Interim Results

29th Aug 2008 11:45

Close High Income Properties PLC INTERIM REPORT

AND FINANCIAL STATEMENTS

For the six month period ended 30 June 2008

Highlights

Three disposals during Period with two further sales completing in July. Total proceeds of £6.29 million.

Debt refixed at 5.56% for two year Period. Loan funding in place until May 2013.

Rent weighted void level for Ordinary Share portfolio reduced over Period from 9.8% to 7.14%.

Rent weighted void for D Ordinary Share maintained at 16% despite high office weighting.

Chairman's Statement

Introduction

The first six months of 2008 continued to be a difficult period for the UK Commercial Property Market and this has negatively affected the performance of the Group. The global financial crisis, which started in 2007, has continued to have a major effect on investor sentiment and the consequential lack of liquidity has affected the transaction activity. A more recent concern has been the health of the UK economy and, in particular, whether or not it will slip into recession.

During this Period the Company's Ordinary Share Net Asset Value ("NAV") total return was negative 15.7% (including dividends paid). The "D" Ordinary Shares total return was negative 17.5% (including dividends paid). Whilst we are disappointed with this result, it is in line with our peers and has been caused largely by events outside of our control. In order to put returns into perspective for long-term shareholders, the table below demonstrates the total returns based on dividends and movements in NAV over the life of each share class.

Total Returns
Years	Ordinary Share	"D" Ordinary Share
2003	12.5%	-
2004	24.4%	-
2005	17.3%	-
2006	16.4%	10.6%
2007	(9.4%)	(20.0%)
January - June 2008	(15.7%)	(17.5%)
Since launch	51.4%	(23.9%)

* Total return assumes dividends are reinvested and excludes the initial charge paid on issue of shares

It is disappointing to see that the Company share price continues to trade at an unacceptably high discount to NAV. The current discount is 47.4% for the Ordinary Shares and 50.5% for the "D" Ordinary Shares, although both share classes have been at over a 50% discount for much of the Period. Once again, this is broadly in line with our peers and reflects the core sentiment towards property investment companies as well as in our case a relatively thin trading of the stock. We believe this discount will certainly reduce in the period running up to the shareholder vote in 2010 where it will be decided whether or not the Company will continue.

In line with the measures announced in the Annual Report and Consolidated Financial Statements for the year to December 2007, the dividends paid for both Ordinary and "D" Ordinary Shares were reduced to a more sustainable level with effect from the dividends paid in April 2008.

It is the opinion of the Board that UK commercial property capital values are likely to decline further to reflect the worsening expectations for the occupier market following the slowdown in the economy, as well as the prevailing difficulties investors are experiencing in securing debt finance.

However, the Board further believes that the yield profile of the Group's underlying assets is approaching a level which is sustainable given the context of this more difficult operating environment. Performance over the medium term is likely to be driven by active management of the Group's assets. 

Investment Progress

As stated in previous reports, the Board continues to identify and attempt to dispose of assets where the opportunities for active management have been exhausted or which are considered to be overvalued. However, it has become increasingly difficult given the current state of the investment market, to complete such sales. 

Over the Period the Group completed three successful disposals from the Ordinary Share Portfolio. Two further sales from the Ordinary Share Portfolio completed after the end of the Period. The total amount realised for all five sales was £6.29 million. Additional properties are presently being marketed to potential investors, including two properties from the "D" Ordinary share portfolio.

In addition, the Group has recently agreed terms and exchanged contracts on the sale of a portfolio of 7 industrial estates for £17.25 million. Completion is expected in late September and is only conditional on receiving the appropriate landlord consents for the sale. This sale will generate significant working capital for the Group which will be used, in part, to reduce outstanding debt.

In conjunction with the sales process, the Board continues to focus on generating performance and protecting the Group's income stream through actively managing the Group's assets. Good progress continues to be made in this regard. Further details are again provided by the Property Investment Adviser's Report

Debt

Gearing in the Ordinary Share Portfolio and "D" Ordinary Share Portfolio increased over the Period from 53.9% and 50.6% to 58.4% and 56.4% respectively. This is attributable to the fall in the capital values of the underlying assets. Proceeds from realised sales will be primarily used to reduce the level of the Group's gearing.

The Group's debt facilities had various interest rate swaps which effectively fixed interest rates until 27 June 2008. Upon expiry of these swaps the Board decided to refix the Company's debt at a rate of 5.56%, which runs until 29 December 2010. With inflation forecast to remain stubbornly high and above the Bank of the England's target, the Board was of the opinion that the chance of interest rate cuts were much reduced and that it was prudent to lock in at a level which is serviceable. The proportion of debt which is unfixed is associated with properties which are expected to be sold in the near future. 

Results and Dividends

The consolidated loss of the Group for the Period was £14,952,729 (30 June 2007: profit of £2,874,595)

The NAV of the Ordinary Share Portfolio fell 17.2% over the Period from 101.01 pence per share to 83.67 pence per share. The NAV of the "D" Ordinary Share Portfolio fell 18.4% over the Period from 71.82 pence per share to 58.60 pence per share. These figures do not take into account the distributions that were paid over the Period.

In January 2008, the Company paid dividends of 2.125p for Ordinary Shares and 1.625p for "D" Ordinary Shares. These dividends were approved by the Board in December 2007. The Company also paid quarterly dividends of 1.625p for Ordinary Shares and 1.25p for "D" Ordinary Shares in April 2008. This is consistent with the announcement made in the Audited Annual Report and Consolidated Financial Statements for the year ended December 2007 in which the Board stated that dividend payments would be reduced to what the Board believe is a sustainable level. In the absence of unforeseen circumstances it is the intention of the Board to maintain quarterly dividends at this level giving future gross annual dividends totalling 6.5 pence per Ordinary Share and 5.0p per "D" Ordinary Share. It is probable that future dividends will continue to be paid out of distributable capital reserves rather than revenue reserves.

Cancellation of Shares

The Company has not undertaken any share buy backs over the Period. However this is not as a result of the Directors believing that the shares are overvalued, but that the Board believes that the Group's resources are best directed to maintaining the dividend and ensuring that the Group complies with its banking obligations. Indeed, the Directors and members of the Property Investment Adviser's team purchased a total of 423,700 Ordinary shares in the Company in May 2008 at a price of 54.375 pence per share. 

The Board will continue monitoring the discount to NAV and, where appropriate, buy back shares in the market. However, its primary aim is to ensure that the Company has sufficient liquidity to meet its needs until the shareholder vote in 2010.

Board of Directors

The Board wishes to announce the resignation of Mark Shaw from the Board with effect from 31 July 2008. The Directors would like to thank Mark for his services over the years.

Future Prospects

The Board remains of the opinion that UK commercial property will continue to be detrimentally affected by the global financial crisis and the worsening prognosis for the UK economy. While the investment market will continue to be severely affected by the marked reduction in the availability of bank debt, the occupier market is likely to suffer from a slowdown in demand for commercial property and weaker prospects for rental growth. In this context, it is likely that UK commercial values will continue to fall. 

The Board however, still of the opinion that the underlying assets held by the Group will prove to be more resilient than those of our peers. The multi let nature of the Group's assets ensures that income generation is diversified with circa 700 tenants. In addition, the Group has no exposure to Central London or the Retail Warehouse sectors which have so far been disproportionately affected by the ongoing correction in capital values.

The Board will continue to review the Group's assets on an ongoing basis with the intention of making further disposals where appropriate. Proceeds from such sales are likely to be used to reduce further the level of the Company's gearing.

DIRECTORS' REPORT

The directors present herewith the Report and Financial Statements of the Company and its subsidiaries (together "the Group") for the six months ended 30 June 2008.

The Company

The Company is an Isle of Man closed-ended investment company. The Company was incorporated on 10 June 2002 and its principal activity is that of investment in commercial property.

The directors confirm that:

no one property represents more than 15% of the gross assets of the Group;

income receivable from any one tenant, or tenants within the same group, in any one financial year does not exceed 20% of the total rental income of the Group;

at least 90% by value of properties are held in the form of freehold or long leasehold; and

the proportion of the Group's property portfolio which is unoccupied or not producing income or which is in the course of substantial redevelopment or refurbishment does not exceed 25% of the value of the portfolio.

Results and dividends

The consolidated loss after taxation of the Group for the six months ended 30 June 2008 amounted to £14,952,729 (30 June 2007: Profit of £2,874,595).

On 31 January 2008 a dividend of 2.125 pence per Ordinary Share and 1.625 pence per "D" Ordinary Share was paid. This dividend was resolved by the Board in December 2007. In addition, a quarterly capital distribution of 1.625 pence per Ordinary Share and 1.25 pence per "D" Ordinary Share were declared and paid in April 2008. This level of capital distribution was also declared and paid in July 2008.

Company Secretary

Martin Katz served as Secretary throughout the period.

Going concern

The directors confirm that the Group continues to be a going concern.

Auditors

In accordance with section 12(2) of the Companies Act 1982, Ernst & Young LLC have indicated their willingness to continue in office.

Jonathan Clague

Chairman

29 August 2008

STATEMENT OF DIRECTORS' RESPONSIBILITIES

Company law requires the directors to prepare financial statements for each financial period which give a true and fair view of the state of affairs of the Company and of the Group and of the profit or loss of the Group for that year. In preparing those financial statements, the directors are required to:

select suitable accounting policies and then apply them consistently;

make judgements and estimates that are reasonable and prudent; 

state whether all applicable accounting standards have been followed; and

prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.

The directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Group and enable them to ensure that the financial statements comply with the Companies Acts 1931 to 2004. They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

CORPORATE GOVERNANCE STATEMENT

In December 1992, the Committee on the Financial Aspects of Corporate Governance ("the Cadbury Committee") published a Code of Best Practice. This was updated by the issue of The Combined Code: Principles of Good Governance and Code of Best Practice ("the Combined Code"). The Combined Code contains recommendations as to best practice, focusing on the control and reporting functions of boards of directors.

The Board of Close High Income Properties PLC, whilst not being under a formal obligation to report to the shareholders regarding the extent to which the Company complies with the Combined Code, monitors the Company's established procedures. The Board believes that the Company complies with the provisions of the Code to the extent which is appropriate to the Company's nature and scale of operations.

A revised version of the Combined Code has been adopted by the Financial Reporting Council ("The New Code") with effect from the Company's financial year commencing 1 January 2005. The Board is taking steps to ensure compliance with The New Code to the extent which it is appropriate and will report on this in its next annual report.

PROPERTY INVESTMENT ADVISER'S REPORT

Introduction

The UK commercial property market has continued to suffer from the most challenging economic environment since the early 1990s. The reduction in availability of debt finance combined with an increase in its cost has seen the investment property market stall, whilst the slowdown in the UK economy has reduced demand for commercial property across all sectors and consequently expectations for future rental growth. This has resulted in sustained falls in capital values over the last twelve months. Further falls in capital values are expected as the economic downturn continues although the prospect of reduced interest rates in 2009 may offset future yield shifts. 

In common with most commercial property funds, the Ordinary and "D" Ordinary Share Portfolios have been affected with falls in the value of their underlying assets of 7.51% and 8.23% respectively over the Period.

In April 2008, the UK Government's legislative reforms to empty rates liabilities came into effect. The new law introduced an obligation for owners of commercial property to pay full business rates for vacant industrial property and reduced the exemption period for empty office property. This has had a material impact on the Company's performance as a level of void property is inevitable across a multi-tenanted portfolio. We estimate that in a full year our rates expense may now have increased by circa £300,000. This figure does not take into account any resultant impact on the valuation of the Company's properties caused by additional and unjustifiable tax. 

I am pleased to report that a number of disposals were completed during the Period and thereafter. Further sales are expected over the remainder of the year in order to maintain loan to value covenants with the lending banks. Active asset management continues in parallel with this process and has yielded some success with a reduction in void levels in the Ordinary Portfolio over the Period, while the void rate has remained steady in the "D" Ordinary Share Portfolio. 

The Property Portfolios

Ordinary Share Property Portfolio

The Ordinary Share property portfolio consists predominately of provincial industrial and office properties located throughout England.

During the Period the Company sold properties located at Chapel Road, Worthing and Fretherne Road, Welwyn Garden City. A unit was also sold at Chilton Industrial Estate, County Durham. Following the period end the sales of the final unit at Chilton Industrial Estate and Vicarage Court, Edgbaston also completed. The proceeds realised from these sales totalled £6.29m and were in line with prevailing valuations.

Active management of the Portfolio's underlying assets remains a priority and success was achieved with vacant space let, leases renegotiated and a reduction in the void rate. During the Period 24 lease renewals were agreed, which are expected to generate income of circa £1.8m over their duration. Rents on renewals were on average 12.0% higher than the previous passing rents and 47 lettings of vacant units were also completed during the Period. Of the 46 units which became vacant, 25 were re-let to new tenants and at rents on average 8% higher than previously paid by the outgoing tenant, generating at least £3.1 million in additional income for the Group over the duration of the leases.

The additional lettings, combined with our continuing success in retaining existing tenants resulted in a fall in the Portfolio's void rate. As at 30th June 2008 the rent weighted void level stood at 7.14%. This compares with 9.8% as at 31 December 2007. 

Gearing in the Portfolio increased as the value of underlying assets fell. The proceeds from sales completed during and after the Period will be used to reduce gearing levels as well as providing working capital for the Portfolio.

"D" Ordinary Share Property Portfolio

The "D" Ordinary Share property portfolio consists of nine courtyard style multi tenanted office properties that were purchased in March 2006. 

Active asset management of the portfolio continues, with each estate and tenant being visited by the Portfolio's asset managers during the second quarter of 2008. The relationships developed during these face to face meetings forms the core of the Company's tenant retention strategy. Work has also begun on renovating common areas in a number of the Portfolio's properties. 

10 leases were renewed during the Period with rents on average 4.7% higher and 22 vacant units were let during the Period; 10 of which had become vacant during the Period. The cumulative effect of lease renewals and lettings from void space will add at least an additional £1.2m to the income of the Company over the duration of the leases. 

The Portfolio's void level remained broadly constant over the Period, rising only slightly from a rent weighted 16.29% to 16.36%. Void rates are expected to remain above the Ordinary Share Portfolio given the stronger weighting towards the office sector. 

Gearing has also increased in the Portfolio over the Period. As mentioned in the Chairman's statement, the intention is to dispose of one or two properties over the remainder of the year to ensure loan to value ratios stay within the banking covenants.

Property classification by sector as at 30 June 2008

Classification by Sector	Ordinary Share Portfolio (%)	"D" Ordinary Share Portfolio (%)	Total as a percentage of Market Value
Industrial	69	-	55
Offices	18	100	34
Mixed	12	-	10
Other	1	-	1
Total	100	100	100

Property classification by region as at 30 June 2008

Region	Ordinary Share Portfolio (% of Market Value)	"D" Ordinary Share Portfolio (% of Market Value)	Total as a percentage of Market Value
Midlands	27	38	30
East of England	18	22	19
North East	9	-	5
North West	11	27	17
South East	10	-	9
South West	14	-	8
Wales	1	-	1
Yorkshire & Humberside	10	13	11
Total	100	100	100

The table below summaries some of the property portfolio's key statistics as at 30 June 2008.

	Ordinary Share Portfolio	"D" Ordinary Share Portfolio
	2008	2008
Average annual rental per tenant	£20,666	£20,318
Average length of lease remaining	3.09 years	3.28 years
Average rental per square metre	£52.65	£127.46
Largest tenant by rental value	£345,000 Scotts Ltd	£206,250 Bedfordshire County Council
Average lease length	4.79 years	4.55 years
Longest unexpired lease term	16 years	13.9 years

Schedule of properties as at 30 June 2008

Property	Square Feet	Location	Use	Value at 30 June 2008
* all freehold unless otherwise stated
Anglia Way, Mansfield	20,459	Midlands	Industrial	955,000
Appleton Court, Wakefield (long leasehold)	26,100	Yorkshire & Humberside	Offices	4,560,000
Ascroft Court, Oldham	14,000	North West	Offices	1,040,000
Ashmead Industrial Estate, Keynsham	38,301	South West	Industrial	2,190,000
Barbot Hall, Rotherham (long leasehold)	69,129	Yorkshire & Humberside	Industrial	2,750,000
Barshaw Business Park, Leicester	21,000	Midlands	Offices	2,600,000
Bartlett Park, Yeovil	23,465	South West	Industrial	1,420,000
Basset Court, Northampton	18,005	Midlands	Offices	3,320,000
Bellway Industrial Estate, Newcastle-upon-Tyne	75,499	North East	Industrial	4,000,000
Bumpers Way, Bumpers Farm, Chippenham	11,203	South West	Industrial	630,000
Chilton Industrial Estate, Chilton, County Durham	15,142	North East	Industrial	430,000
Churchfield Court, Barnsley	27,977	Yorkshire & Humberside	Offices	3,720,000
Clarendon Court, Warrington	36,526	North West	Industrial	2,850,000
Cleton Business Park, Tipton	38,318	Midlands	Industrial & Office	1,940,000
Connaught Business Centre, Mitcham	10,491	South East	Industrial	1,300,000
Dalton Court, Blackburn	25,780	North West	Offices	3,560,000
Elizabethan Way, Lutterworth	14,272	Midlands	Industrial	700,000
Falcon Business Park, Burton-upon-Trent	29,397	Midlands	Industrial	1,635,000
Faraday Court, Burton-upon-Trent	25,487	Midlands	Offices	3,710,000
Farrington Place, Burnley	41,511	North West	Industrial	1,880,000
Farthing Road Industrial Estate, Ipswich	131,506	East of England	Industrial	5,750,000
Gainsford Drive, Halesowen	14,546	Midlands	Industrial	725,000
Goodridge Avenue, Gloucester	11,614	South West	Industrial	500,000
Greenfield Business Centre, Royston	34,451	South East	Industrial	2,175,000
Groundwell Farm Industrial Estate, Swindon	92,599	South West	Industrial	5,200,000
Haines Park, Great Avenue, Leeds (long leasehold)	13,143	Yorkshire & Humberside	Industrial	1,050,000
Henwood Business Park, Ashford	29,423	South East	Industrial	2,350,000
Ikon Trading Estate, Hartlebury	160,168	Midlands	Industrial	6,550,000
Kendall House, Burgess Hill	27,285	South East	Offices	2,300,000
Kirkleatham Industrial Estate, Redcar (long leasehold)	70,493	North East	Industrial	2,740,000
Links Estate, Weymouth	31,304	South West	Industrial	1,530,000
Lowmoor Industrial Estate, Bradford	24,858	Yorkshire & Humberside	Industrial	1,050,000
Marlborough House, Swindon	8,921	South West	Offices	750,000
Minerva Business Park, Peterborough (long leasehold)	33,030	East of England	Offices	3,850,000
New England Industrial Estate, Hoddesdon	22,479	South East	Industrial	1,230,000
Newton Court, Wolverhampton (long leasehold)	23,781	Midlands	Offices	3,300,000
Nightingale Road, Horsham	23,182	South East	Industrial	1,550,000
North Seaton Industrial Estate, Ashington	21,272	North East	Industrial	1,000,000
Oak Tree Park, Redditch	15,086	Midlands	Offices	1,400,000
Oakhill Trading Estate, Leicester (long leasehold)	57,299	Midlands	Industrial	2,000,000
Peartree Lane, Dudley	20,678	Midlands	Industrial	900,000
Portland Business Park, Handsworth, Sheffield (long leasehold)	77,597	Yorkshire & Humberside	Industrial	3,250,000
Preston Technology Centre, Preston	60,010	North West	Industrial & Office	4,660,000
Priestly Court, Stafford (long leasehold)	10,070	Midlands	Offices	1,370,000
Quays Reach, Salford	13,116	North West	Offices	2,200,000
Roseville Business Park, Roseville Road, Leeds (long leasehold)	29,801	Yorkshire & Humberside	Industrial	1,825,000
Rossendale Road Industrial Estate, Burnley	44,973	North West	Industrial & Office	1,480,000
Rutherford Court, Stafford (long leasehold)	17,734	Midlands	Offices	2,770,000
Ryan and Leanne Business Park, Wareham (long leasehold)	43,383	South West	Industrial & Office	2,820,000
Shadsworth Business Park, Blackburn	34,060	North West	Industrial	2,000,000
Sheiling Court, Corby	22,834	Midlands	Industrial	1,400,000
Smead Dean Centre, Sittingbourne	33,857	South East	Industrial	2,350,000
Spire Road, Washington (long leasehold)	18,772	North East	Industrial	1,020,000
St. James Mill, Millbrook, Northampton	42,529	Midlands	Industrial	3,730,000
St Margarets Way, Huntingdon	27,910	East of England	Industrial	2,100,000
Stadium Court, Cradock Road, Luton	66,223	East of England	Industrial	4,050,000
Stephenson Court, Bedford (long leasehold)	42,260	East of England	Offices	7,380,000
Terminus Road, Eastbourne	2,508	South East	Retail	625,000
Tewkesbury Business Park, Delta Drive, Tewkesbury (long leasehold)	59,580	South West	Industrial	3,890,000
Trinity Court, Warrington	29,607	North West	Industrial	1,925,000
Units 13-15, Malmesbury Road, Cheltenham	14,935	South West	Industrial	925,000
Units 16-25, Malmesbury Road, Cheltenham	17,639	South West	Industrial	1,170,000
Units 5-7, Maxwell Road Industrial Estate, Peterborough	61,339	East of England	Industrial	2,700,000
Units 20-25, Maxwell Road Industrial Estate, Peterborough	60,051	East of England	Industrial	2,450,000
Vicarage Court, Edgbaston (long leasehold)	16,015	Midlands	Offices	2,140,000
Walker Riverside, Newcastle	66,628	North East	Industrial	3,420,000
Warwick House, Solihull	15,470	Midlands	Offices	3,760,000
Watermark Way, Hertford	26,030	East of England	Offices	3,580,000
Webb Ellis Business Park, Rugby	82,948	Midlands	Industrial & Office	7,280,000
Wern Industrial Estate, Newport	22,980	Wales	Industrial	1,050,000
Whitworth Court, Runcorn, Cheshire	25,773	North West	Offices	3,400,000
Wren Industrial Estate, Maidstone (long leasehold)	19,910	South East	Industrial	1,350,000
Wyther Lane, Leeds	16,259	Yorkshire & Humberside	Industrial	950,000
Yale Business Park, Ipswich	30,911	East of England	Industrial	1,680,000
Total	2,602,892			179,790,000

Outlook

The correction in the UK commercial property market, which began in summer 2007, has continued. Estimates suggest that UK commercial property has fallen by 20-30% from its peak of summer 2007. 

As previously stated, it had been our opinion that UK commercial property yields fell to unsustainably low levels during the first half of 2007, leaving asset values over inflated. Whilst we anticipated a correction in capital values, the speed at which the correction occurred and its depth were unexpected. 

It remains our belief that capital values have further to fall in order to compensate for the now weakening occupier demand and expectations for negative rental growth resulting from a slowing UK economy (and structural changes in the property market). Consequently we expect capital values to fall for the remainder of 2008 and into 2009, while rental levels will decline in absolute terms over this period. 

Economy

The debate as to whether the UK will experience a technical recession over the next 18 months - which now seems likely - is secondary to the fact that the UK economy is slowing sharply and is having a detrimental affect on commercial property. 

Consumer spending, the mainstay of the UK economy, is slowing as households come under strain from the rising cost of living and limited wage growth. With savings rates at record lows and access to credit significantly more limited, households will have little option but to cut back on spending. Flat or reduced consumer spending, combined with weaker global demand will result in companies scaling back and will likely lead to a rise in unemployment.

The UK Government has very limited scope to inject stimulus into the economy, with borrowing at the limit of the Government's fiscal rules and tax receipts forecasted to fall. 

Under normal circumstances the Bank of England would be actively cutting interest rates to cushion the economy's slowdown. However, above target inflation has left the Bank's Monetary Policy Committee hamstrung and with risks to inflation, interest rates look set to remain at or around 5% for sometime to come. 

Investment Market

Even if the Bank of England were to cut the base rate of interest, it would be unlikely to provide much assistance to the investment market. Instead, the indications are that we are entering a protracted period of restricted availability of debt finance, as well as an increase in its cost.

The large rises in lending witnessed in the year to summer 2007 were not funded directly by banks or building societies, which did not have sufficient retail deposits or balance sheet capacity to accommodate such an expansion. Instead the gap between lending and deposits was filled via the secondary wholesale market and in particular securitisation. This outlet has been effectively closed since summer 2007 and looks unlikely to reopen to any significant extent in the near future. As a result, the availability of finance will remain constrained for some time to come. If, and when, it does relax there is also no guarantee that it will reduce the cost of debt finance in the manner it did up until the summer of 2007. In the interim, the relative scarcity of credit will be reflected in its cost to borrowers. 

In the absence of debt backed purchasers, only buyers with strong relationships with lenders or buyers, paying entirely in cash will be active in the market. We believe that the reduced competition for assets will further impact capital values. There is no doubt however that during this period there will be interesting buying opportunities as the banks force borrowers to sell and those assets with active management opportunities to increase income will be in demand.

When combined with the deterioration in the occupier market (rising voids, lower rental levels and shorter lease lengths) and the erosion of comparative value, it is our opinion that capital values are likely to fall for at least the next 12 months. 

Occupier market

The slowdown in the economy, weakened business investment and a rise in unemployment - the fundamental driver of demand for commercial property - has already seen demand for commercial property weaken across all sectors and with it, expectations for rental growth. 

The latest Royal Institute of Chartered Surveyors (RICS) Commercial Property Occupier Survey registered some of the lowest balance readings in its history for new enquires, demand and rental growth. Investment Property Databank ("IPD") has also begun to record its first few months of negative month on month rental growth. 

At a sector level, the regional office market has been less reliant on the more exposed financial and business service sectors ("FBS") than the City and West End and therefore should be less affected by the widespread redundancies anticipated amongst FBS workers. In addition, rental growth expectations for the regional office market were lower and therefore yields, in percentage terms, have not moved out as much as they have in Central London. However, the regional office sector is already feeling the impact of the slowing economy, with demand sluggish and prospects for positive rental growth much reduced. 

In the industrial property market, manufacturers are facing large increases in their input costs which they have been unable to fully pass onto their customers. Distributors, who have become an increasingly important sub-sector of the industrial market, are also struggling with the marked increase in transportation costs. In addition, the sector has become increasingly exposed to changes in consumer spending through its links with the retailers. Countering this, the recent fall in the value of sterling will make exporters more competitive in world markets.

Weaker demand for space and the introduction of empty rates liability on industrial property - which is likely to result in some landlords accepting lower rents to ensure a property is occupied - will usually result in rents declining in absolute terms. However, the higher yield profile of the sector should see it recover more quickly than other sectors of commercial property, as its higher income return will help to counteract further capital value falls. 

Both the regional office and industrial sector should outperform the retail sector, which will come under pressure from higher costs, weaker consumer spending and a significant increase in the availability of second-hand space, as retailers look to rationalise their portfolios. 

Going forward

Our focus over the next period is to ensure that the Company maintains sufficient liquidity, whilst continuing rigorous active management of the existing property portfolio. Particular attention will be paid to the void level across the portfolio, while also ensuring vacant properties are redecorated and refurbished to expedite possible occupation. A high level of tenant retention has always been one of the hallmarks of the Company and this is expected to continue over the forthcoming year. Significant detail has been provided earlier in this report showing the success the Company's asset managers have achieved in reducing voids and increasing rents when renewing leases.

We believe the composition of the Company's portfolio and its industrial focus should help to provide resilience. Our tenants are substantially diversified in terms of geographical spread and sector. In addition, the multi-let nature of the portfolio along with circa 700 tenants ensure that the Company is not overly exposed to any one tenant. We further believe that economical rent levels will make the Company's properties increasingly attractive as the economy slows and occupiers are forced to become more efficient.

Finally, the completion of the recent portfolio sale will reduce the Company's gearing level as well as providing general working capital. At the share price the Company is presently trading at, we believe it is attractive proposition for investors. 

Peter Roscrow

Close Investments Limited

Property Investment Adviser

29 August 2008

INDEPENDENT REVIEW REPORT

For the six month period from 1 January to the 30 June 2008

Introduction

We have been engaged by the Company to review the set of financial statements in the half-yearly report for the six months ended 30 June 2008 which comprises the consolidated income statement, the consolidated balance sheet, the consolidated statement of changes in equity, the consolidated statement of cash flow, the company balance sheet, the company statement of changes in equity, the company statement of cashflow, the Ordinary shares consolidated income statement, the Ordinary shares consolidated balance sheet, the "D" Ordinary shares consolidated income statement, the "D" Ordinary shares consolidated balance sheet and the related notes 1 to 15. 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 financial information in the condensed set of financial statements.

Our report has been prepared in accordance with the terms of our engagement to assist the Company in meeting the requirements of the London Stock Exchange and for no other purpose. No person is entitled to rely on this report unless such a person is a person entitled to rely upon this report by virtue of and for the purpose of our terms and engagement or has been expressly authorised to do so by our prior written consent. Save as above, we do not accept responsibility for this report to any other person or for any other purpose and we hereby expressly disclaim any and all such liability.

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 rules of the London Stock Exchange which require that the half yearly report be presented and prepared in a form consistent with that which will be adopted in the company's annual accounts having regard to the accounting standards applicable to such annual accounts.

As disclosed in note 2, the annual financial statements of the group are prepared in accordance with International Financial Reporting Standards, as endorsed by the European Union. The financial statements are prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting".

Our Responsibility

Our Responsibility is to express to the Company a conclusion on the financial statements in the half-yearly financial report based on our review.

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 consists of making enquiries of persons responsible for financial reporting 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 during 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 set of financial statements in the half-yearly financial report for the six months ended 30 June 2008 is not prepared, in all material respects, in accordance with International Accounting Standard 34.

Ernst & Young LLC

Chartered Accountants

Douglas

Isle of Man

CONSOLIDATED INCOME STATEMENT

For the six month period from 1 January to 30 June 2008

								(Audited)
					Notes	30 June 2008	30 June  2007	31 December  2007
							£	£
INCOME
Rental income from investment properties						6,809,692	7,603,005	14,475,535
Other income						79,994	59,108	109,624
						6,889,686	7,662,113	14,585,159
EXPENDITURE
Property Investment Adviser's management fee						(704,296)	(855,405)	(1,672,732)
Property Investment Adviser's incentive fee written back						-	142,582	2,642,122
Property expenses						(1,359,280)	(1,078,472)	(3,111,080)
Other expenses						(243,116)	(331,442)	(755,859)
						(2,306,692)	(2,122,737)	(2,897,549)
Net operating profit for the period  before finance costs						4,582,994	5,539,376	11,687,610
Interest receivable						585,315	350,338	930,445
Interest payable and similar charges						(3,750,522)	(3,226,891)	(7,000,192)
Gain on realised SWAP						-	20,245	-
						(3,165,207)	(2,856,308)	(6,069,747)
Gains / (losses) from investments
Realised gain /(loss) on disposal of investment properties						781,778	(72,023)	979,344
Unrealised (loss) / gain on revaluation of investment properties						(17,152,294)	263,550	(22,923,311)
						(16,370,516)	191,527	(21,943,967)
Net (loss) / profit from ordinary activities before taxation						(14,952,729)	2,874,595	(16,326,104)
Taxation on net (loss) / profit of ordinary activities					3	-	-	-
						-	-	-
Net (loss) / profit from ordinary activities after taxation attributable to members						(14,952,729)	2,874,595	(16,326,104)
Dividends - paid				Ordinary	4	-	(9,714,227)	(14,573,637)
				"D" Ordinary	4	-	(853,729)	(2,126,141)
						-	(10,567,956)	(16,699,778)

CONSOLIDATED BALANCE SHEET

As at 30 June 2008

							(Audited)
				Notes	30 June 2008	30 June  2007	31 December 2007
					£	£	£
NON-CURRENT ASSETS
Fixed Investment properties				5	179,790,000	225,350,000	198,600,000
					179,790,000	225,350,000	198,600,000
CURRENT ASSETS
Trade and other receivables				6	4,395,086	4,595,784	4,665,166
Cash and cash equivalents					4,822,092	4,326,095	4,716,322
					9,217,178	8,921,879	9,381,488
Total assets					189,007,178	234,271,879	207,981,488
NON-CURRENT LIABILITIES
Provision for Incentive fee				7	-	2,499,543	-
Bank loans				8	107,121,164	104,944,044	108,270,769
					107,121,164	107,443,587	108,270,769
CURRENT LIABILITIES
Trade and other payables				9	4,262,765	3,052,393	6,152,119
					4,262,765	3,052,393	6,152,119
Total liabilities					111,383,929	110,495,980	114,422,888
CAPITAL AND RESERVES
Share capital	- Ordinary			10	747,259	780,759	747,259
	- "D" Ordinary			10	257,651	262,686	257,651
	- Deferred shares			10	50,136	50,136	50,136
Distributable capital reserve	- Ordinary				72,640,967	77,428,597	73,831,134
	- "D" Ordinary				23,756,361	-	24,078,425
Capital redemption reserve	- Ordinary				39,925	1,390	39,925
Share premium	- "D" Ordinary				-	24,475,852	-
Revenue reserves					(20,820,437)	19,464,813	(5,867,708)
Hedge reserves				12	951,387	1,311,666	421,778
					77,623,249	123,775,899	93,558,600
					189,007,178	234,271,879	207,981,488

These financial statements were approved by the Board of Directors on 29 August 2008 and signed on its behalf by:

J D Clague

P P Scales

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY 

For the six month period from 1 January to 30 June 2008

	Share Capital	Share Premium	Capital  Reserve	Capital Redemption Reserve	Hedge Reserve	Retained profit	Total
As at 1 January 2007	1,094,971	24,475,852	77,610,638	-	851,001	27,158,174	131,190,636
Net loss for the year	-	-	-	-	-	(16,326,104)	(16,326,104)
Dividends declared and paid	-	-	-	-	-	(16,699,778)	(16,699,778)
Movement in unrealised gains on revaluation of interest rate swaps	-	-	-	-	(429,223)	-	(429,223)
Cancellation of "C" Ordinary Shares on merge	(501,357)	-	-	50,136	-	-	(451,221)
Issue of new Ordinary Shares arising from merge	451,221	-	-	-	-	-	451,221
Issue of deferred shares arising from merge	50,136	-	-	(50,136)	-	-	-
Buyback of Ordinary shares	(34,890)	-	(3,779,504)	34,890	-	-	(3,779,504)
Buyback of "D" Ordinary shares	(5,035)	-	(397,427)	5,035			(397,427)
Cancellation of share premium account		(24,475,852)	24,475,852
As at 1 January 2008	1,055,046	-	97,909,559	39,925	421,778	(5,867,708)	93,558,600
Net loss for the year	-	-	-	-	-	(14,952,729)	(14,952,729)
Capital distribution	-		(1,512,231)	-	-	-	(1,512,231)
Movement in unrealised gains on revaluation of interest rate swaps	-	-	-	-	529,609	-	529,609
As at 30 June 2008	1,055,046	-	96,397,328	39,925	951,387	(20,820,437)	77,623,249

CONSOLIDATED STATEMENT OF CASHFLOW 

For the six month period from 1 January to 30 June 2008

				(Audited)
		30 June 2008	30 June 2007	31 December 2007
		£	£	£
Cash flows from operating activities
Net operating profit before financing		4,582,994	5,539,376	11,687,610
Amortised borrowing costs		42,895	61,694	80,374
Decrease in debtors		723,789	1,046,865	120,193
Decrease in creditors		(1,869,702)	(1,145,694)	(2,641,823)
Cash generated from operating activities		3,479,976	5,502,241	9,246,354
Interest received		585,315	350,338	1,008,349
Interest paid		(3,774,881)	(3,266,608)	(7,096,329)
Taxation received/(paid)		77,706	-	(29,224)
Net Cash inflow from operations		368,116	2,585,971	3,129,150
Cash flow from investing activities
Payment for the purchase of properties and subsequent costs		(1,206,755)	(2,871,450)	(4,656,540)
Proceeds from the sale of properties		3,646,239	3,775,603	10,235,771
Net deposits received		2,901	-	1,563
Net cash inflow from investing activities		2,442,385	904,153	5,580,794
Cash flow from financing
Payment for share buyback		-	(182,041)	(4,176,931)
Equity dividends paid		(1,512,231)	(10,567,956)	(14,693,236)
Proceeds from long term borrowing		-	3,666,398	10,763,000
Issue costs of long term borrowing		(7,500)	(5,500)	(5,500)
Proceeds on break of SWAP		-	20,245	-
Repayment of long-term borrowing		(1,185,000)	-	(3,785,780)
Net cash outflow from financing activities		(2,704,731)	(7,068,854)	(11,898,447)
Net increase / (decrease) in cash		105,770	(3,578,730)	(3,188,503)
Cash at 1 January		4,716,322	7,904,825	7,904,825
Cash at 30 June/31 December		4,822,092	4,326,095	4,716,322

 

 

COMPANY BALANCE SHEET

 As at 30 June 2008

 

								30 June		(Audited)
					Notes		30 June 2008		2007  restated	31 December 2007
							£		£	£
NON CURRENT ASSETS
Fixed asset investments						11	771,942		29,111,418	8,506,201
							771,942		29,111,418	8,506,201
CURRENT ASSETS
Trade and other receivables						6	75,972,700		90,612,957	91,670,979
Cash at bank							1,775,734		4,786,273	788,027
							77,748,434		95,399,230	92,459,006
Total assets							78,520,376		124,510,648	100,965,207
CURRENT LIABILITIES
Trade and other payables						9	897,127		131,728	4,294,495
							897,127		131,728	4,294,495
CAPITAL AND RESERVES
Share capital			- Ordinary			10	747,259		780,759	747,259
			- “D” Ordinary			10	257,651		262,686	257,651
			- Deferred shares			10	50,136		50,136	50,136
Distributable capital reserve			- Ordinary				72,635,932		77,428,597	73,831,134
			- “D” Ordinary				23,761,396		-	24,078,425
Capital redemption reserve			- Ordinary				39,925		1,390	39,925
Share premium			- “D” Ordinary				-		24,475,852	-
Revenue reserves							(19,869,050)		21,379,500	(2,333,818)
							77,623,249		124,378,920	96,670,712
							78,520,376		124,510,648	100,965,207

 

This financial statement was approved by the Board of Directors on 29 August 2008 and signed on its behalf by:

J D Clague

P P Scales

COMPANY STATEMENT OF CHANGES IN EQUITY 

For the six month period from 1 January to 30 June 2008

	Share Capital	Share Premium	Capital  Reserve	Capital Redemption Reserve	Retained profit	Total
	£	£	£	£	£	£
As at 1 January 2007 (previously reports)	1,094,971	24,475,852	77,610,638	-	17,340,844	120,522,305
Prior year adjustment					10,668,331	10,668,331
As at 1 January 2007 (restated)	1,094,971	24,475,852	77,610,638	-	28,009,175	131,190,636
Net loss for the year	-	-	-	-	(13,643,215)	(13,643,215)
Dividends	-	-	-	-	(16,699,778)	(16,699,778)
Cancellation of "C" Ordinary shares on merge	(501,357)	-	-	50,136	-	(451,221)
Issue of new Ordinary shares arising from merge	451,221	-	-	-	-	451,221
Issue of deferred shares arising from merge	50,136	-	-	(50,136)	-	-
Buyback of Ordinary shares	(34,890)	-	(3,779,504)	34,890	-	(3,779,504)
Buyback of "D" Ordinary shares	(5,035)	-	(397,427)	5,035	-	(397,427)
Cancellation of share premium account	-	(24,475,852)	24,475,852	-	-	-
As at 1 January 2008	1,055,046	-	97,909,559	39,925	(2,333,818)	96,670,712
Net loss for the year	-	-	-	-	(17,535,232)	(17,535,232)
Capital distribution	-	-	(1,512,231)	-	-	(1,512,231)
As at 30 June 2008	1,055,046	-	96,397,328	39,925	(19,869,050)	77,623,249

COMPANY STATEMENT OF CASHFLOW

For the six month period from 1 January to 30 June 2008

				(Audited)
		30 June 2008	30 June 2007	31 December 2007
		£	£	£
Cash flows from operating activities
Net operating (loss) / profit before financing		(73,606)	798,812	(284,784)
Decrease/(increase) in debtors		10,563	(5,359)	(9,144)
(Decrease)/increase in creditors		(2,075,402)	40,471	2,985
Cash generated from operating activities		(2,138,445)	833,924	(290,943)
Interest received		2,381,056	2,954,836	6,227,074
Interest paid		(704)	-	(1,191)
Net Cash inflow from operating activities		241,907	3,788,760	5,934,940
Cash flow from investing activities
Dividends received		-	-	800,799
Net cash inflow from investing activities		-	-	800,799
Cash flow from financing
Payment for share buyback		-	(182,041)	(4,176,931)
Equity dividends paid		(1,512,231)	(10,567,956)	(14,693,236)
Loans made to Group companies		(5,546,968)	(1,306,671)	(3,056,708)
Loans repaid from Group companies		7,804,999	8,028,728	10,953,710
Net cash inflow / (outflow) from financing activities		745,800	(4,027,940)	(10,973,165)
Net increase / (decrease) in cash		987,707	(239,180)	(4,237,426)
Cash at 1 January		788,027	5,025,453	5,025,453
Cash at 30 June/31 December		1,775,734	4,786,273	788,027

  ORDINARY SHARES

CONSOLIDATED INCOME STATEMENT 

For the sixth month period from 1 January to 30 June 2008

									(Audited )
							30 June 2008	30 June 2007	31 December 2007
							£	£	£
INCOME
Rental Income from investment properties							5,594,243	6,028,653	11,924,550
Other income							74,112	59,108	109,624
							5,668,355	6,087,761	12,034,174
EXPENDITURE
Property investment adviser's management fee							(595,720)	(715,997)	(1,404,837)
Property investment adviser's incentive fee							-	142,582	2,642,122
Property expenses							(941,714)	(757,140)	(2,296,214)
Other expenses							(187,411)	(303,267)	(538,718)
							(1,724,845)	(1,633,822)	(1,597,647)
Net operating profit for the period before finance costs							3,943,510	4,453,939	10,436,527
Interest receivable							563,803	329,863	890,003
Interest payable and similar charges							(3,194,145)	(2,759,235)	(6,023,387)
							(2,630,342)	(2,429,372)	(5,133,384)
Gains from investments
Realised gain /(loss) on disposal of investment properties							781,778	(72,023)	979,344
Unrealised gain on revaluation of investment properties							(13,923,526)	282,662	(17,193,058)
							(13,141,748)	210,639	(16,213,714)
Net (loss) / profit from ordinary activities before taxation							(11,828,580)	2,235,206	(10,910,571)
Taxation on profit from ordinary activities							-	-	-
							-	-	-
Net profit from ordinary activities after taxation attributable to members							(11,828,580)	2,235,206	(10,910,571)
Dividends - paid							-	(9,714,227)	(14,573,637)
Basic and diluted earnings per Ordinary Share (pence)							(15.83)	2.71	(14.15)

  ORDINARY SHARES

CONSOLIDATED BALANCE SHEET

As at 30 June 2008

							(Audited)
					30 June 2008	30 June  2007	31 December 2007
					£	£	£
NON-CURRENT ASSETS
Fixed investment properties					145,590,000	182,550,000	161,330,000
					145,590,000	182,550,000	161,330,000
CURRENT ASSETS
Trade and other receivables					3,468,067	3,782,161	3,892,743
Cash and cash equivalents					4,072,490	3,341,819	3,139,628
					7,540,557	7,123,980	7,032,371
Total assets					153,130,557	189,673,980	168,362,371
NON-CURRENT LIABILITIES
Provision for incentive fee					-	2,499,543	-
Bank loans					87,404,086	87,161,541	88,576,251
					87,404,086	89,661,084	88,576,251
CURRENT LIABILITIES
Trade and other payables					3,202,513	2,765,824	4,730,987
					3,202,513	2,765,824	4,730,987
Total liabilities					90,606,599	92,426,908	93,307,238
CAPITAL AND RESERVES
Share capital					747,259	780,759	747,259
Deferred shares					50,136	50,136	50,136
Capital reserve					72,640,967	77,428,597	73,831,134
Revenue reserves					(11,743,403)	18,090,364	85,177
Capital redemption reserve					34,890	1,390	34,890
Hedge reserves					794,109	895,826	306,537
					62,523,958	97,247,072	75,055,133
					153,130,557	189,673,980	168,362,371

  "D" ORDINARY SHARES

CONSOLIDATED INCOME STATEMENT 

For the sixth month period from 1 January to 30 June 2008

								(Audited)
						30 June 2008	30 June 2007	31 December 2007
INCOME						£	£	£
Rental Income from investment properties						1,215,449	1,574,352	2,550,985
Other income						5,882	-	-
						1,221,331	1,574,352	2,550,985
EXPENDITURE
Property investment adviser's fee						(108,576)	(139,408)	(267,895)
Property expenses						(418,263)	(321,332)	(814,866)
Other expenses						(55,008)	(28,175)	(217,141)
						(581,847)	(488,915)	(1,299,902)
Net operating profit for the period before finance costs						639,484	1,085,437	1,251,083
Interest receivable						21,512	20,475	40,442
Interest payable and similar charges						(556,377)	(467,656)	(976,805)
Realised gain on SWAP						-	20,245	-
						(534,865)	(426,936)	(936,363)
Losses from investments
Unrealised loss on revaluation of investment properties						(3,228,768)	(19,112)	(5,730,253)
						(3,228,768)	(19,112)	(5,730,253)
Net (loss) / profit from ordinary activities before taxation						(3,124,149)	639,389	(5,415,533)
Taxation on profit of ordinary activities						-	-	-
						-	-	-
Net (loss) / profit from ordinary activities after taxation attributable to members						(3,124,149)	639,389	(5,415,533)
Dividends - paid						-	(853,729)	(2,126,141)
Basic and diluted earnings per "D" Ordinary Share (pence)						(12.13)	2.43	(20.70)

  "D" ORDINARY SHARES

CONSOLIDATED BALANCE SHEET 

As at 30 June 2008

							(Audited)
					30 June 2008	30 June 2007	31 December 2007
					£	£	£
NON-CURRENT ASSETS
Fixed Investment properties					34,200,000	42,800,000	37,270,000
					34,200,000	42,800,000	37,270,000
CURRENT ASSETS
Trade and other receivables					921,839	820,331	772,423
Cash and cash equivalents					749,602	984,276	1,576,694
					1,671,441	1,804,607	2,349,117
Total assets					35,871,441	44,604,607	39,619,117
NON-CURRENT LIABILITIES
Bank loans					19,717,078	17,782,503	19,694,518
					19,717,078	17,782,503	19,694,518
CURRENT LIABILITIES
Trade and other payables					1,055,072	293,277	1,421,132
					1,055,072	293,277	1,421,132
Total liabilities					20,772,150	18,075,780	21,115,650
CAPITAL AND RESERVES
Share capital					257,651	262,686	257,651
Capital reserve					23,756,361	-	24,078,425
Share premium					-	24,475,852	-
Revenue reserves					(9,077,034)	1,374,449	(5,952,885)
Capital redemption reserve					5,035	-	5,035
Hedge reserves					157,278	415,840	115,241
					15,099,291	26,528,827	18,503,467
					35,871,441	44,604,607	39,619,117

ENDIR FKCKNKBKDNFB

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