The CBF Church of England Property Fund. Annual Report & Accounts 31 December 2017

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2 Inchinnan Business Park, Glasgow 06 Cover story 08 About the Fund 10 Church of England Charities and Property 12 CCLA s approach to investment Contents 14 Asset focus 16 Key facts 18 Report of the Investment Manager* 24 Independent Auditor s report 27 Risk and reward profile *Collectively, these comprise the Manager s Report. **Audited. References to CCLA refer to the CCLA Group, comprising CCLA Investment Management Limited and CCLA Fund Managers Limited. 02

3 28 Comparative table 29 Portfolio analysis 30 Portfolio statement* 31 Statement of total return** 31 Statement of change in net assets attributable to unitholders** 32 Balance sheet** 33 Cash flow statement** 34 Notes to the financial statement** 45 Distribution table** 46 Statement of Trustee and Manager responsibilities 48 Trustee and Manager* Disability Discrimination Act 1995 Extracts from the Annual Report and Financial Statements are available in large print and audio formats. 03

4 The longer-term income and total return performance record is attractive for charities and reflects a balance between a regular reliable income and a long-term contribution from capital. Paul Hannam Head of Property, CCLA Inchinnan Business Park, Glasgow 04

5 The year to 31 December 2017 began with an understandable level of caution as investors tried to understand the implications of the EU referendum result both for the property market and the UK economy as a whole. In the event, whilst much of the uncertainty remained, concerns about property investment returns proved unfounded, as rental growth continued and valuations rose consistently through the year. A feature, particularly in the London market, was the level of demand from overseas investors, attracted by a weaker sterling exchange rate. Domestic investors were also active, although, as the year progressed, their focus narrowed to properties which offered the strongest income credentials, including industrials and niche investments such as hotels. Against this background, the Fund Manager s approach has been to seek to keep the portfolio fully invested, to maximise income and the exposure to rising capital values. The Fund s only investment, the COIF Charities Property Fund, has experienced modest outflows and so the balance of activity has been on portfolio rebalancing, taking advantage of buoyant conditions to sell eight mature, generally small investments for a total consideration of some 30m. A busy lease management programme once again generated a material increase in rents received; however, this has been temporarily offset by income foregone on properties undergoing refurbishment, the largest of which was the enhancement of the COIF Charities Property Fund s property at 80 Cannon Street in the City of London. Details of major transactions and lease changes are shown in the Investment Manager s report on page 18. The current economic and political environment is uncertain, making it particularly difficult to predict the outcome for the coming year. Investment in UK property, however, provides a useful source of income for charity investors and should provide a reasonable level of total return over the long-term. Richard Williams Chairman of The CBF Church of England Property Fund 05

6 80 Cannon Street, London Cover story A rare opportunity to acquire a top-class City asset and add significant value. The building is situated on Cannon Street, an important through route in the City of London. It is just a few minutes from the Bank of England and in the area refreshed by the development of the new Bloomberg headquarters. This part of London was once the home, not of armament manufacturers, but of candle making. Over time Candelwrichstrete gradually evolved into the current name. The building was completed in Accommodation comprises lower ground and ground floors and 10 upper storeys to give over 54,000 sq. ft. of accommodation. In the original design, the lower two levels were left void to accommodate the expected route of the new Jubilee line. In the event, the planners decided to keep the path south of the Thames, freeing space which is now a large retail outlet, currently occupied by Boots. The distinctive external cladding on the building is not just an aesthetic feature. It has an important structural role and is also part of the fire protection system the pipework is filled with water. 06

7 We acquired the building at the end of At this point it was not in the condition that its prime position justified, with the neglect reflected in the rents achieved and the amount of empty space. We saw a rare opportunity to acquire a top-class City asset and add significant value by bringing it up to the standard its quality and location deserved. We put in place a programme of refurbishment, revamping vacant floors and improving the public areas. Importantly, a redundant mezzanine floor once used for plant and machinery has been converted to office use, materially increasing rentable space. The programme was the most expensive ever undertaken by the Fund. The new mezzanine floor and the refurbished space has attracted an encouraging level of interest. 80 Cannon Street, London 80 Cannon Street, London 07

8 About the Fund: Structure, objective and controls Inchinnan Business Park, Glasgow Structure and management of the Fund (the Fund) is a Common Fund established under the Church Funds Investment Measure of 1958, as amended by the Church of England (Miscellaneous Provisions) Measure 1995, the Church of England (Miscellaneous Provisions Measure 2000) and the Trustee Act 2000 together (the Measure). It was launched on 1 March The Fund has charitable status, but is not under the jurisdiction of the Charity Commission. CBF Funds Trustee Ltd is the Trustee and Operator of the Fund. It has delegated to the Manager, CCLA Investment Management Ltd, a range of functions including investment management, marketing, administration, registrar and secretarial services. The Trustee Directors meet quarterly with the Manager to review investment strategy and performance, portfolio structure and dividend policy. They also review the Report on the Fund and the financial statements. HSBC Bank plc has been appointed to monitor the Manager in respect of activities such as administration and the safe keeping of assets. This independent review provides an important additional layer of protection for investors. Investment objective The Fund aims to provide investors with a high level of income and long-term capital appreciation. Investment policy The Fund is an actively managed portfolio of UK Commercial properties. It will principally invest in commercial properties in the UK, but may invest in other assets. The property exposure will be achieved by investing in the COIF Charities Property Fund. The Fund is managed in compliance with the property investment policy of the Church of England s Ethical Investment Advisory Group. These are available on the Church of England s website. 08

9 Church of England investors benefit from Stamp Duty exemption. Benchmark The Fund s benchmark is the AREF/IPD Other Balanced Property Funds Index. Suitability The Fund is suitable for the long-term funds of any charity seeking exposure to UK commercial property. Controls and risk management The Board receives regular reports from the Manager on the range of risks faced by the Fund and the effectiveness of its programme to control them. Responsible Investment Achieving sustainable long-term returns is a key objective of the Fund and an important consideration for the Fund s unitholders. We link the financial assessments of the investments made on behalf of the unitholders with broader environmental, social and governance (ESG) issues. This recognises the importance of ESG risks for property, and is reflected in our investment processes and the day to day management of the Fund s property portfolio. CCLA s Ethical & Responsible Investment and Property teams work closely, together with the BNP Paribas Real Estate sustainability function, to integrate ESG and performance monitoring. Further details on the Fund s Responsible Investment Policy and management information is available on request from the Manager. 18 years since launch in m value of property portfolio 43% growth in size of the Fund since the transfer of portfolio to the COIF Charities Property Fund 729 charities invested in the Fund Source: CCLA. Past performance is no guarantee of future returns. 09

10 Church of England Charities and Property Braywick House, Maidenhead Braywick House, Maidenhead Property investment has been a consistent mainstay of charity portfolios for good practical reasons, as it has been a rewarding relationship. The foundation has been high and reliable income, but that is not the only attraction, as it is important not to overlook the contribution property has made both to long-term growth in capital values and risk control. The income attractions of the sector are clear. Today, property is one of the highest yielding of the major asset classes, providing an income which is a multiple of that achievable from cash or even government bonds. The richness of the income flow, however, is not the only merit. Just as important is the consistency and predictability of the payments which comes from the contractual nature of the relationship. Leases set out clearly the level of income which will be paid and the period over which it can be relied upon. Not only is the initial income from property high, it also tends to rise over time, with increases in rents helping to protect charity spending power from inflation. Property is a real asset one where returns are directly linked to the growth in the economy. This link to economic expansion has also supported rising capital values; good quality assets have maintained and increased their value in real terms. There are other benefits to including property in a balanced portfolio, which are less obvious on a day-to-day basis, but no less valuable. The factors which influence property values are not the same as those which act on other assets in a charity investment portfolio. The result is that adding property to a multi-asset portfolio can diversify risk and so reduce the overall exposure to short and medium term fluctuations in values. 10

11 Braywick House, Maidenhead 11

12 CCLA s approach to investment Portfolio diversification but not an index clone A core objective of our portfolio construction is a prudent level of diversification, across regions, sub-sectors and individual assets. This does not mean, however, that the Fund simply reflects the shape of the industry. Instead, there are strong structural biases to the areas forecast to give the best returns. Currently, there is an above average weighting to industrial properties and to offices in the South East. In contrast, retail, battered by oversupply and significant changes in shopping patterns, is a sector where the Fund has low weightings relative to the industry. Providing a consistent premium income Fund managers seeking to provide an income above that of the sector have important choices to make. One approach is to hold lower quality assets, but whilst this may give an immediate boost to yields, future income predictability from this strategy is low. An alternative stance is to use borrowings to give a geared exposure to the sector, but of course, whilst in the current low interest rate environment, this will push receipts higher, it pushes risk higher too. Our stance is to avoid these negative approaches and focus instead on top quality assets, a proportion of which are acquired on shorter leases. Well chosen, these give a premium income without sacrificing core portfolio quality; shorter leases also help in the search for income growth, because they give access to the property so that income enhancing refurbishment or lease restructuring can begin. Ethical and responsible investment and property Environmental, social and governance (ESG) factors are an increasing concern for charity investors and may impact upon the future profitability of property investment assets. For this reason, we incorporate ESG considerations into all aspects of our property investment management. Prior to acquiring a new asset, we undergo a rigorous due diligence process and seek to avoid the worst rated properties. We consider factors such as the likelihood of the property becoming susceptible to flooding, which we anticipate will become an increasing concern due to changing weather patterns, and the potential for us to drive value by improving the asset s energy and environmental performance. We monitor the environmental performance of the assets contained within our portfolio annually. Our managing agents purchase renewable energy tariffs as standard and are constantly seeking to decrease our buildings carbon footprint, waste to landfill, energy and water use through an ongoing programme of tenant consultation. When undergoing refurbishments, we take the opportunity to conduct larger scale improvements to our properties. These can include the installation of LED lightbulbs and investigating the opportunity for more efficient heating and cooling systems. We seek to manage the portfolio in a manner that protects the reputation of our clients and avoid tenants who are engaged in activities that are restricted by the Church of England s Ethical Investment Advisory Group. 12

13 1-3 College Hill, London 13

14 Asset focus Spotlight: industrials Industrial assets proved to be the best performing part of the property sector in 2017 and are well placed to continue to generate attractive returns in the year ahead. The strength is due to a very positive balance of supply and demand. The availability of good quality assets has been reduced by conversion to other, higher value uses, particularly residential. The problem is most acute in urban locations and in the home counties, where house prices are highest. At the same time demand is rising strongly, based on general factors, such as population growth and specific drivers such as the dramatic change that has occurred in shopping patterns over the past few years a change that has seen online purchases grow to almost 25% of all non-food shopping. The need is not just for more sheds, but for different ones too. At one end of the scale, efficiency and cost control require structures of a size which developers have been unwilling to provide speculatively, in anticipation of demand. Ealing Road, Alperton At the other, next day delivery has increased the need for inner-city sites capable of supporting the last-mile journey to the consumer. Site availability and planning issues and the continued rapid increase in requirements are such that this tension will continue for at least the medium-term. In 2017 the strength of returns was due to rising rents, another area where the sub-sector performed best, and a willingness of investors to buy at ever lower yields. Looking forward, rental growth is expected to continue in 2018, which will underpin income flows and support higher valuations. Ealing Road, Alperton 14

15 Long Income Assets Demand for good quality property assets with long income profiles has been a feature of the sector in Traditional property investors have been keen buyers, but support has also come from a wide range of other investors. Pension funds have been a key group, viewing the long-term income flows as a good match against liabilities, but there has been steady interest too from investors simply keen to lock-in to known income flows to help shelter returns in a period of political and economic uncertainty. price trends in the regions. Overseas interest has not been limited to room use, non-uk investors have been keen asset buyers too, with US purchasers leading on transaction values, Asian investors by deal volumes. Looking forward, new supply is sufficient to meet anticipated demand growth, but no more. Reflecting changing patterns of demand, over 40% of the increased capacity is in the budget category, much in regional locations or linked to the Crossrail development in London. Long-term income contracts are a feature of the other sub sector, a diverse group of asset types that includes car parks, leisure, specialist residential, and hotels. Of these, hotels are attracting a dominant share of interest. Hotel assets trade at yields materially below those of the sector as a whole, but offset this disadvantage with some important merits. In particular, asset backing tends to be strong, supported by alternative use valuations such as residential or office conversion. This, coupled with long term leases, makes valuations defensive in periods of uncertainty. Hotels were the best performing sub-sector in the financial crisis and they have again shown relative strength recently as valuation growth has slowed and sentiment has become clouded by economic uncertainty and Brexit concerns. The defensive attractions are also supported by good current trading. Although business travel volumes have fallen since the referendum, tourist numbers have grown sufficiently so that average room rates have risen faster than inflation in London, matching general 1-3 College Hill, London 15

16 Key facts Portfolio (within the COIF Charities Property Fund) 68 property assets 151 tenancies 34m rental income 89% of income from tenants rated low or negligible risk by Dun and Bradstreet 2.4m largest single rent 7.7m average value of assets 29.4% weighting to strongest performing sub-sector and outlook 4.9 years weighted expiry to lease break dates facilitates active management and high-quality property portfolio 59% weighting to strongest performing South East and London regions Source: CCLA. Past performance is no guarantee of future returns 80 Cannon Street, London 16

17 Performance 7.40p annual rate of income per share distribution maintained 5.5% annual income yield (31/12/17) 9.6% total return to investors in the year to 31/12/17 9.7% total return to investors per annum for last 3 years p nav share price (31/12/17) 17

18 Report of the Investment Manager for the year ended 31 December 2017 Performance Property returns in 2017 surprised on the upside, reflecting a recovery in investment values following the disruption caused by the EU Referendum in June The CBF Church of England Property Fund s Share price ended the year at p, compared to a price of p twelve months ago, providing a capital return for Shareholders of 3.8%. The income return was 5.7%, based on a maintained distribution of 7.43p per Share. This compares with a yield on the benchmark, the AREF/IPD Other Balanced Property Funds Index, of 3.6% and a yield on the AREF/IPD All Pooled Property Funds Index of 2.8%. The total return after all expenses was 9.7% compared to a benchmark return of 10.6%. The performance record of the Fund over longer periods is shown in the table below. Annualised total capital and income return 1 year 5 years 10 years To 31 December 2017 % % p.a. % p.a. Performance against market indices (after expenses) * Benchmark # # Benchmark AREF/IPD Other Balanced Property Funds Index. * NAV to NAV income re-invested for income units. Source: CCLA. The longer-term income and total return performance record is attractive for Church of England charities and reflects a balance between a regular reliable income and a long-term contribution from capital. In recent periods, the environment has been less supportive as the income focus of the strategy has slowed the pace of capital growth. Nevertheless, annual returns are attractive in absolute terms and have built each quarter as the year has progressed. Industrial asset valuations rose strongly, and this was the best performing sub-sector by some margin. The Fund s overweight allocation has helped performance. In contrast, returns within the office sub-sector have been mixed and subdued overall. A high weighting to offices in an environment of reduced investor appetite for risk has held back returns in some areas of the portfolio. In addition, a shift in investors preferences to favour long secure income investments has benefited the alternative Other asset group where the portfolio has had a limited exposure. At the asset level, lease management activity has supported returns by creating longer income streams, however short leases in general have been viewed with more 18

19 Report of the Investment Manager for the year ended 31 December 2017 caution and capital expenditure and improvements to assets have taken longer to be reflected in valuations. The Fund ended the year at a total value of 171m, down from 173m at the start of the year. Property portfolio valuation increases were offset by planned asset capital expenditure and there was a modest outflow due to Shareholder redemption activity. Strategy The Fund s performance objectives target a high and above average income return and some capital appreciation, to provide a competitive total return over the long term. These objectives are consistent with the income needs of the Shareholders and fit well with the performance characteristics of property as an asset class. The current policy to achieve this performance objective is to invest in the property sector indirectly via a holding in the COIF Charities Property Fund, gaining an exposure to a larger pool of property assets to the enhancement of underlying asset quality, diversification and risk control for the Fund s Shareholders. The investment strategy adopted to achieve these performance objectives is focused on asset selection, together with an active approach to asset and portfolio management. The aim of this bottom-up approach is to reduce property stock specific risk and reflects the imperfect nature of property markets. Risk control is additionally supported by a high level of diversification by asset type, tenant, sector, region and micro location. The shape of the portfolio will change over time to reflect the outlook and the risks which emerge from time to time. The long-term strategy has a bias towards higher yielding assets, including shorter leases, but without sacrificing asset quality or using gearing to boost total returns. At the sub-sector level offices and industrials in south-east locations are favoured whilst High Street retail exposure is underweight relative to the sector. An attractive range of investment management opportunities exist, combining assets offering high quality, reliable income flows and others with the potential to provide growth in capital values and income in the future. We expect to adjust the profile to a more cautious approach to reflect a less certain period ahead. This will be achieved by proactively managing the shorter leases and by increasing the allocations to assets with longer leases. Together these will bring greater income resilience and protection for capital. Cautionary Note: Past performance is no guarantee of future returns. The value of investments may go down as well as up and, therefore, investors may not get back the amount originally invested. 19

20 Report of the Investment Manager for the year ended 31 December 2017 Market review The period of decline in property investment valuations resulting from the Referendum was short-lived and has been followed by an upturn which has continued all through 2017, picking up pace as the year went on. Total investment market transaction volume remained supportive, if unspectacular and there were positive occupier trends in several key sub-sectors, with rising demand combining with supply shortages to compress yields. This was particularly the case for prime and good quality secondary assets, creating a highly competitive backdrop with fierce bidding for the best assets driving prices higher. Values have now risen for 15 consecutive months, reflecting a combination of yield compression and rising rates of rental value growth and this, together with the income return, has resulted in attractive total returns for the year. By the year-end, the MSCI IPD UK Monthly Capital Index had risen by 5.4%, an important part of the 11.2% total return. This was above the cautious forecasts made at the start of the year. This resilient performance reflected the ongoing popularity of UK property in a low interest rate environment, offering investors an attractive initial yield plus prospects for income growth in the future. The attractive headlines however disguise a more complicated picture beneath the surface, with an increasingly selective approach by investors. Although sentiment has been buoyed by the absence of the selling pressure many observers expected and demand from overseas investors has continued, transaction data has been flattered by a number of large deals and there has been a domestic emphasis on a narrowing range of investments offering secure longer-term income. Investor interest in assets such as hotels, leisure, and various forms of residential property has increased, whilst demand has also remained strong in the industrial sector, reflecting strong occupier demand and limited supply. Against this, rental pressures within the retail sector continue to erode confidence and uncertainty has increased with regards to the outlook for parts of the office sector, including London and the South-East. As a result, industrial sector capital growth far exceeded progress elsewhere, rising by 14.7%, compared with 1.5% and 3.5% growth on retail and office investments respectively. Of the smaller sub-sectors, hotels rose by 9.5%. These relative trends may continue. Industrial warehouse rental growth amounted to 4.9% in the year whilst non-traditional asset categories are currently attractive to investors because they tend to feature inflation linked or assured growth in income. Across the sector void rates remained stubbornly high at 10.5%, indicative that letting prospects may not be as healthy as some headlines paint. 20

21 Report of the Investment Manager for the year ended 31 December 2017 Activity The structure of the Fund s investments allows the cash holding to be managed precisely, ensuring cash levels are kept to a minimum. This is achieved by monthly dealing of COIF Units to directly mirror capital flows within the Fund. Reflecting a net outflow of investor funds during the year, the Fund now holds 148,642,435 the COIF Charities Property Fund Units, compared to a holding of 156,115,487 Units at the start of the year. This holding provides with an investment exposure to a fully invested portfolio of 68 direct property assets valued at 523 million and providing a yield at the portfolio level of 6.4%. The COIF Charities Property Fund is fully invested, utilising the loan facility from time to time to manage efficiently investor outflows and asset disposals. One new asset was purchased, at a cost of 9.5m, an industrial warehouse property well located on the A1(M), south of Newcastle upon Tyne. The investment features secure longterm income with an unexpired term of 51 years. The attractive 7.0% initial income yield is secured by a low risk tenant and will rise over time as rent reviews are linked to RPI. Asset disposals dominated activity in the second half of Eight mainly small properties were sold, taking advantage of strong sales market conditions. In total, 29.7m was raised, representing overall attractive gains compared to both pre-sale valuations and book costs. Details of all sales are noted in the table below. Location Sector Sale Price (million) Date Derby, East Street High Street Shop 0.43 July 2017 Motherwell, Eurocentral Industrial warehouse 3.20 July 2017 Hook, Bartley Wood Office Business Park August 2017 Bristol, Avonmouth Industrial warehouse 3.40 August 2017 Salisbury, Southampton Road Retail warehouse 3.73 September 2017 Gloucester, Barnwood Fields Industrial warehouse 1.95 September 2017 Birmingham, Nexus Point Industrial warehouse 3.25 October 2017 Manchester, Trafford Park Industrial warehouse 3.49 November 2017 Total

22 Report of the Investment Manager for the year ended 31 December 2017 Management activity during the year has been focused on the improvement and refurbishment project at Cannon Street in the City of London, the largest asset by value in the portfolio. Development and improvement works at the property have been completed, enhancing the quality of the accommodation and increasing rental values on letting. This property makes up a third of the Fund s current void rate and letting progress will therefore be important in Elsewhere, management objectives have been progressed or achieved on several other assets, including a new 25-year lease on the industrial premises near Glasgow Airport at Inchinnan, a new 10-year lease on the warehouse holding on Eurocentral near Motherwell, which was subsequently sold, and a lease extension at a higher income on Aecom House, an office property in central St Albans. The industrial warehouse on Trafford Park, Manchester was sold with vacant possession. Rent reviews have supported income generation including on the industrial estate holding in Mendlesham, Suffolk, where the rent increased by 2.5%. New leases were also completed for the small industrial holding in Gloucester, which was subsequently sold. At the office business park asset in Cambridge new lettings have been counter-balanced by a new vacancy and by refurbishment projects. The leases of the industrial warehouse at Meir Point, Stoke, and the office building on George Street, Edinburgh expired and the buildings fell vacant during the year, however, re-letting activity is underway and prospects are encouraging. Reflecting the COIF Charities Property Fund s active approach, the portfolio void rate can vary due to activity levels. At the year end, the void rate on the portfolio had increased to 6.9% from 3.7% as at 31 December The void rate recorded by the MSCI/IPD Monthly Index is 10.5%. Outlook The UK property investment sector displayed resilience and adaptability during 2017, demonstrating that uncertainty can resolve on the upside. Looking back, it is clear that forecasters focused too much on the negative factors, failing to identify the strength of occupier markets over the shorter term and the continued strength of demand. Property offers the highest income yield available on a major asset category. Will 2018 be similarly successful? Our expectation is that, although income will remain reliably attractive, capital growth prospects are less clear given the uncertainties facing the sector. A material set back in valuations is, however, unlikely as the excess supply of new capacity which has been a problem in the past is absent this time and new development activity has fallen faster than occupier demand in many sectors. Overall, our expectation is for positive, but more moderate returns, provided mainly from income and with the potential for active management to add value in a changing environment. 22

23 Report of the Investment Manager for the year ended 31 December 2017 The property sector is now at a mature phase of the cycle. Returns will be supported by attractive income flows, but capital growth will be more dependent on active asset management and Investors will need to work harder for returns. Although forecasts for sector total returns vary, agreement is broader on which sectors will out-perform and which will underperform. The conditions that have led industrial property to produce the best returns should continue, whilst alternative Other assets will remain popular due to the specific investment features they offer. Against that traditional retail and office sub-sectors remain challenged and at risk. A prudent strategy combining greater risk diversification and resilient income flows, together with a focus on the proactive management of well-chosen individual assets, is expected to provide positive support to performance, controlling voids, supporting income and adding value, at a time when market driven capital performance is subdued. Paul Hannam Head of Property CCLA Investment Management Limited 21 May 2018 Risk warning The Fund s units and the revenue from them can fall as well as rise and an investor may not get back the amount originally invested. Past performance is no guarantee of future returns. Property and property related assets are inherently difficult to value because of the individual nature of each property. As a result valuations are open to substantial subjectivity. There is no assurance that the valuations of the properties will reflect the sale price achieved, even where such sale occurs shortly after the valuation point. The performance of the Fund could be affected adversely by a downturn in the property market in terms of capital value or a weakening of rental yields. The revenue received by the Fund is dependent to a large extent upon the occupancy levels of any property owned by the Fund and the rents paid by these tenants. Rental revenues and property values are affected by changes in general economic climate and local conditions. Property values are dependent in particular on current rental values, prospective rental growth, lease lengths, tenant credit worthiness and the valuation yield (which is itself related to interest rates, the market appetite for property investment in general and with reference to the specific property in question) together with the nature, location and physical condition of the property concerned. The Fund s units are intended only for long term investment and are not suitable for money liable to be spent in the near future. The units are realisable only on each monthly dealing day and a period of delay may be imposed for redemption of units depending on the Fund s liquidity. 23

24 Independent Auditors Report to the Shareholders of Report on the audit of the financial statements Opinion In our opinion, The CBF Church of England Property Fund s financial statements (the financial statements ): give a true and fair view of the financial position of the Fund as at 31 December 2017 and of the net revenue and the net capital gains of its scheme property for the year then ended; and have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland, and applicable law), the Statement of Recommended Practice for UK Authorised Funds, and the Trust Deed. have been prepared in accordance with the requirements of the Church Funds Investment Measure 1958, as amended, and the Trustee Act We have audited the financial statements, included within the Annual Report and Financial Statements (the Annual Report ), which comprise: balance sheet as at 31 December 2017; the statement of total return, the statement of change in net assets attributable to shareholders for the year then ended; the accounting policies; the distribution tables and the notes to the financial statements. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) ( ISAs (UK) ) and applicable law. Our responsibilities under ISAs (UK) are further described in the Auditors responsibilities for the audit of the financial statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We remained independent of the Fund in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, which includes the FRC s Ethical Standard and we have fulfilled our other ethical responsibilities in accordance with these requirements. Conclusions relating to going concern We have nothing to report in respect of the following matters in relation to which ISAs (UK) require us to report to you when: the Authorised Fund Managers use of the going concern basis of accounting in the preparation of the financial statements is not appropriate; or the Authorised Fund Manager has not disclosed in the financial statements any identified material uncertainties that may cast significant doubt about the Fund s ability to continue to adopt the going concern basis of accounting for a period of at least twelve months from the date when the financial statements are authorised for issue. 24

25 Independent Auditors Report to the Shareholders of However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the Fund s ability to continue as a going concern. Reporting on other information The other information comprises all of the information in the Annual Report other than the financial statements and our auditors report thereon. The Authorised Fund Manager is responsible for the other information. Our opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except to the extent otherwise explicitly stated in this report, any form of assurance thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If we identify an apparent material inconsistency or material misstatement, we are required to perform procedures to conclude whether there is a material misstatement of the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report based on these responsibilities. Responsibilities for the financial statements and the audit Responsibilities of the Authorised Fund Manager for the financial statements As explained more fully in the Report of the Trustee set out on page 46, the Authorised Fund Manager is responsible for the preparation of the financial statements in accordance with the applicable framework and for being satisfied that they give a true and fair view. The Authorised Fund Manager is also responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the Authorised Fund Manager is responsible for assessing the Fund s ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the Authorised Fund Manager either intends to liquidate the Fund or to cease operations, or has no realistic alternative but to do so. Auditors responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in 25

26 Independent Auditors Report to the Shareholders of accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council s website at: This description forms part of our auditors report. Use of this report This report, including the opinion, has been prepared for and only for the unitholders of the Fund as a body in accordance with the Trust Deed and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors 7 More London Riverside London 21 May

27 Risk and reward profile The risk and reward indicator table demonstrates where the Fund ranks in terms of its potential risk and reward. The higher the rank, the greater the potential reward, but the greater the risk of losing money. It is based on past data, may change over time and may not be a reliable indication of the future risk profile of the Funds. The blue shaded area in the table below shows the Fund s ranking on the risk and reward indicator Typically lower rewards (lower risk) Typically higher rewards (higher risk) The Fund is ranked 5 because funds of this type have experienced above average rises and falls in value in the past. Please note that even the lowest risk class can lose you money and that extreme market circumstances can mean you suffer severe losses in all cases. The risk and reward disclosures above are based upon categories of risk which were required to be disclosed as at 31 December 2017, the reporting date of these financial statements. From 1 January 2018, new measures of the categories of risk are in force, with the result that the risk disclosures currently available for the Fund in the Key Information Document are not on a comparable basis to the disclosures above. For further risk information please see the Scheme Information, available on our website at 27

28 Comparative table Change in net assets per share Income shares Year to Year to Year to pence pence pence per share per share per share Opening net asset value per share Return before operating charges* Operating charges (0.03) (0.03) (0.03) Return after operating charges* Distributions on income shares (7.43) (7.43) (7.43) Closing net asset value per share * after direct transaction costs of (pence per share): Performance Return after charges 9.58% 2.54% 12.62% Other information Closing net asset value ( 000) 170, , ,602 Closing number of shares 127,683, ,186, ,039,355 Operating charges** 0.69% 0.68% 0.68% Direct transaction costs Prices (pence per share) Highest share price (offer) Lowest share price (bid) The return after charges has been calculated in accordance with the Statement of Recommended Practice for UK Authorised Funds prescribed calculation methodology. This is for financial statement reporting purposes only and differs from the Fund s performance disclosed in the Report of the Investment Manager. ** Operating charges reflect the Manager s periodic charge and other expenses annualised and divided by average net assets for the year. Industry guidance requires a synthetic operating charge figure to be calculated where a Fund invests a substantial proportion of its assets in other funds. As substantially all of the Fund s assets are held in the COIF Charities Property Fund, the operating charge figure comprises the operating charge figure in the COIF Charities Property Fund (0.73%), less rebates (0.06%) plus expenses in the Fund (0.02%). 28

29 Portfolio analysis at 31 December 2017 Top Ten Property Holdings Property % of Fund London, 80 Cannon Street Retail & Offices Bracknell, 5 Arlington Square Offices 6.20 Mendlesham, Mendlesham Industrial Estate Industrial 5.02 London, 1 Fetter Lane/ Fleet Street Retail & Offices 4.76 London. EC4, 1-3 College Hill Offices 3.54 Chertsey, Syward Place, Pyrcroft Road Offices 3.02 Bristol, & 1600 Aztec West Industrial 2.73 Uxbridge, 1 Roundwood Avenue, Stockley Park Offices 2.49 Northampton, 100 Pavilion Drive, Brackmills Industrial 2.47 Aberdeen, Arnhall Business Park, Prospect Road Offices 2.14 Asset by type Geographical distribution Offices 44.4% Industrial & Warehouses 30.9% Retail Warehouses 15.9% Shops 7.2% Other Retail 1.6% Cash 0.0% Industrial, rest of UK 18.6% Offices, rest of South East 18.5% Retail Warehouses 15.9% Offices, City 13.1% Industrial, South East 12.4% Offices, rest of UK 9.3% Shops, South East 4.6% Offices, West End & Mid Town 3.5% Shops, rest of UK 2.5% Other 1.6% Cash 0.0% Portfolio turnover Portfolio turnover rate 1.87% 6.14% The portfolio turnover rates are calculated by the total sales or purchases (excluding cash), whichever is less, divided by average monthly assets during the year. The portfolio details are those of the COIF Charities Property Fund as at 31 December

30 Portfolio statement at 31 December 2017 Fair value Holding 000 COIF Charities Property Fund 148,642, ,642 NET OTHER ASSETS 294 TOTAL NET ASSETS 170,936 30

31 Statement of total return for the year ended 31 December 2017 Year ended Year ended Note Income Net capital gains/(losses) 2 7,539 (4,736) Revenue 3 9,868 10,240 Expenses 4 (1,305) (1,350) Net revenue before taxation 8,563 8,890 Taxation 5 Net revenue after taxation 8,563 8,890 Total return before distributions 16,102 4,154 Distributions 6 (9,730) (10,096) Change in net assets attributable to shareholders from investment activities 6,372 (5,942) Statement of change in net assets attributable to shareholders for the year ended 31 December 2017 Year ended Year ended Opening net assets attributable to shareholders 173, ,602 Amounts receivable on issue of shares 4,949 9,647 Amounts payable on cancellation of shares (13,435) (14,257) (8,486) (4,610) Change in net assets attributable to shareholders from investment activities 6,372 (5,942) Closing net assets attributable to shareholders 170, ,050 The notes on pages 34 to 44 and distribution table on page 45 form part of these financial statements. 31

32 Balance sheet at 31 December Note ASSETS Fixed assets: Investments 170, ,804 Current assets: Debtors 7 2,771 2,723 Cash equivalents Cash and bank balances Total current assets 3,050 2,981 Total assets 173, ,785 LIABILITIES Creditors: Other creditors Distribution payable 2,490 2,617 Total liabilities 2,756 2,735 Net assets attributable to shareholders 170, ,050 The financial statements on pages 31 to 45 have been approved by the Trustee. Approved on behalf of the Trustee R Williams, Chairman 21 May 2018 CBF Funds Trustee Limited The notes on pages 34 to 44 and distribution table on page 45 form part of these financial statements. 32

33 Cash flow statement for the year ended 31 December 2017 Year ended Year ended Note Net cash inflow from operating activities 13 8,687 8,965 Servicing of finance Distributions paid (9,857) (10,170) Net cash outflow from investment activities Payments to acquire investments (2,434) (6,924) Proceeds on disposal of investment 11,022 11,589 Manager s periodic charge rebate 1,262 1,306 9,850 5,971 Net cash inflow from financing activities Issue of shares 4,775 9,646 Cancellation of shares (13,434) (14,257) (8,659) (4,611) Increase in cash The notes on pages 34 to 44 and distribution table on page 45 form part of these financial statements. 33

34 Notes to the financial statements for the year ended 31 December Accounting policies (a) Basis of preparation The financial statements have been prepared on a going concern basis, in compliance with FRS 102 and in accordance with the the Statement of Recommended Practice for UK Authorised Funds (SORP) issued by the Investment Management Association in May 2014 and the Scheme and the Collective Investment Scheme Sourcebook. The financial statements have been prepared under the historical cost basis, as modified by the revaluation of investments. (b) Revenue recognition Property income distributions received are credited to revenue on the dates when the investment are first quoted ex-dividend or otherwise, on receipt of cash. Interest on bank deposits and interest on deposits in The CBF Church of England Deposit Fund are accrued on a daily basis. Revenue is stated net of irrecoverable tax credits. (c) Expenses During the year, the Manager s periodic charge, paid to the Manager, was charged to the capital of the Fund before distribution. This fee is based on a fixed percentage of the value of the Fund, which is currently 0.65% p.a. plus VAT on the first 100m, then 0.50% p.a. plus VAT thereafter. The value of the Fund at the end of the previous day was taken to calculate the fee due. This fee covers the provision of investment services and other expenses incurred by the Manager. The Fund receives a management fee rebate credited to the capital of the Fund for its holdings in the COIF Charities Property Fund where during the year, management fees were taken to capital. The Fund also receives a management fee rebate credited to the revenue expenses of the Fund for its deposits in The CBF Church of England Deposit Fund during the year, where management fees were charged to revenue. The fee payable to the Manager is offset against the fee charged by the Manager on the COIF Charities Property Fund which represents all of the property assets of the Fund. The Trustee fee, audit, legal, insurance, property valuation fees and direct property fees are charged seperately to the revenue of the Fund before distribution. (d) Distributions Distributions are paid quarterly. The Fund utilises an income reserve to even out the fluctuations in revenue which arise over the years (see note 10). Movements in the income reserve are therefore adjustments made to net revenue in determining the distributions. 34