Caledonian Trust PLC Final Results (3378L)

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RNS Number : 3378L

Caledonian Trust PLC

21 December 2018

The information contained within this announcement is deemed by the Company to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014 ("MAR")

21 December 2018

Caledonian Trust PLC

(the "Company" or the "Group")

Audited Results for the year ended 30 June 2018

Caledonian Trust PLC, the Edinburgh-based property investment holding and development company, announces its audited results for the year ended 30 June 2018.

Enquiries:

 
 
Caledonian Trust plc 
Douglas Lowe, Chairman and Chief Executive Officer  Tel: [phone] 
Mike Baynham, Finance Director                      Tel: [phone] 
 
 
Allenby Capital Limited 
 (Nominated Adviser and Broker) 
Nick Athanas                                        Tel: [phone] 
 Alex Brearley 
 
 

CHAIRMAN'S STATEMENT

Introduction

The Group made a pre-tax profit of GBP2,886,000 in the year to 30 June 2018 compared with a profit before tax of GBP1,040,000 last year. The profit per share was 24.49p and the NAV per share was 186.2p compared with a profit of 8.83p and NAV per share of 161.71p last year.

Income from rent and service charges increased to GBP416,000 from GBP410,000 in 2017. The sale of the first of the two new homes built at Brunstane resulted in a profit on sale of development properties of GBP273,000 (2017 GBP37,000). Administrative expenses were GBP649,000 (2017 GBP611,000) and interest payable was GBP23,000 (2017 GBP14,000). The increase in the interest charge reflects the increase in base rate on 2 November 2017 and the average base rate for the year was 0.41% compared to 0.27% in the previous year.

Review of Activities

The Group's property investment business is evolving as a result of a prospective significant change to St Margaret's House, our investment property held for development, as discussed below. We continue to hold two high yielding retail parades, and our North Castle Street office, and four central Edinburgh garage investments. In September 2017 we recovered GBP266,000, a part of the purchase price retained on the sale of Baylis Road, London SE1, in 2012 against potential exceptional costs arising from building adjacent to the London Underground Northern line.

The Group's management resources are almost wholly engaged in property development, or development prospects for investment properties, including development necessary to secure consents, and on the provision of infrastructure for development plots. Until recently our developments have been delayed by poor market conditions, except to a lesser extent for "starter" homes, almost certainly resulting from the relatively poor performance of the Scottish economy, which has been affected by the contraction of the oil industry and by continuing political uncertainty. In 2015 and 2016 Scottish house prices were little unchanged but rose 3.1% in 2017 with Edinburgh prices rising a remarkable 9.0%, largely due to Edinburgh's continuing economic growth which contrasts with Scotland's poor performance and where in the last 10 years growth has only been just over half the UK's where over the three years from 2015 to 2017 growth has only been about 3.0% compared to 8.0% in the UK. Thus, Edinburgh is to Scotland as London is to England.

Given these propitious circumstances, we have concentrated on Edinburgh where our largest property, St Margaret's House, a 92,000ft(2) 1970s multi-storey building, is located on the A1 about one-mile east of the Parliament and Princes Street, and adjacent to Meadowbank Stadium. Fortunately, the attraction of St Margaret's House has been increased by the prospective redevelopment of Meadowbank Stadium immediately to the north and west of St Margaret's House but on the other side of the main east coast rail line. Whilst finalising our development plans we received several unsolicited approaches, two of which for exceptional reasons we were prepared to consider, and in early February 2018 we agreed a conditional sale for St Margaret's House for a cash consideration of GBP15 million, a large increase over the June 2017 value. Details of the proposed sale of St Margaret's House were announced on 5 February 2018. The long planning process inevitably results in a lengthy period until completion, which also requires vacant possession, and the whole process is now expected to complete in 2020. An earlier completion, in accordance with the previously announced timeline, is possible if the conditions are purified or a later completion date may be agreed if there is an unavoidable planning delay. We will continue to update shareholders at the appropriate time.

Pending redevelopment, since November 2010 St Margaret's House has been let at a nominal rent, presently just over GBP1 per ft(2) of occupied space, to a charity, Edinburgh Palette, who have reconfigured and sub-let all the space to over 200 "artists" and "artisans" and "galleries". Last year, before the announcement of the conditional sale, we were negotiating a small rent increase, but in view of Edinburgh Palette's likely costs of finding and adapting, if necessary, new premises and of moving existing or of finding new tenants, we have not pursued this increase.

I am pleased to report that Edinburgh Palette have been successful in gaining not one but two new and very different premises. The first are at 525 Ferry Road EH5 2FF in north central Edinburgh just west of the Fettes College's playing field, and near the Western General Hospital where a modern 125,000ft(2) Grade A office building has been secured on favourable terms. This central site is served by eight bus routes and has 125 car parking spaces, 83 single offices and numerous large open plan spaces.

The second, quite different premise, is the Stanley Street Container Village lying on an area of ground just north of Portobello Golf Course and about half a mile from the A1 and Brunstane Rail Station. Edinburgh Palette expect to provide "community services" and 50 - 60 single unit studios primarily for local residents currently leasing space at St Margaret's House and for other creative groups and individuals. The Container Village is expected to open in the summer next year.

Both new premises are slightly different to St Margaret's House and together cover a wider spectrum of the market with Ferry Road quickly attracting tenants. I expect a gradual movement from St Margaret's House elsewhere, although at present this movement is being largely replaced by a continuing influx of new tenants, a "churn" I expect to continue until the lease at St Margaret's House is determined following the purification of the conditional sale. The car parking spaces continue to be let to Registers of Scotland, but the release of 6 spaces to allow more space for disabled visitors was agreed. The rent has been increased from GBP1.20 to GBP2 per space per day, modest by Edinburgh's standards and the current parking rent is GBP52,000 per year. The many years of favourable terms have allowed Edinburgh Palette to use their very considerable skills to establish and develop an exemplary public service and opportunity for creative artists whose work enhances Edinburgh's reputation for creativity and facilitated the expansion of this concept.

Development at Brunstane continues slowly, but now very satisfactorily. Our original purchase was of five Georgian terraced houses, open ground to the south of these houses, a large listed Georgian steading and two adjacent acres of land, all part of Brunstane Home Farm all of which was in the Green Belt, but is in east Edinburgh just off the A1 and immediately adjacent to Brunstane railway station (with services on the Borders Railway between Tweedbank and Edinburgh (eight minutes from Brunstane) and on to South Gyle and Fife. We have refurbished and sold four of these terraced houses over the last few years for about GBP280/ft(2) and a mid-terraced house re-sold for over GBP350/ft(2) last year while the end terrace house adjacent to the steading currently under development re-sold for GBP290,000 (equivalent to GBP360/ft(2) ) in July 2018.

On the open ground south of these houses we secured consent in 2014 to construct two new semi-detached houses of modern construction but faced with stone which, together with the wood to the west, completed a traditional farm courtyard. In 2016 we gained consent to extend the easterly gable and add a sun room to the west elevation, increasing the total area to nearly 3,000ft(2) and development started in August 2016 for completion the following Spring, but shortly before then the builder, a medium sized contractor/developer, went into liquidation. A replacement was engaged quickly, but the funds for utilities paid to the original contractor had been misappropriated and the inevitable delay in securing the utilities delayed the completion by several months. The houses were marketed in November 2017 at over GBP290/ft(2) , inviting offers over GBP435,000 and GBP445,000 respectively. They attracted immediate interest, and, following the first four viewings, we received four notes of interest, and three offers in December 2017. We put the houses under offer at above the asking prices for completion in the spring of 2018. The westerly house sale completed in April 2018 and is reflected in this year's accounts, but the offerer for the other house was in an "chain" and the offer completed post year end in August 2018. The timeous sale of the western house yielded GBP345/ft(2) .

We have consent to convert the listed stone-built Georgian steading, to refurbish and extend a house attached to it to form ten individually designed houses, comprising 15,000ft(2) with a development value of over GBP4.5 million. The houses have been extensively redesigned, principally to provide contemporary style large dining/living spaces, more en-suite bathrooms and better fenestration, together with lower construction costs. Work on the stonework for the current phase of five of these ten houses, the "Horse Mill" phase, which comprises the five stone-arched cart sheds, the single storey cottage, the main barn and a hexagonal Horse Mill, a notable feature, was largely completed late last year, and a contractor was appointed in the late summer who started on site in early November.

Fortunately, this interval has been put to good use, as further improvements to the design were incorporated into the specification, avoiding contract changes. The development has a Gross Development Value of GBP2.4 million and has very recently been funded by a construction loan peaking at GBP1.4 million. The loan with complex covenants and security took several months to negotiate, and, while very competitive in market terms, is very expensive compared to loans before the current financial restrictions. Prior to accepting this loan we had assessed the outline terms offered by more than 10 prospective lenders, some in considerable detail. We hope to establish a longer-term relationship with the funder whose final terms are similar to the indicative terms.

The five house Horse Mill phase forms a courtyard whose easterly boundary forms the westerly elevation of the next courtyard of five houses, the "Steading" phase. To create the necessary uniformity for marketing this natural stone elevation will be built before the Horse Mill phase is marketed. We have used the period before starting the Horse Mill contract to gain consent to demolish and rebuild the Steading phase barn which allows fenestration and the internal layout to be improved.

In the Steading phase of five houses, only this west barn will require to be built using recycled stone and other four houses will be "new build", giving a similar high-quality product to the Horse Mill phase, but at a much lower construction cost. The Steading phase costs will also be reduced as the services already provided can be extended at marginal cost. The Steading phase is 7,750ft(2) and the Board expect it to have a Gross Development Value of GBP2.75m.

East of the "Steading" lies a derelict farmhouse and piggeries and beyond them an open area, all of which properties were abstracted from the Green Belt in the Edinburgh Local Development Plan adopted in November 2016 and now form the "Stackyard" phase. The appearance, approach and access to this phase will be greatly improved by the rebuilding of the barn bounding the Horsemill phase. Proposals for the development of Stackyard phase have been accepted in principle, and it is suitable for a development of 19 new-build houses over 26,750ft(2) . East of our Stackyard phase the "New Brunstane" Master Plan has been approved for an extensive residential development for which ground investigations have been completed, and part of the site is now under offer.

The third of our Edinburgh sites is in Belford Road, a quiet cul-de-sac less than 500m from Charlotte Square and the west end of Princes Street, where we have taken up both an office consent for 22,500ft(2) and fourteen cars and a separate residential consent for twenty flats over 21,000ft(2) and twenty cars. This site has long been considered "difficult". To dispel this myth we have created a workable access to the site; cleared collapsed rubble and soil, exposed the retaining south wall and the friable but strong bedrock in parts of the site; and completed an extensive archaeological survey. In consequence the extent of those works is much reduced compared to earlier estimates. Work was delayed for many months in negotiating the agreement to divert a small public sewer currently running through the site. The neighbouring building is now vacant, allowing us more easily to demolish certain structures on our land abutting it, so widening the cleared site and the access, and this work has now started. We propose to obtain variations of the existing residential consent to optimise layouts, features and finishes for the current market.

The value of the town houses and flats that would be developed has increased considerably over the last few years, especially so for a city centre site in a cul-de-sac by the Water of Leith. Until now the low base value of the site was an obstacle to obtaining funding at the current "normal" rates, but such a scheme now seems possible in view of the potential development profit.

At Wallyford, Musselburgh, we have implemented a consent for six detached houses and four semi-detached houses over 12,469ft(2) . The site lies within 400m of the East Coast mainline station, is near the A1/A720 City Bypass junction and is contiguous with a completed development of houses. Taylor Wimpey have nearly completed the construction of over 500 houses nearby but on the other side of the mainline railway, which are selling at prices of that have risen to around GBP250/ft(2) for smaller 3-bedroom end-terraced houses and GBP230/ft(2) for larger detached houses. On the southern boundary of Wallyford a very large development of 1,050 houses has commenced at St Clement's Wells. On the eastern side Persimmon have sold 37 houses and have only four currently available with starting prices of GBP200,000 or GBP240/ft(2) , for three-bedroom semi-detached houses. On the western side of St Clement's Wells Barratts are building 245 three - and four-bedroom new houses with three-bedroom detached houses selling for GBP298,000 or GBP240/ft(2) and terraced houses for GBP200,000 or GBP235/ft(2) . The Master Plan for this development includes a school, now largely complete, a supermarket and many civic amenities and is subject to a proposal to expand St Clement's Wells to 1,450 houses by incorporating land immediately east. The environment at Wallyford, formerly a mining village, but well located and on the fertile East Lothian coastal strip, is rapidly becoming another leafy commuting Edinburgh suburb.

The Company has three large development sites in the Edinburgh and Glasgow catchments of which two are at Cockburnspath, on the A1 just east of Dunbar. We have implemented the planning consent on both the 48-house plot northerly Dunglass site and on the 28-house plot, including four affordable houses, southerly Hazeldean site. The Dunglass site is fifteen acres of which four acres is woodland, but the non-woodland area could allow up to a further thirty houses to be built if the ground conditions, which currently preclude development, could be remediated.

These two sites are one mile east of the East Lothian/Scottish Borders boundary. In the year to September 2017 East Lothian prices rose by 5.3% and by a further 7.2% by September 2018. Avant Homes are building just east of Dunbar at Newtonlees where three-bedroom detached houses are priced at GBP235,000 or GBP252/ft(2) and four-bedroom houses with integral garage at GBP343,000 or GBP264/ft(2) . Conversely, the market in the Scottish Borders is currently depressed as prices fell 0.1% in the year to September 2018. However, as Cockburnspath is on the eastern edge of the Lothian Coastal plain before the Lammermuir Hills dip into the sea and where the A1 becomes largely single carriageway, and only nine miles from the Main line rail station at Dunbar, it is much more closely aligned with East Lothian than with the Scottish Borders. Any further improvement in market conditions would allow profitable development of those parts of the sites requiring only minimal infrastructure.

The third large development site is only seven miles from central Glasgow at Gartshore, Kirkintilloch (on the Union Canal), East Dunbartonshire, and comprises the nucleus of the large estate previously owned by the Whitelaw family. It includes 120 acres of farmland, 80 acres of policies and tree-lined parks, a designed landscape with a magnificent Georgian pigeonnier, an ornate 15,000ft(2) Victorian stable block, three cottages and other buildings and a huge walled garden. Gartshore is near Glasgow, two miles from the M73/M80 junction, seven miles from the M8 (via the M73) and three miles from two separate Glasgow/Edinburgh mainline stations and from Greenfaulds, a Glasgow commuter station. Gartshore's central location, its historic setting and its inherent amenity identify it as a natural site for development. To make the best use of these attributes, proposals have been prepared for a village of several hundred cottages and houses together with local amenities, all within the existing landscape setting. This development would complement our separate proposals for a high-quality business park, including a hotel and a destination leisure centre, all situated in mature parkland. Representation to, and discussions with, East Dunbartonshire Council continue from whom we seek support for a joint promotion of the site and an allocation for development in the next Local Plan. One of the stables has been refurbished as an exhibition and visitor centre in order to provide an on-site nucleus for Gartshore's promotion but its opening continues to be delayed by necessary external repairs to the stable block. In the interim we expect to hold an exhibition in the recently refurbished historic Council's Chambers next year. The next Local Plan is due to be published in 2022, although such plans are often delayed, and we will work closely with the East Dunbartonshire Council to gain suitable allocations.

The company owns fourteen rural development opportunities, nine in Perthshire, three in Fife and two in Argyll and Bute, all of which are set in areas of high amenity where development is more controversial and therefore subject to wider objection to which Councillors, now elected by proportional representation, are increasingly sensitive especially as such small developments, outwith major housing allocations, may not merit high priority. Thus, gaining such consents is tortuous, although such restrictions add value. Nevertheless, we have successfully promoted many sites through this difficult planning process. In general, the rural housing market has not been experiencing the rapid growth taking place in Edinburgh and Glasgow and in their catchment areas over the last two years with values in some regions such as Perth and Kinross, Moray, Angus, Argyll and Bute and Highland declining in real terms. Accordingly, no immediate investment is proposed in the rural portfolio, except to maintain existing consents or to endure them.

In Perthshire, at Tomperran, a 34-acre smallholding in Comrie on the River Earn, we hold a consent for twelve detached houses totalling over 19,206ft(2) which has been endured by the demolition of the farm buildings. West of this site, nearer Comrie, we hold a consent for a further thirteen houses on our adjoining two-acre area, previously zoned for industrial use, on which the S75 Agreement has recently been signed. We expect to gain consent to change the current terrace of four houses into three detached and two semi-detached houses. In total the twenty-five new houses covering these two areas will occupy over 33,912ft(2) . The original farmhouse, currently let, will remain intact within the development.

At Chance Inn farm steading we hold a consent for ten new houses over 21,831ft(2) following acceptance of our proposals for the mandatory environmental improvements. Chance Inn, part of the Loch Leven catchment area, is subject to very strict regulations governing the phosphate flows into the loch. New developments are required to effect a reduction in the total phosphate emissions to the loch such that, for every 1.00 grams of phosphate that a new development is deemed to discharge, 1.25 grams of phosphate has to be eliminated. New developments with suitable treatment discharge very low levels of phosphate but, patently, do not effect an overall reduction. In order to allow our developments at Chance Inn to proceed we have negotiated for five years with four neighbouring houses to effect the necessary reductions. We have recently made the final connection, bringing the total cost of emission reduction to GBP125,000, so purifying this condition. In the summer we demolished an existing farm building so enduring the consent for the 10 houses. When we sold the Chance Inn farmhouse we retained land in the former garden on which we gained consent for two new houses of 2,038ft(2) and 2,080ft(2) . One of these two plots was sold in October 2016 for over GBP100,000 together with a small paddock for GBP34,000. Work on this new house is progressing well and we intend to market the other farm house plot in 2019. We hold sufficient land next to the farm steading to allow the sale of similar paddocks to purchasers of all the new houses.

Also in Perthshire, nearby at Carnbo, on the A91 Kinross to Stirling road, the Local Plan includes within the village settlement the paddock which we retained when we sold the former Carnbo farmhouse. Based on this new Plan consent was issued on 29 July 2015 for the development of four houses over 7,900ft(2) in the paddock. The planning application was first registered by the planning authority on 26 June 2008, seven years earlier! Earlier this year we undertook the archaeological works which are an essential pre-condition of the planning consent and so endured the consent.

Work on our other Perthshire sites is restricted to improving marketing and to maintaining or enduring consents. At Strathtay we have endured all consents gained in 2011 for two large detached houses totalling over 6,040ft(2)

and for a mansion house and two ancillary dwellings over 10,811ft(2) in a secluded garden and paddock near the River Tay. The proposal last year to move services to permit the formation of entrances on to the public road in order to allow marketing of the two large house plots was delayed and should now be carried out in 2019. At Myreside Farm, in the Carse of Gowrie between Perth and Dundee, after five planning attempts and appeals since our first application in 2007 and, following guidance from the planning department, we finally gained approval four years ago for five new-build houses over 8,531ft(2) , adjacent to the existing listed farmhouse which is let on a short-assured lease. The redevelopment has been frustrated by the high cost entailed in using reclaimed natural stone. However, we will renew the existing consent in 2019 when we will seek to redesign it to reduce the use of natural stone, as almost all the stone, used only for farm buildings and never of high quality, has delaminated further. At Ardonachie, just off the A9 at Bankfoot, we have started demolition of the existing steading, so enduring the consent for ten houses over 16,493ft(2) . At Balnaguard a 1.77-acre brown field site, eight miles from the A9 at Dunkeld and within Tay valley, we hold a consent for nine houses over 16,254ft(2) . The existing buildings on the site were demolished in the spring so enduring this consent. Further north the small site at Camghouran on Loch Tummel has consent for three units on 2,742ft(2) for which the consent is endured. When rural market conditions improve this site will be marketed.

The opening of the Queensferry Crossing and the completion of the associated roadworks have improved the desirability of all our development sites north of the Forth estuary. Further north the existing A9 dual carriage is being extended for about six miles from Luncarty (four miles north of Perth) to near Birnam ("wood to Dunsinane hill" of Macbeth fame!), giving an uninterrupted dual carriageway to our site at Ardonachie where we have planning permission for ten units totalling over 16,493ft(2) . The extension of the dual carriageway will also result in our sites at Balnaguard (16,254ft(2) ) and Strathtay (6,060ft(2) and 10,811ft(2) ) being only about ten miles from the dual carriageway to Perth.

Work on our three sites near St Andrews, Fife has been suspended pending an improvement in markets. The large expansion of the University of St Andrews near the River Eden at Guardbridge marks a significant move away from the narrow confines of St Andrews which I expect to improve the local housing market. We have recently renewed our consent for nine units over 19,329ft(2) at Larennie, by Peat Inn, only 7 miles from St Andrews.

Ardpatrick is our largest rural development site, a peninsula of great natural beauty with six miles of sea frontage on West Loch Tarbert, but less than two hours' drive from Glasgow and the Central Belt. The long-term prospects for residential property are excellent, but their realisation continues to require investment, skill and patience to rectify the cumulative effect of severe prolonged neglect. Fortunately, the original design and construction of most of the period property was of a very high standard and where damaged is recoverable. Repairs to some of Ardpatrick's buildings, farm sheds and landscape caused by the exceptional storms in recent years continue to be delayed by even more urgent work. However, significant repairs continue to be effected to roads, culverts, ditches, drainage, field accesses, dykes, and fences and the very late spring in 2018 has validated the repairs achieved and highlighted those in train or still to be made. Frustratingly, unlike most repairs, the majority of these achieved are not obvious and the benefits not readily appreciated, but comparison of the present conditions of the landscape with previous photographs reveals the extent of the recovery. An important consequence of this recovery is that a much higher percentage of the property is maintained in a higher more valuable grade of agricultural land, and should retain higher EU or equivalent UK support, and the stock carrying capacity of the land is reinstated.

The prospect for forestry is being investigated but significant areas are handicapped by terrain or by access or by topography. However with high timber prices earlier this year we have applied for a felling licence for the 20 hectares of commercial forest. Unfortunately the necessary maintenance of this forest in its early years was neglected by the former owners, reducing its value, but if recent prices are maintained the harvested value would be over GBP100,000. The considerable mandatory replanting cost may be mitigated by extending the replanting and this is being considered.

Ardpatrick development possibilities fall into two groups. Prior to the 2009 North Kintyre Landscape Study relatively few sites were deemed suitable for development. Before that study we gained consent to change the use of "Keepers", a bothy situated amongst the Achadh-Chaorann group of cottages, and to extend that building to form a three-bedroom house complete with stone outhouses conditional on providing a new access and drive. We also obtained consent to develop Oak Lodge, a two-storey 1,670ft(2) new building on the Shore Road. In spite of being withdrawn from the market this continued to attract viewers including one from a special purchaser to whom it is under offer a little below the asking price of GBP125,000.

We have gained several consents in areas designated in the Landscape Capacity Study. In 2011 we secured consent for two one-and-a half storey houses each of 2,200ft(2) at the north end of the estate on the B8024 Kilberry Road and a road access has recently been formed to endure these two consents. Nearby on the east side of the UC33 Ardpatrick Road, bordering the Cuildrynoch Burn, we held an outline consent for two houses on the Dunmore schoolhouse field and on the west side of the UC33, the old Post office garden, an outline consent for a detached house in a woodland setting and we will seek to upgrade all three house sites to full consents.

Since the 2009 study the number of consents had risen markedly and at least twenty plots are available between Ardpatrick to nearby Tarbert. Economic realisation of new sites is likely to be slow in these circumstances, especially with the infrastructural impositions at Ardpatrick.

The poor market conditions are exacerbated by the cost of upgrading the inadequate infrastructure. It is not difficult to envisage that second homes, holiday homes and relocation/retirement homes would be amongst the last to recover following a depression, a recovery now slowed by the tax impositions on second homes and on buy-to-lets. Despite this background it is encouraging to note that one or more new houses continue to be built each year and others renovated in the Tarbert to Ardpatrick corridor, further improving the area and reinforcing it as a centre properly renowned for its landscapes, seascapes and wildlife. In any recovery Ardpatrick's pre-eminent position will continue to command a premium, especially with its extensive coastline. Until then further development will continue to be limited and the properties put on a care and maintenance basis, possibly with a view to establishing short-term lettings where conditions allow.

Economic Prospects

En France en vacances à Sète. The intriguing history of Sète, a small port transformed by the 17(th) century Canal Royal en Languedoc provides an early insight to the evolution of political economy in France, comprising a mingling of dirigiste and mercantilist policies. The long-standing French philosophy, now woven into the fabric of the EU, sets it apart from the UK, creating the political differences that accompany economic differences. It is the outcome of the interplay of these differences that is the chief determinant of the economic prospects of the UK today. In many negotiations the greatest uncertainly often erupts towards the conclusion - in the Kasbah, traditionally, one walks away, pursued by the relenting trader - and in this instance the uncertainty is compounded by the very great diversity of objectives within the UK, resulting in the current extensive range of possible outcomes. Any analysis of all the likely outcomes and their effects is so complex as to have little meaning, except for a broader and more important analysis of the difference between short-term and long-term effects. As I conclude, the outcome has potentially dramatic short-term effects, but the long-term effects are uncertain, and generally overstated.

The political basis for the Canal Royal en Languedoc represents a stream of thought that flows through French political history like the écluses of the long winding Canal. A joint venture between Louis XIV, the "Sun King", and Pierre-Paul Riquet, Baron de Bonrepos, a landowner and salt-tax collector in Languedoc, constructed the canal which joined the river Garonne, near Toulouse, to the Etang de Thau, a protected partial enclosure of the Mediterranean sea bordered on the south by Sète. Given its obvious economic political and military advantages, the canal had been long in contemplation - by the Roman Emperors, Augustus and Nero, Charlemagne, and previous French Kings, including Francois I, who brought Leonardo da Vinci to examine a route in 1516, but both the scale of the project and the technical problems were immense. When Riquet had constructed it, completing in 1681, shortly before his death, it had occupied 12,000 workers for fifteen years.

The overriding technical problem was the need to pass over the watershed, the 189m Seuil de Naurouze, away from which the water flowed and to which the canal needed a constant supply of water to replace the 90 million cubic metres of water necessary each year to feed both sides of the watershed. Piquet solved the problem by tapping higher more consistent water sources 25 km away. To provide a reliable even flow reservoirs were constructed, giving reserves of eight million cubic metres, principally at the Bassin de Sant-Ferréol, where a dam 780m wide, 32m high, and 140m thick at the base was constructed, the largest individual construction item in the whole Canal project. The Canal Royal, a truly momentous undertaking, and, apart from Louis XIV's palace at Versailles, the largest construction project in France, achieved many purposes. Ricard, seeking royal patronage for the canal, wrote, "the Straits of Gibraltar will cease to be an absolutely necessary passage so that income of the King of Spain in Cadiz will be reduced and those of our King rise especially on farm inputs and outputs of goods ... the rights received from the said canal will rise to immense sums ... and a thousand new businesses...". It is significant that Riquet was a "salt tax" collector, or ferme-général for Lanquedoc-Roussillon, a large region suffering from an agricultural depression, and experiencing sectarian strife, which opposed the King's dirigiste policy of centralising his control. The increased economic activity due to greatly reduced from transport costs of the canal, together with less political instability were likely to increase greatly the tax "harvest" to be shared by the collector and the King. In Languedoc in 1677 it was estimated that 33% of all such tax collected was paid to the "local notables", and a further 19% spent under their "direction": a rich harvest.

The project was authorised by Jean-Baptiste Colbert, Cardinal Jules de Mazarin's protégé and successor, to counter foreign trade advantage, especially Spanish and Dutch, and to foster the principle of absolutisme, or concentration of power in the Sovereign and away from the nobility's fiefdom by increasing prosperity: economic development facilitated political control. The timing of Riquet's proposal in 1661 was propitious. Since the early 1640s Cardinal Mazarin had conducted an extensive diplomatic programme designed to end and to benefit from ending the Thirty Years' War that then engulfed France and virtually all of Western Europe. The causes of the war, were manifold and, like most wars, the war itself inflamed those causes and ignited others. However, Mazarin identified as an important contributing factor to the war the continuing economic decline of the many "German" sovereign or near sovereign states, caused by increased trade restrictions. The river Rhine, flowing from Switzerland through the Empire to the Netherlands, was a natural communication and development corridor, but trade had been increasingly stifled by tolls, "rights" and tariffs imposed by the many regimes, the "river princes", many of whom were on opposing sides in the 30-year war. Even in peace such a fragmented system of common ownership - of the river passage - would naturally give rise to a classic "tragedy of the commons": the benefit of each of the many individuals in raising tariffs eventually leads to the disbenefit of all as traffic falls. Mazarin's analysis of the damage of such fragmentation of their interests is supported by R M Spaulding's "Central Europe History".

"Ironically, one unique element of the Rhine's modern commercial growth preceded and was more important than any of these others, yet remains almost unrecognised: the creation of a single, unified commercial regime to regulate the river and all its commerce as they flowed through several independent sovereign states. Throughout its history, the fragmentation of state authority along the river sharply distinguished the Rhine from other important inland waterways and the international nature of the Rhine continues to set it apart from the world's two other great commercial rivers, the Yangtze and the Mississippi."

The unique problems of fragmented authority along the Rhine were understood by Mazarin who realised that the promotion of and protection of economic development along the river Rhine would increase French influence and in 1642 announced that France, the second most powerful political entity after the Holy Roman Empire, (HRE) would guarantee security subsequent to any peace treaty on the following basis "From this day toward, along the two banks of the Rhine River and from the adjacent provinces, commerce and transport of goods shall be free of transit (sic) for all the inhabitants, and it will no longer be permitted to impose on the Rhine any new toll, open birth right, customs, or taxation of any denomination and of any sort, whatsoever". The injunction included "and from adjacent provinces" indicating an intention to include both principalities on the Rhine and those beyond it, deeper into Germany.

Mazarin's ambitions extended far beyond the Rhine. He had detailed studies prepared of the river traffic systems throughout the HRE: from the Vistula and the Oder in the east, and from the Elbe and the Weser in the west, together with prospective canals between them and also to the Rhine running west through Westphalia to the North Sea. He also had extensive reports on trading opportunities on the Danube which flowed through southern Europe, in order to connect with the eastern trade via the Black Sea and, in support of this grandiose project, identified 28 primary cities for the establishment of state-aided "Houses of Commerce".

Mazarin's vision was of the establishment of a more unified Germany under French protection as the guarantor of the Peace of Westphalia. His wider ambition was for a more influential role for France to be achieved by dirigiste economic policies, and the promotion of trade providing economic benefit in the client political entity, increasing the political dependence on that economic benefit, so reinforcing the role of France, who underwrote the economic benefits - the "guarantor".

The expansion of trade and the closer economic and political integration achieved by the participating states was influential in the significant geopolitical changes the Treaty of Westphalia promoted and represented a triumph of diplomacy for Mazarin and his successor Jean-Baptiste Colbert. In summary the long-term consequences were a diminution in the powers of Hapsburgs in the centre, the Venetians in the south and Anglo Dutch influence in the north and east; and a consolidation of Europe along economic rather than historic and religious axes. Mazarin's and Colbert's plans for Danube / Rhine canal, connecting the Black Sea to the North Sea, had to wait three centuries. The recognition of the immense economic and hence political significance of facilitating trade by reducing barriers and gaining political influence from the subsequent economic improvements achieved was one of the many great achievements of Mazarin and Colbert: one which Colbert surely recognised as he commissioned

this second most important state project in France, the Canal Royal linking the Atlantic at Bordeaux with the Mediterranean at Sète.

The genius of Mazarin and Colbert was to institutionalise a changed basis for political alignment. In place of traditional or feudal loyalty, religious or military compliance, or national expansionism, the shared interests and benefits of trade from such economic cooperation would lead states together in mutual self-interest promoted by Colbert as the "Advantage of the Other". Economic policy to achieve the aim of mutual advantage between and within states was vested in state authority, directing policy and channelling investment. The Schiller Institute's, "The Treaty of Westphalia", says "For Colbert, the most important asset of the common good, and the most powerful enemy of war itself, was the development of infrastructure projects". The Treaty of Westphalia was a great triumph of French diplomacy, the economic benefits reinforcing the acceptance of Colbert's policies that used economic power and "the advantage of the other" to erode and change political allegiances, shaping western Europe for many centuries. For France he liberated "the peoples of Europe from the predatory control of the Austrian Hapsburg Empire and from the central banking role of the Venetian and Dutch "oligopolies"; and he facilitated the beautiful "Canal Royal".

Modified in use, the Canal Royal has survived the centuries, as have policies echoing those of Mazarin and Colbert. "Determined to lay the foundations of an ever-closer union among the peoples of Europe," was the first of eight objectives of the Treaty of Rome, signed on 25 March 1957 by the six states, successors to the ECSC, who "have decided to create a European Economic Community and to this end have designated as their Plenipotentiaries ..." . "Ever closer union", while the first stated of the objectives, was in conjunction with seven others calling for "economic and social progress" "constant improvement" "steady expansion, balanced trade and fair competition", "unity of economies ... reducing differences" "abolition of restrictions on international trade" "solidarity ... ensure the development of their prosperity", and "pooling resources to preserve and strengthen peace".

The UK first attempted to join the EEC in 1961, an application vetoed by Charles de Gaulle, but did join in 1973 and in a referendum in 1975, held as Labour, objecting to the terms, promised a renegotiation and then a referendum, voted 67.2% to stay in the EEC. The referendum was contested on many points but the main thrust of the argument was economic - not ever closer union. The economic arguments for joining were founded on the UK's then erratic "stop-go" economic performance, the rapid growth of the EEC's six founder members, Germany and Italy in particular; and the long-term exclusion from the growing single market. There is little doubt that of all the arguments economic short-term advantage had triumphed over limited political consideration for a very large proportion of the electorate. Indeed, many may not have been aware of the political implications which indeed had been much more clearly set out in the explanatory 1955 Brochure of the European Coal and Steel Community as:-

What? The Community is the first truly European government with federal institutions. It exercises sovereign powers over the coal and steel resources of six nations. In the Community the coal and steel resources of the member nations are pooled in a common market and are subject to common rules administered by common institutions, acting in the interests of the Community as a whole.

Why? to create a single market for the basic commodities of coal and steel throughout the area of the member states;

to raise the standard of living by encouraging an expanding economy through competition;

to ensure the continuing expansion of production by smoothing out maladjustments, notably social ones;

and to take the first step towards a United States of Europe.

With whom? "Our Community is not closed upon itself, but on the contrary open to all who wish to join".

It was signed JEAN MONNET.

The key statements are "truly European government with federal institutions. It exercises sovereign powers"; ... and "to take the first steps towards a United States of Europe".

In the ECSC Monnet, like Mazarin, offers "the common good" while the EEC emphasises economic gain with Colbert's "The Advantage of the Other" as a lure into a political affiliation.

Prominent opponents of the proposal to join the EEC came from diametrically opposed politicians. Enoch Powell, commenting on the referendum outcome, which he had expected to be rejected said:-

"No sir, the British people do not mean it because they have still not been able to credit the implications of being in the Common Market. They still think they will be a nation. They still think they will govern and tax and legislate for themselves. They are mistaken. It's not the fault of many of the pro-marketeers

that they are mistaken, but it is the thing, so incredible to them, that I am not inclined to blame them overmuch. But they will learn ... that this did indeed mean that they will become a province in a new state. Now I do not believe that when that is realised, that it will be assented to".

Tony Benn, writing to constituents before the referendum took place, said:

"In Short, the power of the electors of Britain [through their direct representatives in Parliament to make laws, levy taxes, change laws which the courts must uphold, and control the conduct of public affairs] has been substantially ceded to the European Community whose Council of Ministers and Commission are neither collectively elected, nor collectively dismissed by the British people nor even by the peoples in all the Community countries put together ..." and later "the arguments presented to the British public that year led them to believe that the common Market was a matter of trade only".

In essence short-term obvious attractions of greater economic prosperity proved more attractive than intangible long-term and obscure disadvantage of a little understood political structure.

The EEC did deliver considerable economic benefit, primarily through freer trade, as trade barriers then were generally high but the centralised Commission, as is the way of all bureaucracies, introduced amusing "quirks". Curiously, in the fruit trade, "grading" was required in which cucumbers had to be "straight" - the EEC permitted no bends, twists or kinks, an absurd example echoing Colbert's economic doctrine ("Dirigisme") where government directs rather than only regulates a market economy. Such regulation echoes back over three centuries: Colbert had the quality and measure of each article fixed by law, punishing breaches by public exposure of the delinquent, by destruction of the goods concerned, and, on the third offense, by the pillory. I "drilled" my soldier cucumbers, escaping that ignominy. Morrisons now have a special category: "wonky fruit".

The Treaty of Westphalia was a diplomatic triumph for France and expanded the sovereign French state, especially on the Rhine, so concluding the French military and diplomatic initiatives of Cardinal Richelieu (died 1642), Mazarin's and Colbert's predecessor. Westphalia marked the apogee of French european expansion dating from the 12(th) century when most of France was under English control, and much of the remainder under the effective control of powerful rulers, such as the Duke of Burgundy: English domination was only ended in 1453, after the 100 Years' War, including Joan of Arc's famous campaign in 1429, following which there was rapid expansion of French power, annexing most of the feudal and ducal lands. The state of France had consolidated from a disparate group of interests, culminating in Louis XIV's and Richelieu's enfeeblement of the nobility, giving rise to the Sun King and the Palace of Versailles.

Subsequently, French expansionism was contained by "the League of Augsberg" and "The Grand Alliance", 1688-97, in the "War of the English Succession", a war whose memory continues to haunt UK politics by celebrations of the English victory over the Franco-Irish army at the Boyne in 1690. Louis XIV's last attempt to extend French power was to unite the crowns of France and Spain though his eldest son, the grandson of Philip IV of Spain. This prospect together with French Mercantilism, adversely affecting English and Dutch trade and the French occupation of fortresses between the Dutch and Spanish Netherlands, led to an alliance between the English and the Dutch Netherlands and the Holy Roman Empire in the "War of the Spanish Succession" against France and Spain. The French forces were heavily defeated by forces under Churchill, 1(st) Duke of Marlborough, at Blenheim, and later at Ramillies and Oudenarde. The Treaty of Utrecht resulted in Spain and France relinquishing trading rights and ceding territories, including Gibraltar, and Louis XIV's grandson, Philip V of Spain's, renunciation of rights to the French throne and Louis XIV's other relatives' renunciation of rights to the Spanish throne. This Treaty marked the end of that phase of French ambitions of hegemony in Europe, and, according to G M Trevelyan, "ushered in the stable and characteristic period of Eighteenth-Century civilisation, marked the end of danger to Europe from the old French monarchy, and it marked a change of no less significance to the world at large, - the maritime, commercial and financial supremacy of Great Britain".

The "Napoleonic" war was the last French attempt at military expansionism, a series of five major conflicts between the French Empire and its allies against a changing array of coalitions of European powers largely financed and usually led by the UK. The first Napoleonic war started in 1803 as a conflict with the First French Republic, a de facto military dictatorship originating in Napoleon's seizure of power in 1799. Amongst the many reported causes of war was the insult suffered by Napoleon's assertion, like de Gaulle 150 years later, that "England" deserved no voice in European affairs - undoubtedly an extreme position then as George III was Elector of Hanover: in truth the meaningful motives were a toxic cocktail of power, politics and profit. These conflicts were a different scale to earlier wars and cost over four million lives. Napoleon, an undoubted military genius, won over 90% of his battles, but like Hitler in 1941 made a grievous strategic error, the invasion of Russia, and subsequently lost the last battle, Waterloo, on the whim of chance. The long battle, advantage and field constantly shifting, but by evening in French favour, caused Wellington to exclaim: "Night or the Prussians must come" ...

and they did at 7 pm, appearing on Wellington's left flank, but behind the French right who, outmanoeuvred, fled the field. At about 9 pm the two leaders met, Blucher, greeting him with his only French, "Quelle affaire". Of the battle Wellington said: "It has been a damned nice thing ... the nearest run thing you ever saw in your life". The arrival of the Prussians under Blucher had been determinant in France's defeat, the first of several subsequent French humiliations by Germany in 1870, 1914 and 1940.

During WWII French diplomats formulated proposals to consolidate Europe, enunciated by Jean Monnet, an influential member of the National Liberation Committee of the de Gaulle "government" in exile on 5 April 1943: "There will be no peace in Europe, if the states are reconstituted on the basis of national sovereignty ... The countries of Europe are too small to guarantee their peoples the necessary prosperity and social development. The European states must constitute themselves into a federation."

Such a proposal had a long pedigree. In 1919 at the Versailles Peace Conference, Monnet, then an assistant in the Ministry of Commerce proposed, but had rejected, "a new economic order", based on European Cooperation. Earlier, Victor Hugo, shortly after the Franco - Prussian War, instigated by France in July 1870 but crushingly defeated in September 1870, entered a plea for unity: "Let Germany feel happy and proud, with two provinces more and her liberty less. But we, we pity her; we pity her enlargement which contains such abasement ... We shall see France arise again, we shall see her retrieve Lorraine, take back Alsace. But will that be all? No ... Seize Trier, Mainz, Cologne, Koblenz, the whole of the left bank of the Rhine. And we shall hear France cry out: It's my turn, Germany, here I am! Am I your enemy? No! I am your sister. I have taken back everything and I give you everything, on one condition, that we shall act as one people, as one family, as one Republic. I shall demolish my fortresses, you will demolish yours. My revenge is fraternity! No more frontiers! The Rhine for everyone! Let us be the same Republic, let us be the United States of Europe!" An undoubted literary genius and romantic, Victor Hugo was clearly not pragmatic: However, Colbert would have been proud of Hugo's attempt to introduce his concept of the "advantage of the other", and Mazarin of the marrying of political aims with trade advantage.

A realistic small practical step towards Monnet's goal of a federation of European states occurred on 9 May 1950. Robert Schuman, a French Minister, announced the intention to form what became the European Coal and Steel Community. The "Schuman Declaration", prepared by Monnet, said "Europe will not be made all at once, or according to a single plan. It will be built through concrete achievements which first create a de facto solidarity. The coming together of the nations of Europe requires the elimination of the age-old opposition of France and Germany".

The Schuman plan, while a tactic very cleverly designed to appear only to resolve a dispute between France and Germany over privileged French access to German coal, advanced the strategic actions of integration as Monnet's declaration, delivered by Schuman illustrates: "Through the consolidation of basic production and the institution of a new High Authority, whose decisions will bind France, Germany and any other countries that join, this proposal represents the first concrete step towards a European federation, imperative for the preservation of peace". France gave up some contentious war reparation payouts by forming a permanent European body, incorporating a control over German assets and advancing its stated ambitions for a more integrated Europe, while Germany gained recognition as an equal in a European institution. This coup, control of German economic assets and their dispersion into a wider organisation fulfilled Monnet's 1945 reparation plan and, in his words, succeeded:- "in taking control of the Ruhr and Saar coal producing areas and redirecting the production away from Germany industry and into French, thus permanently weakening Germany and raising the French economy above its pre-war levels". As part of "Europeanism" these assets were moved into the "High Authority" of ESCA, presided over by Monnet, whose decisions bound - ie they were supra-national - the sovereign nations in or joining the Authority. In exchange Germany gained the abolition of the further dismemberment of its industry and the previously imposed limit on its industrial production. In 1955 integration policy advanced further when Monnet founded the Action Committee for the United States of Europe which provided the initiatives for the establishment of the EEC by the Treaty of Rome in 1957, whose six signatories declared that they were: "determined to lay the foundations of an ever-closer union among the peoples of Europe".

President de Gaulle sought a closer union under the leadership of France to be revived by a strong economy and with a monetary system backed by gold and in 1968 the German Chancellor, Kiesinger, described his views as:- "General de Gaulle once told me that his country had become terribly run down in the last 150 years, 'damaged' was the word he used. He saw his task as bringing about a turnaround, as far as he could. For this, he needed a period of calm, and he would let no one disturb this... As France went through a process of renewal, the General would like to see other European states grouped around it forming a type of confederation under French leadership. But he could realise this aim only if he kept Britain out."

Part of de Gaulle's vision was for world monetary reform, to be achieved by strengthening the role of gold which he said has "no nationality ... and ... which is eternally and universally accepted" and eliminating the reserve

currency status of sterling and the dollar. GBP and $ trade deficits were financed by foreign holders of such currency liabilities, prompting the French philosopher, Raymond Aron's, comment ... "they paid their foreign debts with their own currency: when it was devalued, holders had to take the consequences". Fortified by de Gaulle's grandeur, France attempted to establish a gold-based Franc as an international currency by aggressively selling dollars for gold at a time when the dollar was weakened by rising US inflation and its deepening involvement in Vietnam. The UK's high inflation made UK exports increasingly less competitive, requiring even greater external financing and reinforcing the attack on Sterling which eventually was devalued by 14.3% against the $ of which Harold Wilson said ... "the pound in your pocket ..."

The Deutsche Bundesbank's President, Otmar Emminger, said the 14.3% devaluation was caused by "the inability of the British economy to compete". Sterling's devaluation was highly destabilising, resulting in further gold purchases and dollar and sterling sales, as the UK external balances were slow to react to the devaluation. Consequently, the "Gold Pool", set up in 1961 and operated by Central Banks in the USA and seven European countries to stabilise the $35 gold price, but weakened by the French withdrawal from the "Pool" in 1967, collapsed in March 1968 effectively devaluing the $. The delayed benign effect of the sterling devaluation, coupled with international support for sterling, restored confidence in the GBP, which together with the effective devaluation of the $, exposed the overvaluation of the Franc, especially compared to the DM. So, ended de Gaulle's dream of a "Franc fort", leaving only a devaluation of the "Franc faible" and a DM revaluation - an undisguisable symbol of the DM's economic strength - as a practical solution. But, faced with so obvious a sign of French weakness, de Gaulle blocked the currency realignment, imposing strict exchange controls which quickly proved ineffective.

The abject failure of de Gaulle's policy to use renewed economic strength to reinforce France's leadership of the EEC marked a turning point in French policy, as Germany's innate economic strength became starkly apparent. Before he resigned soon after the debacle in early 1969 de Gaulle told Chancellor Kiesinger:- "France has a certain hesitancy and caution regarding Germany's economic strength, as it does not wish to be inundated by German industry. Germany has been a large industrialised country for a long time. As a result, with its entrepreneurs, its population and its infrastructure it is best equipped for production, trade and especially export. That is the nature of Germany, that is the German reality. France has been an agricultural country for much longer, with far fewer large cities and large corporations there is nothing to compare with the enormous complex of the Ruhr or the former Silesia ... In industry and trade Germany is in the lead."

The extent to which Germany was "in the lead" became increasingly apparent. Three devaluations of the Franc occurred in the next seven years and one revaluation of the D-Mark, resulting in the 'New' Franc losing 7/8(ths) from its value between its inauguration in 1960 to its consolidation into the Euro in 1999. The political consequences for leadership of the EU of the economic weakness of France, keenly sensed by de Gaulle, was fully exposed by Michel Debré: "In November 1968 the strength of the Mark promoted Germany for the first time to speak with a very loud voice. This strength ensured it of the economic supremacy that made it the master of Europe for a very long time." Recognising the essence of the matter, de Gaulle had attempted a full assault on established international financial powers: playing for the highest stakes, he had lost.

President Pompidou's response to the loss of the possibility of direct French pre-eminence was to widen and deepen the EEC by including the UK, Ireland, Denmark and Norway and by promoting Economic and Monetary Union (EMU), to dilute the power of Germany within the EEC, and to shackle German monetary policy by gaining influence over it through a central bureaucracy. The use of economic incentives and the resulting political control was the key by which Mazarin and Colbert had gained so much influence over the riparian and inland Rhineland states. In this instance such power was not to be so easily obtained. The acceptance of the EMU initiated a policy struggle that lasted a quarter of century between the French desire for currency fixing and reserve pooling and the German desire for flexible currency with monetary union happening only when European economies had converged. The EMU proposals exposed inherent contradictions between France and Germany, but they also ignited the continuing different contradictions within the UK. A contemporary Bank of England paper, released only in 2000 after 30 years, says "the plan for EMU has revolutionary long-term implications, both economic and political. It could imply the creation of a European federal state, with a single currency. All the basic instruments of national economic management (fiscal, monetary, incomes and regional policies) would ultimately be handed over to the central federal authorities".

The significance of the Bank paper is not in its content but in that it was considered significant. The underlying intention of the ECSC, the EEC and the EMU had been clearly stated, as argued cogently by Powell and Benn, but in 1974 Lord Denning drew attention to its inevitability and pervasiveness in the simile. "The treaty is like an incoming tide. It flows up the estuaries and up the rivers. It cannot be held back", and later, continuing the simile, "now in 1979 the tide is advancing. It is no use our trying to stop it, any more than King Canute did. He got his feet wet; I expect we shall all get our feet wet". The Bank paper showed the political inevitability never had the emphasis of all the other many ancillary and often banal expressions of peace, "goodwill to all men", equality, the

advancement of society, "freedoms" all of which are so warming, so immediately understandable and so little requiring of change. The unswerving background is of the repetitive emphasis on economic advantage and, as easily understood, higher living standards. The Bank paper is significant because its content unmasked the promoted and accepted appearance of the EEC. It was not released for thirty years.

During the ensuing power struggle over EMU the accommodative stance of the USSR after Gorbachev took office reduced the apparent external threats that underlay so high a German commitment to the West: left wing intellectuals talked of "nationalism and neutralism"; and Mitterand warned "unless we make progress in the construction of Europe, we will not escape bargaining over Germany between East and West." France, rightly, was greatly concerned that the greater economic powers of Germany, unfettered by EEC regulations, would act independently, resist the economic integration that gave power to the proposed political integration and undermine the whole real political purpose of the project over which France continued to have the major influence. Like Mazarin he realised economic co-independence gave political influence. This French fear was highlighted when, at a meeting nominally discussing joint decision making on deploying French nuclear weapons, Mitterrand's advisor, Jacques Attali, interjected, "So that we can have a balance, let us now talk about the German atom bomb". The astonished German officials replied 'You know we don't have the atomic bomb - what do you mean?' Attali replied: 'I mean the D-Mark'. Such was the importance in which the French held the Bundesbank's dominance in European monetary policy."

France's opportunity to advance EMU followed the fall of the Berlin Wall on 9 November 1989. The prospect of a reunified Germany touched a very deep German political ideal, "The Fatherland". Such a reunification would entail strong political support to ensure the greatly enlarged Federal Republic was recognised in NATO and in other International treaties. The political cost was German agreement to Monetary Union against the advice of the independent Bundesbank. The German minutes of Khol's meeting with US Secretary of State John Baker at Strasburg record: Kohl "took this decision against the German interests... . For example the president of the Bundesbank was against the present development. But the step was politically important, since Germany needed friends", adding "as one does, when one is trying to unite Germany without blood and iron". A "wit" quipped "the whole of Deutschland for Kohl, half the Deutsche Mark for Mitterrand". Opportunistic French diplomacy secured a further tether on Germany, binding it with France and tying it into the EU, away from the East, allowing France to hitch a ride on the pre-eminent economic power in Western Europe, a tactic of which Mazarin would have been proud.

In the UK those apprehensive of the political purpose of EMU were but distant voices, Cassandras, crying unheard in the wilderness. Philip Stephens, writing in the FT, puts it "for all its decades of membership, Britain has never really joined the EU. ... it has never properly grasped the psychology of European integration. For France, Germany, Italy and the rest, the union was a political project with emotional roots deeper than the economic rationale. For Brits, it was a commercial transaction - a club they had signed up to by dint of straitened economic circumstance rather than political choice."

The analogy is often wrongly made between the EU and a Club - you join the club, sometimes with difficulty, as the UK experienced with de Gaulle's "black ball", but then you are free to resign, to leave without penalty. But the EU resembles a Hire Purchase agreement: you sign up to it, you pay instalments and you get the use of it, but you cannot trade it, you cannot change it and you cannot easily abandon it. You can decide to leave the EU agreement, but you only have two years to agree any settlement. It is alleged that during the Japanese WWII reconstruction negotiations the Japanese hosts, having solicitously enquired about their visiting American guests' return travelling arrangements, would invoke all manner of cultural guises to delay serious negotiating until it was almost, but not quite, too late! Time pressure gained negotiating advantage. Similarly, once the UK invoked Article 50 its position became ever weaker, as did its "no deal" stance when no preparations for such a "no deal" were apparent. The UK has made concessions on the financial "settlement" that are far more removed from those

that were original promulgated. Indeed, when the UK invited the EU to "whistle for it", they got it! The technical aspects of the Treaties are disadvantageous to those leaving the EU by invoking Article 50.

The "European movement" has always placed emphasis on trade, peace, social responsibility and economic development. Starting from the rudimentary conditions of the ESCC successive layers of economic co-operation have been incorporated, agreed and ratified by the Treaty. As Jean Monnet says "The fusion of economic functions would compel nations to fuse their sovereignty into that of a single state". The epitome of such progressive fusing has been the creation of the Euro, an economic policy designed for political ends which now harms some nations, stands in a marked contradiction to other major social policies and has now almost certainly imprisoned the countries that embraced it. It is salutary to reflect that, had the UK joined the Euro, its political future was sealed as, given the UK's current difficulties in leaving the EU, it is inconceivable that it would practical to do so if the UK was in the EZ. It is even more salutary to consider, given the difficulties in leaving the EZ, if this was a

consideration for some protagonists, including the FT and the Economist, as distinguished members amongst others, who advocated joining the Euro, particularly when it has proved such an unfortunate option. More kindly, perhaps they, the Bank, and many other eminent forecasters just got it plain wrong! The significance properly attached to the Euro is immediately evident from the extraordinary lengths to which the EU was prepared to go to maintain it during the "Great Recession" when rules were twisted, special conditions allowed and unprecedented support mechanisms conjured up to save it.

The adoption of the Euro was accompanied by emphasis on its economic aspects, an emphasis which overlaid a deeper political purpose. The drive for the Euro was predominantly led by France in pursuit of German integration into Europe and the economic "fusion" forecast by Monnet, leading to political integration, yielding a political body that affords its government worldwide influence a vicarious "Franc Fort" so keenly sought by de Gaulle. And, like a two-compound building resin, once a nation binds to it it is set irrevocably.

Social policies and EU economic policies are often designed towards gaining political support for closer economic union. Most evident are the well documented EU support for the arts and culture and special support for disadvantaged areas. There is protectionism in key industries, special protection in particular for agriculture, state ownership, and a dirigiste Colbert policy towards industry all of which have nurtured political acquiescence. In consequence, and like many of the contradictions in the EU, while the long-term benefits of free trade were widely recognised, they are not normally implemented, a disparity particularly apparent in some sectors, notably agriculture. The EU endorses free trade within the EU, but practises highly protectionist policies within the EU in very many service areas, and, outwith the EU it is highly protectionist, despite the long-term economic advantage of free trade. Indeed, historically, the EU and the predecessor organisations and nations were more protectionist than the UK with a long-established international trading history. Thus the political necessity for the EU to reach a "trade" deal with the UK is diminished. Protectionism allows the EU to exact large benefits from nations wishing to enter their trading bloc with its high tariff and non-tariff barriers, especially services and such mercantilism, while economically disadvantageous in the long run, has political advantages so well illustrated in the current UK withdrawal negotiations.

Trade settlements are much less important in the EU27 than in the UK because of the asymmetry of size. The EU comprises 27 nations with an economy about 10 times the size of the UK's economy. If protectionism is equally damaging, then each EU individual's welfare is reduced by only 1/10 of the UK's! If all economies grow at 2.25% and the economic contraction caused by any trade disturbance was 2.5%, then the UK would sink into recession, but the EU growth would drop from 2.25% to 2.00% - a small change, statistically insignificant. I quote from last year: "The economics, the politics, the culture, and the over-riding ambitions of "ever closer union" will not lead the trade talks, any more than the financial settlement talks did, to a position that the promoters or voters for "leave" expected or even now do expect!"

As I write an extreme outcome of the current withdrawal negotiations is still unlikely, although recent events have changed the probabilities of some outcomes from being scarcely worthy of consideration to "not impossible", as, for example, a withdrawal of the invocation of Article 50 or of another referendum. In assessing the many outcomes available two factors are particularly relevant. First in the current position there is a significant disadvantage in "no deal" outcome, admittedly a lesser one for the EU, but still important. The second factor can be derived from observing how the EU actually acts rather than what it says. The EU often "stops" the clock: it has enactments widely ignored; it has binding rules for fiscal deficits, regularly breached by both Germany and France; and it has controls over the ECB subtly avoided during the Euro crisis: ultimately it is pragmatic.

All outcomes will have a deleterious effect on the UK economy both in the short term and probably in the long-term. The outcome depends on the trading terms eventually agreed with the EU and the consequent balance between trade destruction and trade creation caused by leaving the EU, a balance which could, in expected circumstances ultimately tip in favour of leaving as a result of much improved wider trading relationships or a fracture of the Euro leading to disruption in some existing EZ nations.

Most studies forecast how much larger or smaller UK GDP would be having left the EU than it would be if the UK remained a member. For example, the leaked government analysis assumes that UK GDP would grow in real terms by 1.5% a year over the next 15 years if the UK were to remain a member of the EU, but would grow 0.4 percentage points less quickly (ie at 1.1%) on average each year if the UK leaves and trades with the EU on WTO terms. As a result, UK economic output in 15 years' time would be 7.7% smaller under the 'Leave' scenario than under the 'Remain' scenario. However, economic output would still be 18% larger than it is today. None of the models predict anything similar to actual year-on-year falls in output that were experienced during 2008 or even in earlier much smaller recessions.

In October 2018 the Institute of Government summarised the forecasts of the long-term impact until 2030 of leaving the EU in GDP relative to remaining in the EU on a "Free-Trade Agreement". Ignoring the extreme "worst" and the extreme "best", the relative "loss" in GDP was 3.8 percentage points. Ignoring the Treasury forecast, the average loss was 3.2 percentage points.

The Treasury's forecasting, so often highly inaccurate, almost "wrong" over a long period, plumbed a new depth in its assessment of the economic consequences that would follow immediately after a "Leave" vote. The Treasury's summary was: 'The analysis shows that the economy would fall into recession with four quarters of negative growth. After two years, GDP would be around 3.6% lower .... 'The fall in the value of the pound would be around 12%, and unemployment would increase by around 500,000, with all regions experiencing a rise in the number of people out of work. The exchange-rate-driven increase in the price of imports would lead to a material increase in prices, with the CPI inflation rate higher by 2.3 percentage points. The Bank of England and the IMF agreed that recession was possible". The Treasury also forecast real wages dropping 2.8% - 4.0% and house prices dropping 10% - 18%. Of these forecasts only one has been clearly realised, the 12% fall in the value of sterling and a consequential but much more modest rise in inflation. No recession materialised, employment has risen and house prices rose. The Bank was less pessimistic but, as the Institute for Government comments "The Bank would have been more accurate if it had stuck to its pre-referendum forecasts". The FT's unashamedly pro EU economics editor Chris Giles wrote: "when the Treasury last published short-term forecasts predicting a recession after a Leave vote, the analysis appeared "made-up" to many neutral advisers." The underlying bias in official and quasi-official forecasting, questions the perceived integrity of the UK "official" forecasts and the independence of the Bank.

Forecasts of the long-term impact of leaving the EU are almost without exception for reductions in real UK GDP. However, for UK residents the relevant economic parameter is per capita GDP, not UK GDP. The Institute for Government analysis has summarised the forecasts for the long-term impact of leaving the EU for a wide number of forecasters, assuming different bases for continuing trade. Assuming a Free Trade Agreement, they show, excluding the most pessimistic forecast HMT 6.0% (as above!) and the most optimistic Oxford Economics (-0.5%), that by 2030 GDP per capita will be on average 2.4% lower, say 0.2 percentage points lower per year, than if the UK remained in the EU. 0.2% change in GDP per year is a small amount!

Given the complexity, the multiplicity and the inconsistency of all the forecasts, no defensible position can be taken on the precise effect of "Leave" by 2030! And even less defensible when the precise conditions of the EU withdrawal from the EU are still unknown! Economic forecasting in the short-term is unreliable, and over 12 years arguments over +/- 0.20 percentage point differences per year in GDP seem surreal. However, it is self-evident that the adjustment in the economy from the present EU membership to any new trading relationship cannot be made without upset and destruction in some areas, in some industries and to some people. While almost without exception the long-term "costs" of leaving the EU are measured in real GDP, the actual effect will be experienced largely in GDP per head, not total GDP and such a qualification would significantly reduce the forecast economic "cost" to individual UK citizens.

This potential loss of GDP from leaving the EU is small compared to other sources of 'losses' of GDP. In the Great Recession of 2008 real GDP dropped by 5% over two years, in contrast to a lesser potential relative loss of 2.4% over twelve years. A much greater thief of actual GDP growth, compared to potential GDP, has been the significant reduction in productivity. In the eight years before the 2008 recession productivity rose 19% or about 2.35% per annum, similar to the previous eight years, but since 2008 productivity has risen less than 0.2% per annum. Last year the OBR estimated that output per hour was 21% below an extrapolation of the pre-crisis trend. By the beginning of 2023 the OBR, assuming an improvement in productivity to about 1% per annum, estimates that output per hour in 2023 will be 27% below its pre-crisis trend. The OBR forecasts an improvement in productivity to 2% by 2030 - a long way off - and even if it averages 1.35% until 2030, the UK economy will be losing 1.0% per year in output, very considerably more than the above annual projection of output loss from leaving

the EU. Productivity is much less tangible than images of queued ports and extended bonded warehouses and factory closures and so may seem less important than the loss from the more obvious trading opportunities, but as Paul Krugman, the Nobel Laureate, says "productivity isn't everything, but in the long run it is almost everything". The relative insignificance of the importance attached to improving productivity being by far the largest economic variable capable of increasing GDP, highlights the emphasis attached to the discussion of EU withdrawal: it is surely the topic of the day and it is a "one off" but it is arguable that such overt alarm on the possible economic consequences is often used as a proxy for covert political preference.

Indeed there may be a political dimension to the discussion of the economic effects of leaving the EU as evidenced by the lack of similar analysis on many other growth reducing policies, many of which appear to be accepted, inevitable or unavailable. Obvious other restrictions to economic growth are the extensive UK oligopolies, including those in the financial sector, restrictive practices in the professions, unprofitable vanity projects such as HS2, the Dome and the Olympics, inefficiencies like the many failed Government IT projects, subsidised tertiary education producing graduates with unwanted skills, support for failing industries, such as agriculture, subsidised green policies, especially in relation to power generation, regional policies, particularly the continuing support of declining industry in old industrial areas and all external tariffs and other trade restrictions. Many changes could be made that improve economic output but such possible improvements are implicitly traded for political advantage or prejudice. It is surely significant that the dog does not bark about these restrictions to growth, but howls over the cost of leaving the EU.

Leaving the EU is invested with a special, almost unique, political aura. Self-evidently, it is a political decision as much as an economic one. The EU is first and foremost a political organisation run for political purpose: it is protectionist, mercantilist and highly centralised with a "democratic deficit". It has largely been dependent on French initiatives, whose cultural motivations date back to the founding of the nation under Louis XIV, in many respects continuing to be guided by French influence. It was conceived in the Schuman plan as a political "first step towards a European federation" and its gestation has been nourished by progressive economic integrations, as predicted by Jean Monnet, the acknowledged "Father of the EU", saying, "The fusion of economic functions would compel nations to fuse their sovereignty into that of a single state"; and, "Via money Europe could become political in years"; and a generation later by Angela Merkel who said "if the Euro fails, then Europe will fail". Thus, economic policy is subject to political policy, most apparent in the Euro project! The external tariffs and non-tariff barriers are barriers to "outside" trade but they give a strong advantage to "inside" trade, as the UK is now discovering, and their integrating purpose and the transitional costs of breaking them, however attractive the final position may be, is high, again as the UK is experiencing. Moreover, the true protectionism of the EU cannot be measured by the low tariffs on Manufacturing (circa 4.0%), as the quotas, "hidden" and non-tariff barriers to trade are much more significant real barriers. These restrictions can be greatly exacerbated by "friction" at the border: origin, specification, health, phytosanitary checks and subject to discretionary manipulation such as by having too few customs staff causing unnecessary delays which are particularly damaging to perishable trades such as fish, meat and fruit and vegetables when a day can reduce the shelf life by a third. In the service sector in the EU little harmonisation has occurred: classically, in Austria even corset makers have to be locally licensed and unlicensed Korsettschneideren are verboten. Such internal EU restrictions serve local political ends, but the very extensive restrictions on services external to the EU reinforce the integrity of the EU and its political influence. All the many protectionist policies have economic advantage to those protected and can be argued as constituting beneficial economic policy. Alternatively, it can be argued protectionism fosters internal political support for the incumbent administration, facilitating integration and external political influence in the EU's transactions with third parties. In the last analysis the EU, successor to the Europe Economic Community, is a political venture, a wolf in sheep's clothing.

The underlying nature of the EU is less fully understood than its economic purposes. Thus there is a strong incentive for those politically aligned with the EU to emphasise its economic consequences which, while not favourable, at least in the short-term, are statistically small and in economic performance less important than other economic variables. Such a hypothesis would account for some of the exaggerated forecasts made by political and other organisations that are covertly pro EU.

The fervour that accompanies some analyses is far removed from considered economic analysis and suggests underlying political preference: as the FT said such analyses appeared "made up". There is a further reason for possible bias amongst the "establishment" who may have many strong incentives to maintain the status quo: relationships, access, understanding, investment in time and money to the corridors of power, and, separately, change is always inconvenient and resisted. The institutions of the EU are as opaque as they are powerful and access to them is limited, giving existing users a protective barrier to entry, a cosy relationship at terms verging towards oligopoly: they can lobby well, work the system well.

Political argument for the European cause is sometimes veiled behind economic arguments, as exposing self-interest, prejudice or ideological preference or anti-UK "establishment" motives would lose the European cause support: economics is safer, directly affects more people and is more simply agreed and more easily accepted. Also, the economic argument is correct - the short-term consequence of leaving the EU is economically unfavourable, giving a lower growth rate, and only the degree is in question.

The Bank of England and the Government have published a wide range of "scenarios" for the long-term change in GDP compared to the present EU membership. These include a short-term scenario with GDP falling 10.5% over five years if there was a "no deal" Brexit! Patently, such an outcome is possible - we might have a huge volcanic eruption the ash of which would obscure the sun, giving a catastrophic economic outcome - but how likely is it? The Bank of England dodges this key question.

The forecasters, making assumptions, usually of "reasonable" outcomes to the current negotiations - ie an outcome not far from the present proposals - are remarkably uniform in their forecasts for the next few years. The OBR forecast growth of 1.6% of 2019 and 1.4% average over the next three years, figures, within 0.2% of the 2019 forecasts reported for the Bank, NIESR and IMF but above the EC and the OECD forecasts. For 2020 and onwards the OBR is about 0.2% lower than other reported forecasts, although Oxford Economics, the only private forecast quoted, forecasts subsequent years at 2.1%. The difference between these forecasts almost certainly falls within statistical error.

The key determinant of economic prospects is the passage or otherwise of the existing Bill before Parliament, which if it is not passed in its present form, or with minor revision, will certainly result in a significant reduction in short-term economic activity and has a high probability of impinging very adversely on the next few years. As to the outcome of the Bill, I have no basis on which to make a forecast, certainly not an informed one. I do forecast that for this most important decision, nothing will be decided until the outcome of that Bill is known: we all must wait.

Property Prospects

In the previous investment cycle the CBRE All Property Yield Index peaked at 7.4% in November 2001, then fell steadily to a trough of 4.8% in May 2007, before rising in this cycle to a peak of 7.8% in February 2009, a yield surpassed only twice since 1970, on brief occasions when the Bank Rate was over 10%. Subsequently yields fell to 6.1% in 2011, rose briefly to 6.3% in 2012 before falling steadily to 5.4% in 2015, and reaching a low of 5.3% in August 2017 before rising fractionally again this year to 5.4%.

Yield changes within the individual components of the All Property Index have been significant. In the year to August 2017 Secondary Shopping Centre yields rose 0.75 percentage points and in the year to September 2018 have risen another 0.5 percentage points to 9.00%, and Best Secondary Shopping Centres have risen similarly to 7.25%, while Prime Shopping Centre rises were slightly less at 0.35 percentage points to 5.00%. High Street Shop yields have also risen but Prime Shops and Good Secondary by only 0.25 percentage points to 4.25% and 7.01% respectively. No change occurred in Offices yields apart from a small 0.25 percentage points fall in Regional Offices. Industrial yields fell in all sub categories with Secondary Estates falling by up to 0.75 percentage points to 6.50%.

Some "specialist" sectors have surprisingly low yields, usually unchanged since 2017. Prime London residential yields are 3.75% in outer areas but 3.15% in Prime Zone 2; Prime London Corporate Pubs are 3.50% and central London University Student Accommodation RPI linked is 3.75% and Direct Let 4.25%, both 0.25 percentage points lower than in 2017. In "non-specialist" sectors only West End Offices have equivalent low 3.75% yields.

The peak All Property yield of 7.8% in February 2009 was 4.6 percentage points higher than the 10-year Gilt, then the widest "yield gap" since the series began in 1972 and 1.4 percentage points wider than the previous record yield gap in February 1999. The 2012 yield of 6.3% marked a record yield gap of 4.8 percentage points, due largely to the then exceptionally low 1.5% Gilt yield. The yield gap fell to a low of 3.3 percentage points in 2014 but rose a little each year to 4.1 percentage points in 2017, the present level, given the current 10-year Gilt yield of circa 1.30%.

The All Property Rent Index, apart from a brief fall in 2003, had risen consistently from 1994 until 2008 when it fell by 12.3% in the year to August 2009. Since 2009 there have been three small increases totalling 1.6% to August 2012, but since then rental growth improved slightly and averaged 3.6% in the five years to 2017 before reducing to 0.8% growth, in first half of the year with no subsequent rise and now stands 5.0% above the previous rental peak attained in 2008, just before the Great Recession.

Rent changes in 2018 in the individual sectors are expected as Shops -0.6%, Industrials 4.1%, Offices 0.8%, Shopping Centres -1.3% and Retail Warehouses -1.1%, these two last sectors having the poorest performance for the last three years. Since the depression began ten years ago, the All Property Rent Index (as extrapolated) has risen by 5%; Shops by 6%; Offices by 9% and Industrials by 24%, but Retail Warehouses have fallen by 14%. Since the market peak of 1990/91 the CBRE rent indices, as adjusted by RPI for inflation, have all fallen: All Property 29%; Offices 34%; Shops 19%; and Industrials 28%.

Property returns as measured by IPD were 9.5% in the year to October 2018, similar to 2017, in spite of a reduced return in October, possibly influenced by the negotiations to Leave the EU. In 2016 the return was only 2.9% as capital values dropped following the "Leave" vote in the referendum, falling by 2.0% in July 2016 due, primarily, to large falls in London offices. The last property boom ended in 2007 and by December 2008, a month when the

index fell a record 5.3%, the index had fallen 26.6%. In the ten years subsequent the total return has been 135.8% or nearly 9% per annum. Since just before the boom ended the return has been 73.0% or only just over 4.5% per annum.

The International Property Forum last year forecast total return in 2018 as 4.0% but the current expectation for 2018 is 6.2%. The rise in total return is wholly due to the Industrial sector where the return is expected to be 15.2% as opposed to the 7.8% forecast. In contrast Retail returns are expected to be sharply down from forecast as Shopping Centre returns forecast at 2.8% are expected as minus 2.2%, Retail Warehouses 1.8% as opposed to 4.3% forecast and "Standard" Retail 2.1% as opposed to 3.7% forecast. The 2017 forecasts, while forecasting lower returns from "Retail", underestimated the rapidity of the actual change in "retail". Offices are expected to return 6.0% in 2018 as opposed to the 1.9% forecast due to expected capital value growth of 1.8% instead of the minus 2.3% forecast, a surprising outcome close to yields falling markedly in the London City and West End offices, possibly as a result of improved prospects for London offices after leaving the EU.

The IPF forecasts for 2019 and subsequent years are for moderate returns. The only negative total return forecast for 2019 is for Shopping Centres where further falls in capital values of over 10% are forecast over three years, reducing total returns to 2.0%. The capital values of Retail Warehouses are forecast to fall 7.8% over the next four years and as rental values ease slightly, returns will be positive in 2019 and total returns are expected to be about 30% per year over the next three years. Industrial returns are expected to be above 5.0%, but a reduction on the expected 2018 total return of 15.2%. All Property total return is forecast at 3.0% in 2019 rising to 3.5% in 2020 and to 5.0% for the following two years.

Forecasters are notoriously unable to detect pivotal points such as the unexpected Referendum vote which was largely responsible for the marked reduction in the IPF forecast property returns for 2017 made between May 2016 and August 2016. In May 2016 IPF forecast All Property 2016 returns of 7.1% for 2016 which was downgraded in August 2016 to -0.4%, and the 2017 forecast downgraded to 0.6%. During 2017 this 0.6% forecast was revised to 4.8% in May, 6.7% in August and in November 2018 to 8.2%. Similarly, the recent sharp deterioration in change in retail returns described above was not forecast in spite of the factors giving rise to the change becoming increasingly obvious.

But are the forecasters "right" now? Last year I said "Current forecasts are for a recovery in 2017, a fall in returns in 2018 and for a small continuing improvement thereafter - a trend analysis following the reaction to the Referendum". The recovery in 2017 took place, reaching 11.0%, hardly surprising as the forecast was made in that Autumn, but the extent of the returns in 2018 then forecast to 4.0%, is now forecast to be 6.2% and the continuing improvements are not now forecast and in November 2018 the three years forecast total return was only about 3.0%. The IPF forecast was made when the economy was expanding at 0.6% per quarter and there was still a high probability that the UK would agree terms for leaving the EU that provided minimal interruption to trade in goods and services. Indeed the OBR assume "that the negotiations between the UK and the EU lead to an orderly transition to a new long-term relationship, whatever that relationship might be" and, given that conditions expect GNP to continue to grow at the current rate of about 1.4% until 2022: no change, then.

Unfortunately the OBR's assumption, similar to that made by other forecasters, has become less probable as the Withdrawal Agreement may not be ratified by Parliament. If it is not so ratified, a very wide range of possibilities arise which possess some features in common. In the long-term, including a withdrawal with "no deal", the reduction in the UK growth rate per annum will not be large. In the medium term, there will be a cost in effecting the change, greatest for "no deal" and least, if the EU agrees that on 29 March 2019 the position reverts to the status quo ante or to a position with little material change: these options previously considered so improbable as not even to be worth considering are daily becoming more probable.

In the short-term there will be a serious downturn, unless a favourable solution presents itself, a "deus ex machina". In this short-term there will be a manifest delay in investment (eg "I will delay buying my house until after Brexit") and saving, hoarding and despair about the long-term future. This negative appraisal will be reinforced by those who forecast the future as less unsatisfactory, but who will reflect that the different views of others will so damage the economy that they in turn will emulate their behaviour, thus reinforcing the trend.

The outcome from no ratification will introduce a scenario quite different from those on which most forecasts are based: almost unquestionably these forecasts will prove optimistic, as the basic assumption of a "negotiated deal" - at least in the accepted timetable - was flawed. In the short-term the investment market will be disrupted, possibly seriously. In the long-term UK growth may be impaired, but, as I argued above, the precise trading relationships of the UK with the EU will only affect the UK economy to an equivalent extent to other economically disadvantageous policies but whose political value is deemed to be worth their economic cost.

This time last year forecasts for house prices in 2018 were muted. HMT's "Average of Forecasts" was for a rise of 1.4%, and the OBR forecast 2.9%, forecasts in line with current 2018 estimates of 1.9%, by the HMT survey and 3.4% in the OBR forecast. Increases in house prices in the twelve months to the end of October 2018 are reported as: Halifax 1.5%; Nationwide 1.9%; and Acadata 1.0% (England and Wales only), all showing reduced growth compared to this time last year. Acadata report the 1% average growth is the lowest since April 2012 and, as the price rise is considerably below the 3.3% RPI rate of inflation, house prices have fallen in real terms. In all English regions house price rises are lower now than previously reported. Anomalously, year on year price falls occurred in the most expensive region, South East, and the least expensive, North East, where the average price is only GBP157,176.

Scottish prices rose 1.9% in September, the largest increase in a single month since June 2007, and 5.1% year on year, providing a strong contrast to the small rise of 1.0% in England and Wales, but the average price in Scotland is only GBP180,030 with the lowest, in West Dunbartonshire, GBP119,725. In Scotland there is a considerable disparity between the regions as, unlike England where the highest increase was 3.1% (West Midlands) and the largest fall was 0.2% (North East), in Scotland increases of 10% or more occurred in Edinburgh, Glasgow, Argyll & Bute, North Lanarkshire, Inverclyde and the Outer Isles ... to GBP121,469! while falls of over 3% occurred in Stirling and Scottish Borders.

In Edinburgh prices have continued to increase rising 9.6% in the year to September 2018, following a similar rise last year. Savills report that "Edinburgh has seen higher price value growth than any other UK city with room for more ..." they say "due in part to Edinburgh being voted (in the Royal Mail survey) the most attractive UK city in which to live and work". Over the last few years overseas migration to Edinburgh has totalled 22,575 and UK relocation 10,839 giving a 6.9% increase in population. Edinburgh University is considered by Savills as a leading UK university, especially in technology, which together with Edinburgh's other universities make Edinburgh a "University City" and by this standard Edinburgh has not yet fully recovered from the Great Recession or the negative influences of LBTT and of "Independence", as Edinburgh prices are only 1.6% above the pre-recession levels whereas in Cambridge prices have risen 45%, in Oxford 20%, in Bath 17% and in York 16%. They stress the wide appeal of Edinburgh where 42% of their clients buying come from outside Edinburgh, strong evidence of national and international "pull" which is also evidenced by the recent rise of 28% in registered new buyers. Savills conclude that current market conditions are such that continuing price rises are likely.

The OBR forecast house prices to rise by 3.1% in 2019 and 14.4% over the next four years. HMT forecast prices to rise 2.2% in 2019 and 8.5% over the following three years. JLL are more cautious, forecasting only 0.5% growth in 2019 but 10.9% over the next few years, but with higher growth in London and the South East but much lower growth in North East and Wales. Scotland is forecast to be similar to the UK. Savills provide house price forecasts, carefully distinguishing them as second-hand, for up to five years for both Mainstream and Prime markets. For mainstream markets they forecast a rise of 14.8%, similar to the OBR. Within that overall forecast they expect considerable variation, London for instance growing only 4.5%, following a fall of 2.0% in 2019 and no rise in 2020. Central areas such as the Midlands and "remote" areas such as Wales, Yorkshire, North West, North East and Scotland are expected to have price rises of 18% to 22%.

For prime property lower price rises are generally expected, notably in London suburban, commuting and outer areas, but peripheral areas in the "south" the Midlands and North England are expected to gain by about 15%. In contrast, Central London prices are expected to grow 20% over five years. Scotland's Prime market is expected to be similar to other regions with prices rising only 14% over five years, four percentage points less than Scotland's Mainstream market.

The Halifax index peaked at the GBP199,600 recorded in August 2007. The equivalent inflation-adjusted price in October 2018 would have been 33.4% higher, or GBP273,334* but the current October 2018 Halifax index price is GBP227,869 - some way off! If house prices rise at about 3.9% and inflation is 2.0%, then ten more years will elapse before the August 2007 peak is regained in real terms.

House prices are difficult to forecast and historically errors have been large, especially around the timing of reversals or shocks. I repeat what I have said previously, "... the key determinant of the long-term housing market will be a shortage in supply, resulting in higher prices".

Future Progress

The Group's current strategy is to increase the rate at which it takes advantage of the Edinburgh housing market in which prices are increasing rapidly. To implement this policy we made extensive preparations last year formally to market St Margaret's House. During this preparation we had several unsolicited approaches to purchase the property which we declined as premature. However, of these approaches two were from known reputable developers who proposed particular developments that had not been previously identified, which offered high values, and one of which led to the conditional sale of St Margaret's House. The planning process for such a major project takes many months and costs over GBP0.5m. The primary conditions to be purified are the necessary planning, for which the contracted date is August 2019 and vacant possession which, given the short-term lease over the property, should follow within 7-9 months. The site investigation has been completed and is satisfactory.

In November 2018 a contractor was appointed to our Horsemill phase at Brunstane and some of the restored buildings are already re-roofed. The first completions are expected in the summer. There have been very considerable delays in securing the small additional funding for the project due to credit restrictions which are as onerous they are arbitrary and the cost, even of the mainstream lending secured on low LTVs, is high. A major constraint on financing is the reluctance of funders to value sites at other than cost - a severe limitation where, as in our case, most sites were purchased at low or existing use values. The next phases at Brunstane, being new build rather than fully restored stone buildings, should be readily financed. We will commence other developments as soon as these can be funded with bank debt at reasonable cost or with equity as it comes available from sales.

Our developments require a stable and liquid housing market, but we do not depend on any increase in prices for the successful development of most of our sites, as almost all of these sites were purchased unconditionally, for prices not far above their existing use value and before the 2007 house price peak. A major component of the Group's site development value lies in securing planning permission, and in its extent, and it is relatively independent of changes in house values. For development or trading properties, unlike investment properties, no change is made to the Group's balance sheet even when improved development values have been obtained. Naturally, however, the balance sheet will reflect such enhanced value when the properties are developed or sold.

The strategy of the Group will continue to be conservative, but responsive to market conditions. The closing mid-market share price on 21 December 2018 was 195p, a small premium to the NAV of 186.2p as at 30 June 2018. The Board does not recommend a final dividend, but intends to restore dividends when profitability and consideration for other opportunities and obligations permit.

My Chairman's statements have been more discursive than is typical for the genre. I have sought to entertain, to inform and to stimulate my readers, being sometimes provocative, sometimes pedantic and at times, I trust prescient. Over the many years I have been encouraged by readers' criticisms and corrections: one "whopper" being "Yon [wee] Kipper" for "Yom Kippur" war! This style does not accord with that which is market practice for an AIM company and my statement next year will be suitably prosaic.

Conclusion

The UK's economy continues to operate in the shadow of the Great Recession of 2008 and the longest depression since 1873-96 as growth since has been poor, and unusually there has been no rebound or "catch up" of above average growth following the recession. UK growth has been restricted by the poor growth in productivity and by fear of the consequence of leaving the EU. Unfortunately, the low growth of productivity is either due to a very long cycle or to a secular trend. For at least the next few months, or perhaps longer, enhanced fear of and uncertainty as to the outcome of the EU withdrawal project will cause further damage.

The management of the economy, the inflation target, the fiscal balance, the previous and varied "golden rules" are derived from forecasting. Such forecasting has proved fallible, supporting policies that resulted in the Great Depression, the recent Great Recession and the EMU. Errors of forecasting are evident in contributing to the extensive UK lobbying to join the EZ, the now waning fixation with the inflation target, and, most recently and quite vividly, in the forecast drastic short-term consequences of voting to leave the EU. The accuracy of past economic management does not give confidence in the likely accuracy of current forecasts of the various outcomes of the various options of the UK's future relationship with the EU.

The underlying difficulty in assessing consequences of such outcomes derives from a misunderstanding of the essence of the EU. The EU is primarily and increasingly a political entity, not as so misrepresentingly named a Common Market or a European Economic Community. The wide acceptance of such a portrayal is caused either by carelessness or imprecision or covert bias or political motivation. The tenor and style of the recent presentation of scenarios by the Governor of the Bank provide an extreme example: what is remotely possible is conveyed as, or at least interpreted as, worrying likely.

The EU had its evolutionary origin not in post WWII Europe but in the Middle ages. The thread of economic argument and political objective spun since the Thirty Years War is unbroken today. The overt motivation of the almost exclusively French post WW II civil servants, continuing the tradition of Richelieu, Mazarin and Colbert, was political, finding its first formal expression in the ECSC but fully set out in the 1957 Treaty of Rome "Determined to lay the foundations of an ever-closer union".

The EU's major economic policies reinforce its political objectives. The formation of the Euro, while subject to the most detailed technical analysis and careful planning had a popular promotion which avoided consideration of its inherently inflexibility. For some Eurozone countries the Euro has proved highly disadvantageous, both facilitating inappropriate economic boom and subsequently denying the most appropriate remedial actions and has bound them forever in a political organisation for better or for worse, as the cost of breaking free is prohibitive.

The UK's decision not to join the Euro has been unquestionably vindicated. However, as this was contrary to the advice of the most respected economic forecasters, either their ability or their independence must be in question. The EU's resolve to "save" the Euro in the Great Recession with disregard for the rules and for avowed social responsibilities to their citizens and to others underlines its over-riding political importance.

The EU's trade policy is the second economic policy that is consistent with political aims. All inhibitions of trade reduce long-term economic growth. The EU is essentially a protectionist, economy with some very high tariffs, with very restrictive non-tariff barriers and quotas, but these mechanisms provide specific political support within the EU and externally they offer economic incentives to join, to be "in". Protective trading policies are an important device for fostering political cohesion.

The foundering of the present negotiation reinforces the interpretation of the EU as profoundly political. It is self-evident that "free" trade would be mutually beneficial. It appears that many still view the EU as an economic entity putting insufficient stress on its political nature and such views may have influenced the judgement made over the likely outcome of the talks. In truth any settlement that jeopardised the political interests or integrity of the EU was most improbable. The EU have used their mercantilist policy extremely successfully to maintain and to further their political aims.

In the present imbroglio any forecast for the UK economy has only a random chance of being accurate. My forecast is that, if the UK withdraws from the EU on any agreed terms, the economic penalty will be measurable but manageable. Far greater damage to economic growth is being caused by the opportunity cost of lower productivity growth, a level around 1% per year on a continuing basis. Productivity growth would be improved by cultural and social change, by changes in political governance, by improved economic and capital analysis, by less intrusive social and economic policies and by more rigorous management. Political choices in monopoly control, social policies, transport policy, green policy and most fashionably "correct" areas are often inimical to economic growth, but may represent democratically acceptable choices.

Nullifying the withdrawal agreement will reduce the immediate penalty but may jeopardise the very long-term growth of the UK, especially if it joins the Euro. Within the UK the defeat of a populist movement by successive waves of establishment initiatives, the incompetence of Government foresight and planning and the fractionating of both political parties will lead to considerable political unrest endangering economic growth. The short-term "fix" of a revocation of Article 50 will be eclipsed by a long-term disadvantage compared to a comprehensive mutually beneficial trade agreement. Fortunately, as Adam Smith said, "There is a great deal of ruin in a nation".

I D Lowe

Chairman

21 December 2018

Strategic report for the year ended 30 June 2018

Operating and Financial Review

Principal Activities

The principal activities of the Group are the holding of property for both investment and development purposes.

Results and proposed dividends

The Group profit for the year after taxation amounted to GBP2,886,000 (2017 profit: GBP1,040,000). The directors do not propose a dividend in respect of the current financial year (2017: Nil).

Business review

A full review of the Group's business results for the year and future prospects is included in the Chairman's Statement within the Review of Activities on pages 2-7 and Future Progress on page 19. In accordance with legislation the accounts have been prepared in accordance with IFRS as adopted by the EU ("adopted IFRS"). As permitted by Section 408 of the Companies Act 2006, the profit and loss account of the parent Company is not presented as part of these financial statements.

Key performance indicators

The key performance indicators for the group are property valuations, planning progress and the stability of house prices, all of which are discussed in the Chairman's Statement.

Principal risks and uncertainties

There are a number of potential risks and uncertainties, which have been identified within the business and which could have a material impact on the group's long-term performance.

Development risk

Developments are undertaken where appropriate value is judged to be obtainable after consideration of economic prospects and market assessments based on both internal analysis and external professional advice. Committed developments are monitored regularly.

Planning risk

Properties without appropriate planning consent are purchased only after detailed consideration of the probabilities of obtaining planning within an appropriate timescale. The risk that planning consent is not obtained is mitigated by ensuring purchases are made at near to existing use value. In such purchases the Group adopts a portfolio approach seeking an overall return within which it accepts a small minority will be less successful.

Property values

The Group principal investment properties have either development prospects or a development angle which will insulate them against the full effect of any general investment downgrade of commercial property.

Principal risks and uncertainties (continued)

Availability of funding

The Group is dependent upon bank funding to undertake its developments and for future property acquisitions. Bank facilities will be negotiated and tailored to each project in terms of quantum and timing. Any intended borrowings for future projects will be at conservative levels of gearing.

Funding is readily available, provided the current strict criteria are met and the high price is accepted.

The low acquisition cost of some of the Group sites reduces the overall development cost and hence the level of funding available on current formulaic lending based on loan to cost.

Tenant relationships

All property companies have exposure to the covenant of their tenants as rentals drive capital values as well as providing income. The Group seeks to minimise exposure to any single sector or tenant across the portfolio and continually monitors payment performance.

Environmental policy

The Group recognises the importance of its environmental responsibilities, monitors its impact on the environment and designs and implements policies to reduce any damage that might be caused by Group activities.

Corporate Governance

The directors recognise the need for sound corporate governance. As a company whose shares are traded on AIM, the Board has determined that it will apply the Quoted Companies Alliance's Corporate Governance Code ("the QCA Code"). An updated corporate governance statement including any disclosures required pursuant to the QCA Code has been published on the Company's website www.caledoniantrust.com.

M J Baynham

Secretary

21 December 2018

Directors' report for the year ended 30 June 2018

Directors

The directors who held office at the year end and their interests in the Company's share capital and outstanding loans with the Company at the year-end are set out below:

 
 Beneficial interests - Ordinary shares 
  of 20p each 
 
                                Percentage      30 June 2018      30 June 2017 
                                    held 
                                                         GBP               GBP 
 I D Lowe                                79.1      9,324,582         9,324,582 
 M J Baynham                              6.2        729,236           729,236 
 R J Pearson                                -              -                 - 
 
 
 Beneficial interests - Unsecured loans 
 
 I D Lowe                               100.0      4,330,000         4,185,000 
  MJ Baynham                            100.0         99,999            99,999 
 
 

The interest of ID Lowe in the unsecured loans of GBP4,330,000 (2017: GBP4,185,000) is as controlling shareholder of the lender, Leafrealm Limited. The interest of MJ Baynham in the unsecured loan of GBP99,999 (2017: GBP99,999) is in respect of a loan made by his wife, Mrs V Baynham.

No rights to subscribe for shares or debentures of Group companies were granted to any of the directors or their immediate families or exercised by them during the financial year.

Political and charitable donations

Neither the Company nor any of its subsidiaries made any charitable or political donations during the year.

Disclosure of information to auditor

The directors who held office at the date of approval of the Directors' Report confirm that, so far as they are each aware, there is no relevant audit information of which the Group's auditor is unaware; and each director has taken all the steps that he ought to have taken as a director to make himself aware of any relevant audit information and to establish that the Group's auditor is aware of that information. This confirmation is given and should be interpreted in accordance with the provisions of Section 418 of the Companies Act 2006.

Auditor

In accordance with Section 489 of the Companies Act 2006, a resolution for the re-appointment of Johnston Carmichael LLP will be put to the Annual General Meeting.

By Order of the Board

M J Baynham

Secretary

21 December 2018

Consolidated income statement for the year ended 30 June 2018

 
                                                                              2018                      2017 
                                                          Note              GBP000                    GBP000 
 Revenue 
 Revenue from development property sales                                       505                       145 
 Gross rental income from investment properties                                416                       410 
 
            Total Revenue                                    5                 921                       555 
            Cost of development property sales                               (232)                     (108) 
            Property charges                                                 (162)                     (232) 
                                                                ------------------       ------------------- 
 
            Cost of Sales                                                    (394)                     (340) 
                                                                ------------------       ------------------- 
             Gross Profit                                         527                                    215 
            Administrative expenses                                          (649)                     (611) 
            Other income                                                        16                        15 
                                                                ------------------       ------------------- 
 
            Net operating loss before investment 
             property 
            disposals and valuation movements                5               (106)                     (381) 
                                                                ------------------       ------------------- 
 
 
            Gain on sale of investment properties           10                   -                       259 
             Valuation gains on investment properties                        3,040                     1,200 
            Valuation losses on investment properties       10                (25)                      (25) 
                                                                ------------------       ------------------- 
            Net gains on investment properties                               3,015                     1,434 
                                                                ------------------       ------------------- 
 
            Operating profit                                                 2,909                     1,053 
                                                                ------------------       ------------------- 
 
            Financial income                                 7                   -                         1 
            Financial expenses                               7                (23)                      (14) 
                                                                ------------------       ------------------- 
            Net financing costs                                               (23)                      (13) 
                                                                ------------------       ------------------- 
 
            Profit before taxation                                           2,886                     1,040 
            Income tax                                       8                   -                         - 
 
            Profit and total comprehensive income 
             for the financial year attributable to 
             equity holders of the parent Company                            2,886                     1,040 
                                                                ==================       =================== 
 
            Profit per share 
            Basic and diluted profit per share (pence)       9              24.49p                     8.83p 
 

The notes on pages 37 - 57 form an integral part of these financial statements.

Consolidated balance sheet as at 30 June 2018

 
                                                2018            2017 
                                Note          GBP000          GBP000 
 
 Non-current assets 
 Investment property              10          15,095          12,080 
 Plant and equipment              11               7              10 
 Investments                      12               1               1 
                                           ---------       --------- 
 Total non-current assets                     15,103          12,091 
                                           ---------       --------- 
 
 Current assets 
 Trading properties               13          11,650          11,633 
 Trade and other receivables      14             137             396 
 Cash and cash equivalents        15             451              55 
                                           ---------       --------- 
 Total current assets                         12,238          12,084 
 
 Total assets                                 27,341          24,175 
                                           ---------       --------- 
 
 Current liabilities 
 Trade and other payables         16           (970)           (835) 
 Interest bearing loans and 
  borrowings                      17           (360)           (360) 
                                           ---------       --------- 
 
 Total current liabilities        17         (1,330)         (1,195) 
  Non-current liabilities                    (4,070)         (3,925) 
  Interest bearing loans and 
   borrowings 
                                           ---------       --------- 
 Total liabilities                           (5,400)         (5,120) 
                                           ---------       --------- 
 Net assets                                   21,941          19,055 
                                           =========       ========= 
 
 Equity 
 Issued share capital             21           2,357           2,357 
 Capital redemption reserve       22             175             175 
 Share premium account            22           2,745           2,745 
 Retained earnings                            16,664          13,778 
                                           ---------       --------- 
 
 Total equity attributable 
  to equity holders of the 
  parent Company                              21,941          19,055 
                                           =========       ========= 
 
 

NET ASSET VALUE PER SHARE 186.2p 161.71p

The financial statements were approved by the board of directors on 21 December 2018 and signed on its behalf by:

ID Lowe

Director

Consolidated statement of changes in equity as at 30 June 2018

 
                            Share      Capital     Share   Retained 
                          capital   redemption   premium   earnings    Total 
                                       reserve   account 
                           GBP000       GBP000    GBP000     GBP000   GBP000 
 
 At 1 July 2016             2,357          175     2,745     12,738   18,015 
 
 Profit and total 
  comprehensive income 
  for the year                  -            -         -      1,040    1,040 
                           ______       ______    ______     ______   ______ 
 At 30 June 2017            2,357          175     2,745     13,778   19,055 
 
 Profit and total 
  comprehensive income 
  for the year                  -            -         -      2,886    2,886 
                           ______       ______    ______     ______   ______ 
 At 30 June 2018            2,357          175     2,745     16,664   21,941 
                           ======       ======    ======     ======   ====== 
 

Consolidated statement of cash flows for the year ended 30 June 2018

 
                                                                       2018                     2017 
                                                                     GBP000                   GBP000 
 Cash flows from operating activities 
 
 Profit for the year                                                  2,886                    1,040 
 
 Adjustments for : 
 Gain on sale of investment property                                      -                    (259) 
 Net gains on revaluation of investment properties                  (3,015)                  (1,175) 
 Depreciation                                                             7                        7 
 Net finance expense                                                     23                       13 
 
                                                                    _______                  _______ 
 Operating cash flows before movements 
 in working capital                                                    (99)                    (374) 
 
 (Increase) in trading properties                                      (17)                    (468) 
 Decrease/(Increase) in trade 
  and other receivables                                                 259                    (243) 
 Increase in trade and other payables                                   111                      124 
                                                                    _______                  _______ 
 Cash generated from/(absorbed 
  by) operations                                                        254                    (961) 
 
 Interest received                                                        -                        1 
                                                                    _______                  _______ 
 Net cash inflow/(outflow) from 
  operating activities                                                  254                    (960) 
                                                                    _______                  _______ 
 Investing activities 
  Proceeds from sale of investment 
  property                                                                -                      266 
 Acquisition of property, plant 
  and equipment                                                         (3)                      (9) 
                                                                    _______                  _______ 
 
 Cash flows (absorbed by)/generated 
  from investing activities                                             (3)                      257 
                                                                    _______                  _______ 
 
 Increase in borrowings                                                 145                      655 
                                                                    _______                  _______ 
 Cash flows generated from financing 
  activities                                                            145                      655 
                                                                    _______                  _______ 
 
 Net increase/(decrease) in cash and cash 
  equivalents                                                           396                     (48) 
 Cash and cash equivalents at 
  beginning of year                                                      55                      103 
                                                                    _______                  _______ 
 Cash and cash equivalents at 
  end of year                                                           451                       55 
 
 

Notes to the consolidated financial statements as at 30 June 2018

   1          Reporting entity 

Caledonian Trust PLC is a public company incorporated and domiciled in the United Kingdom. The consolidated financial statements of the Company for the year ended 30 June 2018 comprise the Company and its subsidiaries as listed in note 8 in the parent Company's financial statements (together referred to as "the Group"). The Group's principal activities are the holding of property for both investment and development purposes. The registered office is St Ann's Wharf, 112 Quayside, Newcastle upon Tyne, NE99 1SB and the principal place of business is 61a North Castle Street, Edinburgh EH2 3LJ.

   2          Statement of Compliance 

The Group financial statements have been prepared and approved by the directors in accordance with International Financial Reporting Standards and its interpretation as adopted by the EU ("Adopted IFRSs") applied in accordance with the provisions of the Companies Act 2006. The Company has elected to prepare its parent Company financial statements in accordance with IFRS; these are presented on pages 58 to 76.

   3          Basis of preparation 

The financial statements are prepared on the historical cost basis except for available for sale financial assets and investment properties which are measured at their fair value.

The preparation of the financial statements in conformity with Adopted IFRSs requires the directors to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

These financial statements have been presented in pounds sterling which is the functional currency of all companies within the Group. All financial information has been rounded to the nearest thousand pounds.

Going concern

The Group's business activities, together with the factors likely to affect its future development, performance and position are set out in the Chairman's Statement on pages 2 to 21. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in note 18 to the consolidated financial statements.

In addition, note 18 to the financial statements includes the Group's objectives, policies and processes for managing its capital; its financial risk management objectives; details of its financial instruments and hedging activities; and its exposures to credit risk and liquidity risk.

The Group and parent Company finance their day to day working capital requirements through related party loans (see note 24), and as set out in note 25, have bank funding for a specific development project. The related party lender has indicated its willingness to continue to provide financial support and not to demand repayment of its principal loan during 2019.

The Directors have prepared projected cash flow information for the period ending twelve months from the date of their approval of these financial statements. These forecasts include agreed bank funding for a development project and assume the Group will make property sales in the normal course of business to provide sufficient cash inflows to allow the Group to continue to trade. A property sale in August 2018 provided further cash funds of GBP440,000.

Should these sales not complete as planned, the directors are confident that they would be able to sell sufficient other properties within a short timescale to generate the income necessary to meet the Group's liabilities as they fall due.

For these reasons they continue to adopt the going concern basis in preparing the financial statements.

Areas of estimation uncertainty and critical judgements

Information about significant areas of estimation uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amount recognised in the financial statements is contained in the following notes:

Estimates

   --     Valuation of investment properties (note 10) 

The fair value has been calculated by the directors taking account of third party valuations provided by external independent valuers as at 30 June 2016 and adjusted for market movements in the period to 30 June 2018. The independent valuations were based upon assumptions including future rental income, anticipated void cost and the appropriate discount rate or yield. The directors and independent valuers also take into consideration market evidence for comparable properties in respect of both transaction prices and rental agreements.

   --     Valuation of trading properties (note 13) 

Trading properties are carried at the lower of cost and net realisable value. The net realisable value of such properties is based on the amount the Group is likely to achieve in a sale to a third party. This is then dependent on availability of planning consent and demand for sites which is influenced by the housing and property markets.

Judgements

   --     Deferred Tax (note 20) 

The Group's deferred tax asset relates to tax losses being carried forward and to differences between the carrying value of investment properties and their original tax base. A decision has been taken not to recognise the asset on the basis of the uncertainty that surrounds the availability of future taxable profits.

   4        Accounting policies 

The accounting policies below have been applied consistently to all periods presented in these consolidated financial statements.

Basis of consolidation

The financial statements incorporate the financial statements of the parent Company and all its subsidiaries. Subsidiaries are entities controlled by the Group. Control exists when the Group has the power to determine the financial and operating policies of an entity so as to obtain benefits from its activities. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date it ceases.

Turnover

Turnover is the amount derived from ordinary activities, stated after any discounts, other sales taxes and net of VAT.

Revenue

Rental income from properties leased out under operating leases is recognised in the income statement on a straight line basis over the term of the lease. Costs of obtaining a lease and lease incentives granted are recognised as an integral part of total rental income and spread over the period from commencement of the lease to the earliest termination date on a straight line basis.

Revenue from the sale of trading properties is recognised in the income statement on the date at which the significant risks and rewards of ownership are transferred to the buyer with proceeds and costs shown on a gross basis.

Other income

Other income comprises income from agricultural land and other miscellaneous income.

Finance income and expenses

Finance income and expenses comprise interest payable on bank loans and other borrowings. All borrowing costs are recognised in the income statement using the effective interest rate method. Interest income represents income on bank deposits using the effective interest rate method.

Taxation

Income tax on the profit or loss for the year comprises current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case the charge / credit is recognised in equity. Current tax is the expected tax payable on taxable income for the current year, using tax rates enacted or substantively enacted at the reporting date, adjusted for prior years under and over provisions.

Deferred tax is provided using the balance sheet liability method in respect of all temporary differences between the values at which assets and liabilities are recorded in the financial statements and their cost base for taxation purposes. Deferred tax includes current tax losses which can be offset against future capital gains. As the carrying value of the Group's investment properties is expected to be recovered through eventual sale rather than rentals, the tax base is calculated as the cost of the asset plus indexation. Indexation is taken into account to reduce any liability but does not create a deferred tax asset. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised.

Investment properties

Investment properties are properties owned by the Group which are held either for long term rental growth or for capital appreciation or both. Properties transferred from trading properties to investment properties are revalued to fair value at the date on which the properties are transferred. When the Group begins to redevelop an existing investment property for continued future use as investment property, the property remains an investment property, which is measured based on the fair value model, and is not reclassified as property, plant and equipment during the redevelopment.

The cost of investment property includes the initial purchase price plus associated professional fees and historically also includes borrowing costs directly attributable to the acquisition. Subsequent expenditure on investment properties is only capitalised to the extent that future economic benefits will be realised.

Investment property is measured at fair value at each balance sheet date. External independent professional valuations are prepared at least once every three years. The fair values are based on market values, being the estimated amount for which a property could be exchanged on the date of valuation between a willing buyer and a willing seller in an arms-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion.

Any gain or loss arising from a change in fair value is recognised in the income statement.

Purchases and sales of investment properties

Purchases and sales of investment properties are recognised in the financial statements at completion which is the date at which the significant risks and rewards of ownership are transferred to the buyer.

Plant and other equipment

Plant and other equipment are stated at cost, less accumulated depreciation and any provision for impairment. Depreciation is provided on all plant and other equipment at varying rates calculated to write off cost to the expected current residual value by equal annual instalments over their estimated useful economic lives. The principal rates employed are:

            Plant and other equipment             -           20.0 per cent 
            Fixtures and fittings                       -           33.3 per cent 
            Motor vehicles                               -           33.3 per cent 

Trading properties

Trading properties held for short term sale or with a view to subsequent disposal in the near future are stated at the lower of cost or net realisable value. Cost is calculated by reference to invoice price plus directly attributable professional fees. Net realisable value is based on estimated selling price less estimated cost of disposal.

Financial assets

Trade and other receivables

Trade and other receivables are initially recognised at fair value and then stated at amortised cost.

Financial instruments

Cash and cash equivalents

Cash includes cash in hand, deposits held at call (or with a maturity of less than 3 months) with banks, and bank overdrafts. Bank overdrafts that are repayable on demand and which form an integral part of the Group's cash management are shown within current liabilities on the balance sheet and included with cash and cash equivalents for the purpose of the statement of cash flows.

Financial liabilities

Trade payables

Trade payables are non-interest-bearing and are initially measured at fair value and thereafter at amortised cost.

Interest bearing loans and borrowings

Interest-bearing loans and bank overdrafts are initially carried at fair value less allowable transactions costs and then at amortised cost.

Standards and interpretations in issue but not yet effective

IFRS 15 "Revenue from Contracts with Customers" is effective for annual periods beginning on or after 1 January 2018 and will therefore be applicable to the next annual set of financial statements.

The Group intends to apply the modified retrospective method to adoption, though there is not expected to be any significant financial impact of the adoption of this standard and no transition adjustments are expected. The current accounting policies for revenue recognition will be updated to recognise the change in requirement to recognise revenue based on the satisfaction of performance obligations. We will review the accounting policies for the interim statements to 31 December 2018.

For sales of trading properties revenue will be recognised on the transfer of control of the property to the buyer rather than on transfer of the risks and rewards of ownership. We do not anticipate that this will change the accounting recognition for property sales.

For rental income from properties there will be no change in revenue recognition policy or accounting recognition.

IFRS 9 "Financial Instruments" is effective for annual periods beginning on or after 1 January 2018 and will therefore be applicable to the next annual set of financial statements.

The main impact of this standard is on the classification of financial instruments and the related required disclosures. The Group does not have any complex financial instruments therefore we do not believe the adoption of this standard will have a significant financial impact. We will review the accounting policies and classification of financial instruments for the interim statements to 31 December 2018.

IFRS 16 "Leases" is effective for annual periods beginning on or after 1 January 2019. The Group has yet to assess the full impact of this new standard but initial indications are that it will not significantly impact the financial statements of the Group as there are no significant changes for lessors under operating leases.

Operating segments

The Group determines and presents operating segments based on the information that is internally provided to the Board of Directors ("The Board"), which is the Group's chief operating decision maker. The directors review information in relation to the Group's entire property portfolio, regardless of its type or location, and as such are of the opinion that there is only one reportable segment which is represented by the consolidated position presented in the primary statements.

 
 5    Operating profit                                         2018     2017 
                                                             GBP000   GBP000 
      Revenue comprises:- 
 
  Rental income                                                 416      410 
  Sale of properties                                            505      145 
                                                                921      555 
                                                            =======  ======= 
 
      All revenue is derived from the United Kingdom 
 
                                                               2018     2017 
                                                             GBP000   GBP000 
      The operating profit is stated after charging:- 
 
  Depreciation                                                    6        7 
       Amounts received by auditors and their associates 
       in respect of: 
  - Audit of these financial statements (Group 
   and Company)                                                  14       13 
  - Audit of financial statements of subsidiaries 
   pursuant to                                                    7        7 
    legislation 
                                                            =======  ======= 
 
 
 
 6    Employees and employee benefits                       2018        2017 
                                                          GBP000      GBP000 
      Employee remuneration 
 
  Wages and salaries                                         355         338 
  Social security costs                                       41          35 
  Other pension costs                                         28          27 
                                                         _______     _______ 
                                                             424         400 
                                                          ======     ======= 
  Other pension costs represent contributions to defined 
   contribution plans. 
 
 
 
       The average number of employees during the year was as follows: 
                                                                         No.       No. 
   Management                                                              2         2 
   Administration                                                          3         4 
   Other                                                                   2         2 
                                                                     _______   _______ 
                                                                           7         8 
                                                                      ======   ======= 
 
                                                                        2018        2017 
       Remuneration of directors                                      GBP000      GBP000 
 
   Directors' emoluments                                                 250         197 
   Company contributions to money purchase 
    pension schemes                                                       25          25 
                                                                      ======      ====== 
 
 
        Director      Salary and    Benefits          Pension           2018      2017 
                            Fees                Contributions          Total     Total 
                          GBP000      GBP000           GBP000         GBP000    GBP000 
 
       ID Lowe               110           4                -            114        67 
       MJ Baynham            125           3               25            153       147 
       RJ Pearson              8           -                -              8         8 
                          ______      ______           ______         ______    ______ 
 
                             243           7               25            275       222 
 
 
 

Key management personnel are the directors, as listed above. The total remuneration of key management personnel in the year was GBP305,671 (2017: GBP246,135).

 
 
                                                                  2018     2017 
          Retirement benefits are accruing to the following 
          number of 
          directors under: 
 
          Money purchase schemes                                     2        2 
                                                                ======   ====== 
 
 
 
 
 7    Finance income and finance expenses 
                                               2018     2017 
                                             GBP000   GBP000 
      Finance income 
      Interest receivable: 
  - on bank balances                              -        1 
                                                ===      === 
      Finance expenses 
      Interest payable: 
  - Other loan interest                          23       14 
                                               ====     ==== 
 
 
 8   Income tax 
 
 

There was no current nor deferred tax charge in the current or preceding year.

 
 
  Reconciliation of effective 
   tax rate 
                                     2018     2017 
                                   GBP000   GBP000 
 
  Profit before tax                 2,886    1,040 
                                    =====    ===== 
 
  Current tax at 19% (2017: 
   19.75%)                            548      205 
 
  Effects of: 
  Expenses not deductible 
   for tax purposes                     9       15 
  Indexation on chargeable 
   gains                                -     (51) 
  Losses carried forward               16       63 
  Revaluation of property 
   not taxable                      (573)    (232) 
                                   ______   ______ 
  Total tax charge                      -        - 
                                    =====    ===== 
 

A reduction in the UK corporation tax rate from 20% to 19% was effective from 1 April 2017 and a further reduction to 18% (effective from 1 April 2020) was substantively enacted on 26 October 2015. This will reduce the company's future current tax charge accordingly. An additional reduction to 17% (effective 1 April 2020) was substantively enacted on 6 September 2016. This will reduce the company's future current tax charge accordingly.

In the case of deferred tax in relation to investment property revaluation surpluses, the base cost used is historical book cost and includes allowances or deductions which may be available to reduce the actual tax liability which would crystallise in the event of a disposal of the asset (see note 20).

 
 
 
   9       Profit per share 

Basic profit per share is calculated by dividing the profit attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period as follows:

 
                                                 2018          2017 
                                               GBP000        GBP000 
 Profit for financial period                    2,886         1,040 
                                               ======        ====== 
                                                  No.           No. 
 Weighted average no. of shares: 
 for basic earnings per share and 
  for diluted 
 earnings per share                        11,783,577    11,783,577 
                                             ========      ======== 
 Basic profit per share                       24.49 p        8.83 p 
 Diluted profit per share                     24.49 p        8.83 p 
 
  The diluted figure per share is the same as the basic figure 
   per share as there are no dilutive shares. 
 
 
 10    Investment properties 
                                                          2018             2017 
                                                        GBP000           GBP000 
       Valuation 
  At 1 July                                             12,080           10,905 
       Sold in year                                          -                - 
  Revaluation in year                                    3,015            1,175 
                                                      ________         ________ 
  Valuation at 30 June                                  15,095           12,080 
                                                      ========         ======== 
 
  The carrying value of investment property is the fair value 
   at the balance sheet date at directors' valuation and based 
   on valuations by Montagu Evans, Chartered Surveyors, and 
   for one property, by Rettie & Co, a firm of property specialists, 
   as at 30 June 2016. We critically assess the independence, 
   competence and objectivity of the directors responsible 
   for the fair value assessment. Given the qualifications 
   and experience, we are comfortable that the directors are 
   suitable and qualified parties to conduct the valuations. 
   The 2016 fair values were prepared in accordance with the 
   RICS Valuation - Professional Standards (January 2014, revised 
   April 2015) published by the Royal Institution of Chartered 
   Surveyors (RICS). The valuations are arrived at by reference 
   to market evidence of transaction prices and completed lettings 
   for similar properties. The properties were valued individually 
   and not as part of a portfolio and no allowance was made 
   for expenses of realisation or for any tax which might arise. 
   They assumed a willing buyer and a willing seller in an 
   arm's length transaction, after proper marketing and where 
   the parties had each acted knowledgeably, prudently and 

   without compulsion. The valuations reflected usual deductions 
   in respect of purchaser's costs, SDLT and LBTT as applicable 
   at the valuation date. Local comparable data was also adjusted 
   to reflect the individual circumstances and unique characteristics 
   of the valuation subjects. The 2018 directors' valuations 
   reflect changes in lettings and progress on the potential 
   for redevelopment of St Margaret's House, Edinburgh, which 
   is the subject of a conditional agreement for sale for GBP15 
   million entered into on 2 February 2018. 
   The 'review of activities' within the Chairman's statement 
   provides the current status of the Group's property together 
   with an analysis of the 'property prospects' for 2019 and 
   beyond. 
   The historical cost of investment properties held at 30 
   June 2018 is GBP9,521,406 (2017: GBP9,521,406). The cumulative 
   amount of interest capitalised and included within historical 
   cost in respect of the Group's investment properties is 
   GBP451,000 (2017: GBP451,000). 
 
 
 11   Plant and equipment 
 
 
                           Motor        Fixtures        Other 
                        Vehicles    and fittings    equipment     Total 
                          GBP000          GBP000       GBP000    GBP000 
  Cost 
  At 30 June 2016             18              14           67        99 
  Additions in year            -               2            -         2 
                      ----------  --------------  -----------  -------- 
  At 30 June 2017             18              16           67       101 
                      ----------  --------------  -----------  -------- 
 
 
  Depreciation 
  At 30 June 2016             16              14           54        84 
  Charge for year              2               1            4         7 
 
  At 30 June 2017             18              15           58        91 
                      ----------  --------------  -----------  -------- 
 
  Net book value 
 
  At 30 June 2017              -               1            9        10 
                      ==========  ==============  ===========  ======== 
 
 
 
                           Motor        Fixtures        Other 
                        Vehicles    and fittings    equipment     Total 
                          GBP000          GBP000       GBP000    GBP000 
  Cost 
  At 30 June 2017             18              16           67       101 
  Additions in year            2               -            1         3 
                      ----------  --------------  -----------  -------- 
  At 30 June 2018             20              16           68       104 
                      ----------  --------------  -----------  -------- 
 
 
  Depreciation 
  At 30 June 2017             18              15           58        91 
  Charge for year              1               -            5         6 
 
  At 30 June 2018             19              15           63        97 
                      ----------  --------------  -----------  -------- 
 
  Net book value 
 
  At 30 June 2018              1               1            5         7 
                      ==========  ==============  ===========  ======== 
 
 
 
 12    Investments 
                                  2018        2017 
                                GBP000      GBP000 
  Listed investments                 1           1 
                                ======      ====== 
 13    Trading properties 
                                  2018        2017 
                                GBP000      GBP000 
 
  At start of year              11,633      11,166 
       Additions                   249         575 
   Sold in year                  (232)       (108) 
                             _________   _________ 
  At end of year                11,650      11,633 
                              ========    ======== 
 
 
 14    Trade and other receivables                     2018       2017 
                                                     GBP000     GBP000 
       Amounts falling due within one year 
  Other debtors                                         106        370 
  Prepayments and accrued income                         31         26 
                                                    _______    _______ 
                                                        137        396 
                                                     ======     ====== 
 
  The Group's exposure to credit risks and impairment losses 
   relating to trade receivables is given in note 18. 
 
 
 15    Cash and cash equivalents                           2018         2017 
                                                         GBP000       GBP000 
 
  Cash                                                      451           55 
                                                         ======       ====== 
   Cash and cash equivalents comprise cash at bank and in hand. 
    Cash deposits are held with UK banks. The carrying amount 
    of cash equivalents approximates to their fair values. The 
    company's exposure to credit risk on cash and cash equivalents 
    is regularly monitored (note 18). 
 
 
 16     Trade and other payables 
                                                       2018                                                   2017 
                                                     GBP000                                                 GBP000 
 
         Trade creditors                                 64                                                     33 
         Other creditors including taxation              19                                                     15 
         Accruals and deferred income                   887                                                    787 
                                                    _______                                                _______ 
 
                                                        970                                                    835 
                                                     ======                                                 ====== 
 
        The Group's exposure to currency and liquidity risk relating 
        to trade payables is disclosed in note 18. 
 
 
 
 17    Other interest bearing loans and borrowings 
 
       The Group's interest bearing loans and borrowings are measured 
        at amortised cost. More information about the Group's exposure 
        to interest rate risk and liquidity risk is given in note 
        18. 
 
       Current liabilities 
                                                                             2018       2017 
                                                                           GBP000     GBP000 
 
  Unsecured development loan                                                  360        360 
                                                                          =======   ======== 
  Non-current liabilities 
   Unsecured loans                                                          4,070      3,925 
                                                                          =======    ======= 
 
 
 
 
 
   Terms and debt repayment schedule 
   Terms and conditions of outstanding loans were as follows: 
 
 
                                                                2018              2017 
                                        Nominal interest    Fair  Carrying    Fair  Carrying 
                            Currency                rate   value    amount   value    amount 
                                                          GBP000    GBP000  GBP000    GBP000 
 
    Unsecured loan                GBP  Base +3%            3,970     3,970   3,825     3,825 
 
 
    Unsecured development         GBP         Base +0.5%     360       360     360       360 
     loan 
     Unsecured loan               GBP           Base +3%     100       100     100       100 
 
                                                           4,430     4,430   4,285     4,285 
 
 

The unsecured loan of GBP3,970,000 is repayable in 12 months and one day after the giving of notice by the lender. Interest is charged at 3% over Bank of Scotland base rate but the lender varied its right to the margin over base rate until further notice. No notice has been received at 30 June 2018.

The short-term unsecured development loan of GBP360,000 is repayable after the disposal of two properties. Interest is charged at a margin of 0.5% over Bank of Scotland base rate.

The unsecured loan of GBP99,999 is not repayable before 1 July 2019. Interest is charged at a margin of 3% over Bank of Scotland base rate.

The weighted average interest rate of the floating rate borrowings was 3.2% (2017: 3.1%). As set out above, a lender varied its right to the margin of interest above base rate until further notice and so the rate of interest charged in the year is 0.53% (2017: 0.27%).

 
  18     Financial instruments 
 
        Fair values 
         Fair values versus carrying amounts 
         The fair values of financial assets and liabilities, together 
         with the carrying amounts shown in the balance sheet, are 
         as follows: 
                                                          2018                    2017 
                                          Fair value    Carrying            Fair value   Carrying 
                                                          amount                           amount 
                                              GBP000      GBP000                GBP000     GBP000 
 
  Trade and other receivables                    106         106                   370        370 
  Cash and cash equivalents                      451         451                    55         55 
                                        ------------  ----------  --------------------  --------- 
                                                 557         557                   425        425 
                                        ------------  ----------  --------------------  --------- 
 
 

  Loans from related parties                   4,430       4,430                 4,285      4,285 
  Trade and other payables                       955         955                   835        835 
                                        ------------  ----------  --------------------  --------- 
                                               5,385       5,385                 5,120      5,120 
                                        ------------  ----------  --------------------  --------- 
 
 
 
   Estimation of fair values 
    The following methods and assumptions were used to estimate 
    the fair values shown above: 
    Trade and other receivables/payables - the fair value of 
    receivables and payables with a remaining life of less than 
    one year is deemed to be the same as the book value. 
    Cash and cash equivalents - the fair value is deemed to 
    be the same as the carrying amount due to the short maturity 
    of these instruments. 
    Other loans - the fair value is calculated by discounting 
    the expected future cashflows at prevailing interest rates. 
   Overview of risks from its use of financial instruments 
    The Group has exposure to the following risks from its use 
    of financial instruments: 
     *    credit risk 
 
 
     *    liquidity risk 
 
 
     *    market risk 
 
 
    The Board of Directors has overall responsibility for the 
    establishment and oversight of the Company's risk management 
    framework and oversees compliance with the Group's risk 
    management policies and procedures and reviews the adequacy 
    of the risk management framework in relation to the risks 
    faced by the Group. 
 

The Board's policy is to maintain a strong capital base so as to cover all liabilities and to maintain the business and to sustain its development.

The Board of Directors also monitors the level of dividends to ordinary shareholders.

There were no changes in the Group's approach to capital management during the year.

Neither the Company nor any of its subsidiaries are subject to externally imposed capital requirements.

The Group's principal financial instruments comprise cash and short term deposits. The main purpose of these financial instruments is to finance the Group's operations.

As the Group operates wholly within the United Kingdom, there is currently no exposure to currency risk.

The main risks arising from the Group's financial instruments are interest rate risks and liquidity risks. The board reviews and agrees policies for managing each of these risks, which are summarised below:

 
           Credit risk 
            Credit risk is the risk of financial loss to the Group if 
            a customer or counterparty to a financial instrument fails 
            to meet its contractual obligations and arises principally 
            from the Group's receivables from customers, cash held at 
            banks and its available for sale financial assets. 
            Trade receivables 
            The Group's exposure to credit risk is influenced mainly 
            by the individual characteristics of each tenant. The majority 
            of rental payments are received in advance which reduces 
            the Group's exposure to credit risk on trade receivables. 
            Other receivables 
            Other receivables consist of amounts due from tenants and 
            purchasers of investment property along with a balance due 
            from a company in which the Group holds a minority investment. 
           Available for sale financial assets 
            The Group does not actively trade in available for sale 
            financial assets. 
            Bank facilities 
            At the year end the Company had no bank loan facilities 
            available (2017: Nil). 
            Exposure to credit risk 
            The carrying amount of financial assets represents the maximum 
            credit exposure. The maximum exposure to credit risk at 
            the reporting date was: 
                                           Carrying value 
                                            2018       2017 
                                            GBP000     GBP000 
 
          Available for sale investments    1          1 
          Other receivables                 106        370 
          Cash and cash equivalents         451        55 
                                            ________   ________ 
                                            558        426 
                                            =======    ======= 
              Credit risk (continued) 
               The Group made an allowance for impairment on trade receivables 
               of GBP2,000 (2017: GBP33,000) based on specific experience 
               with one tenant. As at 30 June 2018, trade receivables 
               of GBP32,000 (2017: GBP30,000) were past due but not 
               impaired. These are long standing tenants of the Group 
               and the indications are that they will meet their payment 
               obligations for trade receivables which are recognised 
               in the balance sheet that are past due and unprovided. 
               The ageing analysis of these trade receivables is as 
               follows:                                 2018       2017 
                Number of days past due date    GBP000     GBP000 
 
                Less than 30 days               13         1 
                Between 30 and 60 days          4          5 
                Between 60 and 90 days          -          - 
                Over 90 days                    15         24 
                                                ________   ________ 
                                                32         30 
                                                =======    ======= 
 
               Credit risk for trade receivables at the reporting date 
               was all in relation to property tenants in United Kingdom. 
               The Group's exposure is spread across a number of customers 
               and sums past due relate to 8 tenants (2017: 6 tenants). 
               One tenant accounts for 51% (2017: 67%) of the trade 
               receivables past due by more than 90 days. 
             Liquidity risk 
              Liquidity risk is the risk that the Group will not be 
              able to meet its financial obligations as they fall due. 
              The Group's approach to managing liquidity is to ensure, 
              as far as possible, that it will always have sufficient 
              liquidity to meet its liabilities when due without incurring 
              unacceptable losses or risking damage to the Group's 
              reputation. Whilst the directors cannot envisage all 
              possible circumstances, the directors believe that, taking 
              account of reasonably foreseeable adverse movements in 
              rental income, interest or property values, the Group 
              has sufficient resources available to enable it to do 
              so. 
 
 

The Group's exposure to liquidity risk is given below

 
                             Carrying  Contractual  6 months  6-12 months      2-5 
       30 June 2018 GBP'000   amount    cash flows   or less                    years 
--------------------------- 
 
  Unsecured loan              3,970       4,029         44          15       3,970 
 
   Unsecured development 
    loan                        360         367         367          -          - 
                                100 
   Unsecured loan                           117          13          2         102 
 
  Trade and other payables      970         970       970          -             - 
                             --------  -----------  --------  -----------  ---------- 
 
 
                                    Carrying  Contractual  6 months      6-12            2-5 
              30 June 2017 GBP'000   amount    cash flows   or less      months          years 
       --------------------------- 
 
         Unsecured loan 
                                     3,825        3,858        28              5      3,825 
          Unsecured development 
          loan                         360         361          1             360        - 
 
          Unsecured loan               100         111          9              -        102 
         Trade and other payables      835         835       835               -          - 
                                    --------  -----------  --------  -------------  ---------- 
 
       Market risk 
        Market risk is the risk that changes in market prices, such 
        as interest rates, will affect the company's income or the 
        value of its holdings of financial instruments. The objective 
        of market risk management is to manage and control market 
        risk exposures within acceptable parameters, while optimising 
        the return. 
        Interest rate risk 
        The Group borrowings are at floating rates of interest based 
        on Bank of Scotland base rate. 
        The interest rate profile of the Group's borrowings as at 
        the year-end was as follows: 
                                                               2018                         2017 
                                                             GBP000                       GBP000 
       Unsecured loan - see note 17                           3,970                        3,825 
   Unsecured loan - Base +0.5%                                  360                          360 
  Unsecured loan - Base +3%                                     100                          100 
                                                            =======                      ======= 
   A 1% movement in interest rates would be expected to change 
    the Group's annual net interest charge by GBP44,300 (2017: 
    GBP42,850). 
 
 
 
 19    Operating leases 
 
       Leases as lessors 
        The Group leases out its investment properties under operating 

        leases. The future minimum receipts under non-cancellable 
        operating leases are as follows: 
                                                           2018        2017 
                                                         GBP000      GBP000 
 
  Less than one year                                        210         201 
  Between one and five years                                171         181 
  Greater than five years                                   158         167 
                                                          _____       _____ 
 
                                                            539         549 
                                                          =====       ===== 
 

The amounts recognised in income and costs for operating leases are shown on the face of the income statement. Leases are generally repairing leases.

 
 20   Deferred tax 
 
 

At 30 June 2018, the Group has a potential deferred tax asset of GBP943,000 (2017: GBP929,000) of which GBP34,000 (2017: GBP27,000) relates to differences between the carrying value of investment properties and the tax base. In addition, the Group has tax losses which would result in a deferred tax asset of GBP909,000 (2017: GBP902,000). This has not been recognised due to the uncertainty over the availability of future taxable profits.

Movement in unrecognised deferred tax asset

 
                Balance       Additions/    Balance            Additions/      Balance 
                 1 July     (reductions)    30 June          (reductions)    30 Jun 18 
                     16                          17                             at 17% 
                 at 18%                      at 17% 
                 GBP000           GBP000     GBP000                GBP000       GBP000 
 
 Investment 
  properties         74       (47)               27                     7           34 
 Tax losses         897                5        902                     7          909 
                  _____           ______      _____                ______        _____ 
 
 Total              971        (42)             929                   14           943 
                  _____           ______      _____                ______        _____ 
 
 
 
 21    Issued share capital                 30 June 2018            30 June 2017 
                                            No    GBP000           No.    GBP000 
 
  Authorised share capital 
   Ordinary shares of 20p 
   each                             20,000,000     4,000    20,000,000     4,000 
                                      ========   =======      ========   ======= 
 
       Issued and 
       fully paid 
  Ordinary shares of 20p 
   each                             11,783,577     2,357    11,783,577     2,357 
                                      ========   =======      ========   ======= 
 

Holders of ordinary shares are entitled to dividends declared from time to time, to one vote per ordinary share and a share of any distribution of the Company's assets.

 
 22   Capital and reserves 
        The capital redemption reserve arose in prior years on redemption 
         of share capital. The reserve is not distributable. 
        The share premium account is used to record the issue of 
         share capital above par value. This reserve is not distributable. 
 
 
 
   23       Ultimate controlling party 

The ultimate controlling party is Mr ID Lowe.

   24       Related parties 

Transactions with key management personnel

Transactions with key management personnel consist of compensation for services provided to the Company. Details are given in note 6.

Lowe Dalkeith Farm, a business wholly owned by ID Lowe, used land at one of the Group's investment properties as grazings for its farming operation. No rent was charged as the cost of maintaining the land without livestock would exceed the grazing rent.

Other related party transactions

The parent Company has a related party relationship with its subsidiaries.

The Group and Company has an unsecured loan due to Leafrealm Limited, a company of which ID Lowe is the controlling shareholder. The balance due to this party at 30 June 2018 was GBP3,970,000 (2017: GBP3,825,000) with interest payable at 3% over Bank of Scotland base rate per annum. Leafrealm Limited varied its right to the margin of interest over base rate until further notice. Interest charged in the year amounted to GBP16,153 (2017: GBP9,967).

The Group and Company also has an unsecured development loan due to Leafrealm Limited, a company of which ID Lowe is the controlling shareholder. The balance due to this party at 30 June 2018 was GBP360,000 (2017: GBP360,000) with interest payable at a margin of 0.5% over base rate. Interest charged in the year amounted to GBP3,294 (2017: GBP414).

The Group and Company has an unsecured loan from Mrs V Baynham, the wife of a director. This is on normal commercial terms. The balance due to this party at 30 June 2018 was GBP99,999 (2017: GBP99,999) with interest payable at 3% over Bank of Scotland base rate per annum. Interest charged in the year amounted to GBP3,415 (2017: GBP3,274). The loan is not due to be repaid before 1 July 2019.

Contracting work on certain of the Group's development and investment property sites has been undertaken by Leafrealm Land Limited, a company under the control of ID Lowe. The value of the work done by Leafrealm Land Limited charged in the accounts for the year to 30 June 2018 amounts to GBPNil (2017: GBP61,897) at rates which do not exceed normal commercial rates. The balance payable to Leafrealm Land Limited in respect of invoices for this work at 30 June 2018 was GBP106,524 (2017: GBP106,524).

For a full listing of investments and subsidiary undertakings please see note 8 of the parent Company financial statements.

   25        Post balance sheet event 

Since the year end, a subsidiary has agreed a loan facility from Bank of Scotland of GBP1,415,000 to finance the next stage of its Brunstane Development. The loan will be drawn down as expenditure is incurred and interest is payable at a margin of 5.1% over Bank of Scotland base rate. The loan is secured by a floating charge over the assets of the Company and by a standard security over Phases 2 and 3 of the development site.

-ENDS-

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END

FR FELFIFFASELE

(END) Dow Jones Newswires

December 21, 2018 11:03 ET (16:03 GMT)