UK Commercial Property REIT Ltd - Final Results for year ended 31.12.2019

Guernsey: 2 June 2020

LEI: 213800JN4FQ1A9G8EU25

UK Commercial Property REIT Limited

(“UKCM” or the “Company”)

FINAL RESULTS FOR THE YEAR ENDED 31 DECEMBER 2019

UK Commercial Property REIT Limited (FTSE 250, LSE: UKCM) which is managed and advised by Aberdeen Standard Investments and owns a diversified portfolio of high quality income-producing UK commercial property announces its final results for the year ended 31 December 2019.

2019 FINANCIAL HIGHLIGHTS –Strong income generation with lower risk

· POSITIVE NAV TOTAL RETURN

Net Asset Value (“NAV”) at year end of £1.2 billion represents a positive NAV total return of 0.1% in the year.

· STRONG INCOME GROWTH

15% increase in EPRA earnings per share to 3.50p (2018: 3.03p) driven by acquisitions made in 2018 and successful asset management in 2019.

· STRONG SHARE PRICE TOTAL RETURN

11.3% total shareholder return underlining the continued attractiveness of a large diversified REIT with a low risk profile.

· LOW GEARING

Net Gearing of 14.7% (2018: 14.6%) remains one of the lowest in the Company’s peer group (AIC Property UK Commercial sector weighted average gearing of 20%) and the wider REIT sector with successful debt refinancing in 2019 increasing flexibility and maturity of debt, while also reducing cost.

· SIGNIFICANT FINANCIAL FIREPOWER

£130 million available as at 31 December 2019 for investment opportunities which, when utilised, will further boost earnings.

2019 PORTFOLIO HIGHLIGHTS –Portfolio strategically well aligned

· PORTFOLIO PERFORMANCE

Portfolio Total Return of 1.4% (2018: 5.9%) compared to MSCI benchmark return of 1.8% (2018: 6.7%) as real estate returns slowed against a background of continued political uncertainty. Over three years the portfolio has returned 6.4% per annum against the benchmark return of 6.3% per annum.

· STRONG OCCUPANCY RATE

Occupancy rate of 92.1% (2018: 93.1%) compares to benchmark of 92.8% (2018: 92.8%) with over half the remaining vacancy in the Industrial sector.

· WELL-ALIGNED PORTFOLIO STRUCTURE

51% of the portfolio is now invested in the favoured Industrial sector compared to only 21% in the Retail sector following the sale of the Company’s last remaining shopping centre.

· REDUCED ENVIRONMENTAL FOOTPRINT

9% reduction in like-for-like greenhouse gas emissions in 2019.

Commenting on the results, Ken McCullagh, Chair of UKCM, said:

“My first Full Year results announcement as Chair of UKCM comes against the backdrop of an unprecedented global pandemic in COVID-19. As well as the tragic human cost of this virus, the economic implications have been profound and will impact all sectors of the economy for the foreseeable future, with the hope that significant government support and stimulus packages will see a return to growth. Delayed by the COVID-19 outbreak, these results reflect the ongoing market uncertainty and set out how UKCM will deal with current and future challenges it poses.

“We delivered strong earnings growth in 2019, primarily as a result of a number of successful asset management initiatives during the year under review and the benefit of receiving a full year of income from acquisitions we secured throughout 2018. ESG continues to be an important focus, so we are also pleased to report a 9% reduction in like-for-like greenhouse gas emissions across our portfolio. Looking ahead, the current crisis has resulted in significant pressure on the Company’s revenue account with rent collections for the second quarter standing at 68% as at 24 April 2020. However, we believe that UKCM continues to have strong fundamentals in place both at a property and corporate level that will help the Company navigate these unique circumstances, giving us the confidence to have announced in April that we intend to continue paying a dividend to shareholders.”

Will Fulton, Lead Manager of UKCM at Aberdeen Standard Investments added:

“We remain focused on rent collection in 2020 and are working closely with all occupiers to help them through the extreme challenges presented by the COVID-19 crisis. This is especially important for those in the leisure and retail sectors which have been the most acutely affected by the government-imposed lockdown. While we remain cautious in our approach and see very little justification for taking on unnecessary risk at this stage, UKCM remains in a strong position with £154 million of available capital and a flexible strategy to seize appropriate opportunities as we emerge from the pandemic, including the longer term potential for alternative uses on some of our retail assets in London.”

PERFORMANCE SUMMARY

CAPITAL VALUES AND GEARING	31 December 2019	31 December 2018	% Change
Total assets less current liabilities (excl Bank loan & swap) (£’000)	1,414,591	1,462,982	(3.3)
IFRS Net asset value (£’000)	1,167,144	1,212,169	(3.7)
Net asset value per share (p)	89.8	93.3	(3.7)
Ordinary Share Price (p)	88.8	83.2	6.7
Discount to net asset value (%)	(1.1)	(10.8)	n/a
Gearing (%): Net* Gross**	14.7 17.7	14.6 17.1	n/a n/a
	1 year % return	3 year % return	5 year % return
TOTAL RETURN
NAV †	0.1	17.5	33.0
Share Price †	11.3	19.4	24.9
MSCI UK Balanced Portfolios Quarterly Property Index^	1.8	20.1	40.3
FTSE All-Share Real Estate Investment Trusts Index	30.8	28.5	32.2
FTSE All-Share Index	19.2	22.0	43.8
	31 December 2019	31 December 2018
EARNINGS AND DIVIDENDS
Net profit for the year (£’000)	1,643	53,005
EPRA Earnings per share (p)	3.50	3.03
IFRS Earnings per share (p)	0.13	4.08
Dividends declared per ordinary share (p)	3.68	3.68
Dividend Yield (%)***	4.1	4.4
IPD Benchmark Yield (%)	4.8	4.7
FTSE All-Share Real Estate Investment Trusts Index Yield (%)	3.9	4.7
FTSE All-Share Index Yield (%)	4.1	4.5
ONGOING CHARGES AND VOID RATE
As a % of average net assets including direct property costs	1.5	1.5
As a % of average net assets excluding direct property costs	0.8	0.9
Vacancy rate (%)	7.9	6.9

* Calculated as net borrowings (gross borrowings less cash, excl swap valuation) divided by total assets less current liabilities (excl cash, borrowing and swaps).

** Calculated as gross borrowings (excl swap valuation) divided by total assets less current liabilities (excl borrowing and swaps).

*** Assumes re-investment of dividends excluding transaction costs.

† Based on a dividend of 3.68p paid in 2019 and the share price at 31 December 2019.

^ The Company's benchmark was the same in the year but changed its name from the MSCI IPD Balanced Monthly and Quarterly Funds Benchmark to the MSCI UK Balanced Portfolios Quarterly Index.

Sources: Aberdeen Standard Investments, MSCI

CHAIR’S STATEMENT

I am writing this statement, my first as Chair of the Board, against the background of an unprecedented global pandemic due to the spread of COVID-19. As well as the tragic human cost of this pandemic, the economic implications have been profound and will impact all sectors of the economy for the foreseeable future. With central banks and governments across the globe cutting interest rates, funding huge stimulus packages and underwriting the wages and salaries of workers, the outlook remains uncertain. This Annual Report & Accounts for 2019 reflects on the positive progress made over the twelve months to the 31 December 2019 by the Company and sets out the foundations for dealing with the current and future challenges in the market.

In 2019 UKCM continued to make good progress against its aim of being one of the most successful diversified, income focused REITs invested in the UK. The refinancing of our debt facilities at attractive rates, the expansion of our investment policy in the first half of the year as well as the sale of our last shopping centre in November 2019 were significant milestones that ensured the Company’s risk profile remained low against a background of political and economic uncertainty. The effect of the current pandemic and the lack of clarity in the outcome of Brexit are challenges the company will have to face during the year.

UKCM also delivered double digit percentage growth in its EPRA earnings, as the high quality acquisitions made in both the office and industrial sectors in 2018, and the continued successful asset management initiatives, boosted earnings and dividend cover. In addition, I am also pleased to note the passing, by an overwhelming margin, of the Company’s seven yearly continuation vote held in March 2020.

2019 Portfolio Performance

Overall the portfolio delivered a total return of 1.4% in the year compared to the benchmark total return of 1.8%. Similar to the wider commercial property market, the Company’s portfolio reflected the polarisation of returns between the strongly performing industrial sector and the structurally challenged retail sector. The Company’s industrial portfolio, where the Company had a 51% weighting at year end, continued to produce a positive total return, delivering 7.4% over the year, boosted by the letting of an 180,000 square foot industrial unit in Wembley to Amazon on a 10 year index-linked lease. The Company’s high quality office portfolio, which was 97% let at the year end, was also a positive contributor to performance as successful asset management at The White Building in Reading complemented strengthening yields in other areas of the office portfolio and resulted in a total return of 7.1%. As anticipated, this performance was offset by an 11.6% negative total return in the Company’s retail portfolio, driven largely by the sale of the Company’s last remaining shopping centre in Swindon, an asset we expected to continue to underperform in the future. It should be noted, however, that the Company’s remaining retail portfolio, which was 98% let at year end and represents 21% of the portfolio, now comprises predominantly well located retail parks which still offered opportunities to implement successful asset management in the year. This is clearly demonstrated by a number of successful lease events at our retail holdings in Great Lodge Retail Park, Tunbridge Wells (letting to Aldi a unit that was formerly sub-let by B&Q to Toys R Us which resulted in the Company receiving a surrender premium of £1.1 million), Junction 27, Leeds and St George’s Retail Park in Leicester.

Corporate Performance

The Company delivered a 0.1% NAV total return over the year as the attractive income return the Company produced was offset by capital value declines, mainly in the retail sector, as explained earlier. The share price return to shareholders, taking into account dividends paid over the year, was significantly higher at 11.3% as the discount at which the Company’s shares trade versus their net asset value narrowed from 10.8% at the end of December 2018 to 1.1% at 31 December 2019 as investors were attracted to a lower risk, closed ended vehicle such as UKCM given the market uncertainty caused by Brexit.

Over the longer term, the Company has performed well with a NAV total return of 33.0% and share price total return of 24.9% over five years, both ahead of the Investment Association Open Ended Funds UK Direct Property sector return of 22.0% for the same period.

As a Board we also take our environmental, social and governance responsibilities very seriously. The Company, through its Investment Manager, submits data to the Global Real Estate Sustainability Benchmark on an annual basis and in 2019, UKCM was on top of the UK Diversified (listed) peer group, getting a three star rating from GRESB. Linked to this, the portfolio has a number of ongoing portfolio initiatives relating to the use of solar photovoltaic cells at several industrial and retail assets.

Financial Resources

Importantly in the current environment, UKCM continues to be in a financially strong position with a NAV of £1.2 billion as at 31 December 2019 and net gearing of just 14.7% (gross gearing of 17.7%). It remains one of the lowest geared companies in the REIT sector, putting it in a healthy position at a time when capital values will undoubtedly come under pressure. The Company’s debt profile was also enhanced by the debt refinancing in February 2019 which achieved the following:

· Increased the debt maturity profile which now stands at 8.2 years;

· Increased the revolving credit facility (“RCF”) by £100 million to £150 million, which also improved flexibility;

· Added to available resources by securing £50 million of new debt, resulting in total facilities available of £350 million of which £250 million were drawn at the year end;

· Decreased the cost of the Company’s drawn debt from 2.89% to 2.78% as at 31 December;

· Enabled earnings growth as cash from asset sales can be used to repay the RCF facility, thereby reducing the overall interest cost.

As at 31 March 2020, following the post year end sales of a car showroom in Portsmouth and a retail park in Horsham, UKCM had £154 million of capital available comprising £54 million of uncommitted cash and £100 million able to be drawn from the low cost RCF. This robust balance sheet provides the Company with a strong buffer to weather the storm that will inevitably be caused by COVID-19.

2019 Earnings and Dividends

EPRA earnings per share in the year grew by 15.5% to 3.50 pence which equates to dividend cover of 95% in the year (2018: 82%). Earnings rose primarily as a result of the acquisitions made throughout 2018 delivering a full year of income, in particular the £85.4 million Midlands industrial portfolio which was acquired in December 2018. In addition, there were a number of successful asset management initiatives completed in the year, across all the main sectors, which helped secure income and drive earnings growth.

A key focus of the Board is to achieve sustainable earnings growth and hence this increase in earnings is to be welcomed. While there will undoubtedly be fluctuations in earnings, particularly due to COVID-19 and also due to the timing of investment activity and lease expiries, as highlighted above, the Company has significant resources at its disposal which will increase earnings when utilised. UKCM still has material asset management opportunities within its portfolio, particularly in the industrial sector, and a strong track record in creating value from these types of initiatives.

The Company paid and declared dividends totalling 3.68 pence per share in 2019. This equated to an annual dividend yield of 4.1% based on the year end share price of 88.8 pence. It should be highlighted that the tenant base now includes leading global businesses such as Amazon and Warner Bros. In addition, 22% of rents are now fixed or inflation-linked.

Board Changes

I would like to take this opportunity to thank my predecessor, Andrew Wilson. He was a founding director of the Company in 2006, becoming Chair in June 2016 and helped to steer the Company successfully through various capital transactions and the conversion to a REIT, leaving the Company with strong foundations to meet the current challenges. As announced in October, I am delighted to welcome Christopher Fry to the Board. Chris has over 20 years of experience in real estate investment management and has already proven to be a valuable addition to the Board.

Annual General Meeting

This year’s Annual General Meeting will be in held on 27 August 2020 at 11:30am at the offices of Aberdeen Standard Investments, Bow Bells House, 1 Bread Street, London.

In light of the current UK Government Guidelines surrounding COVID-19 pandemic, and expected future social distancing requirements, only the formal business set out in the Notice of the Meeting will be considered, with no presentation by the Investment Management and no refreshments. At the time of writing, it is likely that Members will be restricted from attending the AGM in person or by attorney or by corporate representative. Therefore, the Board encourages all shareholders to exercise their votes in respect of the meeting in advance to ensure that your votes are registered and counted at the meeting.

The Board welcomes questions from our shareholders and, given the format and prevailing circumstances, I would ask shareholders to submit questions to the Board prior to the AGM, and in any event before 24 August 2020. The Board or the Investment Manager will respond to all questions received. You may submit questions to the Board by email to Commercial.Property@aberdeenstandard.com. As soon as practicable, the Board and Investment Manager intend to host a “Meet the Board and Manager” session to allow shareholders to speak directly with the Board and Manager in person.

The Board will continue to monitor the UK Government Guidelines around social distancing in relation to COVID-19 and will update shareholders on any changes to the arrangements for the AGM. However, should social distancing measures be relaxed, we would urge all shareholders to take the health and well-being of their fellow investors into account when deciding whether or not to attend the AGM. I trust that shareholders will be understanding and supportive of this approach. In future, the Board expects to revert back to its normal AGM proceedings and looks forward to welcoming shareholders in person.

Outlook

The outlook for the UK economy and the UK real estate market is fluid at the time of writing but there is no doubt both will suffer substantially due to the impact of COVID-19. The duration and extent of this downturn depends on how quickly the pandemic is brought under control and both the global and UK economy return to some sort of normality, supported by the mass stimulus and wage underwriting mentioned earlier. A further consideration is the approach to Brexit and whether the UK government continue to insist this will need to be finalised by the end of 2020.

Looking at the UK real estate market, there will undoubtedly be larger impacts on capital values than previously forecast pre COVID-19, with material uncertainty clauses now applied to all valuations. However, the main focus is on income and fundamentally how many tenants will still be able to pay rent both during the pandemic and after lockdown restrictions are lifted, and when the economy returns to some sort of normality. At a sector level the retail sector, excluding supermarkets, is particularly vulnerable and the decline in this sector may accelerate, with the structural shift in demand away from physical retailers towards online purchasing expected to persist. The leisure sector will also be materially impacted as the lockdown cuts off all income flows. Industrials, especially urban logistics, and offices are expected to be less affected in the short term but will inevitably suffer if the downturn is longer and more severe than anticipated.

On the positive side, prior to COVID-19, the property market was supported by stronger fundamentals than in previous downturns: relatively high yields compared to other asset classes, limited development, historically high occupancy rates and, in most cases, controlled leverage.

In terms of UKCM, like the wider real estate sector, values have been impacted in the first quarter of 2020 declining by 3.1% on a like for like basis and rent collections for the second quarter standing at 68% as at 24 April 2020. However, UKCM also has strong fundamentals both at a property and corporate level that will help the Company withstand the current emergency. The portfolio is strategically overweight towards industrials which our Investment Manager continues to forecast to be the strongest performing sector over the next three years. It is also significantly underweight to retail, following the sale of the Company’s last shopping centre in Swindon. Combined with an office portfolio that is currently almost 100% let, the portfolio structure should provide a tailwind to relative performance. On the occupational side, over half of the Company’s voids are in well-located industrial units that before COVID-19 saw increased the portfolio has a well-diversified tenant base which should help with income retention, a fact that is crucially important in the current environment.

At a corporate level, the Company has low gearing which is well suited to the current market environment. In addition, the Company also has significant resources and a strong balance sheet which will allow the Board to direct capital and support the portfolio and tenants where it believes this in the best interests of shareholders. However, it cannot be ignored that the current crisis has resulted in significant pressure on the Company’s revenue account and to this end the Company recently announced a 50% reduction in the dividend for the first quarter of 2020, that is payable at the end of May. It should be highlighted that there is a clear aspiration to use the strength of the Company’s balance sheet and financial resources to ensure a dividend payment continues to be made throughout this period of uncertainty. The Board of Directors have also taken a 20% fee cut for the nine months to the end of the year.

Overall, I believe that UKCM, with its strong foundations is well positioned to address this crisis and build on what has been achieved in 2019.

Ken McCullagh

Chair of UKCM

1 June 2020

INVESTMENT MANAGER REVIEW

Market Review

UK GDP growth slowed materially in 2019 as Brexit-related uncertainty, the general election and slower global growth weighed on the UK economy. Despite an upward revision to third quarter GDP growth to 0.5%, UK GDP was flat in the final quarter of the year resulting in an annual growth rate of 1.1% in 2019.

The UK labour market ended the year at historically tight levels and recorded the strongest jobs growth in nearly a year in the three months to November. The general election outcome removed one layer of uncertainty for the UK, resulting in a recovery in business and household sentiment towards the end of 2019 but the COVID-19 pandemic put an abrupt end to that recovery. The UK economy now faces an unprecedented contraction in GDP in 2020.

Returns in the real estate market moderated in 2019, with a total return of 1.2% for the industry as capital growth turned negative over the year. However, returns were markedly different at the sector level, with industrial real estate recording another strong year, delivering total returns of 6.9%, whilst offices returned 4.4%. Retail on the other hand continues to weigh on the All Commercial property returns, with capital values declining by 11.6% over the course of the year and delivering a negative total return of 6.8% according to the MSCI Quarterly Index.

The FTSE UK REIT index experienced a late relief rally towards the end of 2019 resulting in a total return of 30.8% in 2019 as the December election result was viewed positively by the market. This was markedly ahead of the wider stock market, where the FTSE 100 and FTSE All-Share indices returned 17.3% and 19.2% respectively. Again, the COVID-19 pandemic has reversed those gains and the listed sector reflects significant discounts due to more uncertain NAVs. The hierarchy remains broadly the same, however, with industrial names holding up better and the pricing of retail REITs declining very steeply. London office developers started the year strongly but are now trading below where they ended 2019.

Prior to the COVID-19 crisis, occupational markets were largely unfazed by prevailing uncertainty and a lack of clarity on the UK’s future trading relationships. Take-up in the office sector was strong, with Central London leasing volumes falling only marginally short of the 10 year annual average level. However activity has fallen significantly in the face of the pandemic and office take-up is expected to be severely affected, with a large decline in leasing reported for April 2020. Regionally, headline rents have been steadily rising and vacancy rates falling across the ‘Big Six’ office markets but the regions now also face a dramatic slowdown in activity. As in 2018, the retail sector has struggled as structural changes continue to hamper the outlook for the sector. The new crisis clearly adds a cyclical challenge of unprecedented proportions to those structural headwinds. Industrial property, now driven by logistics rather than manufacturing, continues to be a key beneficiary of the structural changes playing out in the UK real estate sector and can be considered a key part of the national infrastructure during the COVID-19 crisis.

The uncertainty created by ongoing Brexit negotiations and the UK general election was felt most acutely through the investment market in 2019. UK real estate investment volumes reached £52 billion in 2019 according to property data, down on the £63 billion recorded in 2018, but in line with the 10 year average for UK real estate investment volumes. Once again, the alternative space gained investment market share on the previous year, accounting for one-third of all investment activity by value in 2019. Meanwhile, the office sector recorded investment volumes of £17.4 billion as a number of large deals in Central London bolstered the overall number. COVID-19 and the containment measures in place will result in a dramatic reduction in transactions this year. It remains too early to say precisely when – and how robustly – activity will return to the market.

Review by Sector

Offices — Performing well in the Regions

Geographically, regional offices were the best performing part of the office sector in 2019, delivering a total return of 5.2% according to the MSCI Quarterly Real Estate Index. This was followed by returns from London’s Mid-Town and West End markets, the City of London and South East offices of 4.7%, 4.3% and 3.8% respectively. Occupational demand for London offices remained resilient in spite of the political uncertainty created by the general election and ongoing Brexit negotiations. Leasing activity was strong in the final quarter of the year which helped bring the full-year take-up total to 12.8 million square feet, marginally below the 10 year annual average of 13.1 million square feet according to CBRE. Availability for second hand and Grade A space both fell over the course of the year, with the squeeze being felt most acutely in newly constructed Grade A space where new lettings have been focussed, leasing secondary space has proved more challenging. Strong take-up, declining levels of availability and a limited forward supply pipeline supported rental value growth of 1.3% for Central London offices in 2019. In the regional office markets, the ‘Big Six’ cities in particular, corporate and public sector consolidation has been driving demand for the best quality space. In a similar vein to Central London offices, supply and pipeline of Grade A office buildings in the ‘Big Six’ remains well balanced. As the year drew to a close, the political clarity derived from the election result prompted a noticeable increase in the level of optimism from agents in the market, particularly towards Central London offices. Early indications suggested that the subsequent improvement in sentiment would result in a pick-up in real estate investment activity in 2020 but conditions are clearly now very different.

Retail — A difficult year

MSCI calculate a retail sector drop in values of 11.6% for the year which fed into a total negative return of 6.8%. Shopping centres were in the eye of this retail storm with values across the MSCI Quarterly Index down 17.7% in 2019 bringing the cumulative fall to 27% over the last two years. Retail warehouses lost 14.5% of their value in 2019 and are now 21% below their last peak at the beginning of 2018. Regional shops fell by a similar amount over the year. Supermarkets, protected by long index linked leases and relatively strong covenants, and Central London shops were the only retail segments to show any stability. In line with the weak performance of large-format retail, liquidity was highly constrained in 2019. Less than £700 million of shopping centres transacted – comfortably the lowest volume on record – and retail warehouse activity only picked up with greater price discovery towards the end of the year. Sentiment is weak and rents, in aggregate, are under intense downward pressure as retailers seek to rationalise portfolios through lease events, direct negotiations with landlords or the more severe option of company voluntary arrangements. Further falls in value were anticipated in 2020, even before COVID-19. In the short term the pandemic is hitting the ability of physical retailers to trade equally, regardless of location, except for those currently deemed essential; even the strongest locations will be impacted by retailer distress. Longer term, proactive asset management across assets that appeal to consumers will remain the key to generating robust income and protecting value. Selectively, mainly in suburban London, some assets may offer the potential for higher values through conversion to alternative uses.

Industrial — Continued rental value growth supporting strong pricing

The industrial sector maintained its position as the best performing UK commercial real estate sector in 2019, outperforming the wider market by over 500bps with a total return of 6.9%. This is the eighth consecutive year that the sector has outperformed the wider market. Despite moderating from the levels witnessed in 2018, rents grew by a robust 2.9% at the headline level in 2019, continuing to provide support for pricing in the sector. In a similar vein to last year, the more space constrained South East industrial market recorded the strongest rental value growth with rents growing by 3.8%, whilst rental growth in the regions grew by a more modest 1.6%. The structural transition to online retailing continues unabated, resulting in another strong year of take-up by third-party logistics providers and retailers. In fact, with more than 35 million square feet of positive net absorption, 2019 was the strongest year since 2015 according to Co-Star. As a result, vacancy rates trended lower over the course of the year and ended 2019 at approximately 3%. Market fundamentals remain supportive for continued rental value growth in the sector, driven by strong demand particularly in London, which has cumulatively lost approximately 2.6 million square feet of industrial space over the last ten years to other uses, most notably residential, as well as in the South East and the best urban locations across the UK.

Alternatives – Income-focused investors abound

The UK real estate investment market remained highly polarised in 2019, with the alternative sector clearly in vogue once again. This alternative sector, or “Other Property” as it is categorised by MSCI, represents real estate which falls outside the traditional ‘Retail’, ‘Office’ or ‘Industrial’ definitions – collectively it is fast becoming mainstream and outperformed the market average in 2019 with a total return of 5.5%. Alternative property types possess a number of appealing facets for income focused investors, most notably the long index linked leases which are common across much of the sector resulting in values which have tended to be less volatile than the traditional commercial sectors. The sector has grown in prominence in recent years and 2019 was no exception; alternative property types accounted for close to a third of all investment activity in UK real estate amounting to its greatest share on record. The Purpose Built Student Accommodation (PBSA) and hotel sectors, the most established alternative sectors for institutional investors in the UK, accounted for over 50% of the £16.5 billion that was invested in alternative property types last year, with the former benefitting from a number of large portfolio transactions and M&A activity. There was a noticeable increase in interest in retirement living and the Build to Rent (BtR) sectors during 2019, which follows a more general trend emerging in UK real estate – one where investors are increasingly allocating to more operational sectors which provide greater exposure to the underlying performance of income generating assets. COVID-19 has exposed the additional risk in such strategies but it is a trend that is likely to re-emerge as the world recovers from the pandemic.

Market Outlook

The political clarity derived from the election result prompted a noticeable increase in the level of optimism from agents in the market, particularly towards Central London offices. However, in light of COVID-19, we see very little justification to be taking on unnecessary risk at this stage in the UK real estate cycle. The focus remains on asset-level risk and income prospects to identify attractive long term investment opportunities in the UK real estate market.

Given the macroeconomic environment, capital values are expected to fall this year but there will be significant dispersion across the sectors. While industrials are forecast to see stable capital values, it is anticipated that retail values will fall substantially, with rents under downward pressure and yields set to move out. Supermarkets are the clear exception to this. Leisure and hospitality assets also face a particularly difficult 2020. While investment volumes in 2019 were down compared to previous years, occupancy ahead of the pandemic was generally high (other than for much of the retail sector), which may help to mitigate some of the effects of the unprecedented contraction in the economy. The trends that have negatively impacted the retail sector have benefitted the industrial/ logistics sector as retailers move more of their business online, increasing the need for storage and distribution space.

Aside from well documented issues in much of the retail sector, the wider property market entered 2020 underpinned by good fundamentals – limited development, high occupancy rates and controlled leverage with attractive income returns compared to other asset classes. But COVID-19 represents a unique challenge for the world, this industry included, and the fundamentals for much of the property market are likely to weaken in the near term.

Portfolio Performance

During the reporting period, the Company’s property portfolio generated a total return of 1.4% versus 1.8% for its MSCI benchmark. This relative underperformance can be attributed solely to the sale in the second half of the year of the Company's last remaining shopping centre. Since the inception of the Company, and over the last three years, the portfolio has outperformed its MSCI benchmark which is the MSCI UK Balanced Portfolios Quarterly Property Index.

The table below sets out the components of these returns for the year to 31 December 2019 with all valuations undertaken by the Company’s external valuer, CBRE Limited.

	Total Return *		Income Return		Capital Growth
	UKCM %	Benchmark %	UKCM %	Benchmark %	UKCM %	Benchmark %
Industrials	7.4	6.8	3.2	4.3	4.0	2.4
Office	7.1	4.6	4.3	4.0	2.7	0.6
Retail	-11.6	-6.4	6.0	5.6	-16.7	-11.4
Alternatives	-1.3	5.4	4.9	4.4	-5.9	0.9
Total	1.4	1.8	4.3	4.6	-2.8	-2.7

Source: MSCI

* Multi-period capital growth and income return may not sum perfectly to total return due to the cross product that occurs as income is assumed to be reinvested on a monthly basis and is subject to capital value change.

The portfolio’s income profile has again been the main driver of total returns, delivering 4.3% compared to a capital return of -2.8% for the 12 month period. This trend, of a reliance on income as the dominant generator of total returns, is expected to continue. The Company has benefited over the year from its now 51% exposure to the industrial sector, 62% of which is located in urban assets and a very high proportion of these urban assets (79%) are within London and the South East. This latter portion of the portfolio has been the largest contributor to total return for the year although the relative income return has fallen a little short of the benchmark; the reason being most of the Company’s unoccupied property (7.9% by rental value) is within the industrial sector – a good thing given the positive prognosis for leasing well located industrial property. Retail exposure has been reduced again, accounting for 21% at the year end, with a further sale in Q1 2020 taking this down further to 19.5%. Though headwinds are still in play for the retail sector, the Company’s risk has been significantly reduced by the sale of its last shopping centre and the retail portfolio occupancy rate was 98% at the year end.

Industrial

The industrial portfolio, now 51% of the Company’s holdings by capital value, has delivered a total return for the year of 7.4% against the benchmark return of 6.8%. This performance was led by the successful reletting to Amazon of the 180,000 square foot Neasden warehouse in Wembley on a 10 year index-linked lease, and despite 12% of this well located industrial portfolio being vacant at the year end. Three of the Company’s industrial properties were in the top five contributors to positive performance for the year – its largest, Ventura Park, Radlett (North London beside the M25), Dolphin Estate at Sunbury-on- Thames (West London), and Emerald Park, Bristol, where a clutch of rent reviews were settled ahead of estimated rental value. We put political uncertainty in the second half of 2019 behind the delay in leasing the Company’s largest void, XDock 377, Magna Park, Lutterworth, where Q1 2020 has seen a significant uptick in occupier interest. Representing approximately 3% of Company rental value the impact upon letting will be positive.

Office

The Company’s office portfolio has again performed strongly during the course of the year, delivering a total return of 7.1% compared to the benchmark return of 4.6%. Outperformance came from a combination of stronger capital growth and income compared to the benchmark, helped in no small amount by achieving full occupancy at Eldon House in the City of London in Q1, and The White Building, Reading, with two final leases completed in Q4. Reading is a hub for the tech industry for which The White Building has proven very popular in terms of design and location; as a result it also featured in the Company’s top five contributors to performance for the year. Looking forward, its popularity should be boosted on the reasonable assumption the Elizabeth Line (Crossrail) will open in the next couple of years, dramatically improving connectivity to Central and East London. As a result of political uncertainty and pricing, against a backdrop of a good occupational market, the Company maintained its exposure to Central London offices through Craven House in the West End and Eldon House in the City, together representing almost 5% of the portfolio by capital value.

Retail

Performance of the Company’s retail portfolio, standing at 21% by value at the year end after two sales in the year, was dominated by the impact of selling the Company’s last shopping centre investment, The Parade, Swindon, without which the Company would have outperformed its benchmark over the year. Swindon town centre suffers from a combination of a large and growing out of town supply and an under-invested town centre environment. Against this backdrop the buyer, a private equity firm, has a different risk and return profile. Having been working on a sale for a considerable period it does represent a significant positive milestone for the Company. Total return from the Company’s retail portfolio for the year was -11.6% versus -6.4% for the benchmark; income return was better than the benchmark and capital loss worse. In absolute terms at the year end 16% of the Company’s portfolio was within the retail warehouse sub-sector (78% of the retail exposure) and, whilst this was by no means immune from the travails of the sector, it performed more in line with the benchmark and as described later allowed for positive asset management opportunities such as the incorporation of an Aldi food store into Great Lodge Retail Park, Tunbridge Wells. The retail portfolio finished the year 98% occupied and the second sale was of a High Street shop in Market Street, Manchester in line with valuation.

Alternatives

In April last year shareholders approved a resolution to widen the Company’s investment policy to include all elements of the alternative real estate sector; assets which are not office, retail or industrial. To date the Company has not invested to take advantage of this wider policy though it remains a firm focus with a number of opportunities under consideration. As such, returns from this sector for the period relate to the Company’s existing assets in the sector which are leisure by nature and collectively represent 11% of the portfolio by capital value. They delivered a total return of -1.3% against the benchmark of 5.4%. In fact this was very much a tale of two cities: the Company’s recent development funding of its long let Dalata-Maldron hotel in Newcastle-upon-Tyne, completed at the end of the previous year, was a top-five contributor to 2019 performance whilst its leisure and supermarket investment at Regents Circus, Swindon, having suffered the closure of its Morrisons supermarket, was in the bottom five. Despite this closure Morrisons remain the tenant and liable to rent for a further 14.5 years allowing us the ability to work with them to find a replacement tenant whilst continuing to collect rent. As the table above shows income from this sector exceeded the benchmark but was offset by capital performance behind the benchmark.

Investment Activity

In a year of political uncertainty we have reduced risk in the portfolio with the Company’s two retail sales described below and have held back from new investment as the shape of the new UK government developed. In line with our strategy to selectively increase exposure to the alternative sector, we have a number of opportunities in different stages of consideration, but not in the restaurant-leisure sector where we see continuing headwinds.

Sales

The Company completed three sales in the year.

· In September we completed the sale of a prime retail unit for £10.3 million in Market Street, Manchester, let to Adidas with a lease break in 1.5 years; this was completed in line with its valuation and, as well as removing risk that Adidas might vacate at a rent we felt would be difficult to replicate, secured a market leading yield.

· In November we made the strategic disposal of the Company’s sole remaining shopping centre asset, The Parade, Swindon, to a private equity partnership for £23.35 million; as described above the asset was projected to continue to underperform with downward pressure on rents despite asset management initiatives being undertaken. Although sold in line with its September valuation, this was considerably below its June valuation.

· In December, having concluded a 10 year lease renewal with Hertfordshire County Council, Meadowside House, an office investment in Apsley, Hemel Hempstead, was sold for £11.5 million, in line with its valuation.

After the year end, and so excluded from numbers and statistics in this report, the Company sold three further assets. In Q1 2020 Motor Park in Portsmouth, a multi-use asset predominantly comprising seven car showrooms, to Glasgow City Council for £29.8 million, representing a 3% discount to the December 2019 valuation. This was sold following a programme of active asset management, increasing the weighted unexpired lease length at the asset with new leases to Snows Business Holdings, which operates BMW, Mini and SEAT franchises, and Harwoods, which operates the Audi franchise. This asset management activity enhanced the asset’s value which we have now crystallised giving the Company additional firepower to reinvest into attractive, income accretive assets where we see longer term opportunity to deliver reliable returns. Secondly Broadbridge Retail Park in Horsham sold for £18.1 million in line with the September and December 2019 valuations, following the exercise of an option to purchase which had been agreed in November 2019.

And finally, on 5 May 2020, the Company unconditionally exchanged contracts to sell Eldon House, its only office asset in the City of London, for £40 million representing a 3.6% discount to its valuation as at 31 March 2020 but ahead of its 31 December 2019 valuation. The property was purchased for £27.8 million in 2015 and the sale follows the completion of an asset management plan which comprised a refurbishment of public spaces, as well as capturing reversionary potential by achieving full occupancy and regearing existing leases.

Purchases

With limited capital available to deploy at the start of the year and accentuated political uncertainty in the second half, no purchases were made during the year. Receipts from sales were used to repay debt on the Company’s efficient revolving credit facility, pending reinvestment. However during the first quarter of 2020, and following an expansion of the Company’s investment policy in 2019, the Company agreed to forward fund a new 221 bed student residential development in central Exeter, adjacent to the main university campus. With completion expected to match the start of the 2022/23 academic year, it is expected that by this time demand for well located, well designed modern accommodation next to “in demand” universities will be strong. The land, with full planning permission, was acquired for £6.5 million with an additional capped funding commitment of c.£21.5 million. Exeter is a Russell Group University that is ranked 10th in the UK according to The Guardian’s University League Table 2020 and, from an investment perspective, benefits from an under-supply of modern accommodation.

Asset Management Activity

Throughout 2019, the Company continued to proactively manage the portfolio to extend lease lengths, drive rents and reduce risk in the portfolio. Over £9.1 million of annual income was secured after rent free periods and incentives through 25 new leases and 21 lease renewals / rent reviews. The Company is also pleased to report that, on average, 97% of rent was collected within 21 days of each quarterly payment date during 2019.

We continued to capture strong rental growth within the industrial portfolio. Over the year £4.54 million of rent was secured at review which was 17% ahead of previous passing rent and 9% ahead of the estimated rental value at the rent review date.

The average weighted unexpired lease term of the portfolio remained consistent at 8.9 years compared to 8.8 years at 31 December 2018. There has been an increase in the proportion of portfolio income derived from leases with fixed or inflation-linked uplifts which has risen to 19% of estimated rental value.

Thematically we have experienced a continued bifurcation in rental growth from the significant uplifts on the London and South East based element of our industrial portfolio, whilst Retail estimated rental values, particularly in the retail parks, have dropped through the year. Despite the falling rental tone amongst the retail assets, the disposal of the shopping centre in Swindon has reduced risk and occupancy across the retail portfolio was 98% at 31 December 2019. The asset management team continues to look to extend leases and rebase rents with retail tenants. The leisure portfolio is predominantly let on long term leases, albeit the food and beverage sector has been subject to similar headwinds to the retail market. Our office portfolio remains well let with minimal voids and the final lettings completed at The White Building, Reading in Q4 further reducing void and risk in this sector.

The following asset management activity represents a summary of noteworthy transactions:

Apsley One, Hemel Hempstead

A lease renewal completed with Hertfordshire County Council for 10 years at a rent of £825,000 per annum which was 19% ahead of the estimated rental value and 36% ahead of the previous passing rent. This greatly enhanced the liquidity of the asset which was subsequently sold in December at a level in excess of valuation.

The White Building, Reading

Two lettings completed to Barracuda Networks, which agreed a 10 year lease, and Act on Software, which signed a five year commitment. The asset is now fully let and the estimated rental value and capital value has been increased since acquisition in Q3 2018. The asset is well placed to benefit from further tenant demand given its proximity to the Elizabeth Line terminus.

Central Square, Newcastle

A refurbishment was undertaken improving the common parts and amenity offer. A lease renewal completed with The Arts Council of England at a rent of £39,616 per annum which was 22% ahead of estimated rental value.

Great Lodge Retail Park, Tunbridge Wells

Completed a new 20 year index-linked lease with Aldi on a 27,000 sq ft unit which was previously part of B&Q’s demise. A part surrender was negotiated with B&Q which included a £1.1m premium from B&Q which was co-terminus with the new lease to Aldi at £500,000 per annum. This transaction will increase footfall on the park given the popularity of Aldi as a retailer, as well as downsizing the store for B&Q and reducing its lease liabilities.

Junction 27 Retail Park, Leeds

At this prime bulky goods park adjacent to an Ikea store, the final vacant unit was let to Natuzzi for 10 years at a rent of £225,450 per annum. In Q4 2019 a 5 year lease extension was completed with Sofology at a rent of £338,715 per annum which increased the unexpired lease term to 7.5 years and was accretive to capital value. We continue to speak to the tenants to look to further extend and restructure lease agreements.

St George’s Retail Park, Leicester

It was another busy year at St George’s Retail Park where the development and letting of a three unit extension completed in Q1 with Wren Living, Tapi Carpets and Floors and Laura Ashley taking occupation on 10 year leases at a combined rent of £599,500 per annum. A 15 year lease was completed to Home Bargains at a rent of £200,000 per annum which further benefitted from fixed rental increases. Finally, a lease renewal completed with DSG (Currys) which agreed a 10 year reversionary lease at £210,500 per annum, in line with estimated rental value.

Motor Park, Portsmouth

Lease Renewals were documented with Affinion International across two units for five years at a combined rent of £359,640 per annum. This further enhanced the weighted average unexpired term of the asset and liquidity of the investment which enabled the asset to be sold post year end.

Central Way, Neasden

A comprehensive refurbishment of the 180,000 sq ft logistics unit was completed and the asset was pre let to the high quality covenant of Amazon, which agreed a 10 year index linked lease. The new rent of £2,700,000 per annum was in excess of the property’s estimated rental value.

Newton’s Court, Dartford

A 10 year lease was secured with Veerstyle Ltd at a rent of £575,237 per annum, representing a 31% increase on the previous passing rent of £440,000 per annum. A lease renewal was also agreed with Compagnie Fruitiere UK Ltd for a two year lease renewal at a rent of £711,000 per annum delivering a 30% uplift on the previous passing rent and an 11% premium to the units estimated rental value.

Dolphin Trading Estate, Sunbury-on-Thames

The estate continues to benefit from the shortage of supply of industrial space within the M25 and strong occupier demand. A rent review was settled with Trans Global Freight Management at £704,000 per annum, providing a £193,400 increase on the previous passing rent and being 13% ahead of the unit’s estimated rental value at the rent review date.

Aberdeen Gateway, Aberdeen

Fixed increases were documented with tenants at this light industrial scheme which secured an overall increase of £393,192 per annum.

M8 Interlink, Coatbridge

Completed a 10 year lease with SPL Powerlines securing a rent of £88,416 per annum, in line with estimated rental value.

Environmental, Social and Governance (ESG)

The Investment Manager views the management of ESG issues as a fundamental part of its business. Whilst real estate investment provides valuable economic benefits and returns for investors it has, by its nature, the potential to affect environmental and social outcomes, both positively and negatively. The Investment Manager’s approach is underpinned by the following three principles:

· Transparency, Integrity and Reporting: being transparent in the ways in which we communicate and discuss our strategy, approach and performance with our investors and stakeholders.

· Capability and Collaboration: drawing together and harnessing the capabilities of our ESG platform, with the insights and experiences of our property consultants and industry best practice.

· Investment Process and Asset Management: integrating ESG into decision making, governance, underwriting decisions and asset management approach. This includes the identification and management of material ESG risks and opportunities across the portfolio.

A key element of our approach is the employment of our ESG Impact Dial a proprietary research framework in support of investment strategies and asset management approach. We have identified four major forces for change:

· Environment and Climate

· Governance and Engagement

· Demographics and Technology

· Infrastructure

These forces together form the basis of the ESG Impact Dial. These guide the assessment of materiality and integration of ESG factors within the Company’s portfolio and provide the framework for our ESG objectives.

Specific examples of our ESG Strategy in action include:

Office Portfolio

Our ESG data platform, Envizi, captures energy and emissions performance data from these assets and provides the facility for live monitoring and action planning. Our Consultants, Property Manager and the Investment Manager’s portfolio management team all have access to the platform, which also provides the basis for meeting the Company’s energy and emissions reporting obligations.

This approach has resulted in a number of recent improvements at office assets. At 9 Colmore Row, Birmingham the replacement of a large chiller and extensive lighting upgrades resulted in an 8% reduction in electricity consumption in 2019. Similar lighting upgrades and improvements to the operation of heating and ventilation equipment at Eldon House, London led to a 5% improvement in 2019.

Our consultants have also started an exercise to benchmark office assets against industry net zero emission targets.

Industrial Refurbishments

The Company has recently completed the refurbishment of industrial assets at Hannah Close, Neasden and Magna Park, Lutterworth. Both projects incorporated high levels of sustainability performance to deliver modern, future proof industrial buildings.

Wembley 180 at Hannah Close was refurbished to a BREEAM Very Good standard, incorporating a solar PV array (with capacity to expand further in future), high efficiency lighting and high levels of natural light. The Energy Performance Certificate (EPC) improved to a C rating as a result of the works. The projects also incorporated biodiversity improvement measures including an insect hotel on spare land.

The project at XDock 377 at Magna Park, Lutterworth included a full refurbishment of the office space including full LED lighting and high-efficiency heating, ventilation and cooling. The warehouse space incorporates a high level of natural light; reducing the need for artificial lighting. The EPC rating for the asset improved to a B as a result of the works, future-proofing the asset against expected tightening of energy performance regulations over the next decade.

Portfolio Strategy

Your Company aims to deliver an attractive level of income, together with the potential for capital and income growth, through investment in a diversified UK commercial property portfolio.

Our strategy to achieve this is clear and benefits from the sale of our last shopping centre asset, forecast to be the weakest sub-sector of UK real estate over the next three years. Conversely the industrial sector, which comprises more than 50% of the portfolio, remains a top forecast performer over that period.

We will continue to selectively sell non-core assets, reinvesting with several objectives in mind:

· to diversify the portfolio towards sectors which will deliver income growth, particularly given the disruption in the retail sector through e-commerce and the uncertainty in the market surrounding viable base rent levels;

· to cover the dividend medium term with sustainable and growing earnings and do so without materially increasing income risk while at the same time keeping gearing modest.

COVID-19 has undoubtedly created more risk in the world. The Company had a very clear strategy entering 2020 and in broad terms that clear strategy remains unchanged as outlined above. However, as this report is published, it is harder to forecast the route the UK will take to emerge from the pandemic and bring its working population back to work which, of course, helps inform prospects for different sectors of the property market. As a result your Company will adopt an ‘eyes-open’, flexible focus within the parameters of its strategy outlined above.

One aspect of that focus is the alternatives sector, whilst at the same time monitoring the market for signs of price weakness, perhaps from sellers with liquidity requirements, in areas of the market with strong fundamentals. The additional sub-sectors we now have access to, which have come to be regarded as mainstream and are commonly referred to as “alternative sectors”, include healthcare, student housing, hotels, car parks, pubs, petroleum and automotive and the commercially-managed private residential rental sector, amongst others. These represent an increasing share of the commercial property investment market encouraged by a combination of favourable structural drivers which we believe are set to continue – for example demographic, urbanisation and trends in technology, together with the stability of income returns and diversification benefits that investing in this alternative sector brings. As an example we are studying closely, but very selectively, the student accommodation market, where our focus is on universities that are not overly reliant on the international student population and where demand is forecast to outstrip supply; we believe this to be having a renaissance with the removal of student number caps expected to create a demand swing in favour of the better universities. Since the year end we have concluded on an agreement to fund the construction of one such, relatively small, investment adjacent to the University of Exeter expected to complete for the start of the academic year 2022/23. We will take advantage of a tried and tested operational leasing arrangement which, for the right investment such as this, we believe offers a compelling yield premium linked to a diversifying income stream. We would also consider long-let indexed income, but much of that market continues to be very expensive, and also judicious funding opportunities with planning permission and where income risk is suitably considered and controlled. Finally, and with additional weight since the year end given the uncertainty caused by the COVID-19 global pandemic, we are alert to take advantage of pricing anomalies and opportunities across favoured sectors.

At the year end we had £130 million of capital available to invest, comprising £30 million in cash and £100 million undrawn debt from our revolving credit facility. Taking account of post-year end investment activity throughout the first quarter of 2020 we now have £154 million of available capital.

Alongside new investment it is important to actively manage the bulk of the portfolio we retain to improve the quality of the portfolio and income stream. The industrial portfolio is designed to provide better yielding steady income from the circa 30% invested in regional logistics stock. The 70% balance invested in urban and London and South East stock targets the rental growth we experienced from occupiers being priced out of very central London locations as demand builds against a backdrop of limited supply. In retail, the Company’s assets are well located and by and large we believe our tenants who like to trade from their units, can make a profit, but are often paying more rent than the current rental value. Here we work with them to manage their lease and commitments with a view to extending leases and increasing income security.

We remain focused on rent collection in 2020 and in particular we are working closely with tenants in the leisure and retail sectors which are most affected by the COVID-19 crisis and lockdown. Our engagement is even more active to help them through the extreme challenges presented by this pandemic. We are also aware of the longer term potential for alternative use value on some of our retail assets in London and its environs.

The escalation of the COVID-19 pandemic is having a dramatic impact on economic activity. It is hitting retail, leisure and hospitality businesses especially hard. On top of this the UK still has to contend with Brexit, potential trade negotiations and/or delay and the further uncertainty that brings, especially when mixed in with COVID-19. All businesses, including UKCM, will face a challenging year. However the point of diversification is to offer a degree of insulation from risk events and the Company benefits from a diverse tenant, and so income, exposure. All in all we enter the year with a diversified portfolio biased towards favourable sectors of the market with continuing positive fundamentals, a reversionary income portfolio, a clear investment strategy, and a strong balance sheet.

Will Fulton

Fund Manager

Aberdeen Standard Investments

1 June 2020

STRATEGIC OVERVIEW

Investment Strategy

The Group’s investment strategy, and purpose, is set out in its investment objective and policy below. It should be considered in conjunction with the Chair’s Statement and the Investment Manager’s Review which both give a more in depth review of performance and future strategy.

The Group’s investment objective is to provide ordinary shareholders with an attractive level of income together with the potential for capital and income growth from investing in a diversified UK commercial property portfolio. In order to achieve this objective the Group has an investment strategy that focuses on identifying and acquiring institutional grade, secure income producing assets in favoured sectors as well as identifying assets that benefit from wider infrastructure improvements delivered by others where possible. In addition, the Group will look to sell assets that have limited future return prospects or where there are significant risks to achieving future acceptable returns. As part of this investment strategy, the Group also recognizes that tenants are a key stakeholder and aims to foster a culture whereby the experience of tenants is seen as paramount to the future success of the Group. The Investment Manager works closely with tenants to understand their needs through regular communication and visits to properties. Where required, and in consultation with tenants, the Group refurbishes and manages the owned assets to improve the tenants’ experience, including consideration of health and safety and environmental factors, with the aim being to generate greater tenant satisfaction and retention and hence lower voids, higher rental values and stronger returns.

In addition, members of the Board visit properties and where appropriate engage with tenants directly which enables the Board to have an enhanced understanding of each property and the tenants’ requirements. Further details of how the Company engages with all its stakeholders is set out in the Stakeholder Engagement section of the Annual Report encompassing section 172 of the UK Companies Act 2006.

On 18 April 2019, shareholders voted in favour of an amendment to the investment policy to provide the Investment Manager with the flexibility to invest across a wider spectrum of commercial property assets such as healthcare, car parks and the commercially managed private rental sector. The Group’s investment policy as approved on 18 April 2019 is as follows:

“Investment risks to the Group are managed by investing in a diversified portfolio of freehold and long leasehold UK commercial properties. The Group invests in income producing assets across the commercial property sectors including industrial, offices, retail and other alternative commercial property sector assets. The Group has not set any maximum geographic exposures within the UK nor any maximum weighting limits in any of the principal property sectors. No single property shall, cent of the gross assets of the Group.

The Group is currently permitted to invest up to 15 per cent of its total assets in indirect property funds including in other listed investment companies. The Group is permitted to invest cash, held by it for working capital purposes and awaiting investment, in cash deposits, gilts and money market funds.”

Although not part of the Company’s formal investment policy, the Board intends to limit the Company’s investment into alternative sectors to 35 per cent of the gross assets of the Group at the time of acquisition.

The Company’s current gearing policy, as approved by shareholders at an EGM in 2011, is as follows “Gearing, calculated as borrowings as a percentage of the Group’s gross assets, may not exceed 65 per cent. The Board intends that borrowings of the Group at the time of draw down will not exceed 25 per cent of the Total Assets of the Group. The Board receives recommendations on gearing levels from the Investment Manager and is responsible for setting the gearing range within which the Investment Manager may operate”.

The Group restructured its debt facilities in February 2019 which increased the weighted average maturity of the Group’s debt profile, lowered the cost and increased the debt available while still maintaining the 25 per cent debt cap referred to above.

The Group’s performance in meeting its objective is measured against key performance indicators as set out below. A review of the Group’s returns during the year, the position of the Group at the end of the year, and the outlook for the coming year is contained in the Chair’s Statement and the Investment Manager Review.

The Board of Directors is responsible for the overall stewardship of the Company, including investment and dividend policies, corporate strategy, corporate governance, and risk management. Biographical details of the Directors, all of whom are non-executive, can be found in the Annual Report and indicate their range of property, investment, commercial, professional, financial and governance experience. The Company has no executive Directors or employees.

Management of Assets and Shareholder Value

The Board contractually delegated the management of the investment portfolio and other services to Aberdeen Standard Fund Managers Limited from 10 December 2018 (prior to this Standard Life Investments (Corporate) Funds Limited).

The Group invests in properties which the Investment Manager believes will generate a combination of long-term growth in income and capital for shareholders. Investment decisions are based on analysis of, amongst other things, prospects for future capital growth, sector and geographic prospects, tenant covenant strength, lease length and initial yield. In the year to 31 December 2019, the Group generated operating cash flows of £32.1 million (2018: £45.9 million) and a net profit for the year of £1.6 million (2018: £53.0 million). The fall in profits in 2019 was attributable to the slowing UK commercial real estate sector with losses on investments of £43.1 million compared with gains on investments of £18.9 million being generated in 2018.

Investment risks are spread through investing in a range of geographical areas and sectors, and through letting properties to low risk tenants. A list of all the properties held as at 31 December 2019 is contained in the Annual Report and further analysis can be found in the Investment Manager Review. At each Board meeting, the Board receives a detailed portfolio, financial, risk and shareholder presentation from the Investment Manager together with a comprehensive analysis of the performance of the portfolio during the reporting period.

The Board and the Investment Manager recognize the importance of managing the premium/discount of share price to net asset value in enhancing shareholder value. One aspect of this involves appropriate communication to gauge investor sentiment. The Investment Manager meets with current and potential new shareholders, and with stockbroking analysts who cover the investment company sector, on a regular basis. In addition, communication of quarterly portfolio information is provided through the Company’s website, ukcpreit.com, and the Company also utilises a public relations agency to enhance its profile among investors. In addition the Chair of the Board meets key shareholders on an annual basis.

Key Performance Indicators/Alternative Performance Measures

The Company’s benchmark is the MSCI UK Balanced Portfolios Quarterly Index. This benchmark incorporates all monthly and quarterly valued property funds and the Board believes this is the most appropriate measure to compare against the performance of a quarterly valued property investment company with a balanced portfolio.

The Board uses a number of performance measures to assess the Company’s success in meeting its objectives. The key performance indicators/alternative performance measures are as follows:

· Net asset value and share price total return against a peer group of similar companies

· Portfolio performance against the MSCI benchmark and other selected comparators

· Premium/(Discount) of share price to net asset value

· Dividend cover and dividend yield

· Ongoing charges

Given the structure of the Company and the Company’s knowledge of its underlying shareholder base, it is believed the above measures are the most appropriate for shareholders to determine the performance of the Company. In addition the Board considers specific property KPIs such as void rates, rent collection levels and weighted average lease length on a regular basis.

Risk Management

In accordance with the UK Corporate Governance Code and FRC Guidance, the Board has established procedures to identify and manage risk, to oversee the internal control framework and to determine the nature and extent of the principal risks the Company is willing to take in order to achieve its long-term strategic objectives.

The Board recognises its responsibility to carry out a robust assessment of the Company’s principal risks and emerging risks. Principal risks are defined as those that could result in events or circumstances that might threaten the Company’s business model, future performance, solvency or liquidity and reputation. Emerging risks are those that have not yet occurred but are at an early stage of development or are current risks that are expected to increase in significance and become more fundamental in the future.

The Board has appointed a Risk Committee to ensure that proper consideration of risk is undertaken in all aspects of the Company’s business on a regular basis. The Risk Committee meets quarterly and comprises all members of the Board and is chaired by Margaret Littlejohns. Its duties include the assessment of the Company’s risk appetite and the regular review of principal and emerging risks, seeking assurance that these risks are appropriately rated and that effective mitigating controls are in place, where possible.

Risks are identified and weighted according to their potential impact on the Company and to their likelihood of occurrence. The impact is evaluated in terms of the effect on the Company’s business, finances and reputation, the three of which are usually interlinked. Each identified risk is assessed twice: first as a “gross risk” before taking into consideration any mitigating controls and secondly as a residual or “net risk” after reviewing the safeguards in place to manage and reduce either the severity of its impact or the probability of its event. The Risk Committee uses a detailed Risk Matrix to prioritise the individual risks, allocating scores of 1 to 5 to each risk for both the likelihood of its occurrence (ranging from very unlikely to almost certain) and the severity of its impact (ranging from minimal to highly significant). The combined scores for both the gross risks and net risks are then colour coded, applying a traffic light system of green, amber and red to emphasise those posing the greatest threats to the Company. Those with the highest gross rating in terms of impact are highlighted as top risks within the matrix and are defined here as principal risks.

The Risk Committee, with the help of the Investment Manager’s extensive research resources and market intelligence, surveys the full risk landscape of the Company in order to identify increasing and emerging risks to which the Company may be exposed in the future. In particular, the Risk Committee questions which parts of the Company’s business may be vulnerable to disruption, including but not limited to the business models of its key tenants and its outsourced third party suppliers. The Risk Committee not only reviews the existing portfolio of investments but also ensures that risk is considered in the case of each property acquisition and disposal.

The Risk Committee works closely with the Audit Committee to examine the effectiveness of the risk management systems and internal control systems upon which the Company relies to reduce risk. This monitoring covers all material controls, including financial, operational and compliance controls. All risks and mitigating controls are reviewed by the Risk Committee at least quarterly, and any significant changes to the Risk Matrix are presented to the Board.

Principal Risks

The Company’s assets consist of direct investments in UK commercial property. Its risks are therefore principally related to the commercial property market in general and also to each specific property in the portfolio. Risks to the Company fall broadly under the following six categories:

Strategy (Risk: A)

Management may fail to execute a clear corporate strategy successfully and the strategic objectives and performance of the fund, both absolute and relative, may become unattractive or irrelevant to its investors.

Investment & Asset Management (Risks: B & C)

Ill-judged property investment decisions and associated redevelopment and refurbishment may lead to health and safety dangers and environmental issues and ultimately to poor investment returns.

Financial (Risks: D, E, F & G)

Macro-economic changes (e.g. levels of GDP, employment, inflation and interest rate movements), political changes (e.g. new legislation and regulation), structural changes (e.g. disruptive technology, demographics) or global events (e.g. pandemics, wars, terrorist attacks, oil price disruption) can all impact the commercial property market, both its capital value and income generation, its liquidity and access to finance and the underlying businesses of its tenants. This risk encompasses real estate market risk, interest rate risk, liquidity risk and credit risk, all of which are covered in more detail in note 18 to the accounts.

Operations (Risks: H & I)

Poor service and inadequate control processes at the Company’s outsourced suppliers may lead to disruption, error and fraud, and increasingly cyberattacks. The Company’s key service providers are the Investment Manager, the Company Secretary, the Managing Agent, the Valuer and the Registrar and are assessed at least annually through the Management Engagement Committee, or more often during times of stress.

Regulation (Risk: J)

Failure to comply with applicable regulation and legislation could lead to financial penalties and withdrawal of necessary permissions by governing authorities. Changes to existing regulations could also result in suboptimal performance of the Company.

Stakeholder Engagement (Risk: K)

Failure to communicate effectively and consistently with the Company’s key stakeholders, in particular shareholders and tenants, could prevent the Company from understanding and responding to their needs and concerns.

Emerging Risks

Emerging risks have been identified by the Risk Committee through a process of evaluating which of the principal risks have increased materially in the year and/or through market intelligence are expected to grow significantly. Any such emerging risks are likely to cause disruption to the business model. If ignored, they could impact the Company’s financial performance and future prospects. Alternatively, if recognised, they could provide opportunities for transformation.

The overarching risk that has recently emerged is COVID-19, the global pandemic that has impacted all areas of society in the UK and abroad. This pandemic has caused significant loss of life and global economic disruption and is considered further in the detailed risk reporting below. COVID-19 affects to differing degrees all areas of risk to which the Company is exposed, but particular consideration has been given to the key emerging risks caused by COVID-19 which relate to strategic risk, macroeconomic risk, gearing risk, credit risk and accounting and valuation risk.

Two other areas of emerging risk are noted below:

Ø Macroeconomic changes particularly associated with both the uncertainty surrounding Brexit negotiations and the resultant effect on the UK commercial property market (Risk D).

Ø Credit risk, in particular the structural weakness in consumer facing sectors and its impact on the Group’s tenants, affecting both capital values and income generation of the investment portfolio (Risk G).

The principal and emerging risks, including their impact and the actions taken by the Company to mitigate them, are provided in more detail as follows:

Risk A – Strategic Risks: Widening Discount and Continuation Vote
Risks & Impact	The Company’s strategic objectives and performance, both absolute and relative, could become unattractive to investors leading to a widening of the share price’s discount to net asset value, and potentially a continuation vote.
Mitigation	· The Company’s strategy and objectives are regularly reviewed by the Board to ensure they remain appropriate and effective. · The Board receives regular presentations from research analysts on both the general economy but also the property market in particular to identify structural shifts and threats, so the Board can adapt the Company’s strategy if necessary. · The NAV and share price are constantly monitored and regular analyses of the Company’s performance are reviewed by the Board and compared with the Company’s benchmark and its peer group. · Cash flow projections are prepared by the Investment Manager and reviewed at least quarterly by the Board. · Regular contact is maintained with shareholders and the Company’s broker.
Commentary	· The Company’s periodic continuation vote held in March 2020 was overwhelmingly supported by shareholders. · The next periodic continuation vote is scheduled to be held in 2027 and seven yearly thereafter. · In addition, a continuation vote may be required if, after 18 March 2022 (being the second anniversary of the Company’s most recent continuation vote), the shares trade at a discount of over 5 per cent for a continuous period of 90 dealing days or more. · The Company’s discount decreased in 2019 from 10.8% at the end of 2018 to 1.1% at the end of 2019. This compares to the peer group which moved from an average discount of 6.4% to a premium of 0.8%. · As a result of COVID-19, which has caused global market uncertainty and undoubtedly will have a negative economic impact, the discount has widened considerably, in line with its peer group, and stood at 21.8% on 30 April 2020.
Change	INCREASED AND EMERGING RISK The Company’s rating improved in 2019 together with a continuation vote successfully passed in March 2020. However, the impact of COVID-19 on the future prospects for the UK real estate sector and hence the Company’s ongoing strategy is uncertain.

Risk B – Investment and Asset Management Risks: Health & Safety
Risks & Impact	The Company could fail to identify, mitigate or manage major Health & Safety issues potentially leading to injury, loss of life, litigation and the ensuing financial & reputational damage.
Mitigation	· Health & Safety checks are included as a key part of due diligence for any new property acquisition. · For existing multi-tenancy properties the Group’s Managing Agent (Jones Lang LaSalle) are responsible for managing and monitoring Health & Safety matters of each building. · The Investment Manager monitors on an ongoing basis all identified Health & Safety issues with strict deadlines for resolution by the Managing Agent. · The Investment Manager also engages S2 Partnership Limited who provide an independent Health & Safety review of all multi-let properties. · The Risk Committee reviews the Company’s Health & Safety performance quarterly.
Commentary	· No major Health & Safety issues were noted in the year. A comprehensive fire safety strategy at the Company’s Cineworld property in Glasgow, involving Health & Safety advisers and the Fire Brigade service, has been completed.
Change	NO SIGNIFICANT CHANGE IN RISK.

Risk C – Investment and Asset Management Risks: Environmental
Risks & Impact	Properties could be negatively impacted by an extreme environmental event (e.g. flooding) or the Company’s own asset management activities could create environmental damage. Failure to achieve environmental targets could adversely affect the Company’s reputation and result in penalties and increased costs. Legislative changes relating to sustainability could affect the viability of asset management initiatives.
Mitigation	· The Company considers its impact on the environment and its local communities in all its activities. · In-depth research is undertaken on each property at acquisition with a detailed environmental survey. · Experienced advisers on environmental, social and governance matters are consulted both internally at the Investment Manager and externally where required. · The Investment Manager has adopted a thorough environmental policy which is applied to all properties within the portfolio. · EPC rating benchmarks have been set to ensure compliance with Minimum Energy Efficiency Standards (MEES).
Commentary	· The Company has achieved Sector Leader status in the Global Real Estate Sustainability Benchmark (“GRESB”) as a top performer in ESG (environmental, social and governance). It was awarded an ‘A’ score for Public Disclosure and an EPRA “Gold” rating for European Sustainability Best Practice Recommendations in 2019, compared to sector average of B. · A full review of EPC ratings across the Group’s portfolio has been undertaken with now only two units rated as below standard. A strategy has been put in place to improve these sub-par ratings before any new lease is granted. · A number of asset management initiatives are underway to consider the feasibility of installing solar panels at some of the Company’s properties.
Change	NO SIGNIFICANT CHANGE IN RISK.

Risk D – Financial Risks: Macroeconomic
Risks & Impact	Macroeconomic changes (e.g. levels of GDP, employment, inflation, interest rate movements), political changes (e.g. Brexit, new legislation), structural changes (e.g. new technology, demographics) or global events (pandemics, wars, terrorist attacks, oil price disruption) could negatively impact commercial property values and the underlying businesses of tenants (market risk and credit risk). Falls in the value of investments could result in breaches of loan covenants and solvency issues.
Mitigation	· The Aberdeen Standard Investments Research team takes into account macroeconomic conditions when collating property forecasts. This research is fed into the Investment Manager’s decisions on purchases and sales and sector allocations. · The portfolio is UK based and diversified across a number of different sectors and regions of the UK and also has a wide and diverse tenant base to reduce any risk concentration where possible. · There is a wide range of lease expiry dates within the portfolio in order to minimise concentrated re-letting risk. · The Company is lowly geared with 25% limit on overall gearing. · The Company has limited exposure to speculative development and is generally only undertaken on a pre-let basis. · Rigorous portfolio reviews are undertaken by the Investment Manager and presented to the Board on a regular basis. · Annual asset plans are developed for each property and every building has comprehensive insurance to cover both the property itself and injury to associated third parties. · Individual investment decisions are subject to robust risk versus return evaluation and approval.
Commentary	· The outlook for the UK economy and the UK real estate market is uncertain given the current COVID-19 pandemic and the unknown duration or severity of the impact of the virus itself and of the government measures to restrict its spread. · The Bank of England has introduced a package of monetary measures and the government is providing significant financial support in response to economic hardship but a large contraction in UK GDP is forecast as a result of the pandemic. · Portfolio continues to be diversified with investments across the four main commercial property sectors and across a number of geographical regions. · 245 tenancies at the year end with top ten tenants accounting for 34.2% of annualised rental income. However, some tenants’ loss of income due to the recent government imposed “lockdown” has hampered their ability to pay rent in the short term. · Net gearing of 14.7% at year end. · Occupancy rate of 92.1% at year end.
Change	INCREASED AND EMERGING RISK COVID-19 has materially impacted both the UK and the wider global economy in the short term due to domestic and international “lockdowns”. The extent to which these will have a long term impact on the UK and global economy is unclear at the time of writing although some negative effect should be expected. While the UK general election has removed some of the political uncertainty, there remains a large degree of uncertainty surrounding the negotiation of Great Britain’s withdrawal from the EU. Any trade agreement, or lack of, has a potential impact on the health of the UK economy.
	See further details on risk in note 18 to the accounts.

Risk E – Financial Risks: Gearing
Risks & Impact	An inappropriate level of gearing, magnifying investment losses in a declining market, could result in breaches of loan covenants and threaten the Company’s liquidity and solvency. An inability to secure adequate borrowing with appropriate tenor and competitive rates could also negatively impact the Company.
Mitigation	· Gearing is restricted to a maximum of 25% of gross assets. This low gearing limit means that the Company should, barring exceptional circumstances, have adequate resources to service and repay its debt. · The Company’s diversified, prime UK commercial property portfolio, underpinned by its strong tenant base, should provide sufficient value and income in a challenging market to meet the Company’s future liabilities. · The Company’s relatively modest level of gearing attracts competitive terms and interest rates from lenders for the Company’s loan facilities. · The Investment Manager has relationships with multiple funders and wide access to different sources of funding on both a fixed and variable basis. · Financial modelling is undertaken and stress tested annually as part of Company’s viability assessment, whenever new debt facilities are being considered and whenever unusual events occur. · Loan covenants are continually monitored and reported to the Board at least quarterly and also reviewed as part of the disposal process of any secured property.
Commentary	· The Group increased and extended its loan facilities in February 2019. · Of the drawn amounts, 80% are fixed rate and 20% are variable with a spread of repayment dates. · The increased revolving credit facility will provide the Company with the flexibility to make timely acquisitions when opportunities arise. · Following this refinancing, the weighted maturity profile of the Group’s fixed rate debt stood at 8.2 years (as at 31 December) with an overall blended rate of interest of 2.78% and net gearing of 14.7%. · There is considerable headroom before any loan covenants would be breached with bank covenants all having satisfactory cover as at 31 March 2020 although less headroom than before COVID-19 given the recent fall in rental income receipts and drop in valuations. · Over £480 million of property remains unencumbered. · Good long-term relationship with both lenders who remain supportive.
Change	INCREASED AND EMERGING RISK The Company has low gearing and significant headroom both in relation to its overall corporate gearing limit of 25% and also its individual bank covenants. However, due to the impact of COVID-19 on both income and capital values, the margin of comfort has since decreased.
	See further details on risk in note 18 to the accounts.

Risk F – Financial Risks: Liquidity
Risks & Impact	The Company may be unable to dispose of property assets in order to meet its financial commitments or obtain funds when required for asset acquisition or payment of expenses or dividends. Company’s shares could become illiquid due to lack of investor demand, market events or regulatory intervention and the Company’s shareholders may be unable to sell their shares due to lack of liquidity in the market.
Mitigation	· The Company has a diversified portfolio of good quality, marketable properties. · The Company had significant capital resources at year end. · The closed ended structure of the Company ensures that it is not a forced seller of assets. · The Company is listed on the London Stock Exchange and a component of the FTSE 350 Index made up of the largest 350 companies in the UK by market capitalisation. · Financial commitments are limited by the Company’s relatively low level of gearing. · Liquidity risk is managed on an ongoing basis by the Investment Manager and reviewed at least quarterly by the Board. · Cash is placed in liquid deposits and accounts with a high credit rating.
Commentary	· All financial commitments were comfortably met during the year. · Real estate market liquidity has decreased given COVID-19. · The Company’s closed ended structure has ensured investment strategy is sole driver for any property disposal. · 1.7m shares on average were traded daily in 2019 highlighting the ongoing liquidity of the Company’s shares. · Shareholders are able to sell their shares in a highly regulated and liquid secondary market.
Change	NO SIGNIFICANT CHANGE IN RISK.
	See further details on risk in note 18 to the accounts.

Risk G – Financial Risks: Credit Risk of Tenants
Risks & Impact	Income might be adversely affected by macroeconomic factors. Financial difficulties could cause tenants to default on their rents and could lead to vacant properties. This might result in falling dividend cover for the Company and potential dividend cuts.
Mitigation	· Dividend cover is forecast and considered at each Board meeting. · The property portfolio has a balanced mix of tenants and reflects diversity across business sectors. · Rigorous due diligence is undertaken on all prospective tenants and their financial performance continues to be monitored during their lease. · Rent collection from tenants is closely monitored so that early warning signs can be detected. · Contingency plans are put in place where tenants with financial difficulties have been identified. · Board approval is necessary for any material lettings.
Commentary	· Dividend cover of 95% in 2019, increased from 82% in 2019. · Key focus on ongoing voids, particularly at XDock 377 at Lutterworth. · Retail sector continues to be of concern with a number of administrations in this sector in the last 12 months. · Reduction in Company’s retail holdings which now represent 21% of the portfolio at the year end. · COVID-19 has impacted some tenants’ ability to pay rent. For the billing run relating to the second quarter of 2020, 68% of tenants had paid by 24 April. If, as anticipated, this rental collection rate continues or indeed falls further during the pandemic, then dividend cover will also fall.
Change	INCREASED RISK The continued structural weakness of the retail sector had already increased the credit risk of retail and some leisure tenants in 2019. The imposed “lockdowns” as a result of COVID-19 have further disrupted both retail and leisure businesses in particular, but have also affected some tenants in other sectors depending on their business models, customers and supply chains.
	See further details on risk in note 18 to the accounts.

Risk H – Operational Risks: Service Providers
Risks & Impact	Poor performance and/or inadequate procedures at key service providers i.e. Investment Manager, Company Secretary, Managing Agent, Registrar, could lead to errors, fraud and non-compliance with their contractual agreements and/or with relevant legislation. Failings in their data management processes and disaster recovery and business continuity plans, including cyber security safeguards, could lead to financial loss and business disruption for the Company.
Mitigation	· The Company has a strong control culture that is also reflected in its partnerships with suppliers. · All investment decisions are subject to a formal approval process with specified authority limits. · All third party service providers are carefully selected for their expertise, reputation and financial standing. Service level agreements are negotiated with all material suppliers and regularly monitored to ensure that pre-agreed standards are met. · Suppliers’ business continuity and disaster recovery plans, including safeguards against cyber-crime, are also regularly examined. · The Management Engagement Committee (“MEC”) formally reviews all key service providers once a year and whenever necessary during times of stress.
Commentary	· Key service providers have not changed during 2019. Section 172 statement in the accounts below provides details on the Company’s collegial approach to stakeholders. No material issues noted from the reviews of service providers in the year. · Key service providers have notified the Investment Manager of the impact on their operations caused by COVID-19. Their ability to conduct business during “lockdown” is monitored regularly by the Investment Manager. No material issues of concern have been raised. · The Investment Manager has also updated the Board on its own contingency arrangements and has demonstrated its resilience in terms of remote working.
Change	NO SIGNIFICANT CHANGE IN RISK

Risk I – Operational Risks: Accounting and Valuation
Risks & Impact	Accounting records and financial statements could be incorrect or incomplete or fail to comply with current accounting standards. In particular property valuations, income and expenses could be calculated and recorded inaccurately. Limited transactions in the property market could hinder price discovery and could result in out of date valuations.
Mitigation	· All properties within the portfolio are independently valued by CBRE Limited on a quarterly basis and their year end valuations recorded in the Company’s accounts. · A rigorous valuation process is undertaken each quarter by the Company’s Independent valuer, CBRE. The Investment Manager also feeds into this process. · The Property Valuation Committee reviews thoroughly each quarter this independent valuation process. · Accounting control and reconciliation processes are in place at the Investment Manager. These are subject to regular independent assessment for their suitability and operating effectiveness by an external auditor. · Financial statements are subject to a year end audit by Deloitte LLP.
Commentary	· No material accounting/valuation issues recorded in the year. · Post the year end, CBRE included a material uncertainty clause due to COVID-19 in their valuation at the end of the first quarter 2020. This is set out in full in the Stock Exchange announcement made on 27 April 2020. · In March 2020, the Company’s rent collection process changed with rent collection from 1 March 2020 being moved from the Investment Manager to JLL, the Company’s existing Managing Agent, following a detailed tender process undertaken by ASI.
Change	INCREASED AND EMERGING RISK Material uncertainty now exists in relation to property valuations in 2020. There is no material uncertainty in relation to the 31 December 2019 valuation included in these financial statements.

Risk J – Regulatory Risks: Compliance with Regulation
Risks & Impact	The Company could fail to comply with existing legislation or adapt to new or future regulation. In particular, the Company could fail to comply with REIT legislation and ultimately lose its REIT status, thereby incurring substantial tax penalties.
Mitigation	· The Board receives regular updates on relevant regulatory changes from its professional advisors. · The highest corporate governance standards are required from all key service providers and their reputation and performance are reviewed at least annually by the Management Engagement Committee. · The Board reviews quarterly a REIT dashboard confirming compliance with REIT regulations.
Commentary	· Board has reviewed and taken action to ensure compliance with new AIC Code on Corporate Governance. · The Management Engagement Committee has ensured all key suppliers and contracts are GDPR compliant. · Processes have been put in place to ensure ongoing compliance with REIT rules following the Company’s conversion to a REIT on 1 July 2018.
Change	NO SIGNIFICANT CHANGE IN RISK.

Risk K – Stakeholder Engagement Risks: Communication
Risks & Impact	A communication breakdown with key stakeholders, particularly shareholders and tenants, could prevent the Company from understanding and responding to their needs and concerns. When required to fulfil certain reporting requirements, the Company could fail to communicate with regulatory authorities about its major shareholders. As a result the Company could potentially suffer financial penalties and reputational damage.
Mitigation	· A high degree of engagement is maintained with both shareholders and tenants. Communication has increased considerably as a result of COVID-19. · The Investment Manager regularly meets with shareholders and periodically, the Chair of the Board, also meets shareholders. · Quarterly Board reports include detailed shareholder analysis, written and verbal reports from JP Morgan Cazenove, the Company’s Corporate Broker, and feedback from shareholder and analyst meetings where appropriate. · The Investment Manager works closely with tenants to understand better their needs and to remodel and refurbish buildings to fit their evolving requirements. This helps to reduce the risk of vacant properties. · The Company receives professional advice on its reporting obligations regarding major shareholders to ensure that it complies with regulations.
Commentary	· The Company has held two shareholder and analyst presentations in the year and the Investment Manager has met multiple shareholders. · The Chair of the Board has also met with several institutional shareholders. · The continuation vote was overwhelmingly passed. · Investment Managers have visited all properties held at least once in 2019. · Board of Directors have continued to visit properties during the year as part of a rolling programme to visit all properties over a three year period. · Section 172 report highlights the collaborative nature of interaction between the Company and it key stakeholders.
Change	NO SIGNIFICANT CHANGE IN RISK.

Viability Statement

The Board considers viability as part of its ongoing programme of monitoring risk and also has considered this in light of the ongoing COVID-19 pandemic. The Board continues to consider five years to be a reasonable time horizon over which to review the continuing viability of the Company.

The Board also considers viability over the longer term, in particular to key points outside this time frame, such as the due dates for the repayment of long-term debt. In addition, the Board considers viability in relation to continuation votes. A periodic continuation vote held in March 2020 was passed with the next one scheduled for 2027 and seven yearly thereafter. In addition, under the discount control policy of the Company, a continuation vote may be required if the Company’s shares trade at a discount of over 5% for a continuous period of 90 dealing days or more beginning after the date of the second anniversary of the Company’s most recent continuation vote. The secondary anniversary of the most recent continuation vote is 18 March 2022. Further details on this are set out in the Annual Report.

The Board has considered the nature of the Group’s assets and liabilities and associated cash flows both in a normal environment and also in relation to the current environment as impacted by COVID-19. The Board has determined that five years is a reasonable timescale over which the performance of the Group can be forecast with a material degree of accuracy and so is an appropriate period over which to consider the Company’s viability.

The Board has also carried out a robust assessment of the principal and emerging risks faced by the Group, as detailed above. The main risks which the Board considers will affect the business model, future performance, solvency, and liquidity, are tenant failure leading to a fall in dividend cover, macroeconomic uncertainty and ongoing discounts leading to continuation votes. These risks along with other reported risks have also been considered in relation to the COVID-19 pandemic. The Board takes any potential risks to the ongoing success of the Group, and its ability to perform, very seriously and works hard to ensure that risks are consistent with the Group’s risk appetite at all times.

In assessing the Group’s viability, the Board has carried out thorough reviews of the following:

· Detailed NAV, cash resources and income forecasts, prepared by the Company’s Investment Manager, for a five year period under both normal and stressed conditions and also forecast conditions relating to the COVID-19 pandemic;

· The Group’s ability to pay its operational expenses, bank interest, tax and dividends over a five year period;

· Future debt repayment dates and debt covenants, in particular those in relation to LTV and interest cover;

· Demand for the Company’s shares and levels of premium or discount at which the shares trade to NAV;

· Views of shareholders; and

· The valuation and liquidity of the Group’s property portfolio, the Investment Manager’s portfolio strategy for the future and the market outlook.

Despite the uncertainty in the UK regarding both the COVID-19 pandemic and also Brexit, the Board has a reasonable expectation, based on the information at the time of writing, that the Group will be able to continue in operation and meet its liabilities as they fall due over the next five years. This assessment is based on the results of the reviews mentioned above and also the recent support of shareholders for the Company’s continuation.

Approach to ESG

The Company adopts the Investment Manager’s policy and approach to integrating ESG and this has been used as the basis for establishing the Company’s ESG objectives.

The Investment Manager views the management of ESG issues as a fundamental part of its business. Whilst real estate investment provides valuable economic benefits and returns for investors it has – by its nature – the potential to affect environmental and social outcomes, both positively and negatively.

The Investment Manager’s approach is underpinned by the following three over-arching principles:

Transparency, Integrity and Reporting: being transparent in communicating and discussing our strategy, approach and performance with our investors and stakeholders.

Capability and Collaboration: drawing together and harnessing the capabilities and insights of its platforms with those of investment, supply chain and industry partners.

Investment Process and Asset Management: integrating ESG into decision making, governance, underwriting decisions and asset management approach. This includes the identification and management of material ESG risks and opportunities across the portfolio.

Of particular focus is responding to climate change, both in terms of resilience to climate impacts and in reducing emissions from the Company’s activities. The Investment Manager has committed to achieving net-zero emissions across its global portfolio by 2050 as part of the Better Building Partnership’s Climate Change Commitment. Over the course of the next year the focus will be on benchmarking the Company’s assets and appraising necessary improvement measures in the context of this goal.

The Company’s approach and specific ESG commitments are set out in more detail in the document shown on the website: Dialling up the integration of ESG. Progress against these commitments will be reported in next year’s Annual Report & Accounts.

EPRA Sustainability Best Practice Recommendations Guidelines

We have adopted the 2017 EPRA Sustainability Best Practice Recommendations Guidelines (sBPR) to inform the scope of indicators we report against. We have reported against all EPRA sBPR indicators that are material to the Company. We also report additional data not required by the EPRA sBPR where we believe it to be relevant (e.g. like-for-like greenhouse gas emissions).

A full outline of the scope of reporting and materiality review in relation to EPRA sBPR indicators is included in the Annual Report.

Operational Performance Summary

We have processes in place to ensure operational sustainability performance is monitored and actions are implemented to drive continual improvement. Overall, the energy intensity of the like-for-like portfolio improved by 3% in 2019 (landlord procured energy). Like-for-like electricity consumption reduced by 5%; driven by energy efficiency improvements. Greenhouse gas emissions intensity reduced by 9% on a like-for-like basis, aided by a further improvement in the carbon-intensity of the UK electricity grid.

Water consumption also reduced year-on-year and 100% of waste was diverted from landfill.

Full details of performance against material EPRA sBPR indicators are included in the Annual Report.

2019 GRESB Assessment

The GRESB Assessment is the leading global sustainability benchmark for real estate vehicles. The Company has been submitted to GRESB since 2015. In the 2019 assessment, the Company maintained its position at the top of the UK Diversified (Listed) peer group and achieved a score of 76 and a Three Star rating. The Company also performed well in GRESB’s Public Disclosure Assessment with an A score compared to the peer average of B.

Health & Safety Policy

Alongside these environmental principles the Company has a health & safety policy which demonstrates commitment to providing safe and secure buildings that promote a healthy working environment and a customer experience that supports a healthy lifestyle. The Company, through the Investment Manager and Managing Agent, manages and controls health & safety risks systematically as any other critical business activity using technologically advanced systems and environmentally protective materials and equipment. By achieving a high standard of health & safety performance, the Company aims to earn the confidence and trust of tenants, customers, employees, shareholders and society at large.

Bribery & Ethical Policy

It is the Company’s Policy to prohibit and expressly forbid the offering, giving or receiving of a bribe in any circumstances. This includes those instances where it may be perceived that a payment, given or received, may be a bribe. The Company has adopted this Anti-Bribery and Corruption Policy to ensure robust compliance with The UK Bribery Act 2010. The Company has made relevant enquiries of its Investment Manager and has received assurances that appropriate anti-bribery and corruption policies have been formulated and communicated to its employees. In addition the Board has adopted an ethical policy which highlights the need for ethical considerations to be considered in the acquisition and management of both new and existing properties.

STAKEHOLDER ENGAGEMENT

The Company

Board’s obligations under section 172 of the Companies Act

This section, which serves as the Company’s section 172 statement as requested by the AIC Code on Corporate Governance, explains how the Directors have promoted the success of the Company for the benefit of its member as a whole during the financial year to 31 December 2019, taking into account the likely long term consequences of decisions, the need to foster relationships with all stakeholders and the impact of the Company’s operations on the environment.

The role of the REIT Board

The Company is a REIT and has no executive directors or employees and is governed by the Board of Directors. Its main stakeholders are Shareholders, the Investment Manager, Tenants, Service Providers, Debt Providers and the Environment and Community. The Board considers relations with stakeholders very seriously and has cited Stakeholder Engagement as one of the Company’s principal risks. The mitigating actions to address the Stakeholder Engagement risk are set out in the risk section of this announcement.

The Board, which comprises six independent non-executive directors, retains responsibility for taking all decisions relating to the Group’s investment objective and policy, dividend policy, gearing, corporate governance and strategy.

The Board delegates management functions to the Investment Manager and, either directly or through the Investment Manager, the Company employs key suppliers to provide services in relation to property management, health & safety, valuation, legal and tax requirements, auditing, depositary obligations and share registration, amongst others. The Board regularly reviews the performance of the Investment Manager, and its other service providers, to ensure they manage the Company, and its stakeholders effectively and that their continued appointment is in the best interests of the Shareholders as a whole.

The Board seeks to maintain a constructive working relationship with its stakeholders and prides itself on its transparent and collegiate culture. The Board operates in a manner which is supportive, yet challenging, of the Investment Manager and its other service providers, with the goal of overseeing the Company’s activities on behalf of all stakeholders.

As set out in the Board of Directors’ Report, the Board reviews its performance annually to ensure it is meeting its obligations to stakeholders. The evaluation helps the Board to determine whether they have sufficiently discharged their duties and responsibilities over the course of the financial year in accordance with section 172 (1) of the Companies Act 2006. Engagement with key stakeholders is considered formally as part of the annual evaluation process.

OUR STAKEHOLDERS’ INTERESTS

Shareholders

· Attractive and sustainable level of income, earnings and dividends

· Potential for capital and income growth

· Diversification of portfolio

· Execution of investment objective

· Responsible capital allocation and dividend policy

· Value for money – low ongoing charges

· Liquidity in the Company’s shares

Investment Manager

· Productive working relationship with the Board

· Clear and sustainable investment objective and policy

· Collaboration with all stakeholders

Tenants

· Positive working relationship with the Board and the Investment Manager

· Sustainable buildings — remodelled and refurbished to meet their requirements

· A focus on the community, health & safety and the environment

Service Providers

· Productive working relationship with the Company

· Strong internal controls

· Collaboration

Debt Providers

· Responsible portfolio management

· Compliance with loan covenants

Environment and Community

· Sustainable investment policy

· Community engagement and socio-economic benefit

· A focus on consumption, emissions and resource efficiency

HOW WE ENGAGE WITH OUR STAKEHOLDERS

The Board considers its stakeholders at every Board meeting and receives feedback on the Investment Manager’s interactions with the Company’s Shareholders, tenants and service providers. The Board also engages directly with its stakeholders.

Shareholders

Shareholders are key stakeholders and the Board places great importance on communication with them. The Board’s primary focus is to promote the long term success of the Company for the benefit of its Shareholders as a whole. The Board oversees the delivery of the investment objective, policy and strategy, as agreed by the Company’s Shareholders. The Board welcomes all Shareholder’s views and aims to act fairly between all Shareholders. The Investment Manager and Company’s Broker regularly meet with Shareholders, and prospective Shareholders, to discuss Company initiatives and seek feedback. The views of Shareholders are discussed by the Board at every Board meeting, and action taken to address any Shareholder concerns. The Investment Manager provides regular updates to Shareholders and the market through the Annual Report, Half-Yearly Report, Quarterly Net Asset Value announcements and Company Factsheets.

The Chair meets with key Shareholders at least annually, and other Directors are available to meet Shareholders as required. This allows the Board to hear feedback directly from Shareholders. During the financial year to 31 December 2019, the Board members, and the Investment Manager, undertook several meetings with large Shareholders to provide reports on the progress of the Company and receive feedback, which was then provided to the full Board. Shareholders are also invited to vote on the continuation of the Company at regular intervals and the Board encourages Shareholders to participate in this vote.

The AGM of the Company and also the annual and interim results presentations provide a forum, both formal and informal, for Shareholders to meet and discuss issues with the Directors and Investment Manager of the Company. The Board would ordinarily encourage as many Shareholders as possible to attend the Company’s AGM to engage directly with the Board. However, as set out in the Chair’s Statement, in light of the COVID-19 pandemic, Shareholders are discouraged from attending the AGM but are encouraged to engage with the Company and the Board. Details on how to submit a question in advance of the AGM are set out in the Chair’s Statement.

Investment Manager

The Chair’s Statement and Investment Manager’s Report detail the key investment decisions taken during the year and subsequently. The Investment Manager has continued to manage the Company’s assets in accordance with the mandate provided by Shareholders, with the oversight of the Board. The Company regularly reviews its performance against its investment strategy by reference to its rolling five year business plan to ensure it remains fit for purpose. The Board undertakes an annual strategy meeting to test itself and ensure the Company is positioned well for the future delivery of its objective for its stakeholders. The Board receives presentations from the Investment Manager at every Board meeting to help it to exercise effective oversight of the Investment Manager and the Company’s Strategy. The Board formally reviews the performance of the Investment Manager at least annually. More details on the conclusions from the Board’s review is set out in the Annual Report.

Tenants

Board members regularly visit properties and, where appropriate, engage with tenants directly to enhance their understanding of each property and the tenants’ requirements. Board visits to properties are discussed at every Board meeting to consider relationships, opportunities, and potential challenges, at each of the Company’s assets, to allow the Board to take appropriate action where necessary. During the financial year to 31 December 2019, Directors visited a number of properties in different cities across the UK including Portsmouth, Swindon, Newcastle, Bristol and Glasgow.

The day to day management of the portfolio and tenant interaction is delegated to the Investment Manager. The Investment Manager takes a proactive approach with tenants, working closely alongside them to understand their needs through regular communication, visits to properties and collaboration on projects. The Investment Manager reports on its engagement with tenants at every Board meeting.

Following the outbreak of the COVID-19 pandemic, the Company’s Investment Manager has worked closely with stakeholders, particularly tenants, to understand their needs during the crisis. The Board firmly believes that by helping tenants now and building better relationships the Company will have better occupancy over future months and years, which will in turn benefit the Company’s cash flow.

Service Providers

The Board seeks to maintain constructive relationships with the Company’s suppliers either directly or through the Investment Manager with regular communications and meetings. On behalf of the Company’s Shareholders, the Management Engagement Committee conducts annual reviews of the Company’s Service Providers and their respective fees to ensure they are performing in line with Board expectations and provide value for money.

Debt Providers

The Company maintains a positive working relationship with its debt providers, Barclays Bank plc and Barings Real Estate Advisers, and provides regular updates on business activity and compliance with its loan covenants. The Company has an overall flexible debt profile to allow it to move quickly to take advantage of any attractive opportunities that may occur in the present uncertain economic environment.

Environment and Community

The Board and the Investment Manager are committed to investing in a responsible manner. There are a number of geopolitical, technological, social and demographic trends underway in the developed world that can, and do, influence real estate investments – many of these changes fall under the umbrella of the Environment and Community, or ESG, considerations. As a result, the Investment Manager fully integrates ESG factors into its investment decision making and governance process.

The Board has adopted the Investment Manager’s ESG Policy and associated operational procedures and is committed to environmental management in all phases of the investment process. The Company aims to invest responsibly, to achieve environmental and social benefits alongside returns. By integrating ESG factors into the investment process, the Company aims to maximise the performance of the assets and minimise exposure to risk. Please see the EPRA Financial and Sustainability Reporting in the Annual Report, for more information on the Company’s approach to ESG, plus the Company's separate ESG document available on the Company's website "Dialling Up the Integration of ESG".

Specific examples of stakeholder consideration during 2019

While the importance of giving due consideration to the Company’s stakeholders is not new, and is considered during every Board decision, the Board were particularly mindful of stakeholder considerations during the following strategic decisions undertaken during the financial year to 31 December 2019.

Expansion of the Investment Policy and Objective

As set out in the Chair’s Statement, Shareholders were invited to vote on an extension to the Company’s investment policy and objective at an Extraordinary General Meeting on 18 April 2019. The Board considered that an extension to the investment policy and objective is in the best interests of all Shareholders as it will allow the Investment Manager to invest across a wider spectrum of commercial property assets, to respond to the evolution of the commercial property market and provide the flexibility to maintain an attractive and diversified portfolio, potentially including assets in the alternative commercial property sectors.

Debt Re-financing

In February 2019, the Board announced that it had refinanced and increased the Company’s debt facilities as set out in the Chair’s Statement. The Board considered stakeholder appetite during its deliberations and agreed that increasing the Company’s debt facility in light of the low interest rate environment to take advantage of future investment opportunities, was in the best interests of Shareholders in light of market conditions at that time.

Examples of Tenant Interaction During 2019

Specific examples of collaboration during 2019 include:

· Supporting a tenant’s application for enhanced status with regulatory authorities, which allowed the tenant to invest in their IT systems and to upgrade the security of the property;

· Supporting multiple tenants through the facilitation of a new entrance and reception area to improve and enhance collaboration within a building; and

· Agreeing a specific pre-let specification with an incoming tenant to ensure the property was fit for purpose, with improved ESG credentials.

As set out above, the Board considers the long term consequences of its decisions on its stakeholders to ensure the long term sustainability of the Company.

Approval of Strategic Report

The Strategic Report of the Company comprises Financial and Property Highlights, Performance Summary, Chair’s Statement, Investment Manager Review, Portfolio Information and Strategic Overview incorporating the risk management and stakeholder overview section.

The Strategic Report was approved by the Board on 1 June 2020.

Ken McCullagh

Chair

EXTRACT FROM REPORT OF DIRECTORS

Annual General Meeting

Among the resolutions being put at the Annual General Meeting of the Company to be held on 27 August 2020, the following resolutions will be proposed.

Dividend policy

It is the Directors’ intention in line with the Company’s investment objective to pay an attractive level of dividend income to shareholders on a quarterly basis. The Directors intend to set the level of dividend after taking into account the long term income return of the Property Portfolio, the diversity and covenant strength of the tenants and the length of the leases of the Properties.

Dividends on the ordinary shares are expected to be paid in four instalments quarterly in respect of each financial year in February, May, August and November. All dividends will be in the form of property income distribution, ordinary dividends or a mixture of both and paid as interim dividends. Resolution 2, which is an ordinary resolution, relates to the approval of the Company’s dividend policy to continue to pay four interim dividends quarterly.

Disapplication of Pre-emption Rights

Resolution 12 gives the Directors, for the period until the conclusion of the Annual General Meeting in 2021 or, if earlier, on the expiry of 15 months from the passing of resolution 12, the necessary authority either to allot securities or sell shares held in treasury, otherwise than to existing shareholders on a pro-rata basis, up to an aggregate nominal amount of £32,485,312. This is equivalent to approximately 10 per cent of the issued ordinary share capital of the Company as at 1 June 2020. There are no shares currently held in treasury.

The Directors will allot new shares pursuant to this authority only if they believe it is advantageous to the Company’s shareholders to do so and the issue price of new shares will be at a premium to the latest published net asset value per share.

Directors’ Authority to Buy Back Shares

The current authority of the Board granted to it by shareholders at the 2019 AGM to buy back shares in the Company expires at the end of the AGM to be held in 2020. The Board intends to renew such authority to buy back shares up to 14.99 per cent of the number of ordinary shares in issue. This special resolution (resolution 13), if approved, will enable the Company to buy back up to 194,781,928 shares based on the current number of shares in issue (excluding any treasury shares). Any buy back of ordinary shares will be made subject to Guernsey law and within guidelines established from time to time by the Board, which will take into account the income and cashflow requirements of the Company, and the making and timing of any buy backs will be at the absolute discretion of the Board.

Purchases of ordinary shares will only be made through the market for cash at prices below the prevailing published net asset value of an ordinary share (as last calculated, adjusted downwards for the amount of any dividend declared by the Company upon the shares going ex-dividend), where the Directors believe such purchases will enhance shareholder value. Such purchases will also only be made in accordance with the rules of the UK Listing Authority which provide that the price to be paid must not be more than the higher of (i) five per cent above the average of the middle market quotations for the ordinary shares for the five business days before the purchase is made and (ii) the higher of the last independent trade and the highest current independent bid on the London Stock Exchange. The minimum price (exclusive of expenses) that may be paid is 25 pence a share.

The Company may retain any shares bought back as treasury shares for future re-issue, or transfer, or may cancel any such shares. During the period when the Company holds shares as treasury shares, the rights and obligations in respect of those shares may not be exercised or enforced by or against the Company. The maximum number of shares that can be held as treasury shares by the Company is 10 per cent of the aggregate nominal value of all issued ordinary shares. Ordinary shares held as treasury shares will only be re-issued, or transferred at prices which are not less than the published net asset value of an ordinary share.

It is the intention of Directors that the share buy back authority may be used to purchase ordinary shares in the Company, (subject to the income and cash flow requirements of the Company) if the level of discount represents an opportunity that will generate risk adjusted returns in excess of that which could be achieved by investing in real estate opportunities at a particular time.

The discount control policy of the Company provides that in the event that the share price discount to prevailing published NAV (as last calculated, adjusted downwards for the amount of any dividend declared by the Company upon the shares going ex-dividend) is more than 5 per cent for 90 dealing days or more, following the second anniversary of the Company’s most recent continuation vote, the Directors will convene an Extraordinary General Meeting (“EGM”) to be held within three months to consider an ordinary resolution for the continuation of the Company. If this continuation resolution is not passed, the Directors will convene a further extraordinary general meeting to be held within six months of the first EGM to consider the winding up of the Company or a reconstruction of the Company which offers all shareholders the opportunity to realise their investment. If any such continuation resolution is passed, this discount policy, save in respect of share buy backs, would not apply for a period of two years thereafter. The last continuation vote was held on 18 March 2020.

Auditors

Deloitte LLP has expressed its willingness to continue in office as the Company’s auditor and a resolution proposing its re-appointment will be put to the AGM.

So far as each of the Directors is aware, there is no relevant audit information of which the Company’s auditor is unaware, and each has taken all the steps he/she ought to have taken as a Director to make himself/herself aware of any relevant audit information and to establish that the Company’s auditor is aware of that information.

Recommendations

The Directors believe that the resolutions to be proposed at the Annual General Meeting are in the best interests of the Company and its shareholders as a whole, and recommend that shareholders vote in favour of the resolutions, as the Directors intend to do in respect of all their own beneficial shareholdings.

DIRECTORS’ RESPONSIBILITY STATEMENT

The Directors are responsible for preparing the Annual Report and the Group financial statements in accordance with applicable Guernsey law and those International Financial Reporting Standards (“IFRS”) as have been adopted by the European Union. They are also responsible for ensuring that the Annual Report includes information required by the Rules of the UK Listing Authority.

The Directors are required to prepare Group financial statements for each financial year which give a true and fair view of the financial position of the Group and the financial performance and cash flows of the Group for that period. In preparing those Group financial statements the Directors are required to:

· select suitable accounting policies in accordance with IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors and then apply them consistently;

· present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;

· provide additional disclosures when compliance with the specific requirements in IFRS is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Group’s financial position and financial performance;

· state that the Group has complied with IFRS, subject to any material departures disclosed and explained in the financial statements; and

· prepare the financial statements on a going concern basis unless it is inappropriate to presume that the Group 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 Group financial statements comply with the Companies (Guernsey) Law 2008. 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.

The Directors are also responsible for ensuring that the Group complies with the provisions of the Listing Rules and the Disclosure Rules and Transparency Rules of the UK Listing Authority which, with regard to corporate governance, require the Group to disclose how it has applied the principles, and complied with the provisions, of the AIC Code on Corporate Governance applicable to the Group.

We confirm that to the best of our knowledge:

Ø the Group financial statements, prepared in accordance with the IFRS, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group and comply with the Companies Law;

Ø that in the opinion of the Board, the Annual Report & Accounts taken as a whole, is fair, balanced and understandable and it provides the information necessary to assess the Group’s position, performance, business model and strategy; and

Ø the Strategic Report includes a fair review of the progression and performance of the business and the position of the Group together with a description of the principal risks and uncertainties that it faces.

On behalf of the Board

Ken McCullagh

Chair

1 June 2020

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the year ended 31 December 2019
		Year ended	Year ended
	Notes	31 December 2019 £’000	31 December 2018 £’000
REVENUE
Rental income	2	71,754	65,936
Service charge income	3	6,234	5,950
(Losses)/gains on investment properties and disposal of subsidiaries	10	(43,094)	18,947
Interest income		238	510
Total income		35,132	91,343
EXPENDITURE
Investment management fee	4	(8,700)	(9,567)
Direct property expenses	5	(4,226)	(3,569)
Service charge expenses	5	(6,234)	(5,950)
Other expenses	5	(5,222)	(5,446)
Total expenditure		(24,382)	(24,532)
Operating profit before finance costs		10,750	66,811
FINANCE COSTS
Finance costs	6	(8,359)	(7,976)
Loss on derecognition of interest rate swap		(703)	0
Total finance costs		(9,062)	(7,976)
Net profit from ordinary activities before taxation		1,688	58,835
Taxation on profit on ordinary activities	7	(45)	(5,830)
Net profit for the year		1,643	53,005
OTHER COMPREHENSIVE INCOME TO BE RECLASSIFIED TO PROFIT OR LOSS
Gain arising on effective portion of interest rate swap	14	703	0
(Loss)/Gain arising on effective portion of interest rate swap	14	(1)	1,388
Other comprehensive income		702	1,388
Total comprehensive income for the year		2,345	54,393
Basic and diluted earnings per share	9	0.13p	4.08p
EPRA earnings per share (excluding non-recurring tax items)	9	3.50p	3.03p

The accompanying notes are an integral part of this statement.

All of the profit and total comprehensive income for the year is attributable to the owners of the Company. All items in the above statement derive from continuing operations. Additional EPRA performance measures are in the Annual Report.

CONSOLIDATED BALANCE SHEET
As at 31 December 2019
		Year ended	Year ended
	Notes	31 December 2019 £’000	31 December 2018 £’000
NON-CURRENT ASSETS
Investment properties	10	1,309,541	1,430,851
Interest rate swap	14	—	166
		1,309,541	1,431,017
CURRENT ASSETS
Investment properties held for sale	10	48,850	—
Trade and other receivables	12	30,262	23,765
Cash and cash equivalents		48,984	43,505
		128,096	67,270
Total assets		1,437,637	1,498,287
CURRENT LIABILITIES
Trade and other payables	13	(23,046)	(35,139)
Interest rate swap	14	—	(868)
		(23,046)	(36,007)
NON-CURRENT LIABILITIES
Bank loan	14	(247,447)	(249,661)
Interest rate swap	14	—	0
		(247,447)	(249,661)
Total liabilities		(270,493)	(285,668)
Net assets		1,167,144	1,212,619
REPRESENTED BY
Share capital	15	539,872	539,872
Special distributable reserve		567,075	570,158
Capital reserve		60,197	103,291
Revenue reserve		0	0
Interest rate swap reserve		0	(702)
Equity shareholders’ funds		1,167,144	1,212,619
Net asset value per share	16	89.8p	93.3p
EPRA Net asset value per share	16	89.8p	93.4p

The accompanying notes are an integral part of this statement.

The accounts and following notes were approved and authorised for issue by the Board of Directors on 1 June 2020 and signed on its behalf by:

Ken McCullagh

Director

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the year ended 31 December 2019

		Share Capital	Special Distributable Reserve	Capital Reserve	Revenue Reserve	Interest Rate Swap Reserve	Equity shareholders’ funds
	Notes	£’000	£’000	£’000	£’000	£’000	£’000
At 1 January 2019		539,872	570,158	103,291	—	(702)	1,212,619
Net Profit for the year		—	—	—	1,643	—	1,643
Other comprehensive income		—	—	—	—	702	702
Total comprehensive income		—	—	—	1,643	702	2,345
Dividends declared	8	—	—	—	(47,820)	—	(47,820)
Transfer in respect of losses on investment property	10	—	—	(43,094)	43,094	—	—
Transfer from special distributable reserve	—		(3,083)	—	3,083	—	—
As 31 December 2019	539,872		567,075	60,197	—	—	1,167,144

For the year ended 31 December 2018

		Share Capital	Special Distributable Reserve	Capital Reserve	Revenue Reserve	Interest Rate Swap Reserve	Equity shareholders’ funds
	Notes	£’000	£’000	£’000	£’000	£’000	£’000
At 1 January 2018		539,872	583,920	84,344	—	(2,090)	1,206,046
Net Profit for the year		—	—	—	53,005	—	53,005
Other comprehensive income		—	—	—	—	1,388	1,388
Total comprehensive income		—	—	—	53,005	1,388	54,393
Dividends declared	8	—	—	—	(47,820)	—	(47,820)
Transfer in respect of gains on Investment property	10	—	—	18,947	(18,947)	—	—
Transfer from special distributable reserve	—		(13,762)	—	13,762	—	—
As 31 December 2018	539,872		570,158	103,291	—	(702)	1,212,619

The accompanying notes are an integral part of this statement.

CONSOLIDATED CASH FLOW STATEMENT
For the year ended 31 December 2019
		Year ended	Year ended
	Notes	31 December 2019 £’000	31 December 2018 £’000
CASH FLOWS FROM OPERATING ACTIVITIES
Net profit for the year before taxation		1,688	58,835
Adjustments for:
Losses/(gains) on investment properties	10	43,094	(18,947)
Movement in lease incentives	10	(5,180)	2,408
Movement in provision for bad debts	12	(236)	71
Increase in operating trade and other receivables		(1,081)	(7,996)
(Decrease)/Increase in operating trade and other payables		(13,503)	4,571
Finance costs	6	8,359	7,976
Loss on derecognition of interest rate swap	14	702	—
Cash generated by operations		33,843	46,918
Tax paid		(1,779)	(1,010)
Net cash inflow from operating activities		32,064	45,908
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investment properties	10	—	(156,030)
Sale of investment properties	10	46,250	171,928
Capital expenditure	10	(14,692)	(40,490)
Net cash inflow/(outflow) from operating activities		31,558	(24,592)
CASH FLOWS FROM FINANCING ACTIVITIES
Facility fee charges from bank financing		(2,092)	0
Dividends paid	8	(47,820)	(43,008)
Bank loan interest paid		(7,344)	(6,215)
Payments under interest rate swap arrangement		(184)	(1,031)
Swap breakage costs		(703)	0
Net cash outflow from financing activities		(58,143)	(50,254)
Net increase/(decrease) in cash and cash equivalents		5,479	(28,938)
Opening cash and cash equivalents		43,505	72,443
Closing cash and cash equivalents		48,984	43,505
REPRESENTED BY
Cash at bank		25,453	16,363
Money market funds		23,531	27,142
		48,984	43,505

The accompanying notes are an integral part of this statement.

Notes to the Accounts

1. ACCOUNTING POLICIES

A summary of the principal accounting policies, all of which have been applied consistently throughout the year, is set out below.

(a) Basis of Accounting

The consolidated accounts have been prepared in accordance with International Financial Reporting Standards issued by the International Accounting Standards Board (the IASB), interpretations issued by the IFRS Interpretations Committee that remain in effect, and to the extent that they have been adopted by the European Union, applicable legal and regulatory requirements of Guernsey law and the Listing Rules of the UK Listing Authority. The audited Consolidated Financial Statements of the Group have been prepared under the historical cost convention as modified by the measurement of investment property and derivative financial instruments at fair value. The consolidated financial statements are presented in pound sterling.

The Directors have considered the basis of preparation of the accounts given the COVID-19 pandemic and believe that it is still appropriate for the accounts to be prepared on the going concern basis.

(b) Significant accounting judgements, estimates and assumptions

The preparation of the Group’s financial statements requires management to make judgements, estimates and assumptions that affect the amounts recognised in the financial statements. However, uncertainty about these judgements, assumptions and estimates could result in outcomes that could require a material adjustment to the carrying amount of the asset or liability affected in the future. In applying the Group’s accounting policies, there were no critical accounting judgements.

Key estimation uncertainties

Fair value of investment properties: Investment property is stated at fair value as at the balance sheet date as set out in note 1(h) and note 10 to these accounts.

The determination of the fair value of investment properties requires the use of estimates such as future cash flows from the assets and unobservable inputs such as capitalisation rates. The estimate of future cash

flows includes consideration of the repair and condition of the property, lease terms, future lease events, as well as other relevant factors for the particular asset.

These estimates are based on local market conditions existing at the balance sheet date.

(c) Basis of Consolidation

The consolidated accounts comprise the accounts of the Company and its subsidiaries drawn up to 31 December each year. Subsidiaries are consolidated from the date on which control is transferred to the Group and cease to be consolidated from the date on which control is transferred out of the Group. The Jersey Property Unit Trusts (“JPUTS”) are all controlled via voting rights and hence those entities are consolidated.

(d) Functional and Presentation currency

Items included in the financial statements of the Group are measured using the currency of the primary economic environment in which the Company and its subsidiaries operate (“the functional currency”) which is pounds sterling. The financial statements are also presented in pounds sterling. All figures in the financial statements are rounded to the nearest thousand unless otherwise stated.

(e) Revenue Recognition

Rental income, excluding VAT, arising from operating leases (including those containing stepped and fixed rent increases) is accounted for in the Consolidated Statement of Comprehensive Income on a straight line basis over the lease term. Lease premiums paid and rent free periods granted, are recognised as assets and are amortised over the non-cancellable lease term.

Non-rental service charge income is recognised in the period where the non-rental service charge income is received.

Interest income is accounted on an accruals basis and included in operating profit.

(f) Expenses

Expenses are accounted for on an accruals basis. The Group’s investment management and administration fees, finance costs and all other expenses are charged through the Consolidated Statement of Comprehensive Income.

(g) Taxation

Current income tax assets and liabilities are measured at the amount expected to be recovered from or paid to taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or

substantively enacted by the reporting date. Current income tax relating to items recognised directly in equity is recognised in equity and not in profit or loss. Positions taken in tax returns with respect to situations in which applicable tax regulations are subject to interpretation are periodically evaluated and provisions established where appropriate.

Deferred income tax is provided using the liability method on all temporary differences at the reporting date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred income tax assets are recognised only to the extent that it is probable that taxable profit will be available against which deductible temporary differences, carried forward tax credits or tax losses can be utilised.

The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities. In determining the expected manner of realisation of an asset the directors consider that the Group will recover the value of investment property through sale. Deferred income tax relating to items recognised directly in equity is recognised in equity and not in profit or loss.

(h) Investment Properties

Investment properties are initially recognised at cost, being the fair value of consideration given, including transaction costs associated with the investment property. Any subsequent capital expenditure incurred in improving investment properties is capitalised in the period during which the expenditure is incurred and included within the book cost of the property.

After initial recognition, investment properties are measured at fair value, with the movement in fair value recognised in the Consolidated Statement of Comprehensive Income and transferred to the Capital Reserve. Fair value is based on the external valuation provided by CBRE Limited, Chartered Surveyors, at the Balance Sheet date. The assessed fair value is reduced by the carrying amount of any accrued income resulting from the spreading of lease incentives and/or minimum lease payments.

On derecognition, gains and losses on disposals of investment properties are recognised in the Statement of Comprehensive Income and transferred to the Capital Reserve.

Recognition and derecognition occurs when the significant risks and rewards of ownership of the properties have transferred between a willing buyer and a willing seller.

Investment property is transferred to current assets held for sale when it is expected that the carrying amount will be recovered principally through sale rather than from continuing use. For this to be the case, the property must be available for immediate sale in its present condition, subject only to terms that are usual and customary for sales of such property and its sale must be highly probable.

The Group has entered into forward funding agreements with third party developers in respect of certain properties. Under these agreements the Group will make payments to the developer as construction progresses. The value of these payments is assessed and certified by an expert.

Investment properties are recognised for accounting purposes upon completion of contract. Properties purchased under forward funding contracts are recognised at certified value to date.

Management considers each property transaction separately, with an assessment carried out to determine whether the transaction represents an asset acquisition or business combination. In making its judgement on whether the acquisition of property through the purchase of a corporate vehicle represents an asset acquisition or business combination, management consider whether the integrated set of assets and activities acquired contain both input and processes along with the ability to create outputs.

(i) Operating Lease Contracts

The Group has entered into commercial property leases on its investment property portfolio.

The Group as lessor

When the Group acts as a lessor, it determines at lease commencement whether each lease is a finance lease

or an operating lease. The Group has assessed all leases where it acts as a lessor, based on an evaluation of the terms and conditions of the arrangements, and has determined that the Group retains all the significant risks and rewards of ownership of these properties therefore, the leases are accounted for as operating leases. Where the Group does not retain all the significant risks and rewards of ownership these leases would be classified as finance leases.

Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognised as an expense on a straight-line basis over the lease term.

The Group as intermediate lessor

When the Group is an intermediate lessor, it accounts for its interest in the head lease and the sub-lease separately. The Group has assessed all leases where it acts as an intermediate lessor, based on an evaluation of the terms and conditions of the arrangements, and has identified that all head leases have low value at the lease commencement date. The Group has elected not to recognise right-of-use assets and lease liabilities for leases of low-value assets. The Group classifies the sub-leases as operating leases and accounts for the lease payments on a straight-line basis over the lease terms.

(j) Share Issue Expenses

Incremental external costs directly attributable to the issue of shares that would otherwise have been avoided are written off to capital reserves.

(k) Segmental Reporting

The Directors are of the opinion that the Group is engaged in a single segment of business being property investment in the United Kingdom. The Directors are of the opinion that the four property sectors analysed throughout the financial statements constitute this single segment, and are not separate operating segments as defined by IFRS 8 Operating Segments.

(l) Cash and Cash Equivalents

Cash and cash equivalents are defined as cash in hand, demand deposits, and other short-term highly liquid investments readily convertible within three months or less to known amounts of cash and subject to insignificant risk of changes in value.

(m) Trade and Other Receivables

Trade receivables are recognised initially at their transaction price unless they contain a significant financing component, when they are recognised at fair value. Trade receivables are subsequently measured at amortised cost using the effective interest method.

Other receivables are initially recognised at fair value plus any directly attributable transaction costs and subsequently measured at amortised cost using the effective interest method.

The Group applies the IFRS 9 simplified approach to measuring expected credit losses which uses a lifetime expected loss allowance for all trade receivables and contract assets.

(n) Trade and Other Payables

Rental income received in advance represents the pro-rated rental income invoiced before the year end that relates to the period post the year end. VAT payable is the difference between output and input VAT at the year end. Other payables are accounted for on an accruals basis and include amounts which are due for settlement by the Group as at the year end and are generally carried at the original invoice amount. An estimate is made for any services incurred at the year end but for which no invoice has been received.

(o) Reserves

Share Capital

This represents the proceeds from issuing ordinary shares.

Special Distributable Reserve

The special reserve is a distributable reserve to be used for all purposes permitted under Guernsey law, including the buyback of shares and the payment of dividends. Dividends can be paid from all of the below listed reserves.

Capital Reserve

The following are accounted for in this reserve:

· gains and losses on the disposal of investment properties;

· increases and decreases in the fair value of investment properties held at the year end.

Revenue Reserve

Any surplus arising from the net profit on ordinary activities after taxation and payment of dividends is taken to this reserve, with any deficit charged to the special distributable reserve.

Interest Rate Swap Reserve

Any surplus/deficit arising from the marked to market valuation of the swap instrument is credited/charged to this account.

Treasury Share Reserve

This represents the cost of shares bought back by the Company and held in Treasury. The balance within this reserve is currently nil.

(p) Interest-bearing borrowings

All bank loans and borrowings are initially recognised at cost, being the fair value of the consideration received net of arrangement costs associated with the borrowing. After initial recognition, all interest bearing loans and borrowings are subsequently measured at amortised cost. Amortised cost is calculated by

taking into account any loan arrangement costs and any discount or premium on settlement.

On maturity, bank loans are recognised at par, which is equivalent to amortised cost. Bank loans redeemed before maturity are recognised at amortised cost with any charges associated with early redemptions being taken to the Statement of Comprehensive Income.

(q) Derivative financial instruments

The Group used derivative financial instruments to hedge its risk associated with interest rate fluctuations.

Derivative instruments are initially recognised in the Balance Sheet at their fair value split between current and non-current. Fair value is determined by reference to market values for similar instruments. Transaction costs are expensed immediately.

Gains or losses arising on the fair value of cash flow hedges in the form of derivative instruments are taken directly to Other Comprehensive Income. Such gains and losses are taken to a reserve created specifically for that purpose, described as the Interest Rate Swap Reserve in the Balance Sheet.

On termination the unrealised gains or losses arising from cash flow hedges in the form of derivative instruments, initially recognised in Other Comprehensive Income, are transferred to profit or loss.

The Group considers its interest rate swap qualifies for hedge accounting when the following criteria are satisfied:

· The instrument must be related to an asset or liability;

· It must change the character of the interest rate by converting a variable rate to a fixed rate or vice versa;

· It must match the principal amounts and maturity date of the hedged item; and

· As a cash flow hedge the forecast transaction (incurring interest payable on the bank loan) that is subject to the hedge must be highly probable and must present an exposure to variations in cash flows that could ultimately affect the profit or loss. The effectiveness of the hedge must be capable of reliable measurement and must be assessed as highly effective on an ongoing basis throughout the financial reporting periods for which the hedge was designated.

If a derivative instrument does not satisfy the Group’s criteria to qualify for hedge accounting that instrument will be deemed as an ineffective hedge.

Should any portion of an ineffective hedge be directly related to an underlying asset or liability, that portion of the derivative instrument should be assessed against the Group’s effective hedge criteria to establish if that portion qualifies to be recognised as an effective hedge.

Where a portion of an ineffective hedge qualifies against the Group’s criteria to be classified as an effective hedge that portion of the derivative instrument shall be accounted for as a separate and effective hedge instrument and treated as other comprehensive income.

Gains or losses arising on any derivative instrument or portion of a derivative instrument which is deemed to be ineffective will be recognised in profit or loss. Gains and losses, regardless of whether related to effective or ineffective hedges, are taken to a reserve created specifically for that purpose Swap Reserve.

(r) New standards, amendments and interpretation

The new standards, amendments and interpretations which have been adopted by the Group on 1 January 2019 are listed below.

IFRS 16 – Leases

IFRS 16 Leases (“IFRS 16”) replaces IAS 17 Leases (“IAS 17”) and is effective for annual periods beginning on or after 1 January 2019. The key changes are the lessee and lessor accounting models are no longer symmetrical.

For lessees, the accounting for leases will change to a new single lessee accounting model, requiring recognition of a right-of-use asset (right to use underlying leased asset) and a lease liability (obligation to make lease payments) for a lease with a term greater than 12 months, exclusion to recognition is if the underlying asset is of a low value when new.

For lessors, this remains relatively unchanged – IFRS 16 retains IAS 17’s distinction of finance and operating lease however, IFRS 16 has introduced changes for the lessor where the lessor acts as an intermediate lessor in the lease contract.

The Group has made an assessment of the leases, where the Group acts as intermediate lessor in the lease agreement, and has identified that the Group has five investment properties held on leased land. The rent per annum ranges from one peppercorn to £5 per annum. The classification of the sub-leases will not change from operating lease to financial lease on transition to IFRS 16, as the Group applies the low-value assets exemption outlined in the Group’s updated accounting policy for Operating Lease Contracts, note 1(i).

The Group has made no adjustments to its financial statements following adoption of IFRS 16.

IFRIC 23 – Uncertainty over Income Tax Treatments

IFRIC 23 Uncertainty over Income Tax Treatments (“IFRIC 23”) is effective for annual periods beginning on or after 1 January 2019. IFRIC 23 clarifies the recognition and measurement requirements in IAS 12 Income Taxes when there is uncertainty over income tax treatments. The Group has assessed the impact of IFRIC 23 and determined that it has not been required to make any adjustments to its financial statements in relation to IFRIC 23 and hence this is not discussed further.

Annual Improvements to IFRS

The Group has made no adjustments to its financial statements following adoption of the amendments to the IFRS Standards detailed in the annual Improvements to IFRS 2015-2017 Cycle (1 January 2019). The amendments were not applicable to the Group and hence not discussed.

(s) New standards, amendments and Interpretation not yet effective

There are a number of amended standards issued which are effective from annual periods beginning on or after 1 January 2020. The Group does not anticipate these to have a material impact on the annual consolidated financial statements of the Group and hence not discussed and are detailed below:

· Amendments to IAS 1 Presentation of Financial Statements (“IAS 1”) and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors (“IAS 8”) definition of material.

· An amendment of IFRS 3 Business Combinations (“IFRS 3”) definition of business.

2. RENTAL INCOME

	Year ended 31 December 2019 £’000	Year ended 31 December 2018 £’000
Rental income	71,754	65,936

3. SERVICE CHARGE INCOME

	Year ended 31 December 2019 £’000	Year ended 31 December 2018 £’000
Service charge income	6,234	5,950

The Group’s managing agents Jones Lang LaSalle manage service charge accounts for all the Group’s properties. Service charges on rented properties are detailed in note 5. Service charge expenses, are recharged to tenants.

The service charge paid by the Group in respect of void units was £1.2 million (2018: £0.6 million) and is included within note 5 Direct Property Expenses.

4. INVESTMENT MANAGEMENT FEES

	Year ended 31 December 2019 £’000	Year ended 31 December 2018 £’000
Investment management fee	8,700	9,567

The Group’s Investment Manager is Aberdeen Standard Fund Managers Limited previously, up to 10 December 2018, this was Standard Life Investments (Corporate Funds) Limited.

The Investment Manager received an aggregate annual fee from the Group at an annual rate of 0.60 (2018: 0.65) per cent of the Total Assets.

In the prior year, the Investment Manager was also entitled to an administration fee of £100,000 per annum. In 2019, the Company also paid the Investment Manager £200,000 for marketing services which is included in other expenses. The Investment Management agreement is terminable by either of the parties to it on 12 months’ notice.

5. EXPENSES

	Year ended 31 December 2019 £’000	Year ended 31 December 2018 £’000
Direct Property Expenses	4,226	3,569
Service charge expenses	6,234	5,950
OTHER EXPENSES
Professional fees (including valuation fees)	4,221	4,739
Movement in bad debt provision	236	(71)
Directors’ fees and expenses	350	282
Administration fee	—	100
Administration and company secretarial fees	85	85
Regulatory fees	240	230
Auditor’s remuneration for:
Statutory audit	90	81
Non audit services	-	-
	5,222	5,446

6. FINANCE COSTS

	Year ended 31 December 2019 £’000	Year ended 31 December 2018 £’000
Interest on principal loan amount	7,170	6,352
Amounts payable in respect of interest rate swap arrangement	30	894
Facility fees	588	332
Amortisation of loan set up fees	571	398
	8,359	7,976

7. TAXATION

	Year ended	Year ended
	31 December 2019	31 December 2018
	£’000	£’000
NET PROFIT FROM ORDINARY ACTIVITIES BEFORE TAX	1,688	58,835
UK Corporation tax at a rate of 19 per cent (2018: 19%)	321	11,178
Effect of:
Capital losses/(gains) on Investment properties not taxable	8,188	(3,600)
UK REIT exemption on net income	(8,509)	(3,963)
Income not taxable	—	(50)
Intercompany loan interest	—	(3,478)
Expenditure not allow for tax purposes	—	415
Total current tax charge	—	502
Net movement in deferred tax asset	—	3,271
Net under accrual of tax from previous year	45	2,057
Total tax charge	45	5,830

The Group migrated tax residence to the UK and elected to be treated as a UK REIT with effect from 1 July 2018. As a UK REIT, the income profits of the Group’s UK property rental business are exempt from corporation tax as are any gains it makes from the disposal of its properties, provided they are not held for trading or sold within three years of completion of development. The Group is otherwise subject to UK corporation tax at the prevailing rate.

As the principal company of the REIT, the Company is required to distribute at least 90% of the income profits of the Group’s UK property rental business. There are a number of other conditions that also are required to be met by the Company and the Group to maintain REIT tax status. These conditions were met in the period and the Board intends to conduct the Group’s affairs such that these conditions continue to be met for the foreseeable future. Accordingly, deferred tax is no longer recognised on temporary differences relating to the property rental business or income tax losses previously built up.

The Company owns five Guernsey tax exempt subsidiaries, UK Finance Holdings Limited (UKFH), UK Commercial Property GP Limited (GP), UK Commercial Property Holdings Limited (UKCPH), UK Commercial Property Estates Limited (UKCPEL) and UK Commercial Property Estates Holdings Limited (UKCPEH). GP and UKCPH are partners in a Guernsey Limited Partnership (“the Partnership”). UKFH and UKCPH own two JPUTS. UKCPEL and UKCPEH also own two JPUTS. The Company and its Guernsey subsidiaries have obtained exempt company status in Guernsey so that they are exempt from Guernsey taxation on income arising outside Guernsey and bank interest receivable in Guernsey.

In the prior year, up to REIT conversion on 1 July 2018, The Partnership, UKCPH and UKCPEL owned a portfolio of UK properties and derived rental income from those properties. As the Partnership and the unit trusts are income transparent for UK tax purposes, the partners and unit holders were liable to UK income tax on their share of the net rental profits of the Partnership and unit trusts respectively. The entities directly owning UK property were also own net UK rental profits. All entities subject to UK income tax elected to receive rental income gross under HMRC’s non-resident landlord scheme. On the Group’s submission of the final income tax returns, to 5 April 2019, UKCPEL had underaccrued income tax of £78,000, which has been charged to the Statement of Comprehensive Income in the current year.

The components of the tax charge in the consolidated income statement are as follows:

RECONCILIATION OF CURRENT CORPORATION AND INCOME TAX IN THE CONSOLIDATED INCOME STATEMENT	Year ended 31 December 2019 £’000	Year ended 31 December 2018 £’000
Income Tax charge in the year	—	502
Adjustment in respect of prior year under provision of income tax	78	—
Adjustment in respect of prior year over provision of corporation tax	(33)	2,057
At 31 December	45	2,559

The Company owns two UK Limited Companies, Brixton Radlett Property Limited (“BRPL”) and UK Commercial Property Estates (Reading) Limited (“UKCPERL”). In the prior year, The White Building, Reading was acquired in June 2018 via the purchase of the share capital of UKCPERL. The purchase, and subsequent allocation of the property as an investment property, triggered a corporation tax charge of £2,057,000 which was deducted from the purchase price. On submission of UKCPERL’s CT600, the tax charge was overaccrued by £33,000, which was released to the current year statement of comprehensive income.

RECONCILIATION OF DEFFERED TAX IN THE CONSOLIDATED INCOME STATEMENT	Year ended 31 December 2019 £’000	Year ended 31 December 2018 £’000
Movement in deferred tax asset on tax losses	—	5,635
Movement in deferred tax asset in respect of capital allowance timing differences	—	481
Movement in deferred tax liability in respect of capital allowance timing differences	—	(2,845)
At 31 December	—	3,271

Deferred tax asset

In the prior year, the Group became part of the UK corporation tax regime and it was anticipated that the Group’s pre UK corporation tax regime losses of £40,186,000, based on the 2017/2018 tax returns to

5 April 2018, would not be utilised. As a result the deferred tax asset and liability, which netted off to £3,271,000, were written off in 2018.

8. DIVIDENDS

DIVIDENDS ON ORDINARY SHARES	Year ended 31 December 2019 £’000	Year ended 31 December 2018 £’000
Interim dividends paid per ordinary share:
2018 Fourth interim: property income dividend (“PID”) of 0.775p and Ordinary dividend (“Non PID”) of 0.145p paid 28 February 2019 (2017 Fourth interim: dividend of 0.92p)	11,955	11,955
2019 First interim: PID of 0.92p paid 31 May 2019 (2018 First interim: dividend of 0.92p)	11,955	11,955
2019 Second interim: PID of 0.92p paid 30 August 2019 (2018 Second interim: dividend of 0.92p)	11,955	11,955
2019 Third interim: PID of 0.658p and Non PID of 0.262p paid 29 November 2019 (2018 Third interim: PID 0.643p and Non PID 0.277p)	11,955	11,955
	47,820	47,820

A fourth interim PID of 0.506p and Non PID of 0.414p was paid on 28 February 2020 to shareholders on the register on 14 February 2020. Although this payment relates to the year ended 31 December 2019, under International Financial Reporting Standards it will be accounted for in the year ending 31 December 2020.

9. BASIC AND DILUATED EARNINGS PER SHARE

	Year ended 31 December 2019	Year ended 31 December 2018
Weighted average number of shares	1,299,412,465	1,299,412,465
Net Profit (£)	1,643,000	53,005,000
Basic and diluted Earnings per share (pence)	0.13	4.08
EPRA earnings per share (pence)1	3.50	3.03

1 A breakdown of the calculation is detailed in the table A. EPRA Earnings in the Annual Report.

As there are no dilutive instruments outstanding, basic and diluted earnings per share are identical. Earnings per share are based on the net profit of the year divided by the weighted average number of Ordinary Shares in issue during the period.

10. INVESTMENT PROPERTIES

FREEHOLD AND LEASEHOLD PROPERTIES	Year ended 31 December 2019 £’000	Year ended 31 December 2018 £’000
Opening valuation	1,430,851	1,380,523
Purchase at cost	—	156,030
Capital expenditure	14,692	40,490
(Loss)/Gain on revaluation to market value	(15,172)	14,650
Disposals at prior year valuation	(66,800)	(163,250)
Lease incentive movement	(5,180)	2,408
Total fair value at 31 December	1,358,391	1,430,851
Less: reclassified as held for sale	(48,850)	—
Fair value as at 31 December	1,309,541	1,430,851
(LOSSES)/GAINS ON INVESTMENT PROPERTIES AT FAIR VALUE COMPRISE
Valuation (losses)/gains	(15,172)	14,649
Movement in provision for lease incentives	(5,180)	2,408
(Loss)/gain on disposal	(22,742)	1,890
	(43,094)	18,947
GAINS ON INVESTMENT PROPERTIES SOLD
Original cost of investment properties	(93,300)	(168,188)
Sale proceeds less sales costs	46,250	171,928
(Loss)/profit on investment properties sold	(47,050)	3,740
Recognised in previous periods	(26,500)	(4,938)
Recognised in current period	(20,550)	8,678
	(47,050)	3,740

Given the objectives of the Group and the nature of its investments, the Directors believe that the Group has only one asset class, that of Commercial Property.

CBRE Limited, (the “Property Valuer”) completed a valuation of Group investment properties as at 31 December 2019 on the basis of fair value in accordance with the requirements of the Royal Institution of Chartered Surveyors (RICS) ‘RICS Valuation — Global Standards 2017 (the ‘Red Book’). For most practical purposes there would be no difference between Fair Value (as defined in IFRS 13) and Market Value. The Property Valuer, in valuing the portfolio, is acting as an ‘External Valuer’, as defined in the Red Book, exercising independence and objectivity. The Property Valuer’s opinion of Fair Value has been primarily derived using comparable recent market transactions in order to determine the price that would be received to sell an asset in an orderly transaction between market participants at the valuation date. The fair value of these investment properties amounted to £1,377,890,000 (2018: £1,445,170,000). The difference between the fair value and the value per the consolidated balance sheet at 31 December 2019 consists of accrued income relating to the pre-payment for rent-free periods recognised over the life of the lease totalling £19,499,000 (2018: £14,319,000) which is separately recorded in the accounts as a current asset.

The Group has entered into leases on its property portfolio as lessor (See note 19 for further information).

· No one property accounts for more than 15 per cent of the gross assets of the Group.

· All leasehold properties have more than 60 years remaining on the lease term.

· There are no restrictions on the realisability of the Group’s investment properties or on the remittance of income or proceeds of disposal.

However, the Group’s investments comprise UK commercial property, which may be difficult to realise.

The property portfolio’s fair value as at 31 December 2019 has been prepared adopting the following assumptions:

· That, where let, the Estimated Net Annual Rent (after void and rent free period assumptions) for each property, or part of a property, reflects the terms of the leases as at the date of valuation. If the property, or parts thereof, are vacant at the date of valuation, the rental value reflects the rent the Property Valuer considers would be obtainable on an open market letting as at the date of valuation.

· The Property Valuer has assumed that, where let, all rent reviews are to be assessed by reference to the estimated rental value calculated in accordance with the terms of the lease. Also there is the assumption that all tenants will meet their obligations under their leases and are responsible for insurance, payment of business rates, and all repairs, whether directly or by means of a service charge.

· The Property Valuer has not made any adjustments to reflect any liability to taxation that may arise on disposal, nor any costs associated with disposals incurred by the owner.

· The Property Valuer assumes an initial yield in the region of 3.25 to 8.75 per cent, based on market evidence. For the majority of properties, the Property Valuer assumes a reversionary yield in the region of 3.25 to 10.25 per cent.

· The Property Valuer takes account of deleterious materials included in the construction of the investment properties in arriving at its estimate of Fair Value when the Investment Manager advises of the presence of such materials.

The majority of the leases are on a full repairing basis and as such the Group is not liable for costs in respect of repairs or maintenance to its investment properties.

The following disclosure is provided in relation to the adoption of IFRS 13 Fair Value Measurement. All properties are deemed Level 3 for the purposes of fair value measurement and the current use of each property is considered the highest and best use. There have been no transfers from Level 3 in the year. The

fair value of completed investment property is determined using a yield methodology. Under this method, a property’s fair value is estimated using explicit assumptions regarding the benefits and liabilities of ownership over the asset’s life including an exit or terminal value. As an accepted method within the income approach to valuation, this method involves the projection of a series of cash flows on a real property interest. To this projected cash flow series, an appropriate, market derived discount rate (capitalisation rate) is applied to establish the present value of the cash inflows associated with the real property.

The duration of the cash flow and the specific timing of inflows and outflows are determined by events such as rent reviews, lease renewal and related void or rent free periods, re-letting, redevelopment, or refurbishment. The appropriate duration is typically driven by market behaviour that is a characteristic of the class of property. In the case of investment properties, periodic cash flow is typically estimated as gross income less vacancy, non-recoverable expenses, collection losses, lease incentives, maintenance cost, agent and commission costs and other operating and management expenses. The series of periodic net cash inflows, along with an estimate of the terminal value anticipated at the end of the projection period, is then discounted. Set out below are the valuation techniques used for each property sector plus a description and quantification of the key unobservable inputs relating to each sector. There has been no change in valuation technique in the year.

Sector	Fair Value at 31 December 2019 (£m)	Valuation Techniques techniques	Unobservable inputs	Range(weighted average)
Industrial	706.8	Yield methodology	Annual rent per sq ft Capitalisation rate	£0–£16 (£8) 3.8%–6.7% (4.8%)
Office	227.5	Yield methodology	Annual rent per sq ft Capitalisation rate	£14–£57 (£30) 3.3%–8.7% (5.3%)
Retail	289.4	Yield methodology	Annual rent per sq ft Capitalisation rate	£17–£327 (£51) 3.6%–7.7% (5.7%)
Alternatives	154.2	Yield methodology	Annual rent per sq ft Capitalisation rate	£14–£21 (£18) 5.5%–6.3% (5.8%)

Sensitivity analysis

The table below presents the sensitivity of the valuation to changes in the most significant assumptions underlying the valuation of investment property, which could be caused by a number of factors, including Brexit. The movement of 50 basis points is based on past observed data.

Sector	Assumption	Movement	Effect on valuation
Industrial	Capitalisation rate	+ 50 basis points ? 50 basis points	Decrease £69.3 million Increase £86.6 million
Office	Capitalisation rate	+ 50 basis points ? 50 basis points	Decrease £21.4 million Increase £26.3 million
Retail	Capitalisation rate	+ 50 basis points ? 50 basis points	Decrease £23.5 million Increase £28.6 million
Alternatives	Capitalisation rate	+ 50 basis points ? 50 basis points	Decrease £12.4 million Increase £14.8 million

Investment property valuation process

The valuations of investment properties are performed quarterly on the basis of valuation reports prepared by independent and qualified valuers and reviewed by the Property Valuation Committee of the Company.

These reports are based on both:

· Information provided by the Investment Manager such as current rents, terms and conditions of lease agreements, service charges and capital expenditure. This information is derived from the Investment Manager’s financial and property management systems and is subject to the Investment Manager’s overall control environment.

· Assumptions and valuation models used by the valuers — the assumptions are typically market related, such as yields. These are based on their professional judgment and market observation.

Asset held for sale

At the current year end, the assets held for sale are; Portsmouth Motor Park and Broadbridge Retail Park. The assets are shown at fair value in the Balance Sheet as a held for sale asset and included within the investment property table shown in this note. At the prior year end, there were no assets held for sale.

11. SUBSIDIARY UNDERTAKINGS

The Company owns 100 per cent of the issued share capital of UK Commercial Property Estates Holdings Limited (UKCPEH), a company incorporated in Guernsey whose principal business is to hold and manage investment properties for rental income. UKCPEH Limited owns 100 per cent of the issued share capital of UK Commercial Property Estates Limited, a company incorporated in Guernsey whose principal business is to hold and manage investment properties for rental income. UKCPEH also owns 100% of Brixton Radlett Property Limited, and UK Commercial Property Estates (Reading) Limited, both UK companies, whose principal businesses are that of investment and property companies.

The Company owns 100 per cent of the issued ordinary share capital of UK Commercial Property Finance Holdings Limited (UKCFH), a company incorporated in Guernsey whose principal business is to hold and manage investment properties for rental income. UKCFH owns 100 per cent of the issued share capital of UK

Commercial Property Nominee Limited, a company incorporated in Guernsey whose principal business is that of a nominee company. UKCFH owns 100 per cent of the issued ordinary share capital of UK Commercial Property Holdings Limited (UKCPH), a company incorporated in Guernsey whose principal business is to hold and manage investment properties for rental income.

UKCPT Limited Partnership, (GLP), is a Guernsey limited partnership, whose principal business is to hold and manage investment properties for rental income. UKCPH and GP, have a partnership interest of 99 and 1 per cent respectively in the GLP. The GP is the general partner and UKCPH is a limited partner of the GLP.

In addition, the Group controls four JPUTS namely Junction 27 Retail Unit Trust, St George’s Leicester Unit Trust, Kew Retail Park Unit Trust and Rotunda Kingston Property Unit Trust. The principal business of the Unit Trusts is that of investment in property.

12. TRADE AND OTHER RECEIVABLES

	Year ended 31 December 2019 £’000	Year ended 31 December 2018 £’000
Rents receivable	3,306	4,067
Lease incentives	19,499	14,319
Other debtors and prepayments	7,457	5,379
	30,262	23,765
Provision for bad debts as at 31 December 2018/2017	719	790
Movement in the year	236	(71)
Provision for bad debts as at 31 December 2019/2018	955	719

The ageing of these receivables is as follows:

	2019 £’000	2018 £’000
Less than 6 months	781	566
Between 6 and 12 months	86	124
Over 12 months	88	29
	955	719

Other debtors include tenant deposits of £3,281,000 (2018: £2,618,000). All other debtors are due within one year. No other debts past due are impaired in either year.

13. TRADE AND OTHER PAYABLES

	Year ended 31 December 2019 £’000	Year ended 31 December 2018 £’000
Rental income received in advance	14,023	13,308
Investment Manager fee payable	2,129	2,381
Income tax payable	293	2,030
Withholding tax payable1	-	608
Other payable	6,601	16,812
	23,046	35,139

1 Tax withheld on PIDs at the basic rate of income tax, currently 20%.

Other payables include tenant deposits of £3,281,000 (2018: £2,618,000), bank loan payments of £1,080,000 (2018: £1,429,000 includes swap interest payments of £154,000) and acquisition costs of £550,000 (2018: £830,000). In the prior year, other payables included a dilapidation settlement of £3,500,000 and dividends payable of £4,182,000. On the payment date of the third interim dividend (30 November 2018), Phoenix Life Limited were deemed to be a substantial shareholder under the REIT regulations. PLL notified the Company they were no longer a substantial shareholder in January 2019 and the dividend was subsequently paid. The

Group’s payment policy is to ensure settlement of supplier invoices in accordance with stated terms.

14. BANK LOAN AND INTEREST RATE SWAPS

	Year ended 31 December 2019 £’000	Year ended 31 December 2018 £’000
Total facilities available	350,000	300,000
Drawn down:
Barclays facility	50,000	150,000
Barings facility	200,000	100,000
Set up costs incurred	(6,628)	(4,536)
Accumulated amortisation of set up costs	4,045	3,465
Accrued variable interest rate on bank loan	30	732
Total due	247,447	249,661

Movements in bank loan and interest rates swaps arising from financing activities	At 1 Jan 2019	Cash flows	Changes in fair value	Other changes	At 31 Dec 2019
	£’000	£’000	£’000	£’000	£’000
Bank Loan	249,661	(2,092)	—	(122)	247,447
Interest Rate Swaps	(702)	703	(1)	—	—

(i) Barclays Facility

The Group has a £150 million revolving credit facility (“RCF”), maturing in April 2024, with Barclays Bank plc at a margin of 1.70 per cent above LIBOR. The RCF was taken out by UKCPEH and is cancellable at any time. The RCF was initially taken out by UKCPEL as a £50 million RCF in April 2015 at a margin of 1.50 per cent above LIBOR and was increased and extended in February 2019. The RCF has a non-utilisation fee of 0.68 per cent per annum (0.60 per cent per annum prior to February 2019) charged on the proportion of the RCF not utilised on a pro-rata basis. As at 31 December 2019, £100 million (2018: £150 million) remained unutilised. The RCF is secured on the property portfolio held by UKCPEH. Under bank covenants related to the RCF, UKCPEH is to ensure that at all times:

· The loan to value percentage does not exceed 60 per cent.

· Interest cover at the relevant payment date is not less than 175 per cent and projected over the course of the proceeding 12 months is not less than 175 per cent.

UKCPEH met all covenant tests during the year for the RCF.

In the prior year, the Group had a five year £150 million facility (“Facility 1”), maturing in April 2020, which was fully drawn at the 31 December 2018. The bank loan was secured on the property portfolio held by UKCPEL. Under bank covenants related to the loan UKCPEL had to ensure that at all times:

· The loan to value percentage does not exceed 60 per cent.

· Interest cover at the relevant payment date is not less than 175 per cent and projected over the course of the proceeding 12 months is not less than 175 per cent.

UKCPEL met all covenant test during 2018 for Facility 1.

Facility 1’s interest rate exposure was hedged by the purchase of an interest rate swap contract. The notional amount of the swap and the swap term matched the loan principal and the loan term. As at 31 December 2018, the Group had in place one interest rate swap totalling £150 million with Barclays Bank plc. The interest rate swap effectively hedged Facility 1’s drawn down loan with Barclays Bank plc.

Interest was payable by UKCPEL at a rate equal to the aggregate of LIBOR, mandatory costs of the Bank and a margin. The applicable margin was fixed at 1.50 per cent per annum and this was the applicable margin as at 31 December 2018.

Facility 1 was repaid in February 2019 along with the associated interest rate swap. The cost of closing out the swap was £703,000. There was no repayment fees on the term loan facility.

(ii) Barings Facility

The Group has a £100 million facility (“Facility 2”), maturing in April 2027, with Barings Real Estate Advisers, a member of the MassMutual Financial Services Group. The loan was taken out by UKCFH. As at 31 December 2019, the facility was fully drawn (31 December 2018: Fully drawn). The bank loan is secured on the portfolio of seven properties held within UKCFH. Under bank covenants related to the loan UKCFH is to ensure that at all times:

· The loan to value percentage does not exceed 75 per cent.

· Interest cover at the relevant payment date and also projected over the course of the proceeding 12 months is not less than 200 per cent.

UKCFH met all covenant tests during the year for Facility 2.

Interest is payable by UKCFH at a fixed rate equal to the aggregate of the equivalent 12 year gilt yield, fixed at the time of drawdown and a margin. This resulted in a fixed rate of interest payable of 3.03 per cent per annum. There are no interest rate swaps in place relating to this facility.

During the year, the Group took out a new £100 million facility (“Facility 3”), maturing in February 2031, with Barings Real Estate Advisers. The loan was taken out by UKCFH. As at 31 December 2019, the facility was fully drawn. The bank loan is secured on the portfolio of seven properties held within UKCFH. Facility 3 has the

same bank covenants as Facility 2 as outlined above. UKCFH also met all covenant tests during the year for Facility 3.

Interest is payable by UKCFH at a fixed rate equal to the aggregate of the equivalent 12 year gilt yield, fixed at the time of drawdown and a margin. This resulted in a fixed rate of interest payable of 2.72 per cent per annum. There are no interest rate swaps in place relating to this facility.

Swap Instruments

At the prior year end, the Group had in place an interest rate swap instrument totalling £150 million which was deemed to be an effective hedge as per note 1(q). The revaluation of this swap at the prior year end resulted in a gain on interest rate swaps of £1.4 million. Of the total gain arising on interest rate swaps, £1.4 million related to an effective hedge instrument which is credited through Other Comprehensive Income in the Statement of Comprehensive Income.

The valuation techniques applied to fair value the derivatives include the swap models including the CVA/DVA swap models, using present value calculations. The model incorporates various inputs including the credit quality of counterparties and forward rates. The fair value of the interest rate swaps as at 31 December 2018 amounted to a liability of £702,000. Based on current yield curves and non-performance risk, £868,000 of this value was a liability which related to the next 12 months and was therefore classified as a current liability. The remainder was classified as a Non-Current asset.

The swap was closed out in February 2019 as part of the Group’s refinance at a cost of £703,000.

15. SHARE CAPITAL ACCOUNTS

	Year ended 31 December 2019 £’000	Year ended 31 December 2018 £’000
SHARE CAPITAL
Opening balance	539,872	539,872
Share capital as at 31 December 2019	539,872	539,872

Number of shares in issue and fully paid at the year end being 1,299,412,465 (2018: 1,299,412,465) of 25p each.

Ordinary shareholders participate in all general meetings of the Company on the basis of one vote for each share held. The Articles of Association of the Company allow for an unlimited number of shares to be issued, subject to restrictions placed by AGM resolutions. There are no restrictions on the shares in issue.

16. NET ASSET VALUE PER SHARE

	Year ended 31 December 2019	Year ended 31 December 2018
Ordinary Shares	1,299,412,465	1,299,412,465
Net assets (£’000)	1,167,144	1,212,619
NAV per share (pence)	89.8	93.3
EPRA Net asset value per share (pence)1	89.8	93.4

1 A breakdown of the calculation is detailed in the table B EPRA NAV in the Annual Report.

17. RELATED PARTY TRANSACTIONS

No Director has an interest in any transactions which are or were unusual in their nature or significant to the nature of the Group.

Aberdeen Standard Fund Managers Limited, as the Manager of the Group from 10 December 2018, previously Standard Life Investments (Corporate Funds) Limited, received fees for their services as investment managers. Further details are provided in note 4. The total management fee charged to the Statement of Comprehensive Income during the year was £8,700,000 (2018: £9,567,000) of which £2,129,000 (2018: £2,381,000) remained payable at the year end. The Investment Manager also received £200,000 for marketing services in the year of which £200,000 remained payable at the year end. In the prior year, the Investment Manager also received an administration fee of £100,000, of which £25,000 remained payable at the year end.

The Directors of the Company are deemed as key management personnel and received fees for their services. Further details are provided in the Directors’ Remuneration Report (unaudited) in the Annual Report. Total fees for the year were £335,826 (2018: £282,443) none of which remained payable at the year end (2018: nil).

The Group invests in the Aberdeen Standard Investments Liquidity Fund accounted for as a cash equivalent which is managed by Aberdeen Standard Investments Limited. As at 31 December 2019 the Group had invested £23.5 million in the Fund (2018: £27.1 million). No additional fees are payable to Aberdeen Standard Investments as a result of this investment.

18. FINANCIAL INSTRUMENTS AND INVESTMENT PROPERTIES

The Group’s investment objective is to provide ordinary shareholders with an attractive level of income together with the potential for income and capital growth from investing in a diversified UK commercial property portfolio. Consistent with that objective, the Group holds UK commercial property investments. The Group’s financial instruments consist of cash, receivables and payables that arise directly from its operations and loan facilities and swap instruments. The main risks arising from the Group’s financial instruments are credit risk, liquidity risk, market risk and interest rate risk. The Board reviews and agrees policies for managing its risk exposure. These policies are summarised below and remained unchanged during the year.

Fair value hierarchy

The following table shows an analysis of the fair values of investment properties recognised in the balance sheet by level of the fair value hierarchy:

Explanation of the fair value hierarchy:

· Level 1 Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date.

· Level 2 Use of a model with inputs (other than quoted prices included in level 1) that are directly or indirectly observable market data.

· Level 3 Use of a model with inputs that are not based on observable market data.

31 December 2019	Level 1 £’000	Level 2 £’000	Level 3 £’000	Total fair value £’000
Investment properties	—	—	1,377,890	1,377,890
31 December 2018	Level 1 £’000	Level 2 £’000	Level 3 £’000	Total fair value £’000
Investment properties	—	—	1,445,170	1,445,170

The lowest level of input is the underlying yield on each property which is an input not based on observable market data.

31 December 2019	Level 1 £’000	Level 2 £’000	Level 3 £’000	Total fair value £’000
Bank loans	—	261,589	—	261,589
31 December 2018	Level 1 £’000	Level 2 £’000	Level 3 £’000	Total fair value £’000
Bank loans	—	253,950	—	253,950

The lowest level of input is the interest rate applicable to each borrowing as at the balance sheet date which is a directly observable input.

The following table shows an analysis of the fair values of financial instruments and trade receivables and payables recognised at amortised cost in the balance sheet by level of the fair value hierarchy:

31 December 2019	Level 1 £’000	Level 2 £’000	Level 3 £’000	Total fair value £’000
Interest rate swap	—	—	—	—
Trade and other receivables	—	30,262	—	30,262
Trade and other payables	—	23,046	—	23,046

31 December 2018	Level 1 £’000	Level 2 £’000	Level 3 £’000	Total fair value £’000
Interest rate swap	—	(702)	—	(702)
Trade and other receivables	—	23,765	—	23,765
Trade and other payables	—	35,139	—	35,139

The lowest level of input is the three month LIBOR yield curve which is a directly observable input.

The carrying amount of trade and other receivables and payables is equal to their fair value, due to the short-term maturities of these instruments. Expected maturities are estimated to be the same as contractual maturities.

The fair value of investment properties is calculated using unobservable inputs as described in note 10.

The fair value of the derivative interest rate swap contract is estimated by discounting expected future cash flows using current market interest rates and yield curves over the remaining term of the instrument.

The fair value of the bank loans are estimated by discounting expected future cash flows using the current interest rates applicable to each loan.

There have been no transfers between levels in the year for items held at fair value.

Real Estate Risk

The Group has identified the following risks associated with the real estate portfolio:

· The cost of any development schemes may increase if there are delays in the planning process. The Group uses advisers who are experts in the specific planning requirements in the scheme’s location in order to reduce the risks that may arise in the planning process;

· A major tenant may become insolvent causing a significant loss of rental income and a reduction in the value of the associated property (see also credit risk overleaf). To reduce this risk, the Group reviews the financial status of all prospective tenants and decides on the appropriate level of security required via rental deposits or guarantees;

· The exposure of the fair values of the portfolio to market and occupier fundamentals such as tenants’ financial position.

Credit risk

Credit risk is the risk that an issuer or counterparty will be unable or unwilling to meet a commitment that it has entered into with the Group.

At the reporting date, the maturity of the Group’s financial assets was:

Financial Assets 2019	3 months or less	More than 3 months but less than one year	More than one year	Total
	£’000	£’000	£’000	£’000
Cash	48,984	—	—	48,984
Rent receivable	3,306	—	—	3,306
Other debtors	7,457	—	—	7,457
	59,747	—	—	59,747

Financial Assets 2018	3 months or less	More than 3 months but less than one year	More than one year	Total
	£’000	£’000	£’000	£’000
Cash	43,505	—	—	43,505
Rent receivable	4,067	—	—	4,067
Other debtors	5,379	—	—	5,379
	52,951	—	—	52,951

In the event of default by a tenant, the Group will suffer a rental shortfall and incur additional costs, including legal expenses, in maintaining, insuring and re-letting the property until it is re-let. The Board receives regular reports on concentrations of risk and any tenants in arrears. The Investment Manager monitors such reports in order to anticipate and minimise the impact of defaults by tenants.

The Company has a diversified tenant portfolio. The maximum credit risk from the rent receivables of the Group at 31 December 2019 is £3,306,000 (2018: £4,067,000). The Group holds rental deposits of £3,281,000 (2018: £2,618,000) as potential collateral against tenant arrears/defaults. All tenant deposits are in line with market practice. There is no residual credit risk associated with the financial assets of the Group. Other than those included in the provision for bad debts, no financial assets past due are impaired.

All of the cash is placed with financial institutions with a credit rating of A or above. £23.5 million (2018: £27.1 million) of the year end cash balance is held in the Aberdeen Standard Investments Liquidity Fund, which is a money market fund and has a triple A rating. Bankruptcy or insolvency of a financial institution may cause the Group’s ability to access cash placed on deposit to be delayed or limited. Should the credit quality or the financial position of the banks currently employed significantly deteriorate, the Investment

Manager would move the cash holdings to another financial institution subject to restrictions under the loan facilities.

Liquidity Risk

Liquidity risk is the risk that the Group will encounter difficulty in realising assets or otherwise raising funds to meet financial commitments. While commercial properties are not immediately realisable, the Group has sufficient cash resources to meet liabilities.

The Group’s liquidity risk is managed on an ongoing basis by the Investment Manager investing in a diversified portfolio of prime real estate and placing cash in liquid deposits and accounts. This is monitored on a quarterly basis by the Board. In certain circumstances, the terms of the Group’s bank loan entitles the lender to require early repayment, and in such circumstances the Group’s ability to maintain dividend levels and the net asset value attributable to the ordinary shares could be adversely affected.

As at 31 December 2019 the cash balance was £48,984,000 (2018: £43,505,000).

At the reporting date, the contractual maturity of the Group’s liabilities, which are considered to be the same as expected maturities, was:

Financial Liabilities 2019	3 months or less	More than 3 months but less than one year	More than one year	Total
	£’000	£’000	£’000	£’000
Bank loans	51,734	4,332	245,248	301,314
Other creditors	21,882	—	—	21,882
	73,616	4,332	245,248	323,196

Financial Liabilities 2018	3 months or less	More than 3 months but less than one year	More than one year	Total
	£’000	£’000	£’000	£’000
Bank loans	1,783	5,447	272,167	279,397
Other creditors	33,800	—	—	33,800
	35,583	5,447	272,167	313,197

The amounts in the table are based on contractual undiscounted payments.

Interest rate risk

The cash balance, as shown in the Balance Sheet, is its carrying amount and has a maturity of less than one year.

Interest is receivable on cash at a variable rate ranging from 0.2 per cent to 0.6 per cent at the year end and deposits are re-priced at intervals of less than one year.

An increase of 1 per cent in interest rates as at the reporting date would have increased the reported profit by £490,000 (2018: increased the reported profit by £435,000). A decrease of 1 per cent would have reduced the reported profit £490,000 (2018: decreased the reported profit by £435,000). The effect on equity is nil (excluding the impact of a change in retained earnings as a result of a change in net profit).

Interest rate risk arises on the interest payable on the RCF only, as the interest payable on the other facilities are at fixed rates. At 31 December 2019, the draw down on the RCF was £50 million (2018: Nil). It is estimated that an increase of 1% of the three month LIBOR would reduce the reported profit by £500,000 (2018: Nil). A decrease of 1% of the three month LIBOR would increase the reported profit by £500,000 (2018: Nil). Assumptions are based on the £50 million being outstanding for the full year, based on the exposure to interest rates at the reporting date, and all other variables being constant.

In the prior year, the Group’s bank loans were hedged by interest rate swaps or are at fixed rates, these loans were not subject to interest rate risk.

At the prior year end, the Group had in place a total of £150 million of interest rate swap instruments. The values of these instruments are marked to market and will change if interest rates change. It is estimated that an increase of 1 per cent in interest rates would result in the swap liability decreasing by £1.8 million which would increase the reported other comprehensive income by the same amount. A decrease of 1 per cent in interest rates would result in the swap liability increasing by £1.8 million which would decrease the reported other comprehensive income by the same amount. The other financial assets and liabilities of Group are non-interest bearing and are therefore not subject to interest rate risk.

Foreign Currency Risk

There was no foreign currency risk as at 31 December 2019 or 31 December 2018 as assets and liabilities of the Group are maintained in pounds sterling.

Capital Management Policies

The Group considers that capital comprises issued ordinary shares, net of shares held in treasury, and long-term borrowings. The Group’s capital is deployed in the acquisition and management of property assets meeting the Group’s investment criteria with a view to earning returns for shareholders which are typically made by way of payment of regular dividends. The Group also has a policy on the buyback of shares which it sets out in the Directors’ Authority to Buy Back Shares section of the Directors’ Report.

The Group’s capital is managed in accordance with its investment policy which is to hold a diversified property portfolio of freehold and long leasehold UK commercial properties. The Group invests in income producing properties. The Group principally invests in four commercial property sectors: office, retail, industrial and alternatives. The Group is permitted to invest up to 15 per cent of its Total Assets in indirect property funds and other listed investment companies. The Group is permitted to invest cash, held by it for working capital purposes and awaiting investments, in cash deposits, gilts and money market funds.

The Group monitors capital primarily through regular financial reporting and also through a gearing policy. Gearing is defined as gross borrowings divided by total assets less current liabilities. The Group’s gearing policy is set out in the Investment Policy section of the Report of the Directors. The Group is not subject to externally imposed regulatory capital requirements but does have banking covenants on which it monitors and reports on a quarterly basis. Included in these covenants are requirements to monitor loan to value ratios which is calculated as the amount of outstanding debt divided by the market value of the properties secured. The Group’s loan to value ratios are is shown below. The Group did not breach any of its loan covenants, nor did it default on any other of its obligations under its loan arrangements in the year to 31 December 2019.

	Year ended 31 December 2019	Year ended 31 December 2018
	£’000	£’000
Carrying amount of interest-bearing loans and borrowings	247,447	249,661
External valuation of completed investment property and assets held for sale (excluding lease incentive adjustment)	1,377,890	1,445,170
Loan to value ratio	18.0%	17.30%

The Group’s capital balances are set out in the Consolidated Statement of Changes in Equity and are regarded as the Group’s equity and net debt.

19. CAPITAL COMMIMTMENTS

The Group had contracted capital commitments as at 31 December 2019 of £2.2 million (31 December 2018 – £11.5 million), which include:

· £1 million capital works building pre-let additional units at St George’s Retail Park, Leicester.

· £1.2 million for capital works across Brixton Radlett, XDock 377, Central Square Newcastle, Gallan Park Cannock, The White Building Reading.

20. LEASE ANALYSIS

The Group leases out its investment properties under operating leases.

The future income under non-cancellable operating leases, based on the unexpired lease length at the year end was as follows (based on total rentals):

	Year ended 31 December 2019 £’000	Year ended 31 December 2018 £’000
Less than one year	65,529	65,487
Between one and five years	225,886	218,547
Over five years	325,175	355,523
Total	616,590	639,557

The largest single tenant at the year end accounted for 5.3 per cent (2018: 5.9) of the current annual rental income. The unoccupied property expressed as a percentage of annualised total rental value was 7.9 per cent (2018: 6.9 per cent) at the year end. The Group has entered into commercial property leases on its investment property portfolio. These properties, held under operating leases, are measured under the fair value model as the properties are held to earn rentals. The majority of these non-cancellable leases have remaining non-cancellable lease terms of between 5 and 15 years.

21. EVENTS AFTER BALANCE SHEET DATE

On 6 February 2020 the Group sold Portsmouth Motor Park for £30.65 million.

On 6 March 2020 the Group sold Broadbridge Retail Park for £18.1 million.

On 13 March the Company purchased land at Exeter in relation to the forward funding of a student accommodation development.

On 5 May 2020 the Group sold Eldon House, an office asset in the City of London, for £40 million.

Post Balance Sheet Event Disclosure

The outbreak of the Novel Coronavirus (“COVID-19”) in 2020 has resulted in significant loss of life, adversely affected global commercial activity and contributed to significant volatility in certain equity and debt markets. The global impact of the outbreak is rapidly evolving and on 11 March 2020, the World Health Organization declared a pandemic. Many countries have reacted by instituting quarantines, prohibitions on travel and the closure of offices, businesses, schools, retail stores and other public venues. Businesses are also implementing similar precautionary measures. Such measures, as well as the general uncertainty surrounding the duration and severity of COVID-19, are creating significant disruption in supply chains and economic activity and are having particularly adverse repercussions on transportation, hospitality, tourism, entertainment, non-food retail and other industries. The impact of COVID-19 has led to significant volatility and declines in the global public equity markets and it is uncertain how long this volatility will continue. As COVID-19 continues to spread and the uncertainty remains regarding the reopening of economies, the potential consequences, including global or regional recessions, are increasingly uncertain and difficult to assess.

The outbreak of COVID-19 and the resulting financial and economic market uncertainty could have significant adverse impact on the Group, including the fair value of its investments. The most significant implications relating to COVID-19 arose after the reporting period and as a result the Group considers the emergence of the COVID-19 pandemic to be a non-adjusting post balance sheet event. Any future effect on the Group is likely to be in connection with the assessment of the fair value of investments and stability of rental income at future dates. The Company announced a fall in like for like portfolio values of 3.1% as at 31 March 2020 with a NAV of 86.3p, a fall of 3.9% as announced on 6 May 2020 and announced a 50% reduction in its dividend payable on 29 May 2020. The independent portfolio valuation prepared by CBRE as at 31 March 2020 also included a material uncertainty clause. At the date of reporting it is not possible to quantify the future financial results of COVID-19 on the Group’s investments or rental income with any degree of certainty. The Board will continue to closely analyse and review the impact of COVID-19 on the Group and will take appropriate action as required.

This Annual Financial Report announcement is not the Company's statutory accounts for the year ended 31 December 2019. The statutory accounts for the year ended 31 December 2019 received an audit report which was unqualified.

The Annual Report will be posted to shareholders in June 2020 and additional copies will be available from the Manager (Tel. 07717543309) or by download from the Company's webpage (www.ukcpreit.co.uk).

Please note that past performance is not necessarily a guide to the future and that the value of investments and the income from them may fall as well as rise. Investors may not get back the amount they originally invested.

All enquiries to:

The Company Secretary
Northern Trust International Fund Administration Services (Guernsey) Limited
Trafalgar Court
Les Banques
St Peter Port
Guernsey
GY1 3QL
Tel: 01481 745001
Fax: 01481 745051