F&C UK Real Est. Inv. Annual Financial Report

 
TIDMFCRE 
 
To:                   RNS 
Date:               29 September 2015 
From:              F&C UK Real Estate Investments Limited 
 
 
 
  * Share price total return of 24.9 per cent for the year 
 
  * Portfolio ungeared total return of 16.7 per cent for the year 
 
  * Net asset value per share total return of 22.7 per cent for the year 
 
  * Net asset value per share total return since launch of 117.5 per cent 
 
  * Dividend of 5.0 pence per share for the year 
 
 
Chairman's Statement 
 
It has been an extremely demanding and positive 12 months for the Company. 
Performance continues to be good with the market capitalisation increasing from 
GBP194 million as at 30 June 2014 to GBP233 million as at 30 June 2015. 
 
Share price performance has been strong during the year and the shares were 
trading at a premium to net asset value of 2.6 per cent at the year end, with 
the price at 99.5 pence per share. This represented a share price total return 
for the year of 24.9 per cent. 
 
The net asset value ('NAV') total return for the year was 22.7 per cent with a 
NAV as at 30 June 2015 of 97.0 pence per share, up from 83.4 pence per share at 
the prior year end. 
 
 
Property Market and Portfolio 
 
The UK commercial property market has delivered double digit returns of 15.7 
per cent in the year to June 2015, as measured by the Investment Property 
Databank ('IPD') UK Quarterly Index. With strong competition for stock during 
the year, IPD data showed initial yields at the all-property level reducing to 
5.0 per cent in the year to June. 
 
Whereas the property market has delivered another year of strong performance, 
prime yields have moved to very low levels by past standards and these returns 
may not be sustained over the longer-term. 
 
The occupational market has improved with rental growth of 3.8 per cent in the 
year to June. However, rental growth of more than 10 per cent for London 
offices contrasted with continued negative rental growth for standard retail in 
the rest of the UK, outside London and other key locations. 
 
In line with the wider market, the Company's property portfolio witnessed 
strong performance with an ungeared return of 16.7 per cent over the period, 
outperforming the IPD UK Quarterly Index of 15.7 per cent, with the value of 
the property portfolio increasing to GBP337.5 million before adjustment for lease 
incentives. 
 
Market values have increased over the year, driven by a weight of money 
entering the sector.  The Manager has been careful not to join the ranks of 
'forced buyers' but has acquired two office investments for a total of GBP10.25 
million over the last year. The Company has sold a further four properties 
during this last financial year for GBP5.7 million. 
 
As a result of purchases adding longer term income to the portfolio, as well as 
lease re-gearing and other asset management deals, the average weighted 
unexpired lease term of the portfolio has been maintained at 7.7 years compared 
with the 7.8 years reported as at 30 June 2014. In the meantime, the void rate 
in the portfolio has fallen to 3.3 per cent of rental value, from 5.7 per cent 
a year earlier. 
 
 
Borrowings and Refinancing 
 
The net gearing level as at 30 June 2015 was 29.7 per cent, which compares with 
31.7 per cent as at 30 June 2014 and 40.0 per cent at launch on 1 June 2004. 
The fall in the gearing percentage was due to a combination of the loan being 
reduced to GBP102 million from GBP109 million and an increase in the overall market 
value of the portfolio. This was offset by a reduction in cash held by GBP12.1 
million. The Group had GBP4.7 million of cash available at 30 June 2015 and an 
undrawn loan facility of GBP13 million. 
 
The Board has been considering a refinancing of the existing loan facility with 
Lloyds Bank plc (the 'Existing Facility') which is due for repayment in January 
2017 and has agreed terms to refinance this through a new long-term term loan 
facility with Canada Life Investments and a new revolving credit facility with 
Barclays Bank plc (the 'New Facilities'). The Group has entered into heads of 
terms with  Canada Life Investments and Barclays Bank plc for new debt 
facilities of up to GBP110 million, under a proposed GBP90 million 11 year term 
loan with Canada Life Investments and a GBP20 million 5 year revolving credit 
facility with Barclays. 
 
Based on UK Gilt rates as at the current date, and assuming the New Facilities 
are drawn down in full, it is estimated that the total interest rate payable 
under the New Facilities would be approximately 3.3 per cent per annum. This is 
significantly lower than the existing cost of debt which is approximately 5.8 
per cent per annum and will make a significant contribution towards improving 
dividend cover. 
 
On the basis that all conditions are met with both parties, the Board intends 
to complete the refinancing transaction prior to 31 October 2015. The Board 
believes that it is in the interests of the Group to repay the Existing 
Facility early to ensure that the Group has certainty of available funds in 
advance of the fixed repayment date in January 2017 and so that the Group can 
take advantage of the current availability of long term borrowings at 
attractive rates of interest.  There is no early repayment penalty in respect 
of the Existing Facility but the Group will be liable for the cost of breaking 
the relevant interest rate swap which was accounted for as a liability of GBP6.6 
million at the year end.  No further swap is required given the fixed nature of 
the principal loan. 
 
 
Dividends 
 
Three interim dividends of 1.25 pence per share were paid during the year with 
a fourth interim dividend of 1.25 pence per share to be paid on 30 September 
2015. This gives a total dividend for the year ended 30 June 2015 of 5.0 pence 
per share, a yield of 5.0 per cent on the year end share price. In the absence 
of unforeseen circumstances, it is the intention of the Group to continue to 
pay quarterly interim dividends at this rate. It should be noted, following the 
Company adopting UK REIT status, the third interim dividend was paid as a 
property income distribution, rather than as an ordinary dividend and it is 
expected that the majority of future dividends will be paid in this way. 
 
 
Share Issues 
 
As part of the Company's premium management programme the Board may look to 
issue shares in order to provide liquidity to the market and to reduce 
volatility in any premium to net asset value.  During this financial year, the 
Company has experienced continued market demand for its shares and issued 3 
million Ordinary Shares in January and February this year at a premium to the 
published net asset value at the time of each issuance, raising proceeds of GBP 
2.6 million. Subsequent to these issues, the Board took the decision to hold 
off on any further issuances until properties meeting the appropriate profile 
for the portfolio were identified for purchase.  This type of asset at the 
appropriate price has proved challenging to identify and no further shares have 
been issued to date. 
 
Further to this, we had previously advised of our intention to issue a 
prospectus, providing the Company with the flexibility to raise additional 
share capital through a Placing Programme of up to 100 million shares. Whilst 
the issuance of a prospectus would give the Company the potential flexibility 
to issue shares to finance any property purchases, the difficulty in sourcing 
property meant that it was deemed prudent to delay with a view to revisiting 
this later in the year. 
 
At the year-end there were 233,855,539 Ordinary Shares in issue. 
 
 
UK REIT Status 
 
Shareholder approval was given at an extraordinary general meeting, held in 
December 2014, for the Company to become tax resident in the UK for the 
purposes of entering into the UK REIT regime. The Company therefore entered the 
UK REIT regime with effect from 1 January 2015. 
 
The Group is no longer subject to UK income tax on the profits and gains from 
their qualifying property rental business provided that it meets certain 
conditions. This will effectively reduce the burden of taxation for most 
shareholders as the payment of UK income tax on the Group's property rental 
income was likely to increase significantly moving forward, if UK REIT status 
had not been obtained. 
 
Board Composition 
 
As mentioned previously in the Group's Interim Report, Mr Christopher Sherwell 
and Mr Graham Harrison retired from the Board with effect from 31 December 
2014.The Board have subsequently appointed two new Non-Executive Directors. 
 
Mr David Ross was appointed with effect from 26 March 2015. David was a 
founding partner of Aberforth Partners LLP, an investment management firm 
specialising in investing in UK smaller companies, from which he recently 
retired. 
 
Mr Mark Carpenter was appointed with effect from 28 May 2015. Mark is a 
director of investment at TH Real Estate, formerly the property business of 
Henderson Global Investors, a global real estate asset management company. 
 
We are delighted to have David and Mark join the Board and believe that they 
have the appropriate range of skills and experience to contribute significantly 
to the Board. 
 
Following the repositioning of the Company over the last two years with the 
merger with our sister company ISIS Property Trust, the conversion to a UK 
REIT, the ongoing refinancing, and the refreshing of the Board, I feel that now 
is the appropriate time to retire from the Board and I will not therefore be 
offering myself for re-election at the Annual General Meeting in November.  At 
that time the new Board members will have settled in and to maintain continuity 
the Board have selected Vikram Lall as my successor as Chairman. Vikram was 
Chair of the Audit Committee of ISIS Property Trust with whom we merged and 
currently fulfils the same position with the Company. He is therefore totally 
familiar with the portfolio and the business. 
 
I would like to express my thanks to all my colleagues past and present, the 

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Company Secretariat, the Administrators and Investment Manager for their 
support and guidance during my period as Chairman. 
 
Fund Manager 
 
After 10 years, Ian McBryde has indicated his intention to step down from his 
role as Fund Manager and retire from our investment manager in 2016. The Board 
is fully engaged with our management company in ensuring a smooth handover of 
responsibilities and we are pleased to announce that Peter Lowe will become 
lead fund manager of your Company with effect from the end of 2015.  Peter 
joins the management company from DTZ Investors where he has worked for the 
last 9 years on a number of mandates including Pearl Assurance, Universities 
Staff Superannuation Fund and Imperial Tobacco Pension Funds. 
 
I would like to express our thanks to Ian for the contribution he has made to 
the Company over the last 10 years and wish him well in his forthcoming 
retirement.  Your Board are confident that Peter, supported by the wider 
investment team within BMO Real Estate Partners, will build on Ian's 
achievements and continue to deliver long-term performance for you as 
shareholders. 
 
Outlook 
 
In line with consensus forecasts, we believe that UK commercial property will 
continue to deliver positive total returns over the next few years, although 
this may be front-loaded. There are global uncertainties which may make 
investors wary.  Further yield compression may be limited especially if 
interest rates start to rise.  Returns are more likely to be income driven but 
aided by rental growth in certain key areas and sectors. 
 
We continue to believe in the importance of sound stock selection and that the 
protection and enhancement of the income stream will remain key in delivering 
performance. 
 
 
 
 
 
 
Manager's Review 
 
The UK commercial property market delivered a benchmark total return of 15.7 
per cent in the year to June 2015, as measured by the Investment Property 
Databank ('IPD') UK Quarterly Index for all-property. This compared with 16.7 
per cent in the previous 12 month period. Property is currently delivering 
total returns well in excess of the 6.9 per cent per annum average over the 
past twenty years. 
 
Performance was supported by an income return of 5.0 per cent, but driven by an 
annual 10.3 per cent uplift in capital values. 
 
The UK economy continued to deliver positive growth, with recovery broadening 
to the regions and employment reaching new highs. The inflation rate moved 
lower, affected by falling food and oil prices to finish the reporting period 
at zero on an annual basis. This supported some improvement in consumer 
confidence as real incomes benefited. The general election in May and the 
earlier referendum in Scotland both created uncertainty during the year while 
the rise in sterling may have affected business sentiment. Fiscal policy 
remains tight as the government aims to bring the public accounts into balance 
over the long-term. The Bank of England kept interest rates unchanged 
throughout the year and ten-year gilt yields remained low, finishing the period 
at 2.1 per cent. 
 
The year saw a high level of investment activity, totalling more than GBP72 
billion, which was around double the long-term average. Overseas buyers and UK 
institutions were the main purchasers of property during the period. Banks 
continued to wind down their problem loans but also were more willing to 
undertake new lending, alongside new entrants, for well-secured assets. Demand 
was strong for property across the board but with the greatest annual gains 
seen for leisure and non-traditional property assets such as healthcare and 
student accommodation. Prime remained in favour but investors also looked to 
the regions and more secondary stock in an effort to secure assets and yield. 
 
The strong competition for stock fed through to further yield compression for 
property, aided by an ultra-low risk-free rate during the year. IPD data showed 
initial yields at the all-property level moving in by 40 basis points to 5.0 
per cent in the year to June. 
 
The period saw considerable polarisation by market segment. City and West End 
offices, together with offices and industrials in the South East, all delivered 
total returns in excess of 20 per cent over the year to June 2015. Rest of UK 
offices almost matched the UK all-property average, following a period of 
under-performance. Retail property delivered a reasonable performance in 
absolute terms but lagged behind offices and industrials. Central London retail 
continued to be robust but with a total return of 6.0 per cent, standard retail 
outside the South East saw only muted growth. Supermarkets have struggled as 
customer preferences evolve. 
 
The occupational market has seen signs of improvement with tenant interest more 
apparent and incentives reducing. Net income growth was positive, but modest, 
over the year at 1.7 per cent according to IPD market data. Rental growth at 
open-market values was 3.8 per cent in the year to June but with wide 
differences by sub-market. Rental growth of more than 10 per cent for City and 
West End offices contrasted with negative rental growth for regional standard 
retail. Shortage of supply in several established office and industrial 
locations has led to a revival in development activity, some of it speculative. 
To date, these new schemes have generally let well. In retail, a few shopping 
centre schemes have been revived but the supermarkets have drastically 
re-scaled their expansion plans and vacancy levels have remained stubbornly 
high in weaker locations. 
 
The year saw secondary stock generally out-perform prime in terms of total 
returns, due largely to a strong investment market and limited availability of 
prime stock. In contrast, net income growth, which is determined more by 
occupier fundamentals was still in decline at the secondary end in several 
parts of the market. It would appear that the investment market in some 
instances is running ahead of the occupational market. 
 
The property market has delivered another strong performance over the year to 
June 2015. However, prime yields have moved to very low levels by past 
standards, the investment market for secondary assets seems out of kilter with 
the fundamentals, and development activity has started to add to supply. The 
current momentum may not be sustained over the longer-term. 
 
Portfolio 
 
Over the year, the Company's property portfolio witnessed strong performance 
with an ungeared return of 16.7 per cent over the period outperforming the IPD 
UK Quarterly Index return of 15.7 per cent. The major driver of this strong 
return was capital growth of 10.5 per cent. At 30 June 2015 the value of the 
property portfolio increased to GBP337.5 million, after sales and purchases, 
compared with GBP300.6 million as at the previous year end. 
 
For the second year running, industrial and distribution properties produced 
the highest returns for the portfolio at 22.8 per cent. Offices, boosted by 
holdings in the South East returned 16.5 per cent. The retail sector 
outperformed its sector benchmark returning 13.6 per cent, although this fell 
well short of the all property index. However, the Company's retail warehouse 
portfolio performed extremely well returning 16.3 per cent compared with the 
IPD sub sector benchmark of 10.3 per cent. 
 
A number of specific assets were responsible for boosting returns, not only as 
a result of a strengthening investment and occupational market, but also due to 
asset management and successful lettings. The largest contribution to returns 
came from Units 1-2 Network, Eastern Road, Bracknell, which produced a total 
return of 30.8 per cent following the re-letting of one of the units on a ten 
year term, without break, at a new rental level of GBP367,300 per annum, which 
equates to GBP10.50 per square foot, some 19 per cent higher than the previous 
passing rent. 
 
Echo Park, Banbury, a large distribution unit with a floor area of 195,000 
square feet, let to Bidvest for a further ten and a half years, returned 21.6 
per cent as a result of the continued yield shift enjoyed by large distribution 
property investments, reflecting the weight of money being invested into the 
sector, as well as increased occupier demand. 
 
Lakeside Industrial Estate, Colnbrook, a multi-let industrial estate consisting 
of 8 units close to Heathrow Airport and the M25 and M4 motorways, returned 
24.0 per cent as a result of the estate being fully let for the first time in 
several years, and with rental levels approaching the peak last seen in the 
previous cycle. 
 
1-2, Lochside Way, Edinburgh Park, saw returns of 30.5 per cent over the year 
following the re-gearing of the lease with HSBC plc who will continue to occupy 
the property for another ten years (subject to a break at the fifth year). The 
property, located in Edinburgh Park, Scotland's premier out of town office 
location, comprises two linked buildings totalling 42,400 square feet 
constructed in 1998. The rent agreed equated to GBP16.50 per square foot, subject 
to a rent free period of 12 months but a penalty if the tenant exercises the 
break. 
 
Whereas returns from the property portfolio were, in aggregate, well above the 
benchmark, challenges do remain amongst some of the smaller regional retail and 
office properties and  further asset management opportunities need to be 
implemented to add value prior to sales in accordance with strategy. 
 
The year has seen significant uplifts in values, driven by a weight of money 
entering the sector. Yields have fallen to, in some cases, historic low levels 
which investors are happy to accept as a result of generally low interest rates 
elsewhere. With stiff competition to purchase property, the Manager has been 
very selective with regard to purchases. 
 
The Company completed the acquisition of Unit A3, Glory Park, High Wycombe in 
July 2014 for GBP7.0 million, reflecting a yield of 7.0 per cent. The property 
comprises a Grade A specification, modern business park office building, close 

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to the M40 motorway. Totalling 19,572 square feet on three floors, the building 
is let to two tenants in the pharmaceutical sector with the majority of the 
income secured for 10 years. Since purchase in July 2014, the property has 
returned 19.0 per cent, principally as a result of increased capital value due 
to inward yield movement. 
 
The Company also acquired, an office building, Park View House, The Ropewalk, 
Nottingham, for GBP3.25 million, reflecting a net initial yield of 7.1 per cent. 
The building extending to 16,000 square feet on three floors with car parking, 
had been recently refurbished to a high standard and was let on ten year terms 
without breaks, to Gateleys, Mazzars and AIB. 
 
Since the merger with ISIS Property Trust, and as part of the strategy of 
disposing of small non-core holdings, the Manager has sold a further four 
properties during this last financial year. Three retail properties in 
Southend, Brighton and Rochdale were sold for a total of GBP4.0 million, and a 
further vacant office building in Marlow was sold for GBP1.7 million. 
 
With an improvement in the occupational demand for property, the Company has 
achieved a good success rate in new lettings and lease renewals. Over the 
financial year a number of vacant units have been let, or leases renewed. These 
include the key industrial lettings in Bracknell and Colnbrook and a 
refurbished floor in 14 Berkeley Street, let for five years at a new rental 
equating to GBP92.25 per square foot. At 30 June 2015, the vacancy rate across 
the portfolio was down to 3.3 per cent, of rental value, which compared with 
5.7 per cent as at June 2014. 
 
New property acquisitions and re-gearings of leases to protect and enhance 
income streams and add value to the portfolio have resulted in an average 
weighted unexpired lease term of 7.7 years (to include breaks where 
appropriate). 
 
Borrowings 
 
In line with the Group's Investment Policy, gearing is kept at prudent levels 
and the net level of borrowings at the year-end was 29.7 per cent, a level with 
which the Manager is comfortable. 
 
With the existing loan facility due to expire in January 2017, the Group has 
looked into opportunities to refinance early and take advantage of the low 
rates of interest currently achievable in the market. As explained in more 
detail in the Chairman's Statement, we are currently well advanced on agreeing 
terms to refinance through a new long-term GBP90 million term loan facility with 
Canada Life Investments and a new revolving GBP20 million credit facility with 
Barclays Bank plc. 
 
 
Outlook 
 
The Company believes that the property portfolio is well positioned and well 
balanced across the regions and the sectors to deliver sound returns and be 
resilient to market adjustments over the next few years. The Company will 
continue to dispose of the smaller, and non-core assets into a market which is 
receptive to such assets. At the same time, the Manager will seek investment 
opportunities that deliver sound returns for the portfolio but will remain 
selective in its acquisition strategy, whilst a significant weight of money 
competes for commercial property assets. 
 
If the economy performs in line with consensus forecasts, we believe that 
property will continue to deliver positive total returns, although performance 
may be front-loaded. There are uncertainties in Europe, the US and China and as 
the UK referendum on EU membership approaches, this could lead to investors 
delaying decisions until the result is known. The scope for further yield 
compression may be limited once the UK authorities act to raise official 
interest rates and property performance is likely to become more reliant on 
rental growth and the income return. We continue to believe in the importance 
of sound stock selection and that the protection and enhancement of the income 
stream will remain key in delivering performance. 
 
 
 
All enquiries to: 
Ian McBryde 
Scott Macrae 
F&C Investment Business Limited 
Tel: [phone] 
 
The Company Secretary 
Northern Trust International Fund Administration Services (Guernsey) Limited 
PO BOX 255 
Trafalgar Court 
Les Banques 
St Peter Port 
Guernsey GY1 3QL 
Tel: [phone] 
 
 
 
 
 
 
 
 
                    F&C UK Real Estate Investments Limited 
 
                Consolidated Statement of Comprehensive Income 
 
                                                   Year ended 30      Year ended 
                                                       June 2015    30 June 2014 
 
                                                           GBP'000           GBP'000 
 
Revenue 
 
Rental income                                             18,932          19,603 
 
Total revenue                                             18,932          19,603 
 
Gains on investment properties                            31,665          21,253 
 
                                                          50,597          40,856 
 
Expenditure 
 
Investment management fee                                (1,974)         (1,707) 
 
Expenses of merger                                             -            (32) 
 
Other expenses                                           (1,929)         (1,697) 
 
Total expenditure                                        (3,903)         (3,436) 
 
Net operating profit before finance costs                 46,694          37,420 
 
Net finance costs 
 
Interest receivable                                           15              49 
 
Finance costs                                            (5,955)         (6,016) 
 
                                                         (5,940)         (5,967) 
 
Net profit from ordinary activities before                40,754          31,453 
taxation 
 
Taxation on profit on ordinary activities                  (163)           (540) 
 
Profit for the year                                       40,591          30,913 
 
Other comprehensive income to be reclassified to 
profit or loss in subsequent periods 
 
Net gain on cash flow hedges, net of tax                   2,649           5,198 
 
Total comprehensive income for the year, net of           43,240          36,111 
tax 
 
Basic and diluted earnings per share                       17.5p           14.4p 
 
 
All items in the above statement derive from continuing operations. 
All of the profit for the year is attributable to the owners of the Company. 
 
 
 
                    F&C UK Real Estate Investments Limited 
 
                          Consolidated Balance Sheet 
 
                                                           30 June 2015    30 June 2014 
                                                                  GBP'000           GBP'000 
 
Non-current assets 
 
Investment properties                                           331,874         295,387 
 
Current assets 
 
Trade and other receivables                                       6,861           6,061 
 
Cash and cash equivalents                                         4,656          16,773 
 
                                                                 11,517          22,834 
 
Total assets                                                    343,391         318,221 
 
Non-current liabilities 
 
Interest-bearing bank loan                                    (102,986)       (109,930) 
 
Interest rate swap                                              (1,929)         (4,776) 
 
                                                              (104,915)       (114,706) 
 
Current liabilities 
 
Trade and other payables                                        (6,912)         (6,110) 
 
Income tax payable                                                 (77)           (377) 
 
Interest rate swap                                              (4,658)         (4,459) 
 
                                                               (11,647)        (10,946) 
 
Total liabilities                                             (116,562)       (125,652) 
 
Net assets                                                      226,829         192,569 
 
Represented by: 
 
Share capital                                                     2,339           2,309 
 
Special distributable reserve                                   170,620         170,704 
 
Capital reserve                                                  53,678          22,013 
 
Other reserve                                                       192         (2,457) 
 
Equity shareholders' funds                                      226,829         192,569 
 
Net asset value per share                                         97.0p           83.4p 
 
 
 
                    F&C UK Real Estate Investments Limited 
 
                  Consolidated Statement of Changes in Equity 
 
For the year ended 30 June 2015 
 
 
                                       Special 
                          Share  Distributable Capital   Other  Revenue 
                        Capital        Reserve Reserve Reserve  Reserve    Total 
                          GBP'000          GBP'000   GBP'000   GBP'000    GBP'000    GBP'000 
 
 
At 1 July 2014            2,309        170,704  22,013 (2,457)        -  192,569 
 
 
Profit for the year           -              -       -       -   40,591   40,591 
 
Other comprehensive           -              -       -   2,649        -    2,649 
gains 
 
Total comprehensive           -              -       -   2,649   40,591   43,240 
income for the year 
 
Issue of ordinary            30          2,608       -       -        -    2,638 
shares 
 
 
Dividends paid                -              -       -       - (11,618) (11,618) 
 
 
Transfer in respect of        -              -  31,665       - (31,665)        - 
gains on investment 
properties 
 
 
Transfer to revenue           -        (2,692)       -       -    2,692        - 
reserve 
 
 
At 30 June 2015           2,339        170,620  53,678     192        -  226,829 
 
 
For the year ended 30 June 2014 
 
 
                                       Special 
                          Share  Distributable Capital   Other  Revenue 

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                        Capital        Reserve Reserve Reserve  Reserve    Total 
                          GBP'000          GBP'000   GBP'000   GBP'000    GBP'000    GBP'000 
 
 
At 1 July 2013            2,081        153,929     760 (7,655)        -  149,115 
 
 
Profit for the year           -              -       -       -   30,913   30,913 
 
Other comprehensive           -              -       -   5,198        -    5,198 
gains 
 
Total comprehensive           -              -       -   5,198   30,913   36,111 
income for the year 
 
Issue of ordinary           228         17,955       -       -        -   18,183 
shares 
 
 
Dividends paid                -              -       -       - (10,840) (10,840) 
 
 
Transfer in respect of        -              -  21,253       - (21,253)        - 
gains on investment 
properties 
 
 
Transfer to revenue           -        (1,180)       -       -    1,180        - 
reserve 
 
 
At 30 June 2014           2,309        170,704  22,013 (2,457)        -  192,569 
 
 
 
 
                    F&C UK Real Estate Investments Limited 
 
                       Consolidated Cash Flow Statement 
 
                                                             Year ended      Year ended 
                                                           30 June 2015    30 June 2014 
 
                                                                  GBP'000           GBP'000 
 
Cash flows from operating activities 
 
Net profit for the year before taxation                          40,754          31,453 
 
Adjustments for: 
 
     Gains on investment properties                            (31,665)        (21,253) 
 
     (Increase)/decrease in operating trade and other             (800)             301 
receivables 
 
     Increase/(decrease) in operating trade and other               802            (71) 
payables 
 
     Interest received                                             (15)            (49) 
 
     Finance costs                                                5,955           6,016 
 
                                                                 15,031          16,397 
 
     Taxation paid                                                (462)           (636) 
 
Net cash inflow from operating activities                        14,569          15,761 
 
Cash flows from investing activities 
 
Purchase of investment properties                              (10,054)        (18,812) 
 
Capital expenditure                                               (403)            (48) 
 
Sale of investment properties                                     5,635          15,789 
 
Interest received                                                    15              49 
 
Net cash outflow from investing activities                      (4,807)         (3,022) 
 
Cash flows from financing activities 
 
Shares issued (net of costs)                                      2,638          18,183 
 
Dividends paid                                                 (11,618)        (10,840) 
 
Bank loan interest paid                                         (1,202)         (1,467) 
 
Payments under interest rate swap arrangement                   (4,697)         (4,617) 
 
Bank loan repaid                                                (7,000)         (3,000) 
 
Net cash outflow from financing activities                     (21,879)         (1,741) 
 
Net (decrease)/increase in cash and cash equivalents           (12,117)          10,998 
 
Opening cash and cash equivalents                                16,773           5,775 
 
Closing cash and cash equivalents                                 4,656          16,773 
 
 
 
                    F&C UK Real Estate Investments Limited 
 
Principal Risks and Risk Management 
 
The Group's assets consist of direct investments in UK commercial property. 
Its principal risks are therefore related to the commercial property market in 
general, but also the particular circumstances of the properties in which it is 
invested and their tenants.  More detailed explanations of these risks and the 
way in which they are managed are contained under the headings of Credit Risk, 
Liquidity Risk, Interest Rate Risk and Market Price Risk.  The Manager also 
seeks to mitigate these risks through active asset management initiatives and 
carrying out due diligence work on potential tenants before entering into any 
new lease agreements. All of the properties in the portfolio are insured. 
 
Other risks faced by the Group include the following: 
 
  * Market - the Group's assets are comprised principally of direct investments 
    in UK commercial property and it is therefore exposed to movements and 
    changes in that market. 
  * Investment and strategic - poor investment processes and incorrect 
    strategy, including sector and geographic allocations and use of gearing, 
    could lead to poor returns for shareholders. 
  * Regulatory - breach of regulatory rules could lead to suspension of the 
    Group's Stock Exchange listing, financial penalties or a qualified audit 
    report. 
  * Tax efficiency - changes to the management and control of the Group or 
    changes in legislation could result in the Group no longer being a tax 
    efficient investment vehicle for shareholders. 
  * Financial - inadequate controls by the Manager or third party service 
    providers could lead to misappropriation of assets. Inappropriate 
    accounting policies or failure to comply with accounting standards could 
    lead to misreporting or breaches of regulations. 
  * Reporting - valuations of the investment property portfolio require 
    significant judgement by valuers which could lead to a material impact on 
    the net asset value.  Incomplete or inaccurate income recognition could 
    have an adverse effect on the Group's net asset value, earnings per share 
    and dividend cover. 
  * Credit - an issuer or counterparty could be unable or unwilling to meet a 
    commitment that it has entered into with the Group.  Bankruptcy or 
    insolvency may cause the Group's access to cash placed on deposit to be 
    delayed or limited. 
  * Operational - failure of the Manager's accounting systems or disruption to 
    the Manager's business, or that of third party service providers, could 
    lead to an inability to provide accurate reporting and monitoring, leading 
    to a loss of shareholders' confidence. 
 
The Board seeks to mitigate and manage these risks through continual review, 
policy-setting and enforcement of contractual obligations. It also regularly 
monitors the investment environment and the management of the Group's property 
portfolio, and applies the principles detailed in the internal control guidance 
issued by the Financial Reporting Council. 
 
The Board and the Manager recognise the importance of the share price relative 
to net asset value in maintaining shareholder value. The Manager meets with 
current and potential new shareholders, and with stockbroking analysts who 
cover the investment trust sector, on a regular basis. In addition, 
communication of quarterly portfolio information is provided through the 
Group's website. 
 
Financial Instruments and Investment Property 
 
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.  In addition, the Group's financial instruments comprise cash, 
receivables, a bank loan, an interest rate swap and payables. 
 
The Group is exposed to various types of risk that are associated with 
financial instruments.  The most important types are credit risk, liquidity 
risk, interest rate risk and market price risk. 
 
There was no foreign currency risk as at 30 June 2015 or 30 June 2014 as assets 
and liabilities are maintained in Sterling. 
 
The nature and extent of the financial instruments outstanding at the balance 
sheet date and the risk management policies employed by the Group are detailed 
below. 
 
Credit risk 
 
Credit risk is the risk that an issuer or counterparty will be unable or 
unwilling to meet a commitment that it has entered into with the Group. 
 
In the event of default by an occupational tenant, the Group will suffer a 
rental 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 Manager monitors such reports in order to anticipate, and minimise the 
impact of, defaults by occupational tenants. 
 
The Group has a diversified tenant portfolio. The maximum credit risk from the 
rent receivables of the Group at 30 June 2015 is GBP654,000 (2014: GBP520,000). It 
is the practice of the Group to provide for rental debtors greater than three 
months overdue unless there is certainty of recovery. As at 30 June 2015 the 
provision was GBP65,000 (2014: GBP78,000). Of this amount GBP43,000 was subsequently 
written off and GBP5,000 has been recovered. 
 
All of the cash is placed with financial institutions with a credit rating of A 
or above.  Bankruptcy or insolvency 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 Manager would move the cash holdings to another financial 
institution. 
 
The Group can also spread counterparty risk by placing cash balances with more 
than one financial institution.  The Directors consider the residual credit 
risk to be minimal. 
 
Liquidity risk 
 
Liquidity risk is the risk that the Group will encounter in realising assets or 
otherwise raising funds to meet financial commitments.  The Group's investments 
comprise UK commercial property. 
 
Property in which the Group invests is not traded in an organised public market 

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September 29, 2015 02:00 ET (06:00 GMT)