We continue to search out developments which we believe will provide us
with a competitive advantage due to the scale and complexity that urban
regeneration often entails and for which your Company has considerable proven
expertise
I am pleased to report another very satisfactory
year for your Company, resulting in a significant uplift in shareholder
funds.
An increased contribution from our development activities, coupled with
a strong performance from our property investment portfolio enables me to
report a profit after tax of £23.6 million and earnings of 63.4 pence
per share, compared to £20.1 million and 54.8 pence per share for
the previous year.
Shareholder funds increased for the eleventh successive year, reaching
£231.4 million, equivalent to 568 pence per share. This compares to
£187.5 million and 510 pence per share 12 months earlier.
In light of this strong performance, the Board has recommended the payment
of a final Ordinary dividend for the year of 4.50 pence per share, payable
on 6th July 2007 to shareholders on the register on 8th June 2007. This
brings the total Ordinary dividend coupon for the year to 6.75 pence per
share, an advance of six per cent over the previous year.
The increased strength of our balance sheet of course reflects the £23.1
million Ordinary share placing in November 2006, when 3.7 million shares
were issued at a price of 625 pence per share. As shareholders will be aware,
the proceeds of the placing were principally utilised to acquire a 10-acre
development site in Birmingham, thus allowing your Company to conserve its
cash resources for other potential property acquisitions. We were pleased
with the strength of support demonstrated by both existing and new shareholders
for this successful placing.
Strategy
Shareholders will be aware that the strategic focus of our development activities
over the last two years has been suburban London and the main provincial
UK cities, rather than Central London. The City of London property market
remains innately volatile, due to the dominance of its financial services
sector and, together with the West End market, is always likely to become
one of the most competitive in any development cycle upturn. For some time
now, we have believed that a more attractive risk/return ratio would be
available elsewhere. Indeed, 2006 was a year of considerable progress in
pursuit of our chosen strategy, with project ‘wins’ in Birmingham,
Hammersmith, Southampton and significant advances at recently acquired sites
in North London, Huyton and Manchester.
We continue to search out developments we believe will give us a competitive
advantage, due to the scale and complexity of urban regeneration, for which
your Company has considerable proven expertise. It is likely that large-scale,
multi-phase projects, such as Curzon Park in Birmingham, will be delivered
over more than one economic cycle. This will offer good visibility to our
future activity and, we hope, potential profitability over the medium term.
Our development portfolio now comprises a number of similar projects, further
underpinning what we believe to be a sustainable business model.
The growing size and strength of our balance sheet, recently augmented
by the £23.1 million share placing, supports our adjusted business
model, whereby we now consider it appropriate to secure direct ownership
of land for development. Our recent £33.5 million acquisition of Curzon
Park, in equal partnership with Grainger PLC, is a case in point. We also
plan to take an equity interest in Beadon Road, Hammersmith. Acquiring land
is relatively straightforward and can now be achieved within the constraints
of our enlarged capital structure. However, the subsequent development is
much more capital intensive. Therefore, we will continue to seek leading
financial institutions as equity partners, either in an individual phase
or possibly through the entire project, thus maintaining our risk-averse
approach.
For a sixth successive year, I am pleased to report an excellent level
of returns from our property investment portfolio, generated by Matthew
Weiner and his team. In 2006, your Company achieved an 18.5 per cent IPD
Total Portfolio Return* which compares favourably to the average market
return of 18.1 per cent. In broad terms, six per cent came from the rental
income of the properties themselves and the balance from realised and unrealised
surpluses over existing book values.
During the year, we realised gains from properties where we felt medium-term
rental growth prospects were limited. However, reinvestment of these proceeds
proved more challenging than ever due to the seemingly relentless weight
of money seeking similar assets. As a result, allocation of our resources
into the investment property portfolio fell below target levels. Income
returns in the cash market now approach those available in the direct real
estate market. In order to justify the risk inherent in property ownership,
it is important that asset value grows through significant property-related
initiatives. We have never believed market momentum to be the sole justification
for property investment.
Outlook
Whilst we long ago gave up predicting an end to the current investment market
boom, we find it difficult to believe that the total investment returns
of recent years will be sustainable in 2007. However, we will continue to
seek superior performance through active management both of our existing
portfolio and of acquisitions.
At such points in the property cycle superior returns may be more readily
obtained in the development arena. This is increasingly understood by our
traditional institutional development and joint venture partners, banks
and by those with adequate financial and professional resources to compete
alongside us. The strength of the current development cycle will benefit
from continuing employment growth, a benign economic outlook and declining
office vacancy rates. Prospects for the medium term encourage us to further
expand our project portfolio, which presently has a completed investment
value in excess of £1 billion.
In this regard, your Company will pursue two tactical options. First, we
believe our resources will be more efficiently employed by continuing to
focus on urban development opportunities in suburban London and the main
UK provincial cities, where our brand strength and reputation continue to
grow. Second, we remain keen to expand our regional joint venture relationships
with those whose expertise best complements our own. In some instances,
our partners will be of equal financial strength; in others we may take
the financial lead while the appropriate regional specialist heads the development
project. We look forward to establishing more such relationships in the
near and medium term.
Board composition
As previously reported, Bill Grant retired from the Board in May 2006. Earlier
this month, Paul Willis stood down as a member of our Board for family reasons.
We wish him well for the future. After four years as your Chairman, I shall
not be seeking re-election at this year’s Annual General Meeting.
I shall be succeeded by David Jenkins, who joined the Board in February.
David retired three years ago as a senior audit partner of Deloitte &
Touche LLP where he specialised in the property sector for most of his career.
I have no doubt that he will make a significant contribution to the Company's
further progress.
Conclusion
The strength of the property investment market and the returns now emerging
from our development portfolio resulted in our 2006 financial performance
exceeding even that of 2005. We do not yet discern any credible or significant
threats to the property sector as an asset class, unless values are driven
still higher in 2007, which would make us more apprehensive. Global growth
may slow marginally in 2007, but this might be of benefit, allowing interest
rates generally to fall slightly as any perceived inflationary threats recede.
Given the structure and timing of our development activity, we may well
have to wait until 2008 for the next meaningful contribution to our financial
results. We will endeavour to extend our pipeline of projects in the medium
term. Our financial resources remain available to support any new opportunities
that we consider will provide the returns we seek.
It remains for me to thank all of our Directors, management and staff for
their valued contributions to our performance to date. Their professionalism
and reputations have been an undoubted important feature of our success
so far. Long may it continue.
I am certain we have the executive and management teams to meet the challenges
that lie ahead.
Roy Dantzic
Chairman
30th March 2007
