28 November 2019

 

Urban&Civic plc

("Urban&Civic", the "Company" or the "Group")

 

RESULTS FOR THE YEAR TO 30 SEPTEMBER 2019

CONTINUED STRONG PERFORMANCE FROM UK'S LEADING MASTER DEVELOPER

 

Urban&Civic plc (LSE: UANC) announces its results for the year ended 30 September 2019.

 

	Year ended	Year ended
	30 September 2019	30 September 2018
EPRA NAV (£m)	527.5	481.2
EPRA NAV per share (p)	360.3	331.8
EPRA NNNAV per share (p)	339.5	315.9
Profit before tax (£m)	16.3	22.3
Total shareholder return (%)	7.8	19.1
Dividend per share (p)	3.9	3.5

 

Financial highlights

•	EPRA net asset value up 9.6 per cent at £527.5 million (30 September 2018: £481.2 million) with Waterbeach revaluation
	contributing £24.6 million to the uplift.
•	EPRA net assets 360.3p per share: up 8.6 per cent from 30 September 2018.
•	EPRA triple net assets 339.5p per share; up 7.5 per cent.
•	Profit before tax for the year to 30 September 2019 £16.3 million (£22.3 million to 30 September 2018).
•	Large site discount down partly through realisations but still adds a further £197 million at 30 September 2019, equivalent to
	135p per share (30 September 2018: 145p per share).
•	30 September 2019 EPRA net asset value + large site discount = 495p per share (up from September 2018 477p).
•	Total shareholder return 7.8 per cent on a closing share price of 324p at 30 September 2019.
•	Final dividend 2.5p per share; 11.4 per cent year on year increase to recognise continued strong performance.

 

Operational highlights

•	Urban&Civic has demonstrated unbroken five-year growth against generally flat land prices, building platform and brand
	recognition in the process.
•	Debate over large site contribution in supply constrained South East is over; now about practicalities.
•	Strategic projects being seen to deliver environmental and educational gains that infill sites never can.
•	Recent MHCLG statistics show the land supply shortfall limited to South East and certain parts of the East of England (+
	London).  Squarely in keeping with the Company's 100 mile strategy and where Master Developer enjoys maximum leverage.
•	Accepted necessity becoming superseded by recognition of the virtue of infrastructure led strategic development.
	Witness progress on Tyttenhanger.
•	2019 plot sales 5 per cent ahead of November 2018 forecast by number and 3 per cent by revenue, reflecting mix not prices.
•	Minimum forward licence receipts on projects exceed £100 million for the first time.
•	September planning granted at Waterbeach, 3 miles north of Cambridge with Ministry of Defence. 6,500 new homes and
	associated facilities constitutes the largest consent to date and in the most supply constrained location.
•	Each strategic project consent has attracted Homes England finance: proposed £60.6 million 10 year loan at Waterbeach
	would represent largest to date.
•	Following Waterbeach, the Group, including Catesby, has interests in 32,000 consented or allocated plots with an additional
	19,000 pipeline in process.

 

Commenting on the results, Nigel Hugill, Chief Executive, said:

 

"The debate over large sites is over. Urban&Civic is now consistently outperforming static land markets as Master Developer of new prime environments in which housebuilders want to build and homeowners want to live. Net assets per share were up approaching 9 per cent, marking five years of uninterrupted growth. The keys are location and stakeholder alignment.  Government policies are providing enough land supply for new market homes across most of the country but not South East England, where the Company enjoys actual platform advantage. If we can only see a return to stable politics, the reasonable assumption is for the maturing profile of our projects and pipeline to enable further medium-term acceleration."

 

For further information, please contact:

Urban&Civic plc	+44 (0)20 7509 5555
Nigel Hugill/David Wood
FTI Consulting	+44 (0)20 3727 1000
Giles Barrie/Dido Laurimore/Ellie Sweeney	urban&civic@fticonsulting.com

 

 

A presentation for analysts and investors will be held at 09.30 am today at FTI Consulting, 200 Aldersgate, Aldersgate Street, London, EC1A 4HD.

 

If you would like to attend please contact Ellie Sweeney at FTI on +44 (0)20 3727 1000 or urban&civic@fticonsulting.com. A live webcast of the presentation will be available at www.urbanandcivic.com or via the following link http://webcasting.brrmedia.co.uk/broadcast/5d9489a1f8cc7162f3b011d3 and presentation slides will also be available to download.

 

Alternatively, details for the live dial-in facility are as follows:

Participants:        Tel: +44 (0)330 336 9125

Passcode:            7563190

 

 

Chief Executive's statement

 

Introduction

The Urban&Civic Master Developer model continues to return sustainable growth in generally static market conditions. Witness another strong performance even after a movement in valuation assumptions to reflect current cautions: EPRA net asset value per share up 8.6 per cent at 360.3p as at 30 September 2019. A commensurate increase in EPRA NAV to £527.5 million, as compared with £481.2 million at 30 September 2018. The debate about large site contributions to meeting housing shortfalls in South East England is over. The attention has turned to delivery quality and practicalities. Home ground for our company. Whilst the published indices are that political uncertainty is weighing on land values, the Company maintains upward performance by creating new prime environments where housebuilders want to build and homeowners want to live. Given the now maturing nature of Urban&Civic projects and the extent of existing pipeline, the reasonable assumption is for further medium term acceleration.

 

Profits before tax at £16.3 million were down from £22.3 million last year but fully in line with expectations. The previous twelve months had been boosted by residual commercial realisations as part of the strategy to deploy the Group balance sheet in strategic residential assets where the Company is seen to have maximum competitive advantage. The number and net cash generated from plot realisations to September 2019 were both modestly above November 2018 expectations.

 

Some analysts and commentators prefer to use EPRA NNNAV as the base measure: in our case that involves ignoring any benefit from the terms of funding from Homes England and making an adjustment for the estimated fair value of deferred tax liabilities. EPRA NNNAV per share was calculated as 339.5p as at 30 September 2019, up 7.5 per cent on the comparable figure 12 months previous. In future, we will headline with both net asset per share calculations. It is noteworthy that Urban&Civic has reported successive increases in net asset value-across all measures - in each interim and full year period since coming to market in May 2014.

 

Particular points of note

Good progress has been recorded across the board, including at Catesby, our land promotion business that contributed significant sales during the period. Four particular aspects merit highlighting.

 

First, the minimum value of contracted future licence sales on Group projects reached £101.7 million. The infrastructure investment for those realisations is all made.

 

Second, planning consent was issued for 6,500 new homes at Waterbeach, on the northern perimeter of Cambridge, in September 2019 following the Resolution to Grant announced in May. We are in advanced discussions for an associated £60.6 million infrastructure facility. Both consent and facility represent our largest to date. Preliminary works are on site with the start of the substantive capital programme early in the New Year. Initial new build occupations are scheduled for 3Q 2022.

 

Third, whilst it remains early days, the signs are good for the proposed new settlement at Tyttenhanger in Hertsmere, Hertfordshire. Agreements were signed in February 2019 over 2,000 acres, predominantly to the immediate north of junction 22 to the M25, 18 miles from Marble Arch in Central London. The Development Management arrangements provide for Urban&Civic having responsibility for planning and delivery, including site servicing costs, for which we stand to receive a substantial minority participation. The project requires release from the Green Belt and, as such, necessarily is to be taken through the Local Plan. On the other hand, Hertsmere Borough is 79 per cent Green Belt; it is simply infeasible to reach local employment and housing aspirations without a major release. The current Council timetable is for Local Plan adoption during 2021. There are no local authority elections for Hertsmere during that period providing a correspondingly stable governance base.

 

Fourth, the valuers made some changes to the weighting of their assumptions at the year end, including inflation and discount rates.  The impact of those changes was to lower the level of reported net asset uplift by approximately £25 million when compared with the assumptions used at 30 September 2018.  Partly as consequence, the estimated large site discount also reduced by £13 million to £197 million, equivalent to 135p per share.  The calculation is made between the current open market value of a standard 150- 200 plot parcel on our consented sites only, as then discounted by CBRE into a balance sheet valuation to account for the strategic size of our actual holdings.  Adding back that discount to EPRA NAV gives a figure of 495p per share at 30 September 2019, up from 477p on 12 months previous and notwithstanding the alteration in valuation assumptions.

 

Regional differentiation across the UK land market

Urban&Civic was founded on the political impracticality of meeting housing requirements in the South East without an increased contribution from large developments. Young families and inward movement, not just from abroad but also from other parts of the country, combine to produce local population growth often approaching 1 per cent a year. That translates into a requirement for somewhere approaching 10,000 new homes in each borough or district over the next 10-12 years. That simple calculation demonstrates the necessity for strategic projects in our chosen areas within 100 miles of London.

 

National land indices show no real price movement since the start of 2018. Housebuilders have sought to protect margin and mitigate risk through careful site selection. The nationals are able to point to good land buying opportunities in benign conditions. Government policies and interventions are having a greater national impact than is often credited. Recently published official statistics are that the housing supply in England increased at the highest annual rate to March 2019 at any time in the past 30 years. Significantly, the net addition figure was almost 8 per cent above the pre financial crash peak, despite the aggregate number of housing transactions for the year being 30 per cent lower than the high of 2006-2007. Purchasers (especially first time buyers) are staying longer, having families later and mostly choosing houses over apartments, leaving the secondary market to stagnate relatively, while demand for new-build property strengthens assisted by the continuation of Help to Buy.

 

The statistics also serve to reinforce an observation made in previous reports: the regional shortfalls in new houses being built against the Government's Standard Methodology for measuring those requirements are limited to London, the South East and some parts of the East of England. In the rest of the country, the official targets are now being met or, in some cases comfortably, exceeded. As consequence, outside the South East, the actual limitations are not the availability of consented land on which to build but the extent of customer demand and the fierce determination of housebuilders to maintain cost efficiency.

 

UK employment remains close to a record high and earnings growth exceeds inflation. Fortunately, these are the two principal historic housing drivers, regardless of the prevailing political turmoil. Outside London, the subdued economic environment is impacting upon house prices but much less on absorption rates. Positive underlying demographics, supported by good servicing affordability from low mortgage interest rates, sustain demand nationally without meaningful house price inflation. The evidence from our own projects is for continued build out at a pace above contractual minimums with house price growth at Corby and Newark.

 

Urban&Civic's performance relative to those markets

Pulling those strands together explains why the Company has been able to outperform the land indices and affords good confidence for new openings arising from our established competitive advantage. The success achieved by Urban&Civic to date has not been in especially supply constrained locations. Sales are taking place currently on four strategic projects plus Europa Way at Warwick, which is smaller at 735 units but also fully infrastructured. Alconbury is on the margin of the area for which current net additions are falling short of official housing requirements. The remainder, Houlton in Rugby in particular, are in high demand/well supplied areas. The differentiation lies in our ability to create new quality places and schooling. As illustration, there are 18 new housing outlets in Rugby Borough, where there is a current shortage of school places. The initial intake at the primary school on our project at Houlton is approaching capacity after little more than two years. The consented design provides for ready expansion. Work has started on the secondary school which is on course for September 2021 opening. Our devised funding structure, whereby the Department of Education advances £35.5 million, interest free and repayable only against section 106 hurdles, has been extended to a national pilot. The £25 million link road, accelerated with favourable funding from Homes England, is now open. The greenspace investment looks terrific. The anecdotal evidence is that Houlton is outselling other new outlets in Rugby by 50 per cent per housebuilder.

 

As progression, our next two projects stand squarely in areas of limited supply. Wintringham is within walking distance of the East Coast mainline railway station at St Neots on the Cambridgeshire/ Bedfordshire border. Contracts on parcels totalling 455 units are completed; one to Cala Homes, a new customer, the other to Morris Homes, who are also building at Alconbury and Rugby. Two further contracts are in documentation for approximately the same number again: both new customers. Those four licences will comprise around one third of the total 2,800 consented plots. The frame is erected for the first primary school that will open in September 2020 to coincide with initial residential occupations. Bids have been received from nursery operators and from metro food retailers. The 33 per cent in the project was acquired from our partners, Nuffield College in Oxford, in April 2017 at an acquisition consideration equivalent to £14,285 per unserviced residential plot. The equivalent CBRE valuation as at September 2019, which took account only of the first two contracts, was almost double at £27,400 per plot. The date of first occupations will be a little shy of our original ambitious target but well within three years of first application submission.

 

Waterbeach, three miles to the north of the Science and Business Parks in Cambridge, will follow closely after Wintringham. Planning consent took longer here but in an area of greatest shortfall. The section 106 was signed in September 2019, giving rise to a valuable interest in the former barracks land to Urban&Civic, as well as a right to draw down in accordance with the development management contract. An initial valuation of the combined interests included in the year end accounts gave rise to an uplift over cost of £24.6 million. Occupations of the first new homes are scheduled for third quarter of 2022. From the outset and regardless of the extraordinary lakeside environment, Waterbeach has been positioned as affordable Cambridge. The valuations are based on starting prices well below £400 per sq. ft. The completed conversion of the barracks buildings for nursing accommodation to Papworth hospital supports the assumption that the demand for PRS looks set to be of a different order from other Group projects to further boost likely delivery rates.

 

Environmental and social virtues from operating at scale

If Urban&Civic was established out of the practical necessity for more strategic projects, the virtues of well managed infrastructure led development are now apparent. Put simply, large projects afford the opportunity of creating new green environments with good practices and quality education designed in from the outset in a manner that infill sites never can.

 

Whilst the advantages of infill are speed and lack of risk, as Master Developer, Urban&Civic can provide the same to our housebuilder customers on their serviced land parcels whilst creating new social fabric for all stakeholders across the site. Strategic projects are necessarily infrastructure led. The funding support from Homes England is correspondingly important. That is being repeated at Waterbeach. Securing planning consent also required empirical demonstration to South Cambridgeshire planners of net carbon improvement, emphasising the importance of our Sustainability Framework.

 

We are on site with new schools at Rugby and Wintringham and about to commence the primary school at Newark. The link road at Rugby is open five years ahead of planning obligation. The Urban&Civic way is creating a level of goodwill and institutional alignment that will take some matching. The stream of official visitors to our sites is testimony to the prevailing level of interest. The monetisation that comes from building our own prime becomes shared with our housebuilding customers via the licence arrangements. The price profile may have flattened but the stepped growth since first sales is marked.

 

Operating at scale is underpinned by our natural enthusiasm for consulting widely and with genuine intent; early tree planting; creating usable and sustainable green landscape; recycling and reusing as much material as we can; establishing meaningful programmes for jobs and skills and forging strong bonds of trust with the communities in which we are delivering. We know that what we do makes a difference. I am proud of what we have achieved to date and very aware of the increasing focus on these issues. Having extensively reviewed standard metrics and measurements, we found that none encompass accurately the role of the Master Developer across large scale sites. Accordingly, a bespoke assessment of metric options for Alconbury identified five key sustainability capitals which will underpin our work during 2020 to forge a detailed, repeatable and relevant assessment that we can report on more widely. We welcome comments on the analysis to date and shareholder involvement in the process going forward.

 

Catesby

The Group's land promotion business continued to capitalise on its planning expert positioning. I am pleased to report that the two outstanding Supreme Court hearings and the judicial review were all determined in Catesby's favour. Total sales in the year amounted to £10.1 million giving a realised post tax contribution after overheads of £5.3 million. The net EPRA movement on sites for which consents have been secured but the land not yet sold was a further £1.4 million. Capital invested in Catesby was £29.0 million as recorded in the balance sheet at 30 September 2019. The EPRA uplift included within capital invested aggregated £12.9 million.

 

Operating conditions are not getting any easier but a good pipeline is being maintained with approximately 10,000 units across 52 sites on 2,000 acres. At the time of writing four projects are at appeal or subject to judicial review. A small satellite office has been opened in Basingstoke to provide better coverage to the south and west of London.

 

Manchester

Completion of the three residential blocks at Manchester New Square is programmed between April and September 2020. The development is in joint venture with the Greater Manchester Pension Fund, who provide all incremental funding. Sales are steady with a noticeable increase in footfall now that the hoardings are down. 145 units exchanged/ reserved out of 351. Help to Buy finance will be available on remaining apartments early in the New Year.

 

Refurbishment works contracted at £4 million are about to commence on the Renaissance hotel in Deansgate, in conjunction with a new five year operating lease to Marriott. Manchester City Council has ratified a Strategic Regeneration Framework to confirm the subsequent redevelopment potential.

 

Immediate Priorities

We must always look to improve but last year was one of few project disappointments. The obvious frustration is the time that is being taken to get started at Manydown. The conversion of the procurement process into contract has taken longer than anticipated but does now appear close to completion. An industry leading joint venture between a local authority, a county council, a master developer and the world's second largest charity was never going to be entirely straightforward but, once formed, will have significant experience and firepower. The outline planning application, being run to date by the Councils, shows that large site approvals are not easy even when a local authority is effectively making an application to itself. We look forward to putting our shoulder fully to the wheel post contract.

 

Work will start in earnest at Waterbeach where we enjoy the advantage of making the most of an already established natural environment, really for the first time.

 

The outcome of the deliberations over HS2 have obvious ramifications for Calvert in Buckinghamshire. Our interests in 785 acres, with a working understanding over more, are at the intersection of the programmed HS2 route and the track beds of the Oxford to Cambridge railway line. The rail connections are fundamental, whereas the now unlikely Oxford to Cambridge Expressway is not. We are making the case. Several new projects in which we can look to capitalise on platform advantage are in early due diligence. But no more than that. The priority is for early income realisation.

 

The Executive Management Committee is working well and helps integrate not only internal decision making but also external stakeholder engagement. The operating structures are in place for further expansion.

 

Outlook

Expressing confidence a fortnight before the most significant General Election in living memory is the preserve of the brave, not to say foolhardy. The level of large project realisations last year amounted to 1,066 plots (665 strategic plus 401 Europa Way). The total combined exceeded guidance, albeit not by as much as for 2017/18. Predicting the current year is more difficult again. The resilience in mid-range housing demand is demonstrably hard to suppress, just as the UK economy has faltered, not stalled, despite all bleak prognoses. Maintained uncertainty and further parliamentary gymnastics were there not to be a majority outcome must test the resolve of new purchasers, probably beyond previous limits. Housebuilders may also choose to run slower in securing detailed planning approvals ahead of starting on site.

 

The contrary is also perfectly plausible. The emphasis is manifestly different but there is much common ground across the political manifestos. Housing priorities are unusually detailed. A growing population has to live somewhere and, with the possible exception of Waterbeach, buying is cheaper than renting on and around our projects. Climate and social concerns will continue to accelerate. Our housebuilding customers will be able to apportion some of the benefits in driving down impacts that large sites can provide. To maintain revenues when facing continued political uncertainty, housebuilders may regard Urban&Civic sites as a preferable low risk route to return on capital employed. Build cost pressures are abating. We are seeing those signs in the interest for new parcels from existing and new customers alike: current licences and forward realisations number 28 with a further 11, including some smaller sales, in legal documentation.

 

The most straightforward course in estimating the coming year is to use our central business plan assumptions, acknowledging the extent to which external events could impact in either direction. On that basis, the 2019/20 sales profile remains sharply upwards at 1,200 strategic site realisations (approaching double last year), with an additional 334 at Europa Way. The downside risk is mitigated by the structure of the licence contracts. The average length of forward sales at 3.3 years with progressively higher minimums affords significant comfort if we are to face another bout of unstable minority administration.

 

Looking further forward, the Board is determined to play to the Company's strengths and clear platform advantage. Group projects including Catesby amount to 32,000 consented or allocated plots, with a further 19,000 moving through the planning process. That represents a tripling of holdings in five years. We offer a rapid and pre consented route to sales in affordable and well connected locations with strong underlying demographics in the South East. By contrast, our expectation is that the buyers' market for land will maintain elsewhere and may yet become more pronounced. NPPF guidance envisages circumstances in which councils might need to plan for more housing than the standard method calculation. A recent report from, planning consultants, Lichfields reviewed the plan making progress of all local authorities in England, excluding London. The research found that of one third of submitted or emerging Local Plans went above the pro rata 273,000 home target but that the sponsoring authorities were overwhelmingly in the North and Midlands. Plans in the South East either matched or were providing for less, predominantly citing constraints on supply.

 

That is our area and those are the authorities with which Urban&Civic, as the leading Master Developer, can command most leverage. Tyttenhanger exemplifies where we are concentrating our attention and resources. Equidistant between St Albans and Potters Bar, in one of the most supply constrained locations in Southern England. The covering agreement was made bilaterally with a single landowner and takes our total number of strategic projects to nine, much the highest of any UK Master Developer.

We are working on more.

 

Dividend

The final dividend of 2.5p per share maintains the stated policy of increasing shareholder distributions by 10 per cent per annum in the normal course. The 11.4 per cent increase in the current year recognises the planning consent at Waterbeach and continued strong Group performance. It goes without saying that the Board will review at the half year, at which point the landscape will hopefully have become clearer, or perhaps not.

 

A scrip dividend alternative will be made available for the 2019 final payment, for which I shall again be electing.

 

Continuing thanks

Ever grateful thanks to Board and staff colleagues alike. An inclusive stakeholder approach has been part of the DNA of Urban&Civic from the very outset. Doing things right is just how we work.

 

Nigel Hugill

Chief Executive

27 November 2019

 

 

Financial review

 

Introduction

The Group has delivered a 9.6 per cent growth in EPRA net asset value (or 8.5 per cent on an EPRA triple net asset value basis) in the last 12 months, through a combination of planning uplifts (including outline consent for 6,500 homes at Waterbeach), accelerated infrastructure delivery and placemaking across the Group's strategic sites and completion of 665 plot sales (1,066 plots if you include our sub-strategic site at Europa Way). These 665 strategic site plot sales generated £34.3 million cash for the Group, which was around 5 per cent above expectations in terms of numbers and 3 per cent higher in respect of values (the slightly lower cash generation outperformance was the result of variations to sales mix rather than pricing). This level of sales was achieved without having any housebuilders commencing sales on new parcels in the second half of the year.

 

All consented strategic land sites are now benefitting from house completions except for Waterbeach, which has just received consent, and Wintringham, where two housebuilders are now on site and building homes (completions due in 2020). At 30 September 2019, the Group had sales contracts in place with 19 housebuilders across five sites, which will generate minimum total receipts of £101.7 million (up from £95.9 million at 31 March 2019 and £93.4 million at 30 September 2018) - an annual minimum equivalence of £30.7 million.

 

Gross profits are slightly down on last year and have mostly been derived from residential and Catesby sales rather than the historic commercial property disposals.

 

Key performance indicators

The Group's key performance indicators for the year to 30 September 2019 remain consistent with last year, although I have increased the prominence of the EPRA triple net metric this year (EPRA NNNAV) and I have also added a total NAV return measure (which is defined in the glossary of terms).

 

	Year ended 30 September 2019	Year ended 30 September 2018	Annual increase/ (decrease)
EPRA NAV (EPRA net assets)	£527.5m	£481.2m	9.6%
EPRA NAV per share	360.3p	331.8p	8.6%
EPRA NNNAV (EPRA triple net assets)	£497.0m	£458.1m	8.5%
EPRA NNNAV per share	339.5p	315.9p	7.5%
Total shareholder return	7.8%	19.1%
Total NAV return	8.6%	9.2%
Gearing - EPRA NAV basis	19.9%	16.3%
Look-through gearing - EPRA NAV basis	28.3%	20.6%
Strategic site plot completions1	665 plots	445 plots	49.4%
Europa Way plot completions	401 plots	-	n/a
Cash flow generation from strategic site plot completions2	£34.3m	£21.0m	63.0%
Large site discount per share3	135.0p	145.0p	(6.9)%
EPRA NAV per share + large site discount per share (gross of tax)4	495.3p	476.8p	3.9%

 

1.   Includes 144 plots at Alconbury Weald (six months ended 31 March 2019: 60; year ended 30 September 2018: 100); 155 at Rugby (six months to 31 March 2019: 62; year ended 30 September 2018: 78); 87 at Newark (six months to 31 March 2019: 63; year ended 30 September 2018: 37); 53 plots from new contracts at Priors Hall and 226 plots from pre-acquisition contracts at Priors Hall (six months to 31 March 2019: 180; acquisition to 30 September 2018: 230).

2.   Represents Urban&Civic's (U&C's) share of cash generated by strategic site plot completions.

3.   Large site discount represents the difference between the unserviced land values ascribed by CBRE strategic site valuations (which consider site scale and build-out duration among other matters) and the current retail prices being achieved on smaller parcel sales.

4.   EPRA NNNAV per share + large site discount (net of tax) equates to 451.6p (30 September 2018: 436.3p). The tax allowance was calculated by applying a tax rate of 17 per cent to the gross large site discount.

 

EPRA NAV metrics and total shareholder return remain the Group's principal performance measures, particularly when assessing value growth. EPRA balance sheet measures record the net asset value attributable to equity shareholders, adjusted for the revaluation of trading properties without tax (EPRA net asset value) or with tax (EPRA triple net asset value).

 

Given the impact that revaluations of trading properties have on the Group's EPRA NAV metrics, we continue to engage CBRE Limited (our independent valuers) to provide Red Book valuations for all our consented strategic land sites (as well as others property valuations) using discounted cashflows as a basis for their assessment.

 

I mentioned above that I have increased my focus on EPRA NNNAV in my commentary this year. This reflects the Group's increasing profitability and usage of its historic tax losses; both of which are likely to mean that the Group will pay more tax in the future (especially as the Group is not a REIT).

 

Our justification for selecting the other KPI's is set out in the Strategic Report section of the Annual Report and Accounts.

 

Net Asset Value - EPRA NAV, EPRA NNNAV and IFRS NAV

I have presented below a non-statutory analysis explaining the movements in net asset value over the last 12 months (and comparable period).

 

	Year ended 30 September 2019					Year ended 30 September 2018
	Group £m	Joint ventures and  associates £m	Total £m	Pence per share		Total £m	Pence per share
Revaluation of investment properties and write downs of trading properties1,2	5.1	-	5.1	3.5		9.1	6.3
Profit on trading and investment property sales3,4	19.3	8.1	27.4	18.7		27.6	19.0
Rental, hotel and other property income	2.3	-	2.3	1.6		2.5	1.8
Project management fees	2.9	-	2.9	2.0		3.0	2.2
Administrative expenses	(19.9)	(0.1)	(20.0)	(13.7)		(18.8)	(13.0)
Tax and other income statement movements	(5.1)	-	(5.1)	(3.5)		(4.6)	(3.2)
Total comprehensive income movement	4.6	8.0	12.6	8.6		18.8	13.1
Dividends paid	(5.2)	-	(5.2)	(3.5)		(4.5)	(3.1)
Other equity movements	3.3	-	3.3	2.3		2.9	2.0
Effect of IFRS 15 adoption4	2.4	0.8	3.2	2.2		-	-
IFRS movement	5.1	8.8	13.9	9.6		17.2	12.0
Revaluation of retained trading properties2	36.5	2.8	39.3	26.8		35.1	24.2
Release of trading property revaluations on disposals4	(4.7)	-	(4.7)	(3.2)		(11.6)	(8.0)
Deferred taxation2	1.0	-	1.0	0.7		1.2	0.8
Effect of IFRS 15 adoption2	(2.4)	(0.8)	(3.2)	(2.2)		-	-
Effect of share issues and dilutive options			-	(3.2)		-	(1.6)
EPRA NAV movement	35.5	10.8	46.3	28.5		41.9	27.4
Deferred taxation2	(7.4)	-	(7.4)	(4.9)		(5.7)	(3.8)
EPRA NNNAV movement	28.1	10.8	38.9	23.6		36.2	23.6
EPRA NAV at start of year			481.2	331.8		439.3	304.4
EPRA NAV at end of year			527.5	360.3		481.2	331.8
EPRA NNNAV at start of year			458.1	315.9		421.9	292.3
EPRA NNNAV at end of year			497.0	339.5		458.1	315.9

 

1.   Comprises surpluses on the revaluation of investment properties (£5.8 million) net of trading property write downs (£0.7 million).

2.   Total classified as property revaluations for the purposes of the below EPRA NNNAV growth commentary.

3.   Comprises profits from trading and residential property sales (£22.6 million), construction contracts (£1.3 million) and investment property sales (whether earned by subsidiaries or joint ventures) as well as unwinding of discounts applied to long-term residential property sales debtors (£2.6 million) and surpluses on revaluation of overage entitlements that were acquired with the Priors Hall asset (£0.9 million).

4.   Total classified as profit on property sales for the purposes of the below EPRA NNNAV growth commentary.

 

As reported at the half year, following the adoption of IFRS 15 'Revenue from Contracts with Customers' overages as well as minimums are now recognised ahead of house exchanges or house completions to the extent they are not expected to reverse in the future. The £3.2 million total set out in the table above represents the estimated additional discounted overages, net of tax, receivable up to 30 September 2018 and is accounted for as an opening reserve adjustment.

 

You will also note from the table that property revaluations contributed 23.9p2 to the Group's EPRA NNNAV growth of 23.6p, while profits on property sales contributed a further 17.7p4. Overheads, dividends and the dilutive effect of share options net 20.5p from these gains.

 

A more detailed reconciliation between IFRS, EPRA NAV and EPRA NNNAV is provided in note 18.

 

Total shareholder and NAV return

Urban&Civic's share price increased 20.0p (or 6.6 per cent) over the financial year (from 304.0p on 30 September 2018 to 324.0p on 30 September 2019). This increase, combined with the payment of a 2.2p final dividend and 1.4p interim dividend, has resulted in total shareholder return of 7.8 per cent for the financial year.

 

Total NAV return, which substitutes movements in EPRA NNNAV for movements in share prices when compared to shareholder return calculations, has increased by 8.6% over the 12 months to 30 September 2019.

 

Consolidated statement of comprehensive income

Gross profits, including the Group's share of joint ventures, are broadly in line with last year despite not making the significant commercial asset disposals that have been a feature of prior periods.

 

The Group's profit after tax was down £6.1 million over the comparative financial year, which (given consistent gross profits) is predominantly as a result of lower property revaluations going through the income statement, following the reclassification of most of the Group's property interests into trading stock in this and prior years.

 

I have provided further explanation of the income statement movements below.

 

	Year ended 30 September 2019				Year ended 30 September 2018
	Group £m	Joint ventures and  associates £m	Total £m		Group £m	Joint ventures and  associates £m	Total £m
Revenue	102.1	29.4	131.5		150.4	8.8	159.2
Profit on trading property sales1,2	16.7	7.2	23.9		24.3	2.1	26.4
Rental and other property profits	0.6	-	0.6		0.8	-	0.8
Hotel operating profit	1.7	-	1.7		1.8	-	1.8
Project management and other fees3	2.9	-	2.9		3.0	-	3.0
Write down of trading properties4	(0.7)	-	(0.7)		(2.6)	-	(2.6)
Gross profit	21.2	7.2	28.4		27.3	2.1	29.4
Administrative expenses (net of capitalised costs)3	(19.9)	(0.1)	(20.0)		(18.8)	-	(18.8)
Profit on investment property sales2	-	-	-		1.2	-	1.2
Surplus on revaluation of investment properties4	5.8	-	5.8		10.6	-	10.6
Surplus on revaluation of receivables2	0.9	-	0.9		1.1	-	1.1
Share of post-tax profit from joint ventures	8.0	(8.0)	-		2.1	(2.1)	-
Unwinding of discount applied to long-term debtors2	1.7	0.9	2.6		0.8	-	0.8
Tax and other income statement movements	(5.1)	-	(5.1)		(5.6)	-	(5.6)
Profit after tax	12.6	-	12.6		18.7	-	18.7

 

1.   Comprises profits from trading property sales and residential property sales and profits on construction contracts as disclosed in note 2.

2.   Total classified as profit on trading and investment property sales in the EPRA movement table above.

3.   Recurring project management fees comprise £2.1 million of the total (30 September 2018: £2.1 million) and are earned through recharging administrative expenses to joint ventures where Group employees are engaged on joint venture activities.

4.   Total classified as revaluation of investment properties and write downs of trading properties in the above table.

 

Gross profit

Gross profit is slightly down on last year at £28.4 million (including £7.2 million generated by joint ventures); predominantly due to reduced commercial disposal profits (down £7.6 million - reflecting last year's sale of the Stansted Hilton Hotel development and Skelton Retail Park), which have been compensated by increased residential property profits (up £2.8 million), and significantly lower property write-downs (down £1.9 million).

 

Profits from trading property sales of £23.9 million (which make up 84 per cent of gross profit) include residential profits at Alconbury Weald, Newark and Priors Hall (£2.8 million), £7.2 million in respect of Urban&Civic's share of residential profits at RadioStation Rugby and Wintringham, £3.2 million generated by the disposal of Canningford House commercial property, £1.3 million of Europa Way residential profits and £9.4 million from Catesby land promotion transactions.

 

Included within the residential profits figures are profits from the Group's strategic site licence arrangements. These arrangements are complicated from an accounting perspective, however they are predominantly recognised in two places in the income statement, although often at different points in time.

 

Firstly, we typically recognise the total minimum amounts due under a licence arrangement when the land has been transferred to the housebuilder (usually on contract completion). This minimum sum is discounted and recorded through gross profit line together with an estimate of the overages that the Group expects to collect from the housebuilder when the homes are ultimately sold. This overage sum is also discounted, due to the length of time it takes to earn that overage, and it is only recognised if we do not believe there is a high probability that it will reverse due to market conditions prior to collection.

 

At each subsequent reporting period our estimates will be compared with what has taken place and adjustments made.

 

The second place where you might consider that 'residential profits' are recorded, is through the finance income line. It is here that the discount applied to the long-term minimums and overage debtors unwind; through either the passage of time or upon receipt of the licence proceeds, minimum sum and/or overage.

 

During this financial year, residential profits at Alconbury Weald, Newark and Priors Hall included £2.6 million from the completion of 26 Hopkins Homes and £1.6 million of pre-completion profit recognition of discounted overages across all three sites. A further £1.7 million of discount unwinding, in respect of minimum and overage receivables, was recognised in finance income.

 

Of the £7.2 million of joint venture residential profits, £5.0 million was attributable to the contractual minimums and discounted overages following the sale of a 248-plot parcel to Redrow at Rugby (£4.0 million) and the sale of a 177-plot parcel to Cala at Wintringham (£1.0 million). A further £2.2 million of other profits from Davidsons Homes, Morris Homes and Crest Nicholson agreements were also recognised. Joint ventures also booked a further £0.9 million of discount unwinding, in respect of the overage receivables, through finance income.

 

I have provided a breakdown of plot completions by site, with comparatives, as a footnote to the KPI table above. You should note that 226 completions at Priors Hall in the period relate to existing contracts that were in place when the Group purchased the site in October 2017 and therefore receipts against these acquisition receivables have been credited to the balance sheet receivables; rather than the income statement.

 

The terms minimums, overages and licences have been defined within the glossary and our accounting policy notes sets out how we recognised revenue.

 

Administrative expenses

The Group's gross administrative costs have increased by £1.8 million (to £25.3 million) in the 12 months to 30 September 2019. This is largely as a result of increased staff costs (headcount has increased by seven employees this year) and one-off costs associated with the Group's move to the Premium Listing segment of the London Stock Exchange in April. After capitalising overheads associated with development activity, this gross amount falls to £20.0 million compared with £18.8 million last year.

 

It is worth noting that the Group's recurring project management fees, which are fees earned by our employees for the provision of project management services to our joint ventures (or other third parties), now amount to £2.1 million (30 September 2018: £2.1 million). These project management services and associated fees contribute to overheads as well as acting as a profit centre.

 

Surplus on revaluation of investment properties

The residential-led planning application for the Alconbury expansion land, better known as Grange Farm has now been submitted and therefore, on commencement of early development works, we reclassified this property into trading stock on 1 October 2018.

 

Following this reclassification, and as a result of prior period reclassifications and disposals, the Group's only investment properties now comprise commercial buildings, commercial development land at Alconbury and a proportion of the Group's interest in Waterbeach, which could deliver both commercial buildings and residential rental properties in the future. Consequently there are very few property revaluations accounted for through the income statement under International Financial Reporting Standards.

 

In order to help the reader understand the value of the Group's total property portfolio, as well as reconcile the movements in values at IFRS and EPRA levels, I have produced the table below, which pulls together the property interests that arise throughout the balance sheet .

 

	Property portfolio £m	Investment  properties (wholly owned)	Trading properties (wholly owned)	Properties within  PPE (wholly owned)	Trade and other receivables  (wholly owned)	Subtotal (wholly owned)	Trading properties (share of joint  ventures)	Trade and other  receivables (share of joint ventures)	Total (including share of joint  ventures)
	Valuation at 1 October 2018	86.9	341.2	3.7	31.3	463.1	134.4	11.6	609.1
	Less: EPRA adjustment (trading properties)	-	67.4	-	-	67.4	17.9	-	85.3
	IFRS carrying value at 1 October 2018	86.9	273.8	3.7	31.3	395.7	116.5	11.6	523.8
	Impact of adopting IFRS 15	-	-	-	3.1	3.1	-	0.8	3.9
	IFRS carrying value at 1 October 2018-restated	86.9	273.8	3.7	34.4	398.8	116.5	12.4	527.7
	Capital expenditure (including capitalised overheads)	2.1	44.4	-	-	46.5	41.6	-	88.1
	Transfer to trading properties	(41.9)	41.9	-	-	-	-	-	-
	Disposals/depreciation/write downs	-	(53.1)	(0.5)	18.2	(35.4)	(15.0)	15.3	(35.1)
	Revaluation movements (investment properties)	5.8	-	-	-	5.8	-	-	5.8
	IFRS carrying value at 30 September 2019	52.9	307.0	3.2	52.6	415.7	143.1	27.7	586.5
	Add: EPRA adjustment (trading properties)	-	95.4	-	-	95.4	20.6	-	116.0
	Valuation at 30 September 2019	52.9	402.4	3.2	52.6	511.1	163.7	27.7	702.5
	Memo: movement in EPRA adjustment (trading properties)	-	28.0	-	-	28.0	2.7	-	30.7
	Comprising:
	Effect of IFRS 15 adoption1	-	(3.1)	-	-	(3.1)	(0.8)	-	(3.9)
	EPRA adjustment on sites sold1	-	(4.7)	-	-	(4.7)	-	-	(4.7)
	EPRA adjustment on retained properties	-	35.8	-	-	35.8	3.5	-	39.3

 

1. Classified as EPRA adjustments reversed as properties sold or profits recognised in below commentary.

 

From the above table you can see that investment properties generated £5.8 million of revaluation surpluses in the year (under IFRS) with a further £39.3 million derived from revaluing retained trading properties (wholly owned and held by joint ventures) at the EPRA level. Against this, £4.7 million of EPRA adjustments have been reversed as properties have been disposed of or profits recognised.

 

Of the total £45.1 million uplift, £24.6 million (54.5 per cent) was the result of the revaluation of our interest in Waterbeach following the grant of outline consent for 6,500 homes. Alconbury Weald, Wintringham and Priors Hall strategic land sites contributed a further £6.5 million, £3.8 million and £4.6 million respectively and Catesby planning consents generated a further £1.4 million of uplifts.

 

The revaluation movements in respect of Alconbury Weald, Wintringham and Priors Hall reflect on-site progress, both in terms of sales and infrastructure works (which have resulted in a reduction in the discount rates that CBRE apply to their valuation cashflow models) and Catesby uplifts are derived from changes in planning status of several of its promotion sites. Alconbury Weald remains the Group's most significant property asset comprising 40.7 per cent of the total property portfolio value.

 

Taxation expense

The tax charge as a proportion of profits has increased over recent reporting periods as historic tax losses have been utilised and changes in legislation have restricted how much of these historic tax losses can be utilised in any one period. In the 12 months to 30 September 2019 the Group's tax charge of £3.7 million amounted to 22.7 per cent of profit before tax, higher than the 19 per cent UK corporation tax rate; predominantly due to share based payments and costs such as depreciation being either non-deductible or non-deductible until settlement in the case of share-based payment costs. Taxable profits relate in most part to residential property sales and Catesby disposals.

 

Dividend

The Board proposes to pay a final dividend of 2.5p this year; subject to shareholder approval at the AGM on 6 February 2020. Assuming the final dividend is approved, this will mean that the total dividend for the year amounts to 3.9p, up 11.4 per cent over the prior year and broadly in line with the Group's EPRA NNNAV growth.

 

The final dividend will be paid on 21 February 2020 to those shareholders on the register on 10 January 2020. Investors choosing to participate in the dividend reinvestment scheme will need to make their election by 24 January 2020.

 

The Group paid its 2018 final dividend of 2.2p per share (£3.2 million) in February 2019 and the interim 1.4p per share (£2.0 million) in July 2019.

 

Consolidated balance sheet

Overview

 

	At 30 September 2019				At 30 September 2018
	Group £m	Joint ventures and associates £m	Total £m		Group £m	Joint ventures and  associates £m	Total £m
Investment properties	52.9	-	52.9		86.9	-	86.9
Trading properties	307.0	143.1	450.1		273.8	116.5	390.3
Properties within PPE	3.2	-	3.2		3.7	-	3.7
Properties1	363.1	143.1	506.2		364.4	116.5	480.9
Investment in joint ventures and associates	121.3	(121.3)	-		103.4	(103.4)	-
Trade and other receivables
Non-current property1	45.9	22.1	68.0		20.4	11.6	32.0
Current property1	6.7	5.6	12.3		10.9	-	10.9
Current - other	11.8	12.6	24.4		18.1	10.0	28.1
	64.4	40.3	104.7		49.4	21.6	71.0
Cash	24.4	3.0	27.4		16.6	0.5	17.1
Borrowings	(129.3)	(47.6)	(176.9)		(94.9)	(21.3)	(116.2)
Deferred tax liability (net)	(5.9)	-	(5.9)		(4.1)	-	(4.1)
Other net liabilities	(35.0)	(17.5)	(52.5)		(45.8)	(13.9)	(59.7)
Net assets	403.0	-	403.0		389.0	-	389.0
EPRA adjustments - property1	95.5	20.5	116.0		67.4	17.9	85.3
EPRA NAV adjustments - deferred tax	8.5	-	8.5		6.9	-	6.9
EPRA NAV	507.0	20.5	527.5		463.3	17.9	481.2
EPRA NNNAV adjustments - deferred tax	(30.5)	-	(30.5)		(23.1)	-	(23.1)
EPRA NNNAV	476.5	20.5	497.0		440.2	17.9	458.1

 

1. Total property related interests: £702.5 million (30 September 2018: £609.1 million).

 

Non-current assets

Investment properties

Investment properties at 30 September 2019 amounted to £52.9 million and comprised the commercial development area at Alconbury Weald (£43.0 million) and a proportion of the Group's interest in the Waterbeach site that could deliver both commercial buildings and residential properties for rent in due course (£9.9 million).

 

The Group's total period-end property portfolio, irrespective of balance sheet classification, was valued at £702.5 million, 94 per cent by independent valuers CBRE and 6 per cent by Directors.

 

Investment in equity accounted joint ventures and associates

The Group's Rugby joint venture has been included in the balance sheet at £86.6 million, which along with a half interest in the 351 apartment Manchester New Square development (£15.2 million), a one-third interest in a 2,800 plot site at Wintringham, St. Neots (£17.0 million) and £2.5 million of other residual interests, combine to form an overall Group investment in joint ventures and associates of £121.3 million.

 

During the year joint ventures generated £8.0 million of profits for the Group (£7.0 million at Rugby and £1.0 million at Wintringham) and received £9.2 million of loans from the Group to fund development and infrastructure works at Rugby, Wintringham and Manchester New Square.

 

Non-current trade property and other receivables

The £45.9 million disclosed on the face of the balance sheet comprises both the non-current proportions of the acquired Priors Hall receivables and the discounted values of the contractual minimums and pre-completion discounted overages with Hopkins Homes, Morris Homes, Crest Nicholson and Redrow at Alconbury Weald, Kier at Priors Hall and Avant and Bellway at Newark.

 

Equivalent receivables (U&C's share) are owed to the Rugby joint venture by Crest Nicholson (£4.0 million) and again Morris Homes (£5.8 million) and Redrow (£12.1 million) and to the Wintringham joint venture by Cala (£5.8 million).

 

All sums due will be received as and when the houses to which they relate are sold, or if earlier, when the housebuilders are contractually obliged to pay minimum sums.

 

Current assets

Trading properties

The carrying value of trading properties increased by £33.2 million in the year to £307.0 million.

 

This increase was the result of capital expenditure of £38.3 million (including £35.8 million in respect of Alconbury Weald, Priors Hall, Waterbeach and Newark development works), capitalised overheads amounting to £5.1 million, capitalised finance costs of £3.1 million and £41.9 million of reclassified investment properties - all net of £54.5 million of disposals (including residential disposals at Alconbury Weald, Priors Hall and Newark of £44.9 million and £6.1 million in respect of the sale of Catesby sites) and £0.7 million of written off land promotion and other projects costs; where it was decided not to progress .

 

Cash

Group cash balances at the year-end totalled £24.4 million, up £7.8 million since last year-end; largely due to sales receipts (£54.0 million) and loan drawdowns (£42.0 million) exceeding development expenditure (£45.8 million), loan repayments (£5.3 million), loans to joint ventures (£9.2 million) and other expenses (£27.9 million).

 

Sales receipts comprised £23.1 million of Catesby promotion receipts (including cost reimbursement), £26.3 million of residential sales receipts and £4.6m of commercial sales receipts.

 

Liabilities

Current and non-current borrowings

The Group has put in place four new facilities during the year (totalling £85.8 million). The first was a 5 year extension to the expiring £40.0 million Revolving Credit Facility with HSBC Bank, the second was an £8.6 million, three year and ten month, housebuilding facility at Alconbury Weald with Homes England, the third was a £26.0 million infrastructure loan for our Wintringham joint venture, again with Homes England, and the last facility was an £11.2 million investment facility with HSBC against our hotel in Deansgate, Manchester.

 

In addition to these facilities and following the receipt of outline planning consent at Waterbeach, terms have been agreed in respect of a 10 year, £60.6 million infrastructure facility. Urban&Civic will be the borrower (i.e. it will be on balance sheet) with security provided by the landowner (the MOD). This will significantly reduce recourse to the Group. The facility will help accelerate delivery at Waterbeach.

 

At the year-end, total Group borrowings amounted to £129.3 million (30 September 2018: £94.9 million) with the Group's share of joint venture borrowings adding a further £47.6 million (30 September 2018: £21.3 million).

 

Drawings predominantly funded infrastructure expenditure at Alconbury Weald, Priors Hall and Wintringham and construction costs at Manchester New Square and Civic Living, Alconbury Weald.

 

Financial resources and capital management

The Group's net debt position at 30 September 2019 totalled £104.9 million (30 September 2018: £78.3 million), which after taking into account the Group's cash reserves produces a net gearing ratio of 26.0 per cent (30 September 2018: 20.1 per cent) on an IFRS NAV basis and 19.9 per cent (30 September 2018: 16.3 per cent) on an EPRA NAV basis. A large proportion of this increase relates to Homes England drawings (including Civic Living house building facilities, which will be repaid when homes are sold).

 

Our Homes England infrastructure facilities are typically long dated and only require us to repay an agreed proportion of the loans when we distribute proceeds (i.e. we are typically not required to repay the full amount of the distribution in priority to Homes England); if there is an agreement to recycle distributable funds into further project works then no repayment will be made at that time.

 

On a full look-through basis, which additionally includes the Group's share of joint ventures' net debt, gearing on an EPRA NAV basis increases to 28.3 per cent (30 September 2018: 20.6 per cent). The increase is predominantly due to ongoing development works at Manchester New Square, where the joint venture's capital costs are being fully met by £75.6 million of development facilities. These facilities will be repaid out of apartment sales proceeds when phased practical completions commence (expected in the second quarter of next year).

 

Gearing on all measures continues to remain within our self-imposed limit of 30 per cent, even including the shorter-term Civic Living and Manchester New Square development facilities.

 

	At 30 September 2019
	Group £m	Proportion of  Group borrowings	Joint ventures and associates £m	Look-through £m	Proportion of look-through  borrowings
Homes England	99.0	76.6%	23.6	122.6	69.3%
Corporate RCF	16.3	12.6%	-	16.3	9.2%
Manchester New square	-	0.0%	24.0	24.0	13.6%
Other	14.0	10.8%	-	14.0	7.9%
Borrowings	129.3	100.0%	47.6	176.9	100.0%
Cash	(24.4)		(3.0)	(27.4)
Net debt	104.9		44.6	149.5
EPRA NAV	527.5			527.5
Gearing	19.9%			28.3%

 

The Group's weighted average loan maturity at 30 September was 6.7 years (30 September 2018: 7.9 years) and weighted average cost of borrowing on drawn debt was 3.8 per cent (30 September 2018: 3.3 per cent).

 

The Group has no loans maturing over the next three years, except for the Newark Homes England facility (£9.2 million currently drawn), the Deansgate hotel facility (£11.2 million) and the joint venture development loans at Manchester New Square. The Newark facility is amortising along with residential plot sales and is due for repayment by March 2021 and the Manchester New Square borrowings will be repaid from sale proceeds as previously noted. The term of the Deansgate facility will be reviewed once new hotel management arrangements (which are currently under discussion) are finalised.

 

The Group continues to assess its long-term viability using the procedures set out in the 2019 Annual Report and Accounts.

 

David Wood

Group Finance Director

27 November 2019

 

Consolidated statement of comprehensive income

for the year ended 30 September 2019

 

	Notes	Year ended 30 September 2019 £'000	Year ended 30 September 2018 £'000
Revenue	2	102,114	150,398
Direct costs	2	(80,890)	(123,127)
Gross profit	2	21,224	27,271
Administrative expenses		(19,875)	(18,812)
Surplus on revaluation of investment properties	9	5,791	10,582
Surplus on revaluation of receivables	14	850	1,090
Share of post-tax profit from joint ventures	11	8,039	2,059
Profit on disposal of investments	11	-	94
Profit on disposal of investment properties	9	-	1,244
Operating profit	3	16,029	23,528
Finance income	5	1,777	866
Finance costs	5	(1,470)	(2,127)
Profit before taxation		16,336	22,267
Taxation expense	6	(3,707)	(3,572)
Total comprehensive income		12,629	18,695
Basic earnings per share	7	8.8p	13.0p
Diluted earnings per share	7	8.6p	12.9p

 

The Group had no amounts of other comprehensive income for the current or prior years and the profit for the respective years is wholly attributable to equity shareholders.

 

The accompanying notes form part of this preliminary financial information. 

 

Consolidated balance sheet

as at 30 September 2019

 

	Notes	30 September 2019 £'000	30 September 2018 £'000
Non-current assets
Investment properties	9	52,937	86,918
Property, plant and equipment	10	3,958	4,508
Investments in joint ventures and associates	11	121,262	103,418
Deferred tax assets	12	2,565	2,788
Trade and other receivables	14	45,898	20,445
		226,620	218,077
Current assets
Trading properties	13	306,998	273,770
Trade and other receivables	14	18,463	29,039
Cash and cash equivalents		24,441	16,638
		349,902	319,447
Total assets		576,522	537,524
Non-current liabilities
Borrowings	16	(128,265)	(73,973)
Deferred tax liabilities	12	(8,509)	(6,851)
		(136,774)	(80,824)
Current liabilities
Borrowings	16	(1,000)	(20,891)
Trade and other payables	15	(35,715)	(46,786)
		(36,715)	(67,677)
Total liabilities		(173,489)	(148,501)
Net assets		403,033	389,023
Equity
Share capital	17	29,030	29,009
Share premium account		169,163	168,881
Capital redemption reserve		849	849
Own shares		(4,086)	(4,748)
Other reserve		113,785	113,785
Retained earnings		94,292	81,247
Total equity		403,033	389,023
NAV per share	18	275.3p	268.3p
EPRA NAV per share	18	360.3p	331.8p
EPRA NNNAV per share	18	339.5p	315.9p

 

 

The accompanying notes form part of this preliminary financial information. 

 

Consolidated statement of changes in equity

for the year ended 30 September 2019

 

	Share capital £'000	Share premium account £'000	Capital redemption reserve £'000	Own shares £'000	Other reserve £'000	Retained earnings £'000	Total £'000
Balance at 1 October 2017	28,993	168,648	849	(4,003)	113,785	63,608	371,880
Shares issued under scrip dividend scheme	16	233	-	-	-	-	249
Share option exercise satisfied out of own shares	-	-	-	647	-	-	647
Purchase of own shares	-	-	-	(1,392)	-	-	(1,392)
Share-based payment expense	-	-	-	-	-	3,434	3,434
Total comprehensive income for the year	-	-	-	-	-	18,695	18,695
Dividends paid	-	-	-	-	-	(4,490)	(4,490)
Balance at 30 September 2018	29,009	168,881	849	(4,748)	113,785	81,247	389,023
Effect of adoption of IFRS 15	-	-	-	-	-	3,203	3,203
Balance at 30 September 2018 as restated	29,009	168,881	849	(4,748)	113,785	84,450	392,226
Shares issued under scrip dividend scheme	21	282	-	-	-	-	303
Deferred bonus award and share option exercise satisfied out of own shares	-	-	-	1,417	-	(1,577)	(160)
Purchase of own shares	-	-	-	(755)	-	-	(755)
Share-based payment expense	-	-	-	-	-	3,955	3,955
Total comprehensive income for the year	-	-	-	-	-	12,629	12,629
Dividends paid	-	-	-	-	-	(5,165)	(5,165)
Balance at 30 September 2019	29,030	169,163	849	(4,086)	113,785	94,292	403,033

 

 

Consolidated cash flow statement

for the year ended 30 September 2019

 

Notes	Year ended 30 September 2019 £'000	Year ended 30 September 2018 £'000
Cash flows from operating activities
Profit before taxation	16,336	22,267
Adjustments for:
Surplus on revaluation of investment properties	(5,791)	(10,582)
Surplus on revaluation of receivables	(850)	(1,090)
Share of post-tax profit from joint ventures	(8,039)	(2,059)
Finance income	(1,777)	(866)
Finance costs	1,470	2,127
Depreciation charge	918	1,148
Write down of trading properties	730	2,570
Profit on sale of investment properties	-	(1,244)
Profit on disposal of investments	-	(94)
Loss on disposal of property, plant and equipment	13	2
Share-based payment expense	3,955	3,434
Cash flows from operating activities before change in working capital	6,965	15,613
Decrease in trading properties	11,034	631
Increase in trade and other receivables	(9,243)	(15,284)
Decrease in trade and other payables	(12,368)	(2,330)
Cash absorbed by operations	(3,612)	(1,370)
Finance costs paid	(1,126)	(3,476)
Finance income received	72	39
Tax paid	(1,498)	(111)
Net cash flows from operating activities	(6,164)	(4,918)
Investing activities
Additions to investment properties	(2,144)	(14,174)
Additions to property, plant and equipment	(381)	(558)
Loans advanced to joint ventures	(9,203)	(9,685)
Loans repaid by joint ventures and associates	179	2
Profit on disposal of investments	-	94
Proceeds from disposal of investment properties	-	38,925
Net cash flows from investing activities	(11,549)	14,604
Financing activities
New loans	37,335	42,818
Issue costs of new loans	(580)	(408)
Repayment of loans	(5,622)	(42,015)
Purchase of own shares	(755)	(1,392)
Dividends paid	(4,862)	(4,241)
Net cash flows from financing activities                                                                                         22	25,516	(5,238)
Net increase in cash and cash equivalents	7,803	4,448
Cash and cash equivalents at 1 October	16,638	12,190
Cash and cash equivalents at 30 September	24,441	16,638

 

The accompanying notes form part of this preliminary financial information. 

 

Notes to the consolidated financial information

for the year ended 30 September 2019

 

1. Accounting policies

Basis of preparation

The financial information contained in this announcement has been prepared on the basis of the accounting policies set out in the statutory accounts for the year ended 30 September 2019. Whilst the financial information included in this announcement has been computed in accordance with International Financial Reporting Standards (IFRS), as adopted by the European Union, this announcement does not itself contain sufficient information to comply with IFRS. The financial information does not constitute the Company's statutory accounts for the periods ended 30 September 2019 or 2018, but is derived from those accounts. Those accounts give a true and fair view of the assets, liabilities, financial position and profit and loss of the Company and the undertakings included in the consolidation taken as a whole. Statutory accounts for 2018 have been delivered to the Registrar of Companies and those for 2019 will be delivered following the Company's Annual General Meeting. The auditor's reports on both the 2019 and 2018 accounts were unqualified; did not draw attention to any matters by way of emphasis; and did not contain statements under s498(2) or (3) of the Companies Act 2006.

 

The principal accounting policies adopted in the preparation of this preliminary financial information are set out below. The policies have been consistently applied to both years, unless otherwise stated.

 

Functional and presentation currency

All financial information is presented in British Pounds Sterling (£), the functional currency of all Group entities, and has been rounded to the nearest thousand (£'000) unless indicated to the contrary.

 

Going concern

The consolidated financial information has been prepared on a going concern basis, which assumes that the Group will continue to meet its liabilities as they fall due. At 30 September 2019 the Group has prepared cash flow projections that show that it is expected to have adequate resources to continue in operational existence for the foreseeable future.

 

In arriving at this assessment the Directors have considered any facilities that are due to expire in the next 12 months against progress made on their extension or renewal to date, and/or the Group's ability to repay the maturing facilities from Group resources.

 

Adoption of new and revised standards

In the current period, the Group has adopted IFRS 9 "Financial Instruments" and IFRS 15 'Revenue from Contracts with Customers' which has resulted in a change to certain of the Group's accounting policies.

 

The adoption of IFRS 9 has not had any transitional impact on the Group. Financial assets previously accounted for as loans and receivables continue to be measured at amortised cost and financial assets previously accounted for at fair value through profit and loss continue to be measured at fair value. No material amendment to provisioning adjustments was required as a result of applying the expected credit loss model when assessing financial assets for impairment principally because:

 

•     development values are considered sufficient, even in the worst case scenario, to enable repayment of loans to joint ventures; and

 

•     receivables from housebuilders are secured on land which is valued in excess of the amounts due.

 

The adoption of IFRS 15 has resulted in additional revenue being recognised in relation to the variable consideration to which the Group is entitled under a certain number of its land parcel sales to housebuilders included within residential property sales. The Group has elected to adopt IFRS 15 using the Cumulate Effect Method meaning that full retrospective adjustment of comparative periods is not required. The impact on the Group's balance sheet at 1 October 2018 has been to increase trade receivables by £3,078,000, increase the investment in joint ventures by £781,000, increase the deferred tax liability by £656,000 and increase retained earnings by £3,203,000. The Group's new accounting policy in respect of revenue recognition is stated later in note 1.

 

New standards and interpretations not yet applied

The IASB has issued or amended the following standards that are mandatory for later accounting years, are relevant to the Group and have not been adopted early. These are:

 

•     IFRS 16 'Leases' (effective date: 1 January 2019)

 

The Group has undertaken an assessment of the impact should this standard have been adopted for the current period of account.

 

IFRS 16 'Leases' will be effective for the Group from the period beginning 1 October 2019, and will result in the Group recognising a right-of-use asset and liability on the balance sheet initially at the present value of all future lease payments it is obliged to make for any material leases for which it is the lessee. These are disclosed in note 20. At 30 September 2019, it has been assessed that this would lead to the recognition on the balance sheet of assets and liabilities of £4.3 million. There is no net impact on profit and loss over the lease term, but under IFRS 16 part of the payment currently recognised within administrative expenses (£0.1 million) in the year ended 30 September 2019 would be recognised as a finance cost. The treatment of leases where the Group is acting as a lessor is substantially unchanged from that currently applied under IAS 17.

 

Basis of consolidation

Where the Company has control over an investee, it is classified as a subsidiary. The Company controls an investee if all three of the following elements are present: power over the investee, exposure to variable returns from the investee, and the ability of the investor to use its power to affect those variable returns. Control is reassessed whenever facts and circumstances indicate that there may be a change in any of these elements of control.

 

The consolidated financial information presents the results of the Group as if it formed a single entity. Intercompany transactions and balances between Group companies are therefore eliminated in full.

 

Business combinations

The consolidated financial information incorporates the results of business combinations using the purchase method. In the consolidated balance sheet, the acquiree's identifiable assets, liabilities and contingent liabilities are initially recognised at their fair values at the acquisition date. The results of acquired operations are included in the consolidated statement of comprehensive income from the date on which control is obtained.

 

Joint arrangements

The Group is party to joint arrangements where there are contractual arrangements that confer joint control over the relevant activities of the arrangements to the Group and at least one other party. Joint control is assessed under the same principles as control over subsidiaries.

 

Joint arrangements are accounted for as joint ventures where the Group has rights to only a share of the net assets of the joint arrangements.

 

In the consolidated financial information, interests in joint ventures are accounted for using the equity method of accounting whereby the consolidated balance sheet incorporates the Group's share of the net assets of the joint ventures. The consolidated statement of comprehensive income incorporates the Group's share of the joint ventures' profits after tax.

 

Where there is objective evidence that the investment in a joint venture has been impaired, the carrying amount of the investment is tested for impairment in the same way as other non-financial assets.

 

Joint arrangements are accounted for as joint operations where the Group, along with the other parties that have joint control, have the rights and obligations for assets and liabilities respectively relating to such contractual arrangements.

In the consolidated financial information, where the Group has interests accounted for as joint operations, the Group's share of jointly controlled assets, liabilities, income and expenses are reflected on a line by line basis.

Associates

Where the Group has significant influence but not control or joint control over the financial and operating policy decisions of another entity, it is classified as an associate. Associates are initially recorded in the consolidated balance sheet at cost. The Group's share of post-acquisition profits and losses is recognised in the consolidated statement of comprehensive income, except that losses in excess of the Group's investment in the associate are not recognised unless there is an obligation to make good those losses.

 

Where the Group has a legal obligation to a third party in relation to the losses of an associate, the Group fully provides for its share and the charge is recognised in the consolidated statement of comprehensive income.

 

Investment properties

Investment properties are properties held for long-term rental income and/or for capital appreciation and are measured initially at cost, including related transaction costs, and subsequently at fair value. Changes in fair value of an investment property at the balance sheet date and its carrying amount prior to remeasurement are recorded in the consolidated statement of comprehensive income.

 

Investment properties are recognised as an asset when:

 

•     it is probable that future economic benefits that are associated with the investment property will flow to the Group;

 

•     there are no material conditions present that could prevent completion; and

 

•     the cost of the investment property can be measured reliably.

 

Additions to investment properties in the course of development or refurbishment include the cost of finance and directly attributable internal and external costs incurred during the period of development until the properties are ready for their intended use.

 

An investment property undergoing redevelopment or refurbishment for continued use as an investment property will remain as an investment property measured at fair value and is not reclassified.

 

An investment property is classified as held for sale when it is available for immediate sale, management is committed to a plan to sell, an active programme to locate a buyer has been initiated and a sale is expected to occur within 12 months.

 

A transfer of a property from investment properties to trading properties will be made where there is a change in use such that the asset is to be developed or held with a view to sale.

 

Trading properties

Trading properties comprise both direct interests in property and indirect beneficial interests in property held through land promotion agreements or other contractual arrangements. They are classified as inventory and are included in the consolidated balance sheet at the lower of cost and net realisable value. Net realisable value is the expected net sales proceeds of the developed property in the ordinary course of business less the estimated costs to completion and associated selling costs. A provision is made to the extent that projected costs exceed projected revenues.

 

All external and internal costs, including borrowing costs, directly associated with the purchase, promotion and construction of a trading property are capitalised up to the date that the property is ready for its intended use. Property acquisitions are recognised when legally binding contracts that are irrevocable and effectively unconditional are exchanged.

 

Properties reclassified to trading properties from investment properties are transferred at deemed cost, being the fair value at the date of reclassification.

 

Properties reclassified from trading properties to investment properties are transferred at cost when there is a change in use of the asset such that it is to be held for long-term rental income and/or for capital appreciation.

 

Leases

Where the Group is the lessor, the Directors have considered the potential transfer of risks and rewards of ownership in accordance with IAS 17 'Leases' and in their judgement have determined that all such leases are operating leases. Rental income from operating leases is recognised in the consolidated statement of comprehensive income on a straight line basis over the term of the relevant lease.

 

Where the Group is the lessee, leases in which substantially all risks and rewards of ownership are retained by another party are classified as operating leases. The Directors have determined that all of their lessee arrangements constitute operating leases. Rentals paid under operating leases are charged to the consolidated statement of comprehensive income on a straight line basis over the term of the lease.

 

Property, plant and equipment

Property, plant and equipment is stated at cost or fair value at the date of transfer less accumulated depreciation and accumulated impairment losses. This includes costs directly attributable to making the asset capable of operating as intended.

 

Depreciation is provided on all plant and equipment at rates calculated to write off the cost less estimated residual value, based on prices prevailing at the reporting date, over its expected useful life as follows:

 

Freehold property             -            shorter of expected period to redevelopment and 2 per cent straight line

 

Leasehold improvements -            shorter of term of the lease and 10 per cent straight line

 

Furniture and equipment   -            20-33 per cent straight line

 

Revenue recognition

Revenue is recognised to the extent that a significant reversal is not expected in future periods and performance obligations have been satisfied. The below recognition policies have been applied in respect of each of the Group's principal revenue streams. Note that the only material change in the Group's revenue recognition policies since the previous year is that under IAS 18 variable revenue was only recognised to the extent that it could be reliably measured. Under IAS 18, revenue relating to overages on sales of land parcels to housebuilders was typically only recognised when the housebuilder had made an onward sale of the properties being developed on the relevant parcel. The adoption of IFRS 15 has resulted in overage revenue from certain of these sales being recognised earlier, at the point of sale, to the extent that it is considered such revenue will not be subject to a significant reversal in the future.

 

Trading property sales

The sale of trading properties, including beneficial interests held indirectly through land promotion and other contractual agreements, usually have contractual performance obligations such as securing planning consent or a buyer for the property that are satisfied at a point in time. Revenue is recognised when the performance obligation is satisfied, which occurs when control of the Group's interest has passed to the buyer on completion of contracts. Any variable consideration is estimated, taking into account the timing and variability of consideration and only recognised where it is considered highly probably that there will not be a future significant reversal. Any deferred consideration is discounted to present value with the discount being unwound to profit and loss as finance income. Costs, which prior to sale are included within trading properties on the balance sheet, are expensed to cost of sales at the point of sale.

 

Residential property sales

The sale of residential properties, including land parcels sold to housebuilders for residential development, usually have performance obligations such as securing planning consent and transferring legal title that are satisfied at a point in time. Revenue is recognised when control of the property has passed to the buyer on completion of contracts. Any variable consideration including overages is estimated at the point of sale taking into consideration the time to recover overage amounts as well as other factors which may give rise to variability. It is only recognised to the extent that it is highly probable that there will not be a significant reversal in the future and is reassessed throughout the duration of the sales contracts. Any deferred consideration is discounted to present value with the discount being unwound to profit and loss on finance income. Costs, which prior to sale are included within trading properties on the balance sheet, are expensed to cost of sales at the point of sale.

 

Revenue on construction contracts

Revenue on construction contracts is recognised in line with when performance obligations are deemed to be satisfied. Performance obligations in respect of construction contracts where the Group has no interest in the land are typically determined as being satisfied over time, meaning that revenue is recognised as these obligations are satisfied, which is usually on the basis of percentage of work completed using the input method (reflecting the enhancement in value of the customer's asset). Associated costs are expensed as incurred.

 

Where contracts contain multiple distinct performance obligations, revenue is allocated to each performance obligation in proportion to the assessed stand-alone selling price of the services being provided. For any such performance obligations that are determined as being satisfied at a point in time, revenue is recognised at the point of satisfaction of the relevant performance obligations. Associated costs are initially recognised in trading properties and expensed as a cost of sale at the point of sale.

 

Rental and other property income

Rental and other property income arising from property is accounted for under IAS 17 and recognised on a straight line basis over the term of the lease. Lease incentives, including rent free periods and payments to tenants, are allocated to the consolidated statement of comprehensive income on a straight line basis over the lease term as a deduction from rental income.

 

Hotel income

Hotel income comprises revenues derived from hotel operations, including the rental of rooms and food and beverage sales. Revenue is recognised at the point in time when rooms are occupied and services are rendered.

 

Project management fees and other income, including recoverable property expenses

Fees from development management service arrangements and other agreements are determined by reference to the relevant agreement and recognised over time as the services are provided, typically using the output method.

 

Taxation

Current tax

The charge for current taxation is based on the results for the year as adjusted for items that are non-taxable or disallowed. It is calculated using rates and laws that have been enacted or substantively enacted by the balance sheet date. Tax payable upon realisation of revaluation gains on investment property disposals that were recognised in prior periods is recorded as a current tax charge with a release of the associated deferred taxation.

 

Deferred tax

Deferred tax is provided using the balance sheet liability method in respect of temporary differences between the carrying amount of assets and liabilities in the consolidated balance sheet and the corresponding tax base cost used in computing taxable profit.

 

Deferred tax is determined using tax rates and laws that have been enacted or substantively enacted by the balance sheet date and are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled. It is recognised in the consolidated statement of comprehensive income except when it relates to items credited or charged directly to equity, in which case the deferred tax is also dealt with in equity.

 

Deferred tax assets and liabilities are offset when the Group has a legally enforceable right to offset current tax assets against current tax liabilities and the deferred tax assets and liabilities relate to the same taxable entity and the same tax authority.

 

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.

 

Under IAS 12 'Income Taxes', a deferred tax liability is recognised for tax potentially payable on the realisation of investment properties at fair values at the balance sheet date.

 

Deferred tax balances are not discounted.

 

Share-based payments

The fair value of granting share awards under the Group's performance share plan, and the other share-based remuneration of the Directors and other employees, is recognised through the consolidated statement of comprehensive income. The fair value of shares awarded is calculated by using an option pricing model. The resulting fair value is amortised through the consolidated statement of comprehensive income on a straight line basis over the vesting period. The charge is reversed if it is likely that any non-market-based vesting criteria will not be met. The charge is not adjusted for failure to achieve a market vesting condition or where a non-vesting condition is not satisfied.

 

Employee Benefit Trust

The Group is deemed to have control of its Employee Benefit Trust (EBT) and it is therefore treated as a subsidiary and consolidated for the purposes of the consolidated accounts. The EBT's investment in the parent company's shares is deducted from equity in the consolidated balance sheet as if they were treasury shares. Other assets and liabilities of the EBT are recognised as assets and liabilities of the Group. Any shares held by the EBT are excluded for the purposes of calculating earnings per share and net assets per share.

 

Retirement benefits

Contributions to defined contribution pension schemes are charged to the consolidated statement of comprehensive income in the period to which they relate.

 

Government grants

Government grants received in relation to property asset capital expenditure are generally deducted in arriving at the cost of the relevant asset. Where retention of a Government grant is dependent on the Group satisfying certain criteria, it is initially recognised in other loans. When the criteria for retention have been satisfied, the balance is netted against the cost of the asset.

 

Dividends

Dividends are recognised when they become legally payable. In the case of interim dividends to equity shareholders, this is when the dividends are paid, following approval by the Directors. In the case of final dividends, this is when the dividends are approved by the shareholders at the AGM.

 

Impairment of non-financial assets (excluding trading properties, investment properties and deferred tax)

Impairment tests on the Group's property, plant and equipment and interests in joint arrangements are undertaken at each reporting date to determine whether there is any indication of impairment. If such indication becomes evident, the asset's recoverable amount is estimated and an impairment loss is recognised in the consolidated statement of comprehensive income whenever the carrying amount of the asset exceeds its recoverable amount.

 

The recoverable amount of an asset is the greater of its fair value less costs to sell and its value in use. The value in use is determined as the net present value of the future cash flows expected to be derived from the asset.

 

Financial instruments

Financial assets and financial liabilities are recognised in the consolidated balance sheet when the Group becomes a party to the contractual provisions of the instrument.

 

Cash and cash equivalents

Cash and cash equivalents consist of cash in hand, deposits with banks and other short-term, highly liquid investments with original maturities of three months or less from inception. For the purposes of the cash flow statement, cash and cash equivalents comprise cash in hand and deposits with banks net of bank overdrafts.

 

Trade and other receivables

Trade and other receivables arising in the normal course of business are initially recognised at fair value and subsequently at amortised cost or recoverable amount.

 

For significant receivables, particularly in respect of amounts due from housebuilders, the Group monitors the expected annual and lifetime credit loss by undertaking periodic reviews of housebuilder WACCs, at least six monthly credit checks and the continual monitoring of payment track records and housing sales. Additionally, six monthly comparisons are performed monitoring third party valuations in respect of particular land parcels upon which the receivables are secured compared to those receivables recognised in the balance sheet in respect of such land parcels. As part of this consideration, the Group considers the recoverability of the receivable in the event of a downturn in the market.

 

For all other trade receivables and amounts recoverable under contracts, the Group applies the IFRS 9 simplified approach to measuring expected credit losses using a lifetime expected credit loss provision. To measure expected credit losses on a collective basis, trade receivables and amounts recoverable under contracts are grouped based on similar credit risk and ageing. The expected loss rates are based on the Group's historic credit losses experienced prior to year end and adjusted for current and forward-looking information on macroeconomic factors affecting the Group's customers.

 

Receivables acquired by the Group that include a variable right to receive cash are recognised initially at fair value and are subsequently remeasured to fair value at each reporting date with fair value movements recognised within the income statement.

 

Trade and other payables

Trade and other payables are initially recorded at fair value and subsequently at amortised cost.

 

Borrowings

Interest-bearing loans are initially recorded at fair value, net of any directly attributable issue costs, and subsequently recognised at amortised cost.

 

Borrowing costs

Finance and other costs incurred in respect of obtaining borrowings are accounted for on an accruals basis using the effective interest method and amortised to the consolidated statement of comprehensive income over the term of the associated borrowings.

 

Borrowing costs directly attributable to the acquisition and construction of investment and trading properties are added to the costs of such properties until the properties are ready for their intended use.

 

All other borrowing costs are recognised in the consolidated statement of comprehensive income in the period in which they are incurred.

 

Critical accounting estimates and judgements

The preparation of financial information in accordance with IFRSs requires the use of certain critical accounting estimates and judgements. It also requires management to exercise judgement in the process of applying the Group's accounting policies. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Although these estimates are based on management's best knowledge of the amount, event or actions, actual results may differ from those estimates.

 

Areas requiring the use of estimates and critical judgement that may impact on the Group's earnings and financial position include:

 

Accounting estimates

Valuation of investment and trading properties

For the purposes of calculating the fair value of its investment property portfolio and the net realisable value (and, for EPRA reporting purposes, the fair value) of its trading property portfolio, the Group uses valuations carried out by either independent valuers or the Directors on the basis of market value in accordance with the Appraisal and Valuation Standards of the Royal Institution of Chartered Surveyors. The valuations are based upon assumptions including future rental income, sales prices and rates, estimates of typical profit margins and finance costs, anticipated maintenance costs, development costs, inflation forecasts and appropriate discount rates. Assumptions used in the valuations of the Group's significant investment property interests carried at valuation and trading properties valued for EPRA reporting purposes at 30 September 2019 are disclosed later in note 1. Details of the Group's trading properties that are measured at net realisable value are disclosed in note 13. The valuers and Directors also make reference to market evidence for comparable property transactions and principal inputs and assumptions.

 

Due to the nature of development timescales, it is routinely necessary to estimate costs to complete and future revenues and to allocate non-unit-specific development costs between units legally completing in the current financial year and in future periods.

 

Revenue

Estimates are involved when determining how much revenue to recognise at the point in time of residential property sales where there is deferred consideration and/or variable consideration which is only determined at the point of the future onward sale of constructed homes by the Group's housebuilder customers.

 

In determining the amount of revenue recognised, the Directors consider the following factors:

 

Absorption rates - licence sale contracts contain minimum sales rates as well as minimum prices. The Directors consider as a base case assumption that houses will be sold by housebuilding customers in line with the contracted minimum sales rates. Deferred revenue is therefore discounted by reference to these rates.

 

Discount rates - the onward sale of constructed homes by housebuilder customers will occur over a number of years. Consequently, the time value of money and the credit risk of the housebuilder must be taken into account when measuring the present value of the consideration receivable. The Directors consider the WACC of the housebuilder, or third party cost of borrowing where WACC is not available, to be an appropriate rate at which to discount deferred consideration for the sale of the land. These discount rates are kept under review in the event of indications of a significant change in circumstance of the housebuilding customer. The impact of a change in the discount rates of one per cent either up or down on the Group's revenue recognised would be £1.3 million.

 

Overages - licence sale contracts consist of fixed minimum prices as well as variable overage elements based on the future onward sale value achieved by the housebuilder customer. When determining how much of the variable revenue to recognise at the point of sale, the Directors estimate the amount that they would expect to receive based on market evidence for current house prices and house price inflation forecasts. They then consider the risk of a significant reversal of this revenue in future periods and constrain it accordingly. For the current year, the Directors have assessed that a 20 per cent reduction in house prices, being the approximate peak to trough fall in house prices in the last two recessions, and a one-year delay to the expected receipt of overage payments, to take into account a significant fall in sales rates in a downturn, are appropriate constraints in response to the risk. The impact of a change in the assumed house price reduction by five per cent up and down would be to decrease/increase overage recognised in the year by £1.2 million and £1.3 million respectively.

 

Inflation rates - some contractual minimum prices are subject to annual review and inflation. The Directors consider publicly available inflation forecasts when calculating minimum amounts receivable over the licence contracts.

 

Cost of trading property sales

The sale of parcels or units of strategic land requires an allocation of costs, (where applicable including site-wide infrastructure, any construction costs directly attributable to individual land parcels and capitalised administrative expenses) in order to account for cost of sales associated with the disposal. The costs being allocated, based on plot numbers as a proportion of total project plot numbers, include those incurred to date together with an allocation of costs remaining estimated with reference to latest project forecasts.

 

Taxation

There are transactions and calculations for which the ultimate tax determination is uncertain. As a result, the Group recognises tax liabilities based on estimates of whether additional taxes and interest will be due. The Group believes that its accruals for tax liabilities are adequate for all open years based on its assessment of many factors including past experience and interpretations of tax law. This assessment relies on estimates and assumptions and may involve judgements about future events. The Directors have also exercised their judgement in relation to the recognition of certain deferred tax assets and liabilities. In order to assess whether the Group should recognise a deferred tax asset or liability and the tax rate at which that asset or liability should be measured, the Directors consider the timing and likelihood of expected future profits along with how these expected future profits match up with the existing tax losses within specific Group entities. The proportion of the Group's estimated available tax losses for deferred tax has been disclosed in note 12. The impact of a two per cent increase/decrease in the tax rate would change the net deferred tax liability by £0.7 million up or down at 30 September 2019.

 

Share-based payments

The value of share-based payments is estimated using an option pricing model as at the date of grant and using certain assumptions.

 

Judgements

Distinction between investment properties and trading properties

Where there is a strategic decision taken to develop any element of an investment property for sale rather than hold for investment purposes, then that element is remeasured to fair value at the decision date and transferred to trading properties. Where there is a strategic decision taken to hold any element of a trading property for long-term capital growth or income, then that element is transferred to investment properties at cost and subsequently held at fair value.

 

Property value assumptions

Significant unobservable inputs

The key inputs to the strategic property valuations, for both investment properties and trading properties valued for EPRA purposes, including properties wholly owned, within joint venture vehicles, or subject to joint arrangements included:

	30 September 2019	30 September 2018
House price - private (£psf)	215-300	210-300
House price - affordable (£psf)	125-200	125-200
House price inflation (per cent)	2.5	3.0
Cost price inflation (per cent)	2.0	2.0-2.25
Residential land prices (£'000 per NDA)	694-1,622	682-1,450
Commercial land value (£'000 per acre)	150-400	150-400
Risk-adjusted discount rate (per cent)	6.0-10.0	6.0-10.5

 

Inter-relationship between significant unobservable inputs and fair value measurement

The estimated fair value would increase/(decrease) if:

 

•     expected house prices inflation were higher/(lower);

 

•     expected annual cost price inflation was lower/(higher);

 

•     commercial land prices was higher/(lower); and

 

•     risk-adjusted discount rate was lower/(higher).

 

The significant valuation inputs to the Group's strategic land interest are too interdependent to meaningfully present the impact of varying these inputs.

 

2. Revenue and gross profit

for the year ended 30 September 2019

	Strategic sites and Catesby £'000	Commercial £'000	Total £'000
Trading property sales	25,329	4,950	30,279
Residential property sales	49,307	-	49,307
Revenue on construction contracts	7,972	-	7,972
Rental and other property income	2,250	634	2,884
Recoverable property expenses	325	791	1,116
Hotel income	-	7,621	7,621
Project management fees and other income	2,139	796	2,935
Revenue	87,322	14,792	102,114
Cost of trading property sales	(15,967)	(1,698)	(17,665)
Cost of residential property sales	(46,529)	-	(46,529)
Costs of construction contracts	(6,641)	-	(6,641)
Direct property expenses	(2,226)	(25)	(2,251)
Recoverable property expenses	(325)	(791)	(1,116)
Cost of hotel trading	-	(5,957)	(5,957)
Write down of trading properties	(731)	-	(731)
Direct costs	(72,419)	(8,471)	(80,890)
Gross profit	14,903	6,321	21,224

 

for the year ended 30 September 2018

	Strategic sites and Catesby £'000	Commercial £'000	Total £'000
Trading property sales	11,470	79,743	91,213
Residential property sales	34,454	-	34,454
Revenue on construction contracts	6,688	-	6,688
Rental and other property income	1,960	3,658	5,618
Recoverable property expenses	370	1,087	1,457
Hotel income	-	7,976	7,976
Project management fees and other income	545	2,447	2,992
Revenue	55,487	94,911	150,398
Cost of trading property sales	(3,924)	(69,994)	(73,918)
Cost of residential property sales	(29,391)	-	(29,391)
Costs of construction contracts	(4,724)	-	(4,724)
Direct property expenses	(2,110)	(2,832)	(4,942)
Recoverable property expenses	(370)	(1,088)	(1,458)
Cost of hotel trading	-	(6,124)	(6,124)
Write (down)/back of trading properties	(2,608)	38	(2,570)
Direct costs	(43,127)	(80,000)	(123,127)
Gross profit	12,360	14,911	27,271

 

Other than rental and other property income, all of the Group's revenue has been accounted for under the provisions of IFRS 15. Of this IFRS 15 revenue, £87,887,000 has been recognised at a point in time and £11,343,000 has been recognised over time.

 

	Year ended 30 September 2019	Year ended 30 September 2018
Number of construction contracts	1	1

 

The above construction contract includes a further £6,369,000 of estimated revenue which will be recognised over time in future periods as performance obligations are satisfied.

 

3. Operating profit

Is arrived at after charging/(crediting):	Year ended 30 September 2019 £'000	Year ended 30 September 2018 £'000
Depreciation of property, plant and equipment - included in administrative expenses	561	934
Depreciation of property, plant and equipment - included in direct costs	357	214
Loss on disposal of property, plant and equipment	13	2
Impairment of trade receivables	83	29
Operating lease charges - rent of properties	808	808
Share-based payment expense	3,955	3,434
Capitalisation of administrative expenses to investment properties	(423)	(486)
Capitalisation of administrative expenses to trading properties held at year end	(5,038)	(4,238)
Fees paid to BDO LLP1 in respect of:
- audit of the Company	207	167
Other services:
- audit of subsidiaries and associates	104	95
- audit related assurance services	43	37
- other fees payable	79	42

 

1.    Total fees for 2019 payable to the Company's auditor are £432,500 (2018: £340,500). Of this, £310,500 (2018: £261,500) relates to audit services and £43,000 (2018: £37,000) to assurance services. £79,000 (2018: £42,000) relates to fees incurred for reporting accountant services in relation to the Company's premium listing application.

 

4. Segmental information

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker has been identified as the Board of Directors.

 

The two principal segments are strategic sites and Catesby (being one segment) and commercial property development. The strategic sites and Catesby segment includes serviced and unserviced land, consented and unconsented land and mixed-use development and promotion sites. The commercial segment includes city centre development and commercial regional developments. All of the Group's revenue is generated in the United Kingdom.

 

Segmental information is reported in the table that follows in respect of the current year in accordance with the requirements of IFRS 8 'Operating Segments'.

 

The segmental results that are monitored by the Board include all the separate lines making up the segmental IFRS operating profit. This excludes central overheads and taxation which are not allocated to operating segments.

 

Consolidated statement of comprehensive income

for the year ended 30 September 2019

		Strategic sites and Catesby £'000	Commercial £'000	Unallocated £'000	Total £'000
	Revenue	87,322	14,792	-	102,114
	Other direct costs	(71,689)	(8,471)	-	(80,160)
	Write down of trading properties	(730)	-	-	(730)
	Total direct costs	(72,419)	(8,471)	-	(80,890)
	Gross profit	14,903	6,321	-	21,224
	Share-based payment expense	-	-	(3,955)	(3,955)
	Other administrative expenses	-	-	(15,920)	(15,920)
	Total administrative expenses	-	-	(19,875)	(19,875)
	Surplus on revaluation of investment properties	5,791	-	-	5,791
	Surplus on revaluation of receivables	850	-	-	850
	Share of post-tax profit from joint ventures	8,027	12	-	8,039
	Operating profit/(loss)	29,571	6,333	(19,875)	16,029
	Net finance income/(cost)	1,478	(1,171)	-	307
	Profit/(loss) before tax	31,049	5,162	(19,875)	16,336

 

In the year ended 30 September 2019, there were three major customers that generated £11,367,000, £13,036,000 and £12,500,000 of revenue. Each of these represented 10 per cent or more of the total revenue.

 

Consolidated balance sheet

as at 30 September 2019

	Strategic sites and Catesby £'000	Commercial £'000	Unallocated £'000	Total £'000
Investment properties	52,937	-	-	52,937
Property, plant and equipment	3,348	299	311	3,958
Investments in joint ventures	103,563	17,699	-	121,262
Deferred tax assets	-	-	2,565	2,565
Trade and other receivables	45,898	-	-	45,898
Non-current assets	205,746	17,998	2,876	226,620
Trading properties	279,307	27,691	-	306,998
Trade and other receivables	13,782	4,681	-	18,463
Cash and cash equivalents	-	-	24,441	24,441
Current assets	293,089	32,372	24,441	349,902
Borrowings	(101,899)	(11,045)	(16,321)	(129,265)
Trade and other payables	(24,351)	(11,364)	-	(35,715)
Deferred tax liabilities	(7,806)	-	(703)	(8,509)
Total liabilities	(134,056)	(22,409)	(17,024)	(173,489)
Net assets	364,779	27,961	10,293	403,033

 

Consolidated statement of comprehensive income

for the year ended 30 September 2018

		Strategic sites and Catesby £'000	Commercial £'000	Unallocated £'000	Total £'000
	Revenue	55,487	94,911	-	150,398
	Other direct costs	(40,519)	(80,038)	-	(120,557)
	Write (down)/back of trading properties	(2,608)	38	-	(2,570)
	Total direct costs	(43,127)	(80,000)	-	(123,127)
	Gross profit	12,360	14,911	-	27,271
	Share-based payment expense	-	-	(3,434)	(3,434)
	Other administrative expenses	-	-	(15,378)	(15,378)
	Total administrative expenses	-	-	(18,812)	(18,812)
	Surplus on revaluation of investment properties	10,582	-	-	10,582
	Surplus on revaluation of receivables	1,090	-	-	1,090
	Share of post-tax profit from joint ventures	1,993	66	-	2,059
	Profit on disposal of investments	-	94	-	94
	Profit on disposal of investment properties	-	1,244	-	1,244
	Operating profit/(loss)	26,025	16,315	(18,812)	23,528
	Net finance cost	(449)	(812)	-	(1,261)
	Profit/(loss) before tax	25,576	15,503	(18,812)	22,267

 

In the year ended 30 September 2018, there were two major customers that generated £49,350,000 and £22,961,000 of revenue. Each of these represented 10 per cent or more of the total revenue.

 

Consolidated balance sheet

as at 30 September 2018

	Strategic sites and Catesby £'000	Commercial £'000	Unallocated £'000	Total £'000
Investment properties	86,918	-	-	86,918
Property, plant and equipment	3,423	632	453	4,508
Investments in joint ventures	85,815	17,603	-	103,418
Deferred tax assets	-	-	2,788	2,788
Trade and other receivables	20,445	-	-	20,445
Non-current assets	196,601	18,235	3,241	218,077
Trading properties	246,617	27,153	-	273,770
Trade and other receivables	21,979	7,060	-	29,039
Cash and cash equivalents	-	-	16,638	16,638
Current assets	268,596	34,213	16,638	319,447
Borrowings	(74,973)	-	(19,891)	(94,864)
Trade and other payables	(33,816)	(12,970)	-	(46,786)
Deferred tax liabilities	(6,269)	-	(582)	(6,851)
Total liabilities	(115,058)	(12,970)	(20,473)	(148,501)
Net assets	350,139	39,478	(594)	389,023

 

5. Finance income and finance costs

	Year ended 30 September 2019 £'000	Year ended 30 September 2018 £'000
Interest receivable from cash deposits	81	37
Unwinding of discount applied to long-term receivables	1,663	826
Other interest receivable	33	3
Finance income	1,777	866
Interest payable on borrowings	(4,044)	(3,089)
Amortisation of loan arrangement costs	(503)	(1,220)
Finance costs pre-capitalisation	(4,547)	(4,309)
Finance costs capitalised to trading properties	3,077	2,182
Finance costs	(1,470)	(2,127)
Net finance income/(costs)	307	(1,261)

 

Finance costs are capitalised at the same rate as the Group is charged on respective borrowings.

 

6. Tax on profit on ordinary activities

(a) Analysis of charge in the year

	Year ended 30 September 2019 £'000	Year ended 30 September 2018 £'000
Current tax:
UK corporation tax on profits for the year	2,482	916
Adjustments in respect of previous periods	-	5
Total current tax	2,482	921
Deferred tax:
Origination and reversal of timing differences	1,225	2,746
Adjustments in respect of previous periods	-	(95)
Total deferred tax	1,225	2,651
Total tax charge	3,707	3,572

 

(b) Factors affecting the tax charge for the year

The effective rate of tax for the year varies from the standard rate of tax in the UK. The differences can be explained below:

 

	Year ended 30 September 2019 £'000	Year ended 30 September 2018 £'000
Profit attributable to the Group before tax	16,336	22,267
Profit multiplied by the average rate of UK corporation tax of 19 per cent (2018: 19 per cent)	3,104	4,231
Expenses not deductible for tax purposes	937	694
Differences arising from taxation of chargeable gains and property revaluations	190	(1,384)
Tax losses and other items	(524)	121
	3,707	3,662
Adjustments to tax charge in respect of previous periods	-	(90)
Total tax charge	3,707	3,572

 

(c) Associates and joint ventures

The Group's share of tax on the joint ventures and associates is £Nil (2018: £Nil).

 

7. Earnings per share

Basic earnings per share

The calculation of basic earnings per share is based on a profit of £12,629,000 (2018: £18,695,000) and on 143,442,735 (2018: 143,413,414) shares, being the weighted average number of shares in issue during the year less own shares held.

 

Diluted earnings per share

The calculation of diluted earnings per share is based on a profit of £12,629,000 (2018: £18,695,000) and on 146,176,846 (2018: 145,156,832) shares, being the weighted average number of shares in issue less own shares held and the dilutive impact of share options granted. 2,729,218 (2018: 2,139,020) share options have not been included in the calculation of diluted earnings per share because their exercise is contingent on the satisfaction of certain criteria that had not been met at 30 September.

 

Weighted average number of shares	2019 Number	2018 Number
In issue at 1 October	145,044,582	144,964,808
Effect of shares issued under scrip dividend scheme	49,325	40,878
Effect of own shares held	(1,651,172)	(1,592,272)
Weighted average number of shares at 30 September - basic	143,442,735	143,413,414
Dilutive effect of share options	2,734,111	1,743,418
Weighted average number of shares at 30 September - diluted	146,176,846	145,156,832

 

8. Dividends

	Year ended 30 September 2019 £'000	Year ended 30 September 2018 £'000
Final dividend of 2.2p per share proposed and paid February 2019	2,957	-
Final dividend of 2.2p per share granted via scrip dividend	199	-
Interim dividend of 1.4p per share paid July 2019	1,907	-
Interim dividend of 1.4p per share granted via scrip dividend scheme	102	-
Final dividend of 2.0p per share proposed and paid February 2018	-	2,442
Final dividend of 2.0p per share granted via scrip dividend	-	188
Interim dividend of 1.3p per share paid July 2018	-	1,799
Interim dividend of 1.3p per share granted via scrip dividend scheme	-	61
	5,165	4,490

 

The Directors are proposing a final dividend of 2.5p (2018: 2.2p) per share totalling £3,591,000. The trustees of the Employee Benefit Trust have waived their right to receive a dividend on shares held in the Company. Therefore dividends are not paid on the shares held by the Employee Benefit Trust. The dividend has not been accrued in the consolidated balance sheet at 30 September 2019.

 

9. Investment properties

(i) Carrying amount reconciliation

	£'000
Valuation
At 1 October 2017	99,846
Additions at cost	14,172
Disposals	(37,682)
Surplus on revaluation	10,582
At 1 October 2018	86,918
Additions at cost	2,143
Disposals	-
Transfer to trading properties (note 13)	(41,915)
Surplus on revaluation	5,791
Carrying value and portfolio valuation at 30 September 2019	52,937

 

(ii) Operating lease arrangements

Refer to note 20 for details of the operating leases related to investment properties.

 

(iii) Items of income and expense

During the year ended 30 September 2019, £2,557,000 (2018: £3,595,000) was recognised in the consolidated statement of comprehensive income in relation to rental and ancillary income from investment properties. Direct operating expenses, including repairs and maintenance, arising from investment properties that generated rental income amounted to £2,059,000 (2018: £2,760,000). The Group did not incur any direct operating expenses arising from investment properties that did not generate rental income (2018: £Nil).

 

(iv) Restrictions and obligations

At 30 September 2019 and 2018 there were no restrictions on the realisability of investment properties or the remittance of income and proceeds of disposal.

 

There are no obligations, except those already contracted, to construct or develop the Group's investment properties.

 

(v) Historical cost and capitalisation

The historical cost of investment properties as at 30 September 2019 was £30,964,000 (2018: £52,284,000), which included capitalised interest of £nil (2018: £10,705,000). There was no interest capitalised during the current or prior year. During the year staff and administrative costs of £423,000 (2018: £486,000) have been capitalised and are included within additions.

 

(vi) Transfer of properties

On 1 October 2018, based on the site intention set out in the submitted development plan and the commencement of development works, the Group agreed that the strategy for Grange Farm at Alconbury Weald previously held within investment properties was to develop it for sale. Accordingly, on 1 October 2018 this element of the property was reclassified as a trading property.

 

(vii) Fair value measurement

The Group's investment properties are valued on a semi-annual basis by CBRE Limited (CBRE), an independent firm of chartered surveyors, on the basis of fair value. Where property assets are bifurcated between investment and trading properties, the Directors have allocated CBRE's valuation with reference to the nature of the properties in each classification. The valuation at each period end is carried out in accordance with guidance issued by the Royal Institution of Chartered Surveyors. Fair value represents the estimated amount that should be received for selling an investment property in an orderly transaction between market participants at the valuation date.

 

As noted above, the Group's investment properties are all carried at fair value and are classified as level 3 within the fair value hierarchy as some of the inputs used in determining the fair value are based on unobservable market data. The following summarises the valuation technique used in measuring the fair value of the Group's investment properties.

 

Valuation technique

Discounted cash flows: the valuation model for the Group's strategic land considers the present value of net cash flows to be generated from a property (reflecting the current approach of constructing the infrastructure and discharging the section 106 cost obligations), taking into account expected land value growth rates, build cost inflation, absorption rates and general economic conditions. The expected net cash flows are discounted using risk-adjusted discount rates and the resultant value is benchmarked against transaction evidence.

 

The significant unobservable inputs applied in the valuation of the Group's investment properties are listed in note 1.

 

10. Property, plant and equipment

	Freehold property £'000	Leasehold improvements £'000	Furniture and equipment £'000	Total £'000
Cost
At 1 October 2017	5,425	730	1,372	7,527
Additions	-	86	472	558
Disposals	-	(76)	(248)	(324)
At 1 October 2018	5,425	740	1,596	7,761
Additions	-	17	364	381
Disposals	-	-	(203)	(203)
At 30 September 2019	5,425	757	1,757	7,939
Depreciation
At 1 October 2017	1,313	330	784	2,427
Charge for the year	459	183	506	1,148
Released on disposal	-	(76)	(246)	(322)
At 1 October 2018	1,772	437	1,044	3,253
Charge for the year	425	132	361	918
Released on disposal	-	-	(190)	(190)
At 30 September 2019	2,197	569	1,215	3,981
Net book value
At 30 September 2019	3,228	188	542	3,958
At 30 September 2018	3,653	303	552	4,508

 

No assets were held under finance leases in either the current or prior years.

 

11. Investments

Investments in joint ventures and associates

	Joint ventures £'000	Associates £'000	Total £'000
Cost or valuation
At 1 October 2017	76,755	2	76,757
Share of post-tax profit from joint ventures	2,059	-	2,059
Additions	14,918	-	14,918
Loans advanced	9,686	-	9,686
Loans repaid	-	(2)	(2)
At 1 October 2018	103,418	-	103,418
Effect of adoption of IFRS 15	781	-	781
Balance at 1 October 2018 as restated	104,199	-	104,199
Share of post-tax profit from joint ventures	8,039	-	8,039
Loans advanced	9,202	-	9,202
Profits distributed	(178)	-	(178)
At 30 September 2019	121,262	-	121,262

 

At 30 September 2019 the Group's interests in its joint arrangements were as follows:

 

Joint ventures

Manchester New Square LP	50%	Property development
SUE Developments LP	50%	Property development
Achadonn Limited	50%	Property development
Altira Park JV LLP	50%	Property development
Wintringham Partners LLP	33%	Property development

 

Joint operations

Waterbeach

Property development

 

Waterbeach is a joint arrangement with a landowner that is structured through a contractual arrangement, rather than a separate entity. Decisions about relevant activities in relation to the Waterbeach development require unanimous consent by the Group and the landowner. When the development assets are sold to a third party, the Group will have a right to a proportion of the sales proceeds under a waterfall agreement which will include recovery of costs incurred and a 9% share of residual proceeds. At 30 September 2019, the Group had incurred £21,404,000 (2018: £18,650,000) of costs in relation to the project, which have been capitalised into investment and trading properties.

 

Summarised information on joint ventures 2019

100%	SUE Developments LP £'000	Wintringham  Partners LLP £'000	Achadonn Limited £'000	Altira Park JV LLP £'000	Manchester New Square LP £'000	Total 2019 £'000
Revenue	45,270	18,839	-	925	-	65,034
Profit/(loss) after tax	14,125	2,890	(9)	33	2	17,041
Total assets	229,550	62,610	6,606	858	89,173	388,797
Other liabilities	(163,287)	(59,725)	(6,660)	-	(89,171)	(318,843)
Total liabilities	(163,287)	(59,725)	(6,660)	-	(89,171)	(318,843)
Net assets/(liabilities)	66,263	2,885	(54)	858	2	69,954
The Group's carrying value consists of:
Group's share of net assets	33,131	961	-	429	1	34,522
Loans	53,466	16,005	2,102	-	15,167	86,740
Total investment in joint ventures	86,597	16,966	2,102	429	15,168	121,262

 

SUE Developments LP holds the RadioStation Rugby site.

 

Summarised information on joint ventures 2018

100%	SUE Developments LP £'000	Wintringham  Partners LLP £'000	Achadonn Limited £'000	Altira Park JV LLP £'000	Manchester New Square LP £'000	Total 2018 £'000
Revenue	17,400	-	-	54	-	17,454
Profit/(loss) after tax	3,990	(6)	-	53	-	4,037
Total assets	193,453	44,267	6,564	1,239	45,619	291,142
Other liabilities	(142,877)	(44,273)	(6,609)	(52)	(45,619)	(239,430)
Total liabilities	(142,877)	(44,273)	(6,609)	(52)	(45,619)	(239,430)
Net assets/(liabilities)	50,576	(6)	(45)	1,187	-	51,712
The Group's carrying value consists of:
Group's share of net assets	25,288	(2)	-	594	-	25,880
Loans	45,146	15,383	2,091	-	14,918	77,538
Total investment in joint ventures	70,434	15,381	2,091	594	14,918	103,418

 

Summarised information on associate

	2019 Terrace Hill Development Partnership £'000	2018 Terrace Hill Development Partnership £'000
Revenue	-	-
Profit after tax	-	-
Total assets	-	-
Total liabilities	-	-
Net assets	-	-
The carrying value consists of:
Group's share of net assets	-	-
Loans	-	-
Total investment in associates	-	-
Share of unrecognised profit
At 1 October	-	80
Share of unrecognised profit for the year	-	-
Profits distributed and recognised in the year	-	(94)
Adjustments in respect of previous periods	-	14
At 30 September	-	-

 

The significant unobservable inputs applied in the valuation of the Group's trading properties held in joint venture vehicles for EPRA purposes are listed in note 1.

 

12. Deferred tax

The net movement on the deferred tax account is as follows:

	Year ended 30 September 2019 £'000	Year ended 30 September 2018 £'000
At 1 October	(4,063)	(1,412)
Effect of adoption of IFRS 15	(656)	-
At 1 October as restated	(4,719)	(1,412)
Movement in the year (see note 6)	(1,225)	(2,651)
At 30 September	(5,944)	(4,063)

 

The deferred tax balances are made up as follows:

	At 30 September 2019 £'000	At 30 September 2018 £'000
Deferred tax assets
Tax losses	2,565	2,788
	2,565	2,788
Deferred tax liabilities
Revaluation surpluses	8,035	6,851
Revenue recognised under IFRS 15	474	-
	8,509	6,851

 

At 30 September 2019, the Group had unused tax losses of £20,513,000 (2018: £23,118,000), of which £15,089,000 (2018: £16,302,000) has been recognised as a deferred tax asset. £5,104,000 (2018: £6,227,000) has been applied to reduce the Group's deferred tax liability recognised at the balance sheet date as required by IAS 12 'Income Taxes' in respect of tax potentially payable on the realisation of investment properties at fair value at the balance sheet date. No deferred tax asset is recognised in respect of realised or unrealised capital losses if there is uncertainty over future recoverability.

 

Tax losses of £320,000 (2018: £589,000) have not been recognised as it is not considered sufficiently certain that there will be appropriate taxable profits available in the foreseeable future against which these losses can be utilised.

 

The UK corporation tax rate reduced to 19 per cent from 1 April 2017 and will, as enacted, reduce to 17 per cent from 1 April 2020, which will reduce the amount of UK corporation tax that the Group will have to pay in the future. The Group's deferred tax balances have been measured at rates between 17 and 19 per cent (2018: between 17 and 19 per cent), being the enacted rates of corporation tax in the UK at the balance sheet date against which the temporary differences giving rise to the deferred tax are expected to reverse.

 

13. Trading properties

	Year ended 30 September 2019 £'000	Year ended 30 September 2018 £'000
At 1 October	273,770	289,707
Additions at cost	46,583	90,057
Costs written down	(730)	(2,570)
Disposals	(54,540)	(103,424)
Transfer from investment properties (note 9)	41,915	-
Carrying value at 30 September	306,998	273,770

 

Trading properties by class of property	At 30 September 2019 £'000	At 30 September 2018 £'000
Direct interests in completed and development properties	275,534	238,557
Indirect interests held through land promotion, option or other contractual agreements	31,464	35,213
	306,998	273,770

 

During the year staff and administrative costs of £5,038,000 (2018: £4,238,000) have been capitalised and are included within additions.

 

Capitalised interest of £5,933,000 is included within the carrying value of trading properties as at 30 September 2019 (2018: £3,449,000), of which £3,077,000 (2018: £2,182,000) was capitalised during the year. Included within disposals is £593,000 (2018: £501,000) of interest previously capitalised and written off on disposal.

 

The carrying value of trading properties at 30 September 2019 includes £2,266,000 (2018: £2,656,000) measured at net realisable value. The remaining assets have been measured at cost. In arriving at their net realisable value assessments, the Directors have had regard to the current valuations of the properties (where relevant) and the future expected profitability of the asset.

 

The significant unobservable inputs applied in the valuation of the Group's trading properties for EPRA purposes are listed in note 1.

 

14. Trade and other receivables

Non-current	At 30 September 2019 £'000	At 30 September 2018 £'000
Trade receivables	44,365	17,338
Other receivables	1,533	3,107
	45,898	20,445

 

Current	At 30 September 2019 £'000	At 30 September 2018 £'000
Trade receivables	11,588	19,034
Less: provision for impairment of trade receivables	(83)	(29)
Trade receivables (net)	11,505	19,005
Other receivables	1,563	5,348
Amounts recoverable under contracts (contract assets)	3,203	1,350
Prepayments and accrued income	2,192	3,336
	18,463	29,039

 

Trade receivables include minimum and overage amounts due from housebuilders on strategic land parcel sales which are payable on the completion of the onward sale of completed units by the respective housebuilders, subject to certain minimum amounts that are payable annually over a four to five year period post sale. Other receivables include an amount of £2,163,000 (2018: £6,582,000) relating to overage entitlements that were acquired with the Priors Hall asset in the prior year and attributed a purchase price allocation of £9,366,000. This asset is measured at fair value through profit and loss using a discounted cash flow model and is categorised as level 3 in the fair value hierarchy. The key assumptions applied in the valuation are current expectations over future house price values, the timing of housebuilder delivery and a discount rate of 8.0 per cent (30 September 2018: 9.6 per cent). The fair value movement in the year is £850,000 (2018: £1,090,000) which has been credited to the income statement. Amounts totalling £8,357,000 have been collected by 30 September 2019 (2018: £3,874,000).

 

The ageing of trade receivables was as follows:	At 30 September 2019 £'000	At 30 September 2018 £'000
Up to 30 days	4,226	5,180
31 to 60 days	42	661
61 to 90 days	184	63
Over 90 days	570	555
Total	5,022	6,459
Amounts not yet due	50,848	29,884
Trade receivables (net)	55,870	36,343

 

The Group has determined that there exists no material loss rate for trade receivables held as at year end on the basis that there exists no historical credit losses experienced prior to the reporting date. The Group has also considered the current and forward-looking information on macroeconomic factors affecting the Group's customers, including UK house price inflation forecasts.

 

Furthermore, the Group has considered the nature of the material aspects of trade receivables and contract assets and notes that these balances are primarily derived from contractual minimum payments and overages due from customer contracts which crystallise in the short to medium term, discounted at an appropriate rate. The Group maintains legal charges over the asset(s) disposed and, were there to exist potential credit losses going forward on any individual contract, the Group would have the ability to mitigate the risk of such losses through the enforcement of this security, the value of which is not considered to be materially lower than the related receivable.

 

Given the above, the Group estimates the expected loss rate for current contract receivables to be immaterial to the Group.

 

15. Trade and other payables

	At 30 September 2019 £'000	At 30 September 2018 £'000
Trade payables	10,751	7,978
Taxes and social security costs	4,896	3,124
Other payables	7,104	8,628
Accruals	11,350	24,985
Deferred income	1,614	2,071
	35,715	46,786

 

16. Borrowings

	At 30 September 2019 £'000	At 30 September 2018 £'000
Bank loans and overdrafts	27,366	19,891
Other loans	101,899	74,973
	129,265	94,864

 

Maturity profile	At 30 September 2019 £'000	At 30 September 2018 £'000
Less than one year	1,000	20,891
Between one and five years	45,218	11,424
More than five years	83,047	62,549
	129,265	94,864

 

Other loans comprise borrowings from Homes England and Huntington District Council and a conditional grant. Interest on borrowings from Homes England is charged at between 2.2 and 4.0 per cent above the EC Reference Rate and the facilities are secured against specific land holdings. The £1,000,000 grant is conditional on certain milestones of construction being achieved before 2020. The grant is only repayable if these are not reached.

 

There are two bank loans (the revolving credit facility and Deansgate investment facility), which are secured against specific property holdings. In the prior year, there were no bank loans, other than the revolving credit facility, which was not secured against property.

 

17. Share capital

Urban&Civic plc	At 30 September 2019 £'000	At 30 September 2018 £'000
Issued and fully paid
145,148,088 (2018: 145,044,582) shares of 20p each (2018: 20p each)	29,030	29,009

 

Movements in share capital in issue

Ordinary shares	Issued and fully paid £'000	Number
At 1 October 2017	28,993	144,964,808
Shares issued under scrip dividend scheme	16	79,774
At 1 October 2018	29,009	145,044,582
Shares issued under scrip dividend scheme	21	103,506
At 30 September 2019	29,030	145,148,088

 

18. Net asset value, EPRA net asset value and EPRA triple net asset value per share

Net asset value, EPRA net asset value and EPRA triple net asset value per share are calculated as the net assets or EPRA net assets of the Group attributable to shareholders at each balance sheet date, divided by the number of shares in issue at that date, adjusted for own shares held and the dilutive effect of outstanding share options.

 

	At 30 September 2019	At 30 September 2018
Number of ordinary shares in issue	145,148,088	145,044,582
Own shares held	(1,491,248)	(1,769,935)
Dilutive effect of share options	2,734,111	1,743,418
	146,390,951	145,018,065
NAV per share	275.3p	268.3p
Net asset value (£'000)	403,033	389,023
Revaluation of trading property held as current assets (£'000)
- Alconbury Weald	42,302	38,809
- Radio Station Rugby	8,763	10,561
- Priors Hall	13,952	9,384
- Waterbeach	19,492	-
- Wintringham St Neots	12,297	8,461
- Land promotion sites	12,963	11,667
- Newark	154	138
- Manchester sites	5,600	5,023
- Other	424	1,292
	115,947	85,335
Deferred tax liability (£'000)	8,509	6,851
EPRA NAV (£'000)	527,489	481,209
EPRA NAV per share	360.3p	331.8p
Deferred tax (£'000)	(30,539)	(23,065)
EPRA NNNAV (£'000)	496,950	458,144
EPRA NNNAV per share	339.5p	315.9p

 

19. Contingent liabilities, capital commitments and guarantees

The parent company has given guarantees totalling £69,153,000 (2018: £71,393,000) as part of its development obligations.

 

Capital commitments relating to the Group's development sites, including the Group's share of joint ventures, are as follows:

 

	At 30 September 2019 £'000	At 30 September 2018 £'000
Contracted but not provided for	50,059	54,744

 

20. Leases

Operating lease commitments where the Group is the lessee

The future aggregate minimum lease rentals payable under non-cancellable operating leases are as follows:

Land and buildings	At 30 September 2019 £'000	At 30 September 2018 £'000
In one year or less	725	1,013
Between one and five years	976	841
In five years or more	4,102	33
	5,803	1,887

 

Operating lease commitments where the Group is the lessor

The future aggregate minimum rentals receivable under non-cancellable operating leases are as follows:

Land and buildings (including investment property)	At 30 September 2019 £'000	At 30 September 2018 £'000
In one year or less	1,313	2,996
Between one and five years	2,113	5,580
In five years or more	1,957	4,984
	5,383	13,560

 

21. Related party transactions

Key management personnel

The Directors of the Company who served during the year are considered to be key management personnel.

 

Fees, other income and amounts due from joint ventures and associates

The following amounts are due from the Group's joint ventures and associates. These sums relate to loans provided to those entities and form part of the net investment in that entity.

	At 30 September 2019 £'000	At 30 September 2018 £'000
SUE Developments LP	53,466	45,146
Manchester New Square LP	15,167	14,918
Wintringham Partners LLP	16,005	15,383
Achadonn Limited	3,345	3,334
	87,983	78,781

 

The total provision at 30 September 2019 against amounts due from Achadonn Limited was £1,243,000 (2018: £1,243,000).

 

Fees charged by the Group to SUE Developments LP during the year were £952,000 (2018: £925,000). Included in trade debtors at 30 September 2019 was £241,000 (2018: £273,000) in respect of these fees. Fees charged to Wintringham Partners LLP during the year were £848,000 (2018: £1,048,000) and included in prepayments and accrued income at 30 September 2019 was £228,000 (30 September 2018: £801,000).

 

22. Cash flow information

Net debt reconciliation

At 30 September 2019 £'000	2018	Cash flows	Rolled up interest	Amortisation of issue and arrangement costs	Loans and borrowings reclassified in 2019	2019
Non current loans and borrowings	73,973	31,574	2,945	(118)	19,891	128,265
Current loans and borrowings	20,891	-	-	-	(19,891)	1,000
Total borrowings	94,864	31,574	2,945	(118)	-	129,265
Cash and cash equivalents	(16,638)	(7,803)	-	-	-	(24,441)
Net debt	78,226	23,771	2,945	(118)	-	(104,824)

 

At 30 September 2018 £'000	2017	Cash flows	Rolled up interest	Amortisation of issue and arrangement costs	Loans and borrowings reclassified in 2018	2018
Non current loans and borrowings	69,824	(1,352)	2,182	184	3,135	73,973
Current loans and borrowings	24,026	-	-	-	(3,135)	20,891
Total borrowings	93,850	(1,352)	2,182	184	-	94,864
Cash and cash equivalents	(12,190)	(4,448)	-	-	-	(16,638)
Net debt	81,660	(5,800)	2,182	184	-	78,226

 

 

Glossary of terms

 

AGM	Annual General Meeting
Catesby/Catesby Estates plc	Catesby Estates plc and subsidiaries, joint ventures and associates
CDC or Commercial Development Committee	A subcommittee of senior staff responsible for the delivery of commercial sites. Periodic meetings are held to facilitate cross site collaboration, risk management, problem solving and lessons learnt reviews.
Commercial	One of the Group's business segments that focuses on bespoke City Centre developments targeting shorter-term and de-risked returns
Company	Urban&Civic plc
Earnings per share (EPS)	Profit after tax divided by the weighted average number of shares in issue
EBT	Urban&Civic Employment Benefit Trust
EC Reference Rate	European Commission Reference Rate
Employment land/plots	Land and parcels of land upon which a variety of commercial uses will be delivered in accordance with a planning consent
EPRA	European Public Real Estate Association
EPRA net asset value (EPRA NAV)	Net assets attributable to equity shareholders of the Company, adjusted for the revaluation surpluses on trading properties and eliminating any deferred taxation liability for revaluation surpluses
EPRA net gearing	Total debt less cash and cash equivalents divided by EPRA net asset value
EPRA triple net asset value (EPRA NNNAV)	EPRA net asset value adjusted to include deferred tax on property valuations and capital allowances
Estimated rental value (ERV)	Open market rental value that could reasonably be expected to be obtained for a new letting or rent review at a particular point in time
Fair value	The price that would be required to sell an asset or paid to transfer a liability in an orderly transaction between market participants at a measurable date (i.e. an exit price)
FRC	Financial Reporting Council
FRS 102	Financial Reporting Standard 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland'
Gearing	Group borrowings as a proportion of net asset value
Homes England	Homes England is Homes and Communities Agency (HCA as it was formerly known)
Group	Urban&Civic plc and subsidiaries, joint ventures and associates
Gross development value (GDV)	Sales value once construction is complete
IAS	International Accounting Standards
IASB	International Accounting Standards Board
IFRS	International Financial Reporting Standards
Initial yield	Annualised net rent as a proportion of property value
ISA	International Standards on Auditing
Key performance indicators (KPIs)	Significant areas of Group operations that have been identified by the Board as capable of measurement and are used to evaluate Group performance
LADs	Liquidated ascertained damages
Large site discount	Represents the difference between the unserviced land values ascribed by CBRE strategic site valuations (which take into account site scale and build-out duration among other matters) and the current retail prices being achieved on smaller parcel sales
LEP	Local Enterprise Partnership
Licences	Agreements entered into with housebuilders, which typically comprise a fixed element (the minimums) due to the Group upon reaching unconditional exchange and a variable element (the overage) which is dependent on the final selling price of the house
Listing	The 22 May 2014 transfer of Urban&Civic plc from the Alternative Investment Market (AIM) to the standard listing segment of the Capital Official List and admission to trading on the London Stock Exchange
Look-through gearing	Gearing including the Group's balance sheet attributable to the owners of the Company
LTV	Loan to value
MHCLG	Ministry of Housing, Communities and Local Government
Minimums	Contractual right to receive a minimum plot value in respect of a minimum number of plots each year. These minimums are payable on a look-back basis if minimum sales are not achieved
MOD	Ministry of Defence
Net asset value (NAV)	Value of the Group's balance sheet attributable to the owners of the Company
Net gearing	Total debt less cash and cash equivalents divided by net assets
NPPF	National Planning Policy Framework
Overage	Variable consideration which applies an agreed percentage to the house sales price and then nets off any minimum already paid. No overage is payable where minimums are not achieved
Private rented sector (PRS)	A sector of the real estate market where residential accommodation is privately owned and rented out as housing, usually by an individual landlord, but potentially by housing organisations
PSP	Performance Share Plan
Resolution to Grant (planning consent)	Where a Local Authority planning committee resolves to grant planning permission subject to the completion of a planning agreement (such as a Section 106 agreement)
Return on Capital Employed (ROCE)	A financial ration that measures how well a company is generating profits from its capital
RIDDOR	Reporting of Injuries, Diseases and Dangerous Occurrences
S106	Section 106 planning obligations
SDC or Strategic Development Committee	A subcommittee that functions on the same basis as the CDC, but reviews the Group's strategic sites
SDLT	Stamp Duty Land Tax
Subcommittees	SDC, CDC and Catesby
Terrace Hill Group	Terrace Hill Group plc and subsidiaries at 21 May 2014
Total NAV return	The growth in EPRA NAV per share plus dividends paid, expressed as a percentage of EPRA NAV per share at the beginning of the period.
Total return	Movement in the value of net assets, adjusted for dividends paid, as a proportion of opening net asset value
Total shareholder return (TSR)	Growth in the value of a shareholding, assuming reinvestment of any dividends into shares, over a period
Urban&Civic plc	Parent company of the Group
WACC	Weighted average cost of capital

 

Risk review

 

Risk environment

Our risk management framework is established, monitored and managed in the knowledge that:

•     a large part of the Group's operations is focused on facilitating UK regional housing development and delivery;

 

•     housing markets have historically been cyclical;

 

•  our customers (housebuilders), or our customers' customers (homebuyers), are influenced by mortgage availability, job security and disposable income (amongst other matters) when deciding to buy (or build) homes;

 

•   politics around residential delivery, and in particular around planning consents and Help to Buy availability, is challenging and historically volatile;

 

•     changes in legislation and regulation can impact the way the Group operates, both directly and indirectly; and

 

•     the ability to acquire development sites and bring them forward, so that homes may be built, is heavily dependent on our in-house skillset.

 

Principal areas of focus in 2019

The following reviews or improvements to the Group's risk management framework were undertaken or implemented during the financial year:

•   Board and Executive Management Committee (EMC) reviewed key risk registers together with a summary of corporate and business unit level risks (including emerging risks) at each meeting.

 

•    Board, Audit Committee and EMC each reviewed the Group's risk appetite and detailed top-down risk registers during the year.

 

•    Audit Committee oversaw the completion of the initial three-year internal audit programme (carried out by Grant Thornton), with three internal audits being undertaken on health and safety, investment and divestment and outsourced contracts management. Each audit was undertaken to an Audit Committee agreed scope. A follow-up assessment of previous internal audit recommendations was also carried out and concluded that all agreed and due actions had been implemented.

 

•   Audit Committee agreed a further three-year internal audit programme, which will see all key risks covered and provide assurance that the Group's internal controls are appropriate, in place and functioning.

 

•   Board monitored the political and economic environment at each Board meeting, including giving consideration as to what might be the impact of the UK's exit from the European Union over the short, medium and longer term.

 

•   Health and safety consultants RPS Group continue to be employed to oversee periodic reviews of the health and safety practices at the Group's sites and offices.

 

•    New employee induction programmes have helped to reinforce the Group's risk appetite from the outset.

 

•    More detailed credit checking processes for the Group's subcontractors and suppliers were instigated.

 

Urban&Civic continues to seek to deliver (on behalf of its stakeholders) its strategic objectives through operating a Board-led risk management framework that:

•    establishes the nature and scale of risk that the Group is prepared to take (risk appetite);

 

•    identifies and assesses risks applicable to the Group's strategy and operations (both existing and emerging);

 

•    designs and implements mitigating actions, controls and procedures;

 

•    seeks assurance over the effectiveness of those mitigating actions, controls and procedures; and

 

•    manages the Group's risks on an ongoing basis against risk appetite, acknowledging that risk cannot be fully eliminated.

 

Risk management framework

Our risk management framework has remained largely unchanged during the financial year, although through additional training and internal discussion, the understanding of the framework and how to report risk under the framework has become more embedded, stable and consistent across the Group.

 

Urban&Civic's operational size and regional office network provide the Group with an opportunity to collate, assess and mitigate risks effectively, but only if supported by effective communication and reporting up, down and across the Group. The EMC and Subcommittees (Strategic Development Committee or SDC, Commercial Development Committee or CDC and Catesby) continue to act as hubs for this communication and both play a significant role in helping the Board implement the risk management framework, especially at grassroots levels, where emerging risks are typically identified first (see the corporate governance review for more details on the scope, structure and composition of the EMC and Subcommittees).

 

Risk management structure

The Board continues to have ultimate responsibility for risk management and internal control, with a particular focus on defining the Group's risk appetite, regularly assessing and monitoring the Group's principal risks and reviewing reports produced by internal auditors on internal controls and risk reports from the EMC and business segment Subcommittees.

 

The Audit Committee reviews the adequacy and effectiveness of the Group's financial and non-financial internal controls and risk management systems on behalf of the Board. The Audit Committee also monitors and reviews the external audit, including the auditor's report.

 

The Executive Directors, with the assistance of the EMC, design and manage the internal controls and risk management systems, ensuring that risk registers and risk reporting are maintained throughout the year. The EMC further relies on business segment Subcommittees to help fulfil its risk reporting responsibilities by maintaining live operational risk registers. These procedures give the Executive Directors the ability to provide assurance that the Group's internal controls are appropriate, in place and functioning.

 

Key features of our risk management framework

•     Clear and well communicated risk management framework and structure (including roles and responsibilities).

 

•    Regular reviews of risk (including appetite and registers - including emerging risks) and internal controls by the Board, Audit Committee and EMC.

 

•    Immediate communications to the Board and Audit Committee of material risk events. These events are then investigated by the Executive Directors and EMC, with lessons learnt fed back into the risk management framework.

 

•    Open door policy to all employees, which aids early identification and resolution of issues.

 

•    Clear reporting lines and delegated authorities.

 

•    Formal and informal opportunities for intra-group debate and communication.

 

•    Sensibly paced systems evolution - avoids shocks to the control framework.

 

•    Maintenance of a stable senior management team.

 

•    Robust and regular reporting systems (operational and financial as well as risk).

 

•    Appropriate training (including induction for new employees so they understand the Group's risk appetite).

 

•    Ensure employees understand and have confidence in the Group's whistleblowing policy. Details of this policy are communicated through an employee handbook.

 

Risk management framework components

The principal components of the Group's risk management framework, which the Board, Audit Committee and EMC use to monitor and manage risk, comprise:

 

•     Risk appetite table (see below).

 

•     Risk heatmap (see below).

 

•     Risk summary table - which highlights the principal risks across the Group and the changing risk profiles and emerging risks over time.

 

•   Risk registers (and associated scoring matrices) - encompassing key risk registers, detailed top-down risk registers, business unit risk registers and corporate risk registers.

 

The following table summarises the Board's risk appetite and risk behaviour across the Group's identified risk areas.

 

Risk description	Risk appetite	Risk behaviour	Change in risk appetite in the year
External environment	High	The Group is prepared to operate in a volatile environment, but only when enhanced returns in the longer term compensate for increased risk. Long-term viability is a key override.	>
Operational strategy	Moderate/high	The Group undertakes planning and development activities, both of which have elevated risk profiles.	>
Operations	Low	The Board seeks to deliver developments effectively; complying with all legislation and avoiding actions that could adversely impact reputation and/or stakeholder returns.	>
Finance	Low	The Group seeks to put in place non or limited recourse funding lines, with non-onerous covenants (on a flexed basis) and does not seek to borrow against serviced land (except through infrastructure loans provided by Homes England).	>
People	Low	The Group cannot function without a motivated and well trained workforce and aims to recruit, train, promote and retain staff, ensuring a succession plan is in place.	>

 

You will note that the Group's appetite across the key risk descriptions (into which all risks are classified) has not changed since last year, which given the Group's long-dated model is in line with our expectations. However, the Board recognises that the current volatile political environment which may or may not impact the Group in say 20 or 30 years (the time horizon of our strategic land sites) certainly has shorter-term consequences.

 

Our risk focus over the shorter term

The UK has been in a well publicised period of uncertainty since the EU membership referendum decision in June 2016, and this looks set to continue for a period given the recent announcement of a December general election and an extension to the Brexit deadline. While a no deal hard Brexit would see the UK leave on World Trade Organization rules (with its associated tariffs and regulations), the current direction of travel appears to lean towards a softer deal (with an agreed transition period). Whatever the eventual outcome, it is clear that uncertainty will continue until new EU and international trade agreements are finalised.

 

Although it is not possible to fully assess the impact of Brexit on our business, the Board is taking appropriate action to ensure the Group is resilient to short-term disruption and well positioned over the medium and longer term.

 

Our principal areas of focus over the shorter term (in addition to those already mentioned) have been and will continue to be:

 

•   Developments - although our strategic land sites benefit from relatively low forward development commitments at any one time, we have: increased our due diligence on the financial robustness of our subcontractors and suppliers; put in place performance bonds or guarantees where appropriate and entered into fixed price contracts for material works (at Manchester New Square for example). These measures help to protect the Group from a downturn in UK performance and consequential rising input prices (at least in the near future).

 

•   Customers - homebuyer confidence and ability to access finance and meet mortgage obligations are principal demand drivers for our customers (the housebuilders). While sales rates and demand for land parcels from the housebuilders have maintained to date, we cannot say for certain that this trend will continue. Building up forward sales of £101.7 million (with minimum annual contracted receipts of £30.7 million) has been a key feature in the Board's strategy to manage any short-term disruption (Brexit or otherwise).

 

•    Values - post the EU referendum the value of our strategic land portfolio has continued to grow (reflecting maintained demand, sales rates and pricing); however, falling values (on the back of falling demand, sales rates and pricing for example) would reduce loan covenant headroom. At 30 September our principal valuation loan covenant, in a subsidiary, is based on EPRA net asset value, which would have to fall by 43 per cent before this gearing covenant was breached. Falling values are not all bad news for the Group, as reduced land prices would most likely provide more and better land acquisition opportunities.

 

•    Debt - in addition to the covenant stress that falling values may create (as referred to in the previous paragraph), increased interest rates, falling sales rates or other adverse market changes may also increase covenant pressure. In order to monitor and manage the Group's debt over the shorter term our self imposed gearing limit of 30 per cent of EPRA NAV is monitored at each bi monthly Board meeting, as are all the facility covenants (to ensure compliance and identify emerging issues).

 

•     Sustainability - including climate change is an increasing focus for the Board.

 

As previously noted, a key component of the Group's risk management framework is the maintenance of risk registers. The Group maintains corporate and business unit risk registers, which are used to revise and educate detailed top-down registers that are periodically reviewed by the Board, Audit Committee and EMC. The top-down registers typically include around 35 risks at any one time and the most recent 11 key risks are set out on the following pages. This is one higher than last year having added climate change as an amber risk. Of the other ten key risks some emerging issues have altered the overall key risk rating if not the key risk itself. During the year, seven key risks have increased their risk rating (after mitigation), although none have crossed the threshold to either amber or red categorisations from previously assessed levels. One risk has moved down and two have remained the same. The movements are discussed in more detail below.

 

External environment

R1. Market risk

Impact of risk

The business model may be affected by external factors such as economic conditions, the property market, quoted property sector and political and legislative factors, such as climate change, tax or planning policies. Adverse movements in these market conditions increase the risk of lower stakeholder returns, even though investment opportunities may be more evident.

Controls and mitigation/action

•    Strategy is considered at each Board meeting and specifically at the annual business strategy day.

•    EMC and other Subcommittee meetings just prior to Board meetings provide better quality, bottom-up, information.

•    When making decisions consideration is given to external markets, dynamics
and influences.

•   Press, economic data subscriptions, industry forums and adviser updates are used to keep executives up to date in respect of external markets.

•   Regional focus and local knowledge in areas with strong underlying economics (such as job creation) mitigate the impact of market and economic shocks.

•   Increased focus on putting in place forward sales contracts with contractual annual minimum receipts in respect of the Group's most prominent segment: strategic land.

•   Prior to investment, detailed due diligence and financial appraisals are carried out and flexed to establish the financial outcome on a downside-case basis.

•     Business plan (one-year) and rolling long-term cash flow forecasts (one-year, five-year and ten-year) with sensitivity analysis are maintained.

•     Ongoing monitoring with the assistance of appropriate professional advisers (tax, accounting, regulatory and legal).

 

Typical risk indicators

•     Reduced sales rates and prices (homes and land parcels).

•     Increased interest rates.

•     Legislation enactment.

•     Falling share price or real estate indices (reflecting reduced investor appetite).

•     Increased construction cost.

•     Press or social media narrative (may provide an early warning).

 

Movement description

•   Although the Group's sales rates and pricing points at its strategic sites have been maintained, the UK's general economic position has weakened (largely due to a weaker global economy and uncertainties around Brexit). This weakening could ultimately lead to potential homebuyers postponing their decision to purchase a new house, which in turn could impact not only the timing of currently contracted serviced land overages (minimum receipts are locked in, subject to the creditworthiness of our customers - the housebuilders), but also the behaviour of the housebuilders themselves, all leading to increased market risk.

•   Political commentary around sustainability, the environment and use of greenfield and greenbelt sites increases uncertainty and therefore market risk. See climate change key risk for further considerations.

•    Increased scrutiny around economic, social and corporate governance (ESG) by stakeholders increases compliance risk and risk of penalties for breaches.

 

Operational strategy

R2. Strategic risk

Impact of risk

Implementing a strategy inconsistent with market environment, skillset and experience of the business could devalue the Group's property portfolio or have an adverse impact on the Group's cash flows, consequently eroding total shareholder return.

 

Controls and mitigation/action

•    Board annually approves a business plan and produces rolling longer-term cash flow forecasts with sensitivity analysis.

•  Business plan is periodically monitored by the Board, EMC and Subcommittees and remedial actions are identified, approved and implemented where necessary.

•    Material capital commitments, which have not previously been approved in the Group business plan require additional Board approval.

•    Employment of suitably qualified and experienced staff.

 

Typical risk indicators

•     Adverse variances to the business plan.

•     Fall in independent valuations.

•     Litigation.

•     Contingency utilisation.

•     Covenant breaches.

 

Movement description

•   EMC and other Subcommittee meetings are now held just prior to Board meetings - providing better quality, and timely, bottom-up information.

•  Third party internal auditor reviews in respect of investment and divestment decisions, outsourced contract management and health and safety have provided additional assurance to the Executive Directors, Board and Audit Committee.

•   Confirmation (by Grant Thornton - our internal auditor) that previously agreed and due recommendations from prior period internal audits have been implemented now received.

•   Reported variances to the business plan have not caused the Board undue concern over the last 12 months, which helps demonstrate that current processes are supportive of a reduced risk rating.

•   Continued improvements in Board reporting have provided additional comfort that issues around operational strategy, which could be picked up through operational reporting, have been.

 

R3. Competition risk

Impact of risk

Competition could result in assets being acquired at excessive prices, potential assets not being acquired because pricing is too high or developments commencing at the wrong point in the cycle.

 

Controls and mitigation/action

•     Experience and expertise used to determine suitable offer prices and optimal project timings (to maximise returns).

•    Investment, divestment and development decisions are benchmarked against market conditions prior to contract execution or development commencement (using in-house and third party research and advice).

•    Assessment of competition before acquiring assets (such as competing sites close to a proposed acquisition that might impact the Group's intended strategy).

•   Open, honest and fair relationships with partners, land owners, agents and other stakeholders provide the Group with a competitive advantage through enhancing its reputation of delivering on its promises.

 

Typical risk indicators

•     Ratio of successful to unsuccessful bids.

•     Adverse variances to business plans and/or investment memorandums.

•     Significant or persistent abortive costs.

•     Low rates of return.

 

Movement description

•    Like last year, our competitors continue to benefit from strong cash generation and capital availability, particularly in strategic land and land promotion segments.

•    Institutional investment, such as Legal & General's acquisition of a strategic land site in North Horsham, is becoming more common, which increases direct competition for sites.

•    As planning consents get harder to achieve, site availability reduces, thereby increasing the risk of competition.

 

R4. Legal and regulatory risk

Impact of risk

Non-compliance with laws and regulations could result in project delays, failure to obtain planning consents, inability to raise finance, penalties and fines and reputational damage.

 

Controls and mitigation/action

•    The Group employs highly qualified and experienced staff, and specialist consultants where appropriate, to ensure compliance with laws and regulations.

•    Calendar/diary of important dates maintained.

•    Key reports and announcements reviewed in draft by the Board/Audit Committee.

•    Training and continuing professional development undertaken.

•    Board/Audit Committee review of UK corporate governance compliance.

•    Regular Board/Audit Committee updates and training on regulatory obligations.

•    EMC taskforces formed to take responsibility for emerging laws and regulations.

 

Typical risk indicators

•     Litigation.

•     Investigations or enquiries (LSE, HMRC or Health and Safety Executive for example).

•     Frequency of reportable incidents (health and safety).

•     Penalties.

 

Movement description

•    Increasing ESG requirements and a new governance code and accounting standards have increased the risk in this area.

•    Increased use of advisers and training have helped to mitigate this risk, as has a third party internal audit on health and safety.

•    A further review of GDPR across the Group is ongoing (following its introduction in May last year), which should provide additional assurance.

•    The Group has introduced governance checklists to help ensure compliance with legislation.

•    A new electronic training system (iHASCO) has been rolled out to augment face to face training. Areas such as money laundering, bribery, whistleblowing and equality will be covered by this training method.

 

People strategy

R5. People risk

Impact of risk

Over-reliance on key people or inability to attract and retain people with appropriate qualities and skills, making the Group operationally vulnerable to both time delays and replacement cost.

 

Controls and mitigation/action

•     The Group offers a competitive remuneration package including both long and short-term incentives.

•     Employees generally work on a number of projects across the Group and are not dedicated to one particular site.

•     Short reporting lines and delegated authority ensure staff feel they are contributing to the success of the Group.

•     Nomination and Governance Committee reviews succession planning.

•     Appropriate notice periods to minimise disruption.

•     Adequate resourcing.

•     Performance reviews and training.

•     Exit interviews with results fed back to the EMC.

 

Typical risk indicators

•     High or increasing staff turnover.

•     Critical appraisal or exit interview feedback.

•     Complaints or grievances.

 

Movement description

•     Introduction of an employee advisory group in progress. This is a representative body made of non-Board or EMC employees, which sets its own agenda and can bring forward (to the Board and EMC) any workforce matters it sees fit.

•     New HR Manager appointed.

•     Annual performance appraisal process embedded.

•     New induction process to help monitor/ reinforce corporate culture.

•     Learning and Development Manager now fully employed in delivering staff training.

 

Despite these improvements this risk has been maintained at the same level as last year (which is low post-mitigation).

 

Operations

R6. Cyber risk

Impact of risk

Loss of business credibility due to lack of timely, accurate information.
Cost of reinstatement.

Cost and reputational damage of breaches in data protection regulations.

 

Controls and mitigation/action

•     Passwords, protocols and protections.

•     Physical access to premises and computer servers restricted.

•     Firewalls and anti-virus software with regular updates.

•     Computer data back-up and recovery procedures and periodic testing.

•     Hardware replacement programme to reduce vulnerability.

•     Administration rights restricted.

 

Typical risk indicators

•     Server downtime.

•     Loss or corruption of data.

•     GDPR complaints/penalties.

•     Volume of IT support calls.

 

Movement description

•     Hardware and software upgrades (including move to Office 365) completed and ongoing.

•     New service agreement signed with third party IT support (The Final Step).

•     Data recovery processes tested in the year.

•     Quarterly review meetings now established with The Final Step to discuss network performance and work programmes.

•     Weekly reports on IT performance received.

•     Internal audit recommendations were all implemented.

 

The above progress has produced a stable IT environment and the small increase in risk rating (which is not sufficient to turn this risk to amber) is due to the general increase in the number and complexity of cyber attacks that UK business is encountering.

 

R7. Planning risk

Impact of risk

Appropriate planning consents are not achieved or are challenged once granted, resulting in:

•     loss of promotion costs;

•     value proposition not being maximised;

•     time delay (e.g. from judicial review or call-in) - increasing costs or creating other issues within property cycles; and

•     difficulties in arranging finance.

 

Controls and mitigation/action

•     Internal planning expertise to navigate planning law and regulation.

•     Expert advice obtained before proceeding with planning work.

•    Before significant planning applications are made, the Group, together with its advisers, undertakes detailed consultations with the relevant planning authority, statutory authorities and other stakeholders.

•     Alternative uses considered in case initial application not achieved.

•     Increased focus on political landscape pre-investment (particularly where the local authority does not have a majority control).

 

Typical risk indicators

•     Longer than average times to achieve consent.

•     Planning budget overruns.

•     Increased appeals and judicial reviews.

•     Inability (at all or below expectations) to finance, build out or sell consented scheme.

 

Movement description

•   During the year, appeals and judicial reviews have, in our experience, become more likely in the absence of full local authority support. Achieving this support may be harder to achieve given a significant number of local authorities have gone to "no overall control" and the politics of planning has become more changeable. This has therefore increased likelihood of not achieving consent, but the Group remains confident it has the experience to work within these constraints.

 

R8. Health and safety risk

Impact of risk

Serious injury and loss of life could lead to development site closure, delays and cost overruns, as well as reputational damage and Directors' liability.

 

Controls and mitigation/action

•   Health and safety procedures are reviewed by third party health and safety advisers (RPS Group) and the Group appoints principal contractors and principal designers in line with the Construction (Design and Management) Regulations.

•     Periodic reviews by third party internal auditor (Grant Thornton).

•     Maintain health and safety procedures and policies at operational sites and Group offices.

•     Due diligence carried out (including appropriate references) on principal contractor and design consultants prior to appointment.

•     Appropriate insurance cover is carried by either the Group or its contractors.

•     Training by third party consultants provided and health and safety handbook issued to all employees.

•     Safety log.

 

Typical risk indicators

•     Incidents (reportable and non-reportable).

•     Penalties.

•     Investigations (by the Health and Safety Executive or similar) and enquiries.

•     Adverse health and safety audit findings.

•     Litigation.

 

Movement description

•     Internal audit on health and safety matters (undertaken by Grant Thornton) now complete.

•     RPS Group role now established (although scope is likely to be expanded).

•     Increased health and safety awareness training.

•     Induction process for new staff now includes health and safety matters.

•     Health and safety booklet periodically issued to all staff.

•     A fatality post year end (at one of our housebuilders' construction sites at Alconbury Weald) reminds us to keep vigilant at all times on health and safety matters.

•     Updated health and safety policy and procedures in place.

 

Despite the improved working practices set out above, the risk rating has been held until the internal audit recommendations have been actioned.

 

R9. Delivery risk

Impact of risk

Ineffective delivery of projects could lead to delays, reduced build quality and increased cost pressures.

Controls and mitigation/action

•    Projects are monitored on an ongoing basis by the Board, EMC and Subcommittees.

•    Internal development and project management teams manage project delivery.

•    Fixed price contracts are used where appropriate.

•    Third party internal audit review of project delivery mechanisms.

•   Material subcontractors and customers are credit checked and performance bonds, guarantees and charges are used as appropriate to safeguard delivery.

 

Typical risk indicators

•     Customer/subcontractor complaints.

•     Adverse budget variances.

•     Delayed completion dates.

•     Adverse internal audit findings.

•     Subcontractor or customer default.

 

Movement description

The Group's approach to delivery remains largely unchanged, although during the year the Group enhanced its credit check procedures (content and frequency) in response to current economic uncertainties. These uncertainties have caused us to increase this risk's rating this year (although the risk remains low).

 

Financial

R10. Finance risk

Impact of risk

Lack of funding, cost overruns or failure to adhere to loan covenants could result in financial loss or affect the ability to take advantage of opportunities as they arise.

Controls and mitigation/action

•     Detailed annual business plan prepared, approved and regularly monitored by the Board and EMC.

•     Continuous monitoring of capital and debt markets (with advisers).

•     Maintenance of relationships with lenders and investors.

•     Review of principal terms of prospective loans prior to documentation.

•     Ongoing monitoring of covenants/requirements to ensure compliance.

 

Typical risk indicators

•     Increased gearing metrics.

•     Covenant breaches.

•     Reduced deal flow (reduces options to realise assets to lower debt levels).

 

Movement description

•   Additional contractual minimums with housebuilders at the Group's strategic land sites continue to improve certainty over short-term cash receipts (subject to ongoing viability of the counterparty housebuilder).

•    Reduced commercial portfolio has increased the financial risk as the Group becomes more strategic land focused.

•    Additional Homes England facilities (on Civic Living and Waterbeach - where the loan is in documentation) have or will accelerate delivery of these projects and reduce the Group's equity requirement (which helps to mitigate the financial risk); however, introducing more debt and covenants into the Group's capital structure, increases financial risk.

•    A five-year extension to the HSBC revolving credit facility was agreed in March 2019 and a new £11.2 million facility in respect of our hotel at Deansgate, Manchester was put in place in August 2019 (also with HSBC). Increased borrowing and additional covenants, like increased Homes England borrowing, increase financial risk.

•    On balance (and in light of the above movements) the Board considers there to be an increased financial risk this year, predominantly due to increased borrowings and covenants.

 

External environment

R11. Climate change

Impact of risk

Climate change and/or regulatory controls aimed at preventing climate change create a range of possible impacts for the delivery of large scale sites including impacts on design, delivery timings, costs, values and sales rates (amongst other matters).

 

Controls and mitigation/action

•    Maximise the advantages of large site delivery (which reflect the inbuilt optionality of delivering sites of scale over the long term) to minimise the impacts of delivery on climate factors.

•    Continue to prioritise the delivery of extensive green infrastructure.

•    Settle and adopt a Sustainability Framework with clear metrics to ensure business wide compliance with relevant standards.

•   Work with housebuilder customers and other third party stakeholders to direct, influence and encourage consistent and congruent stakeholder best practice.

•   Identify, interrogate and trial innovations and then promote and adopt where they make a difference.

 

Typical risk indicators

•     Flooding.

•     Heat damage to structures.

•     Community complaints.

•     Reduced sales levels.

•     Regulatory challenges or fines.

•     Negative press comment.

 

Movement description

•     This is a clear global imperative that has increased in importance over a relatively short space of time.

•     Investors and other stakeholders have made an increased number of enquiries on this matter over the last 12 months.

 

The Group has sought to formalise its approach to sustainability by the extensive review of sustainability metrics at Alconbury

Weald and the identification of 5 key sustainability capitals.  This builds upon the work already undertaken at each site and during

the course of 2020 this will then be codified into a Sustainability Framework with specific business wide metrics and targets.