54 million arose on the acquisition. This is recorded in the Income Statement as gain on acquisition of subsidiaries. A share price of 405 pence per share would have resulted in nil goodwill on the acquisition.

As noted in the 2010 annual report the disposal of the C&C US business that was completed in January 2011 resulted in a gain of £40 million before tax. The results for the period also includes a deferred tax provision of £14 million in respect of the investment in Equity One shares and joint venture units received as consideration, giving a net post tax gain of £26 million on the combined impact of this transaction.

The income statement also includes two items arising from the Group's interests in India. The £9.0 million share of associate income from Prozone, the shopping centre developer, is offset by the impairment of £8.7 million in the market value of the 9.9 per cent interest in Provogue, the listed Indian retailer, as the Indian stock market came under pressure especially for stocks of small market capitalisation.

Balance sheet

The Group's net assets attributable to equity shareholders have increased from the £2.3 billion disclosed in the 2010 annual report to £3.1 billion, with the increase largely resulting from the acquisition of The Trafford Centre and the associated equity capital raised.

As detailed in the table below, net assets (diluted, adjusted) have increased by £813 million from 31 December 2010 with the Trafford Centre acquisition and the profit for the period less the payment of the 2010 final dividend comprising the majority of the movement.

(1) The pro forma analysis includes the Trafford Centre and re-classifies the C&C US assets that were held-for-sale to investments.

The investments of £222 million as at 30 June 2011 comprise the Group's interests in the US and India. The investment in the US comprises 4.1 million shares in Equity One, and 11.4 million shares in a joint venture with Equity One, that the Group received in exchange for its interest in C&C US. Based on the Equity One share price of $18.64 the Group's investment has been valued at £179 million at 30 June 2011.

The fair value provision for financial derivatives, principally interest rate swaps, included in other assets and liabilities above, decreased by £15 million largely as a consequence of cash payments made in the period.

Adjusted net assets per share

As illustrated in Chart 6, diluted adjusted net assets per share were 391 pence at 30 June 2011, an increase of 1 pence in the period. The increase is attributable to the property valuation gain, offset by the 2010 final dividend and the exceptional costs. To view Chart 6, please paste the following URL into the address bar of your browser:http://www.rns-pdf.londonstockexchange.com/rns/5170L_-2011-8-1.pdf

Cash flow

The cash flow summary below shows a reduction in the Group's cash balance in the period. This can be attributed to the payments made in respect of exceptional costs (£50 million) and the REIT entry charge (£21 million) in the period.

Investment in property related assets was mainly limited to existing commitments in the period, with the most significant expenditure in the period being in respect of Eldon Square (£2 million) and Braehead (£2 million).

The cash acquired/sold with businesses relates to the Trafford Centre and C&C US respectively.

Net debt repayments of £52 million are discussed in the Debt structure section below.

The table below illustrates that recurring operating cash flow covers the proposed interim dividend.

Capital commitments

The Group has an aggregate commitment to capital projects of £55 million at 30 June 2011, down from the £90 million at 31 December 2010. The most significant element of the reduction is due to the majority of costs to complete the St. David's, Cardiff project, including land assembly costs, now accrued on the balance sheet. In addition to the committed expenditure, the Group has an identified project pipeline of £134 million. It is anticipated that £30 million relating to capital projects will be incurred in the balance of 2011.

Financial position and financing structure

At 30 June 2011, the Group had net external debt of £3,286 million, an increase of £97 million compared to the 31 December 2010 pro forma of £3,189 million. In addition to cash balances of £165 million the Group had undrawn facilities of £275 million at 30 June 2011, the £248 million revolving credit facility and £27 million on the St David's, Cardiff, joint venture loan facility, giving total headroom of £440 million.

Debt structure

The Group's debt is largely arranged on an asset-specific basis, with limited or non-recourse from the borrowing entities to other Group companies. It is largely syndicated bank debt and CMBS structures with corporate-level debt limited to the revolving credit facility. The flexibility of this structure was evidenced by the absence of lender issues during the demerger of Capco.

The revolving credit facility matures in mid 2013 and we have started approaching banks that we consider have the ability to provide similar corporate level facilities, with a view to putting these in place by the end of the first half of 2012. These banks would then be in place to assist with the longer term funding strategy.

Chart 7 shows that the value of maturities peaks in 2015-2016. To view Chart 7, please paste the following URL into the address bar of your browser:http://www.rns-pdf.londonstockexchange.com/rns/5170L_-2011-8-1.pdf

Over the last few months consideration has been given to replacing some facilities early but it has been concluded that the associated one-off costs would outweigh the benefit of longer maturities. Given the high quality of our assets we consider we should have funding optionality from a variety of debt funding sources such as secured bonds and bank loans, CMBS-linked notes, unsecured bonds and bank loans, and private placements.

During the period net debt repayments of £52 million were made, the most significant item being the repayment of the £81 million loan secured on Barton Square. An additional £56 million has been drawn on the St David's, Cardiff joint venture loan facility, with the balance of the net repayment being due to scheduled debt amortisation payments.

Hedging 

The majority of the Group's debt is floating rate. The Group uses interest rate swaps to fix short and medium-term interest obligations, reducing cash flow volatility caused by changes in interest rates. The Group is currently effectively fully hedged, with a small forecast excess in 2012 to 2014.

The table below sets out the nominal amount and average rate of hedging in place under current and forward starting swap contracts:

Since 2009, the Group has reduced the number of forward starting swaps as anticipated borrowing requirements have been reduced by capital raisings and market practice relating to swaps has changed. Costs of rescheduling and terminating such instruments have been treated as exceptional finance charges as incurred. Currently £555 million nominal amount of forward starting swaps remain, carrying a market value liability of around £72 million. As lenders' practice no longer allows the use of existing hedging contracts in new facilities, these contracts are and will remain surplus, unrelated to the current or anticipated borrowing needs. As such, the estimated annual cash payments from 2012 of around £14 million, reducing to £10 million by 2015, will be reported as an exceptional finance charge and will impact NAV (diluted, adjusted) as incurred.

Covenants

Full details of the loan financial covenants are included in the Other Information section of this report. The Group is in compliance with all of its corporate and asset-specific loan covenants. As detailed in that analysis, as a result of improved property valuations and rental income levels, the headroom over the minimum covenant levels has generally increased in the period.

Taxation

Since the Group became a UK REIT on 1 January 2007, the Group has made REIT entry charge payments of £168 million, with £21 million paid in the period. This now completes all payments due in respect of the Group's original REIT charges. Payments in respect of the Trafford Centre totalling £33 million will be made in the next twelve months. The cash flow benefits to date have amounted to £176 million, comprising net rental income and capital gains sheltered from UK tax.

Key risks and uncertainties

The key risks and uncertainties facing the Group are as set out in the table below:

DIRECTORS' RESPONSIBILITY STATEMENT

The Directors are responsible for preparing the condensed set of financial statements, in accordance with applicable law and regulations. The Directors confirm that, to the best of their knowledge:

·; this condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting, as adopted by the European Union; and

·; this condensed set of financial statements includes a fair review of the information required by Sections DTR 4.2.7R and DTR 4.2.8R of the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority.

The operating and financial review refers to important events which have taken place in the period.

The principal risks and uncertainties facing the business are referred to in the operating and financial review.

Related party transactions are set out in note 22 of the condensed set of financial statements.

A list of current Directors is maintained on the Capital Shopping Centres Group PLC website: www.capital-shopping-centres.co.uk.

By order of the Board

D A Fischel

Chief Executive

M Roberts

Finance Director

2 August 2011

INDEPENDENT REVIEW REPORT TO CAPITAL SHOPPING CENTRES GROUP PLC

Introduction

We have been engaged by the company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2011, which comprises the consolidated income statement, consolidated statement of comprehensive income, consolidated balance sheet, consolidated statement of changes in equity, consolidated statement of cash flows and related notes. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

Directors' responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority.

As disclosed in note 1, the annual financial statements of the Group are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting", as adopted by the European Union.

Our responsibility

Our responsibility is to express to the company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review. This report, including the conclusion, has been prepared for and only for the company for the purpose of the Disclosure and Transparency Rules of the Financial Services Authority and for no other purpose. We do not, in producing this report, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2011 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority.

PricewaterhouseCoopers LLPChartered AccountantsLondon

2 August 2011

Notes:

(a) The maintenance and integrity of the Capital Shopping Centres Group PLC website is the responsibility of the Directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website.

(b) Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

CONSOLIDATED INCOME STATEMENT (unaudited)

For the six months ended 30 June 2011

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (unaudited)

For the six months ended 30 June 2011

CONSOLIDATED BALANCE SHEET (unaudited)

As at 30 June 2011

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (unaudited)

For the six months ended 30 June 2011