| Wed 11 Feb 2004, 11:53 | | LIBERTY INTERNATIONAL PLC - FINANCIAL REPORT |
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Liberty International Plc - Financial Report
Release Date: 11/02/2004 10:23:02 Code(s): LBT
LIBERTY INTERNATIONAL PLC - FINANCIAL REPORT
LIBERTY INTERNATIONAL PLC
(Registration number UK3685527)
ISIN Code: GB0006834344
JSE Code: LBT
Issuer Code: LILI I
FINANCIAL REPORT
2003 PRELIMINARY ANNOUNCEMENT
Contents
This document contains:
Highlights
Summary of Investment Property Valuations
Chairman"s Statement and Review of Operations
Financial review
Preliminary results
Further Information
Liberty International PLC is today making a presentation to property analysts in
London. The full text of this presentation, which does not form part of the
Preliminary Announcement, is available today on Liberty International PLC"s
website at www.liberty-international.co.uk.
Enquiries:
Liberty International PLC:
David Fischel Chief Executive +44 (0)20 7960 1207
Aidan Smith Finance Director +44 (0)20 7960 1210
Public relations:
UK: Michael Sandler,
Hudson Sandler +44 (0)20 7796 4133
SA: Matthew Gregorowski,
College Hill Associates +44 (0)20 7457 2020
Nicholas Williams,
College Hill Associates +27 (0)11 447 3030
This announcement includes statements that are forward-looking in nature.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
Liberty International PLC to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Any information contained in this announcement on the price at
which shares or other securities in Liberty International PLC have been bought
or sold in the past, or on the yield on such shares or other securities, should
not be relied upon as a guide to future performance.
LIBERTY INTERNATIONAL PLC
PRELIMINARY RESULTS FOR THE YEAR ENDED 31 DECEMBER 2003
HIGHLIGHTS
Financial Highlights
Increase 2003 2002
Property investment income 9.5% GBP245.4m GBP224.1m
(including joint ventures)
Profit before tax including 6.0% GBP110.0m GBP103.8m
exceptional items
Net exceptional profits GBP5.8m GBP17.2m
Profit before tax and exceptionals 20.3% GBP104.2m GBP86.6m
Earnings per share before 7.3% 27.45p 25.58p
exceptionals (adjusted*)
Earnings per share (unadjusted) (8.0)% 26.25p 28.54p
Dividends per ordinary share 5.3% 25.00p 23.75p
Total property assets (including
investments and trading properties) 5.2% GBP5,005m GBP4,758m
Shareholders" funds 7.6% GBP2,886m GBP2,683m
Net debt (including joint ventures) 1.5% GBP1,917m GBP1,889m
Net assets per share (diluted, 5.1% 906p 862p
adjusted*) 13.5% 906p 798p
Net assets per share (diluted,
adjusted*) - like-for-like basis **
Weighted average number of shares 306.9m 283.6m
(for EPS)
Diluted number of shares (for NAV) 351.8m 325.9m
* Adjusted for deferred tax relating to capital
allowances (see note 13 to preliminary results).
Unless otherwise stated, references in the
preliminary results to earnings per share are to
earnings per share before exceptional items
(adjusted); and to net assets per share are to net
assets per share (diluted, adjusted).
** Market values of investment properties on a like-for-
like basis, eliminating GBP208 million of notional
purchasers" costs from 31 December 2002 valuations
(see Summary of Investment Property Valuations on
page 5)
Revaluation surplus for the year (like-for-like basis)
Market Revaluation
Value Surplus/(Deficit)
31
December
2003
GBPm GBPm %
UK regional shopping centres 3,778 340.6 10.0
US regional shopping centres 165 21.1 14.4
and other retail
Central London 327 (15.6) (4.6)
Business space outside 205 1.6 0.8
London
Retail outside London 132 9.1 7.5
US other commercial 36 (0.1) (0.3)
4,643 356.7 8.4
Development programme
Capital expenditure on developments, acquisitions and existing assets of GBP119
million in 2003.
Book value of development expenditure to date (at cost) of GBP115 million at 31
December 2003. Development commitments outstanding amount to approximately a
further GBP300 million. Principal projects are the new MetroCentre Red Quadrant
(GBP85 million) and Chapelfield, Norwich (GBP275 million). On completion of the
extension in 2004, MetroCentre, Gateshead, (90 per cent owned) will, at 1.8
million sq.ft., be Europe"s largest covered shopping centre.
Positive letting progress with 86 per cent of anticipated rents committed or
under offer at the MetroCentre extension and around 75 per cent at Chapelfield,
Norwich.
Further potential regional shopping centre developments over the next five years
of around GBP850 million, including Cardiff, Oxford and major extensions and
enhancements of both Eldon Square, Newcastle, and The Harlequin, Watford.
Potential commercial and retail developments of Capital & Counties in the UK and
USA now stand at around GBP150 million, including King"s Reach, Southwark, and
190 Strand.
Financial Strength
Debt to assets ratio reduced to 39 per cent and interest cover strengthened to
1.8 times.
Available liquidity approaching GBP1 billion, with cash balances of GBP197
million and aggregate committed and undrawn long-term bank facilities of GBP700
million at 31 December 2003.
Financial Record
Unbroken 10-year track record of annual dividend per share increases and five-
fold growth from 4.55p in 1984 to 25.0p in 2003
Total return (annual dividend and growth in net assets per share) amounts to
15.6 per cent compound per annum for the decade ended 31 December 2003, which
commenced with the launch of Capital Shopping Centres as a separate entity.
Chairman"s Comment on Preliminary Results
Donald Gordon, Chairman of Liberty International, commented:
"I am delighted to report another year of strong growth in headline property
investment income, profits, earnings and dividends per share. With an overall
like-for-like GBP357 million (8.4 per cent) revaluation surplus, our property
assets now exceed GBP5 billion and net asset value per share has reached 906p.
We have a powerful financial position, with shareholders" funds of GBP2.9
billion, the debt to assets ratio reduced to 39 per cent and a significant
development pipeline of around GBP1.3 billion to maintain the strong momentum of
our market-leading regional shopping centre and retail property business."
DIVIDENDS
The Directors of Liberty International PLC have proposed a final ordinary
dividend per share of 13.25p (2002 - 12.5p) to bring the total ordinary
dividend per share for the year to 25.00p (2002 - 23.75p).
The following are the salient dates for the payment of the final dividend:
30 March 2004 Sterling/Rand exchange rate struck.
8 April 2004 Ordinary shares listed ex-dividend on the JSE Securities
Exchange South Africa.
14 April 2004 Ordinary shares listed ex-dividend on the London Stock
Exchange.
16 April 2004 Record date for final dividend in London and Johannesburg.
5 May 2004 Dividend payment day. Where previously requested, dividend
cheques available for collection from Registrar.
South African shareholders should note that, in accordance with the
requirements of
STRATE, the last day to trade cum-dividend will be 7 April 2004. No
dematerialisation or rematerialisation of shares will be possible on the
JSE Securities Exchange from 8 April to 16 April inclusive.
No transfers between the UK and South African registers may take place
from 30 March to 16 April inclusive.
SUMMARY OF INVESTMENT PROPERTY VALUATIONS
31 December 2003 31 December 2002
Like-for-like Open True
True Market revaluation market Purchas equiva
equivalent Value surplus/ value ers" lent
yield(1) (deficit)(2) costs yield(
(3) 1)
% % GBP"m GBP"m % GBP"m GBP"m %
Lakeside, 5.58 (5.61) 8.6 938.0 (42.5) 5.91
Thurrock (4)990. 76.8
5
MetroCentre, 5.59 (5.90) 763.0 51.3 7.2 744.0 (33.7) 5.91
Gateshead
Braehead, 6.01 (6.07) (4)533. 22.4 453.0 (21.6) 6.05
Glasgow 5 96.6
Other M25 5.78 (6.09) 842.0 54.7 7.0 826.3 (42.0) 5.99
Centres
Other Centres 6.34 (6.62) (4)550. 12.2 518.9 (28.2) 6.63
8 60.1
Other 7.39 (7.77) 98.7 1.1 1.3 87.0 (4.8) 7.89
properties
UK Regional 5.83 (6.03) 3,778.5 340.6 10.0 3,567.2 (172.8) 6.10
Shopping
Centres
US Regional
Shopping
centres and 164.8 21.1 14.4 147.3 -
other retail
UK other
commercial
property:
Central 7.88 (8.33) 327.1 (15.6) (4.6) 357.2 (17.0) 8.29
London
Business 8.35 (8.85) 204.6 1.6 0.8 207.8 (11.3) 8.56
space outside
London
Retail 7.64 (7.90) 131.6 9.1 7.5 128.2 (7.0) 7.98
outside London
US other 36.4 (0.1) (0.3) 40.2 -
commercial
properties
4,643.0 356.7 8.4 4,447.9 (208.1)
UK Regional
Shopping
centre 104.6 59.8
developments
Other 20.3 19.8
developments
4,527.5
4.767.9
Investment in - 12.6
UK Prime
Total 4,767.9 4,540.1
investment
properties
Held through (142.7) (143.8)
joint ventures
Group 4,625.2 4,396.3
investment
properties
(1 True equivalent yield used in valuations represents the theoretical yield
) to a purchaser after taking account of the associated acquisition costs.
The figure in brackets represents the yield foregone by Liberty
International shareholders if the asset were to be sold at the market
value. Equivalent yield is the yield assuming all future reversions are
reviewed to the discounted estimated rental value. Nominal yields are
calculated on the assumption that rent is receivable annually in arrears.
Leases generally provide for rent to be paid quarterly in advance. True
equivalent yield reflects the value attributable to this advance receipt
of income.
(2 The like-for-like revaluation surplus makes adjustment for the change in
) estimation technique, described in note 5, by eliminating the purchasers"
costs relating to the 31 December 2002 open market value in order to
calculate the resulting surplus or deficit on a consistent basis.
(3 Purchasers" costs relating to 31 December 2002 open market value.
)
(4 31 December 2003 market value includes the benefit of the relief,
) introduced in 2003, from stamp duty land tax which is available on
certain assets until 31 December 2006.
Reconciliation of revaluation surplus shown in note
5 and like-for-like valuation surplus shown above:
GBP"m
Revaluation surplus for the year ended 31 December 143.4
2003 (note 5)
Add group"s share of valuation of investment 5.2
properties of joint ventures (note 6)
148.6
Elimination of purchasers" costs relating to 31 208.1
December 2002 open market value
Like-for-like revaluation surplus for the year ended 356.7
31 December 2003 (above)
SUMMARY OF CAPITAL & COUNTIES COMPLETED INVESTMENT PROPERTY VALUATIONS
Year ended Year ended
31 December 2003 31 December
2002
Net Revaluation Net Open
Numb Marke surplus/(de prope marke
er prope t ficit) rty t
of rty value incom value
incom GBP"m e GBP"m
prop e GBP"m
erti GBP"m
es
GBP"m %
Central London 22 24.6 327.1 (15.6 (4.6 22.9 357.2
) )%
Business space 14 14.1 204.6 1.6 0.8% 13.8 207.8
outside London
Retail outside 6 8.5 131.6 9.1 7.5% 8.5 128.2
London
Total United Kingdom
investment 42 47.2 663.3 (4.9) (0.7 45.2 693.2
properties )%
United States (1) 9 15.8 201.2 21.0 11.7 15.7 187.5
%
Total completed 51 63.0 864.5 16.1 1.9% 60.9 880.7
investment
properties
(1 Includes GBP1.6 million net property income and GBP9.8 million
) market value (2002 - GBP1.8 million and GBP19.1 million
respectively) in respect of properties owned through joint
ventures.
Properties by use: 31 December 2003 31 December 2002
Retai Office Total Retail Office Total
l s s
GBP"m GBP"m GBP"m GBP"m GBP"m GBP"m
Central London 128.0 199.1 327.1 126.0 231.2 357.2
Business space outside 21.1 183.5 204.6 21.3 186.5 207.8
London
Retail outside London 131.6 - 131.6 128.2 - 128.2
Total United Kingdom 280.7 382.6 663.3 275.5 417.7 693.2
investment properties
United States 164.8 36.4 201.2 147.2 40.3 187.5
Total completed investment 445.5 419.0 864.5 422.7 458.0 880.7
properties
Developments - 20.3 20.3 - 19.8 19.8
Total investment 445.5 439.3 884.8 422.7 477.8 900.5
properties
Held through joint - (19.9) (19.9) (8.4) (18.1) (26.5)
ventures
Group investment 445.5 419.4 864.9 414.3 459.7 874.0
properties
Chairman"s Statement and Review of Operations
Introduction
Once again, I report with much pleasure a year of major advance in the affairs
of Liberty International marked by the following principal achievements:
strong growth in headline property investment income, profits, earnings and
dividends per share
direct property and property-related investments exceeding GBP5 billion for the
first time, after a strong rise in market values, with regional shopping centres
and other retail property, in which we specialise and which constitute some 90
per cent of our assets, significantly outperforming other UK property sectors
a record net asset value per share of 906p compared with 798p last year on a
like-for-like basis
a robust trading performance from our fully-let regional shopping centres in a
more challenging UK consumer environment
a powerful financial position, enhanced by several major long-term financing
transactions increasing the group"s available liquid resources to nearly GBP1
billion
substantial expansion prospects from a high-quality and tightly-controlled
development programme on which significant progress was made in the year, with
GBP300 million of committed capital expenditure and potential projects amounting
to around a further GBP850 million at Capital Shopping Centres and GBP150
million at Capital & Counties.
Results
Our underlying revenue results were very encouraging. Profit before taxation
and exceptional items increased by over 20 per cent from GBP86.6 million to
GBP104.2 million, driven by a substantial GBP19 million rise in UK shopping
centre income. Earnings per share growth at 7.3 per cent was somewhat lower, as
our capital base had been enlarged by the issue of 28 million shares in November
2002 raising GBP157 million of equity. Exceptional profits for the year are
shown at GBP5.8 million and the details and impact of these transactions are
fully described in the accompanying Financial Review.
Our UK regional shopping centres, now 81 per cent of completed investment
properties, increased in market value on a like-for-like basis by a massive
GBP341 million (10.0 per cent) with the remainder of the group"s investment
properties contributing a further GBP16 million (1.9 per cent). The most
notable performer was Braehead, Glasgow, which appreciated by 22 per cent to
GBP533 million now that the centre"s outstanding trading performance since
opening in 1999 has produced clear evidence of strong rental growth.
Net asset value per share at 31 December 2003 increased strongly by 13.5 per
cent to a record 906p against a comparable starting position of 798p at 31
December 2002. The latter figure eliminates GBP208 million of notional
purchasers" costs, particularly stamp duty, equivalent to 64p per share, from
the net asset value actually reported at 31 December 2002 of 862p per share.
The values reported at 31 December 2003 do not include notional purchasers"
costs, in line with the revised RICS Appraisal and Valuation Standards (formerly
the RICS Appraisal and Valuation Manual) which became a requirement from 1 May
2003. The impact of this change to a new and more conservative valuation basis
was readily absorbed within the 2003 year.
Development programme
Development activities are fundamental to the group"s long-term prospects,
through delivering quality products with exceptional investment potential. In
2003, we invested a total of GBP119 million in direct property by way of
development, acquisitions and improvements to existing property assets, while
disposals amounted to only GBP13 million. Properties under development were
stated at GBP115 million (at cost) at 31 December 2003, with expenditure
outstanding on the committed development programme, primarily the new Red
Quadrant at MetroCentre, Gateshead, and Chapelfield, Norwich, estimated at
GBP300 million.
Furthermore, our potential but as yet uncommitted development programme could
amount to as much as GBP850 million at Capital Shopping Centres. This includes
extensions and improvements to existing shopping centres and new projects such
as St David"s 2, Cardiff, and the redevelopment of the Westgate Centre, Oxford.
The equivalent figure for the other commercial and retail activities of Capital
& Counties in the UK and USA is approximately GBP150 million.
Financial position
Liberty International"s financial position remains extremely sound, with
shareholders" funds of GBP2.9 billion and the debt to assets ratio reduced to 39
per cent. Interest cover strengthened to around 1.8 times. Consequently we
have both the capital and the resources to continue our successful and tightly-
controlled business expansion.
Liberty International improved its debt structure with two major financings in
2003; a GBP210 million ten year facility linked to the Victoria Centre,
Nottingham, as yet undrawn; followed by a GBP240 million issue of 3.95 per cent
convertible bonds 2010 with a conversion price of 800p per Liberty International
share. We further strengthened our capital base by calling the remaining GBP60
million of 6.25 per cent convertible bonds 2006. GBP43 million converted into
9.5 million new ordinary shares of Liberty International. The balance of GBP17
million was repurchased and cancelled at a price level equivalent after tax to
604p per share, a substantial discount to net asset value, generating an uplift
amounting to some GBP12 million in aggregate which accrued to the benefit of all
shareholders pro rata.
In addition to GBP197 million of cash balances, stemming largely from the new
GBP240 million convertible bond issue, committed and undrawn long-term non-
recourse facilities are in place amounting in aggregate to GBP490 million at 31
December 2003, well in excess of our current contracted capital expenditure. A
further GBP210 million of committed long-term unsecured bank facilities are also
available to the group.
Dividends
The directors are recommending a final ordinary dividend of 13.25p per share
payable on 5 May 2004, bringing the full year"s dividend to 25.0p per share, an
increase of 5.3 per cent on 2002, continuing our unbroken 10-year track record
of annual dividend improvement.
The directors remain committed to a full and progressive dividend policy and
believe this policy represents a major attraction to long-term investors. The
annual dividend has increased more than five-fold over the last 20 years from
4.55p in 1984 to 25.0p in 2003.
Liberty International"s total return, in terms of annual dividend and growth in
net assets per share, amounts to a compound 15.6 per cent per annum for the
decade ended on 31 December 2003, which commenced with the launch of Capital
Shopping Centres as a stand-alone entity.
Property valuations
Our UK regional shopping centre revaluation surplus of GBP341 million (10.0 per
cent) on a like-for-like basis brought the aggregate open market value to GBP3.8
billion.
A number of factors contributed to the surplus -
* approximately GBP160 million from an average 27 basis points downward shift
in the yields applied by the valuers to our major assets, reflecting
scarcity value and investment demand;
* approximately GBP111 million primarily from underlying growth in estimated
rental values, particularly at Braehead, Glasgow; and
* approximately GBP70 million from lower assumptions than at 31 December 2002
on purchasers" costs, as four of our major assets are located in
"disadvantaged areas" qualifying for relief from the 4 per cent stamp duty
land tax on transactions, a relief limited at this stage to the period to
31 December 2006.
In the case of the group"s UK commercial and retail portfolio, the trend of
valuation movements over the year showed a similar pattern to that of 2002.
Investment property values fell on a like-for-like basis by 0.7 per cent to
GBP663 million. Mixed use Central London properties fell in value by 4.6 per
cent, while retail properties outside London increased in value by 7.5 per cent.
Office investments outside Central London were virtually unchanged, with
provincial office values remaining steady whilst falls in some M25 investments
were outweighed by the effect of lettings of vacant space at Cambridge and
Uxbridge.
Our US investment properties produced an outstanding valuation increase of
GBP21.0 million (11.7 per cent) to GBP201 million in aggregate, with no currency
effect as our US dollar exposure is predominantly hedged into sterling. The
bulk of the uplift stemmed from the retail properties, the Serramonte Shopping
Centre, Ghirardelli Square and The Willows, Concord, all in the San Francisco
Bay area. Including development and trading properties, our US portfolio now
amounts in US dollar terms to around $400 million.
We continue to contend that valuation yields averaging around 6 per cent, well
in excess of current gilt yields and other major investment classes including
equities, are exceptionally defensive for major regional shopping centres, which
are scarce and irreplaceable long-term growth assets and, in the case of Liberty
International, unlikely to be disposed of for decades ahead. In respect of our
other UK property assets, both commercial and retail, the valuation yields
averaging around 8 per cent, compared with the 10-year gilt yield of 4.8 per
cent at 31 December 2003, are even more cautious, albeit reflecting negative
sentiment in office markets where rental values have been under some pressure.
The substantial investor appetite currently in evidence for quality UK property
is hardly surprising, when property yields are compared with yields available on
alternative asset classes such as bonds or equities, and augurs well for the
continued health of the UK property investment market given a stable economic
environment.
Capital Shopping Centres
2003 has been a year marked by continuing progress in three major areas:
* our existing shopping centres which have generated above average results,
both in terms of financial performance and other key criteria;
* our range of attractive enhancement and extension projects at these
centres; and
* our substantial new-centre development programme, which will increase the
scale of our activities from nine to twelve regional centres, excluding our
US shopping centres which are part of Capital & Counties.
Total net property income increased by 11.8 per cent to GBP182.4 million during
the year, boosted principally by rent reviews and the increase in our ownership
of the Victoria Centre, Nottingham, to 100 per cent, which took place at the end
of 2002. The underlying increase in net property income was 6.0 per cent.
Our active management approach, particularly on tenant mix, and the high degree
of expertise which CSC possesses are fundamental to delivering exceptional
returns in the regional shopping centre business. Once again, we can report a
negligible level of voids, 10 units out of a total of 1,418 units at the year
end. During the year, we made 79 tenancy changes, some 6 per cent of all retail
units, producing additional rental income of GBP2.4 million per annum.
Our existing regional shopping locations have again demonstrated their strength,
through the level of support received from both the shopping public and
retailers in a year which has been more challenging for retailers. We recorded
some 175 million customer visits at our shopping centres during 2003,
approximately the same number as in 2002, excluding customer visits at The
Ridings, Wakefield which we sold at the end of 2002.
Non-food sales growth, as measured by the Office of National Statistics,
declined marginally from 4.0 per cent in 2002 to 3.2 per cent in 2003 and our
centres generally measured favourably against this increase. Braehead, Glasgow,
and The Chimes, Uxbridge, continue to show good year-on-year growth in retail
sales figures and at Braehead the exceptional sales performance since opening in
1999 has produced very strong growth in rental levels as we approach the first
rent review cycle which commences in 2004.
Development activities in respect of completed shopping centres
Excellent progress has been made at Lakeside, Thurrock, on the refurbishment and
modernisation programme which started in January 2003. The project has included
the installation of new lifts and additional escalators, new floors and ceilings
and improved customer facilities, and is expected to bring major benefits to our
flagship centre. Alongside our improvements, many retailers have now refitted
their shops or are due to refit this year to coincide with the completion of the
refurbishment works. After a pause during the peak trading months over the
Christmas period, the works are on programme for completion in July this year.
The 371,000 sq.ft. scheme to expand MetroCentre, Gateshead, to provide a new
department store for Debenhams, 28 additional shop units, a 1,100 space car park
and a new public transport interchange, at a cost of GBP85 million is well
advanced and on target to open in Autumn 2004. This scheme, which restores
MetroCentre"s position as Europe"s largest shopping centre at 1.8 million
sq.ft., will add significantly to the retail offer on both trading levels.
Lettings have been completed to a top-quality selection of retailers including
Debenhams, Zara and Hennes. In total 94 per cent of the space is now committed
or under offer, representing 86 per cent of expected initial rents.
At Braehead, following Renfrewshire Council"s resolution to give outline
planning consent for a mixed-use development on 120 acres of the Phase 2 land of
140 acres, we continue to progress the proposed Xscape leisure scheme (including
an indoor snow-slope) under a joint venture with Capital & Regional plc.
Construction is due to commence on site later this year. The other main uses
are residential and business space. Residential developers have shown strong
interest and we expect some land sales to take place during 2004.
At Eldon Square, Newcastle upon Tyne, (961,000 sq.ft.) planning consent has now
been granted for three schemes to massively expand and renovate the centre,
which in total will provide 468,000 sq.ft. of retail space, including a 175,000
sq.ft. department store, creating net additional retail space of 318,000 sq.ft.
The proposals, which involve our two partners, the City of Newcastle and Shell
Pension Trust, include restructuring the headlease from the City of Newcastle
and potentially increasing CSC"s percentage participation.
At Victoria Centre, Nottingham, plans are well advanced to undertake a
remodelling of part of the centre including creating an additional 18,000 sq.ft.
of prime retail space.
More recently, in Watford we have reached a preliminary agreement with Watford
Borough Council with the intention that CSC will enter into a development
agreement for a scheme which includes Charter Place, an older 1970"s shopping
centre owned by the Council which adjoins our major regional centre, The
Harlequin, and other High Street properties we already own. A brief for the
area is presently being prepared and the intention is to submit a planning
application later this year following a full public consultation exercise.
Progress on new projects
At the beginning of 2003, construction work started on the Chapelfield shopping
centre, Norwich, Norfolk, where, under agreements entered into with the
developer Lend Lease Europe, CSC will become the owner on completion, targeted
for Autumn 2005. At the beginning of January 2004, Lend Lease reported that 85
per cent of the space was either let, under offer or with terms agreed,
representing 74.5 per cent of anticipated income. Chapelfield, Norwich,
anchored by House of Fraser, will be the largest shopping centre in East Anglia
when completed.
In Cardiff, the County Council has agreed to grant planning consent for the
proposals to enlarge the St David"s shopping centre, through a joint venture
between Land Securities PLC and CSC, with a major retail-led mixed-use extension
of approximately 750,000 sq.ft. The Welsh Assembly has also now given its
approval to the proposals.
We continue to pursue proposals to expand and upgrade the Westgate Centre in
Oxford, a joint project with LaSalle Investment Management. During 2003, we
withdrew our first planning application, with a view to submitting a new
application in 2004. The revised scheme will include a number of major
improvements, including the John Lewis Partnership as anchor tenant with a full-
line department store.
Capital & Counties
UK
In 2003, the continuing poor conditions in office markets resulted in further
rental value reductions. However, current and past action to let vacant space,
minimise vacancies and upgrade accommodation has supported the value of the UK
properties which, after allowing for capital expenditure, fell by only 0.7 per
cent in aggregate over the year to GBP663 million. Overall vacancy rate at the
year end, however, was 7.3 per cent, including availability within the more
recently completed developments at Cambridge and Uxbridge, but vigorous efforts
are being made to increase occupancy.
In an internal strategic move, the ownership of Capital & Counties" principal UK
investment and trading properties was rearranged in 2003 into a number of
separate entities in order to focus more clearly on the separate elements of the
group"s non-shopping centre activities. Under these arrangements, retail
properties have been placed within a new company, Liberty Retail Properties,
which will in future hold the non-shopping centre retail initiatives of the
group under the management of Capital & Counties. In addition, we have
established a dedicated trading entity, as we anticipate a resumption of our
hitherto successful trading activities which reduced following disposals of most
of our trading stock into buoyant investment markets.
London West End and Mid-town offices and retail (GBP327 million market value)
Whilst we have seen falling office rents and an increase in tenant incentives
over the year, these factors appear to be stabilising, though without as yet any
noticeable erosion of office availability in the small suite sector in which we
are primarily involved. Vacant and available-to-let offices in the company"s
West End and Mid-town investments represent 2.4 per cent of our total office
areas within those properties. In addition, a further 2.1 per cent of such
space is undergoing refurbishment as we firmly believe it is essential to
provide high quality accommodation to attract tenants. Schemes underway or
completed are referred to below. Valuations of our Central London offices now
assume an average rental value of only around GBP24 per sq.ft., which we regard
as defensive.
Strong income flow from a high-quality tenant base is an attractive feature of
the company"s retail properties in Central London and we have no current
vacancies.
Progress continues to be made in preparing planning applications for appropriate
schemes at King"s Reach, Southwark, and 190, The Strand, a total of 443,800
sq.ft. of existing space. In the latter case we are collaborating with
Prudential, the freeholder of the site.
Notwithstanding the unfavourable fundamentals, investment demand in these
markets remained strong in 2003 and we made no acquisitions during the year.
Business space outside London (GBP205 million market value)
Vacancy rates in most of the company"s investments remain low, though the
Western M25 office market remains problematic and we currently have some 56,000
sq.ft. space vacant.
Whilst little new development is taking place, the current excessive supply will
continue to depress rents even if some buoyancy returns to tenant demand.
However, in our favour, all our properties are modern and well-specified with
car parking ratios which in the main comfortably exceed the levels which would
now be permitted in any new scheme.
During the year progress was made at Capital Court, Uxbridge (55,000 sq.ft.)
where lettings of around 30,000 sq.ft. were achieved and negotiations are in
hand in respect of part of the remaining space. At Capital Park, Cambridge, a
further 21,600 sq.ft. was let in 2003 and the remaining 10,700 sq.ft. has been
placed under offer since the year end.
Provincial and Out of Town Retail (GBP132 million market value)
Work continues at the retail warehouse parks at Braintree and Stafford to
increase the scope of existing planning consents and improve tenant mix and we
are actively engaged in the reconfiguration of units in our Swansea City Centre
property.
Planning consent was granted in April 2003 to create offices within the upper
parts of the 513,000 sq.ft. Market Street, Manchester department store and a
similar exercise is underway in respect of the 510,000 sq.ft. Liverpool store.
The first manifestation of the potential growth of activity within the Liberty
Retail Properties entity managed by Capital & Counties was the recent selection
by Redbridge Borough Council of an alliance between the company and Countryside
Properties Plc as its preferred development partners to redevelop 2.6 hectares
of Ilford Town Centre. This scheme is planned to include 120,000 sq.ft. of
retail space and 488 apartments, together with an extension to the Town Hall and
other community benefits. A planning application is expected to be submitted in
mid 2004.
United States
The US company has had an active year resulting in an impressive increase in
property valuations of 11.7 per cent. Total investment property assets now
exceed $360 million by value, with trading and development properties
representing a further $44 million. The investment properties produce an
attractive overall initial yield of 7.5 per cent.
Serramonte, an 850,000 sq.ft. regional shopping centre and our largest US asset,
has proved to be one of the group"s most successful investments, with further
significant capital appreciation in 2003. Phase one of the long-term
enhancement plan was completed in 2003, involving a $4 million internal
refurbishment. In addition, we have conditionally contracted to sell surplus
land for residential development.
During the year, the remaining 50 per cent interest in Ghirardelli Square, San
Francisco, was purchased for $15.4 million. With 100 per cent control, we are
now implementing a business plan to maximise value.
At Redondo Beach, Southern California, we continue to pursue redevelopment
potential and have exercised our option to acquire 7 acres of strategic ocean-
front land essential to the envisaged mixed-use scheme.
In Pasadena, construction of the major $80 million `Trio" apartment scheme in
which we have an interest continues on schedule and within budget. Completion
is scheduled for 2005.
Capital Enterprise Centres
This activity continues to progress well. The 38,000 sq.ft. scheme at
Chelmsford was completed in April 2003 and the level of occupation reached
around 70 per cent by year end. Progress continues on the developments at
Harlow and Croydon and phased refurbishment at Kings Hill, Kent. Conditional
contracts have been exchanged for the purchase of a further site at Milton
Keynes.
Other investments
In 2003, Liberty International has invested a further GBP27 million in Great
Portland Estates plc, a specialist West End property business, increasing our
interest from 19.4 per cent to 25.5 per cent, valued at GBP122 million at 31
December 2003.
The New Star Property Unit Trust (previously Edinburgh Property Portfolio) is an
Authorised Property Unit Trust managed by Capital & Counties on behalf of New
Star Asset Management, which acquired Edinburgh Fund Managers" retail funds at
the end of October 2003. New cash inflows have continued to be strong during
the year, with the Fund size increasing from GBP125 million to GBP157 million
with a further acceleration of interest in the Fund under the New Star banner.
Liberty International"s interest in the Fund was GBP39.5 million at 31 December
2003 representing 25 per cent of the Fund.
Corporate Social Responsibility
Following a highly positive response to our first Corporate Social
Responsibility (`CSR") report issued in February 2003, we will be issuing our
second report at the same time as our 2003 Annual Report later this month. In
fact, the response made it clear that we, and probably the property industry
generally, have not been sufficiently pro-active in promoting this long-standing
and integral aspect of our business activities, whether to the public,
politicians or other interested parties.
By way of example, over 99 per cent of our developments in the UK (and 100 per
cent of our current development programme) are on brownfield land, with our
three large out-of-town centres built on redundant industrial sites. We
estimate that our UK shopping centres have generated employment for around
33,000 people.
In 2003, we concluded comprehensive CSR audits of our nine completed UK shopping
centres. In addition, we are engaged on major initiatives in a number of areas
including security, local employment, emissions, waste and sustainable travel.
Furthermore, in 2003, the UK shopping centres have provided some GBP390,000 in
community support including sponsorship of local causes, support for Town Centre
Management and the provision of free mall space and services.
We need no convincing that the creation of long-term shareholder value requires
a strong commitment to high standards of CSR and their clear communication both
internally and externally.
Economic and financial background
The slide in global stockmarkets which began in March 2000 eventually came to a
halt in March 2003. By the year end, the FTSE-100 index had increased year-on-
year by 13.6 per cent, somewhat outpaced by a 26 per cent rise in the US
Standard & Poors" 500 index and a 50 per cent rise in the NASDAQ index. These
stock market rallies coincided with a welcome recovery in underlying economic
growth rates in the US and UK, stimulated by a low-interest rate policy,
especially in the US.
However, as ever, major economic uncertainties remain, with substantial US
dollar weakness reflecting nervousness about the twin trade and federal budget
deficits which look an increasingly likely source of future global economic
instability.
In the UK, the key economic issue is burgeoning public sector spending and
employment, which not unsurprisingly appears to be producing a poor outcome in
terms of productivity. Without some change of approach, we face the
unattractive prospect in the UK of a higher tax burden and reduced economic
growth potential.
UK property shares performed well in 2003, with Liberty International being no
exception as our shares rose by 21 per cent to 682.5p at year end. Direct UK
property, while eclipsed by UK equities for the first time in some years, has
continued to outperform equities and gilts over 3, 5 and 10-year periods.
Overall UK property returns, as measured by the Investment Property Databank
(`IPD") Monthly Property Index, continued to display a strong degree of
consistency at 11.3 per cent (2002 - 10.5 per cent). Once again, retail (not
generally comparable to CSC"s regional centres) was the strongest performer,
showing a total return of 16.2 per cent (2002 - 14.0 per cent) including capital
appreciation of 9.2 per cent. Offices continued to produce a poor return at 3.4
per cent (2002 - 5.9 per cent) including a 4.0 per cent fall in capital values.
Overall, reflecting strong investment demand, the IPD assets experienced a
favourable reduction in yields of 32 basis points in the year, substantiating
the average 27 basis points reduction in yields applied by the valuers to our UK
regional shopping centres.
The attractiveness of UK property as an asset class, with its combination of a
high running yield and relatively stable total return performance, should have
been reinforced in 2003, as fixed-interest investments performed poorly, with UK
gilts (5-15 years index) producing a total return of just 1.8 per cent. This is
perhaps a foretaste of further poor performance to come for fixed interest
investors, given the stimulatory monetary policies currently being adopted in
some leading world economies.
Stamp Duty Land Tax
Stamp Duty Land Tax, the successor in the UK property market to stamp duty,
remains at an entirely unreasonable level of 4 per cent when compared with
securities transactions which attract only a 0.5 per cent stamp duty levy.
Particularly unwelcome is the possible extension of the 4 per cent levy to the
transfer of partnership interests in property which hitherto have not attracted
stamp duty at all. In addition, during 2003, stamp duty on leases, a cost which
falls on our tenants, was substantially increased to 1 per cent of the net
present value of lease payments (such payments discounted at a distinctly
ungenerous rate of 3.5 per cent).
While the disadvantaged areas regime referred to above has provided some relief,
stamp duty at these levels represents a significant dampener on property market
liquidity and thereby on economic activity and enterprise throughout the UK
economy.
Notwithstanding the government"s obvious but largely self-inflicted need to
explore every tax raising opportunity (particularly if it can be termed a duty
or a levy rather than a tax), we continue to regard stamp duty as an outmoded
and completely inappropriate burden for a modern economy and particularly for
the important property sector.
Real Estate Investment Trusts (`REITS")
The apparent willingness of the UK Treasury to contemplate the idea of a tax
transparent property vehicle, usually referred to as a `Real Estate Investment
Trust" or `REIT", has generated considerable industry and investor interest, the
UK being one of the few major developed economies without such a vehicle. The
details are at this stage completely uncertain and 2005 would be the earliest
feasible date for such a vehicle to be operational.
In principle, the idea has merit, particularly if retail investors can be
attracted into the sector. However, tax transparency will be bought at a high
price if a consequence is greater regulation and reduced operational
flexibility. Furthermore, while the tax benefits may be obvious for some
classes of investor, such as UK pension funds and other tax-exempt investors,
the overall tax burden from a transparent structure could rise for other classes
of investor.
The quoted property sector should therefore avoid infatuation with the concept
and pay careful attention to the fine details of any UK Treasury proposals. In
particular, today"s active and efficient property companies should be wary of
creating through a REIT structure a new class of apparently tax-advantaged but
in reality less efficient competitors.
Liberty International would however undoubtedly represent an attractive REIT
given its size and specialism in a single property sector, in our case retail
property.
Corporate Governance and the Combined Code
Twelve months ago, I commented on the potentially detrimental effect on listed
companies of certain of the proposals contained in the Higgs Review on the role
and effectiveness of non-executive directors. We were pleased and relieved
that, after an extensive process of consultation and debate in which I was
actively involved, some of these criticisms were satisfactorily addressed in the
revised Combined Code on Corporate Governance which was finally issued in July
2003.
In our 2003 Annual Report, we will be reporting on our compliance with the
current requirements. Next year, we will be reporting on compliance in respect
of all the provisions of the revised Combined Code. However, we anticipate
relatively few areas where we will have any major difficulty in complying. In
particular, our Board composition should be entirely compliant with the revised
Combined Code following forthcoming changes in the first half of 2004.
It is interesting, however, to note that the revised Combined Code contains
seventy-five Code provisions and principles, compared with the original Cadbury
Code of Best Practice issued in December 1992 which contained a mere nineteen
Code provisions. One can only hope that the additional administrative and
reporting burden is justifiable and value adding, as it will undoubtedly
represent a major distraction for Boards of listed companies and risk diverting
them from the vital task of attending to their underlying businesses.
Chairmanship, Directorate and Management
After a career in the business world now spanning nearly 50 years, I have
decided the time is nearing when it will be appropriate for me to step down as
Chairman of Liberty International, my one remaining public company chairmanship,
and I intend to do so no later than my 75th birthday on 24 June 2005, the day
which also marks Liberty International"s 25th anniversary.
We are now engaged in the process of determining who should be my successor as
Chairman and an announcement will be made in due course during this year to
enable a sensible handing-over process to be implemented.
Two non-executive directors retire at this year"s Annual General Meeting, Robin
Baillie and Douglas Leslie. Robin Baillie retires as he has reached our normal
non-executive director retirement age of 70. He has been a pivotal non-
executive director of the company since 1988 and we have greatly appreciated his
formidable combination of charm and wit, allied to meticulous attention to
