EUROPEAN REAL ESTATE INVESTMENT TRUST LIMITED ANNUAL REPORT FOR THE YEAR ENDED 31 DECEMBER 2014

Transcription

1 EUROPEAN REAL ESTATE INVESTMENT TRUST LIMITED ANNUAL REPORT FOR THE YEAR ENDED 31 DECEMBER 2014

2 EUROPEAN REAL ESTATE INVESTMENT TRUST LIMITED PAGE 2 CONTENTS Page Chairman s Statement 3 Investment Manager s Report 4 Board of Directors 7 Directors Report 8 Corporate Governance 11 Independent Auditor s Report 13 Financial Statements 14 Notes to the Financial Statements 18 Company Information 38 Information for Shareholders 39

3 EUROPEAN REAL ESTATE INVESTMENT TRUST LIMITED PAGE 3 CHAIRMAN S STATEMENT Overview Management and Costs It has been difficult to achieve sales in 2014 with two minor sales completed realising 8.2 million. Our three remaining assets each have their own challenges and in October 2014 we renewed our contract with Schroders for a further two years reflecting that sales are unlikely to be concluded in the short term. 6.4 million has been returned to shareholders by way of capital redemption in On 20 March 2015 the Board announced a further capital redemption of 3.6 million or 12.1 pence per share. Potential tax liabilities (as described in Note 13) restrict our ability to return significant further funds at this time. The Company has no gearing or hedging arrangements and at 31 December 2014 bank balances totalled 14.7 million which includes 2.3 million held as rent guarantees that are refundable to tenants. Valuations appear to have stabilised somewhat with a fall of 1.5% (in Euro terms) for the 6 months to 31 December Financial Our audited Net Asset Value per share ( NAV ) at 31 December 2014 is 181 pence (31 December 2013: 203 pence). A capital return by way of share redemption of 19.3 pence per share was made on 11 July Between 31 December 2013 and 31 December 2014 shareholders equity reduced by 20.3% reflecting a fall in the portfolio value of 4.3 million ( 5.3 million), foreign exchange losses of 4.3 million and 6.4 million ( 8.2 million) of capital redemptions, offset by net income of 1.7 million. The decline in portfolio value reflected the impact of the lease re-gear of the Panrico properties and the shortening lease to IBM in Nice. It is important to note that the Group does not hedge its foreign exchange exposure and hence a strengthening sterling relative to the euro reduces the NAV (all other things being equal). On 8 October 2014, the Company confirmed that it had renewed its management arrangement with Schroders. The Company also extended its agreement with Klockensteijn B.V. to work alongside the Investment Manager, providing consultancy services to facilitate the sales programme. The renewed appointment of Klockensteijn is for a fixed period to 31 March 2015 and is at a reduced fee. Under the terms of the restated management agreement, the Company has agreed to pay Schroders a management fee monthly in advance at a rate equal to one twelfth of 0.4 million per annum for a two year period. In addition, the Company will pay Schroders a performance fee based on sales of properties in the portfolio. The group structure has been significantly simplified in 2014 and now comprises 15 entities (31 December 2013: 28 entities). This has resulted in a reduction in costs and additionally management fees have been lowered and Board numbers reduced from five to three. Outlook There are issues associated with the Company s investments which restrict the ability to sell them in the short term, however real estate markets have been improving across Europe including Spain. Management initiatives are aimed at maintaining and enhancing our remaining assets and we hope to announce further progress during Stephen Coe Chairman Portfolio There are three investments owned by the Group, comprising a total of five properties in Germany, France and Spain. All of the properties are income producing. In Spain, we completed a lease re-gear with our tenant Panrico, adding over 8 years to the leases in exchange for a reduction in the rent being paid. In France we are negotiating a lease amendment with the tenant IBM who will re-locate to a smaller property in the centre of Nice later in the year. It is unlikely that the tenancy with IBM will continue after Schroders is actively considering future alternative uses for the land and buildings on our site in consultation with the local authority, the mayor and the development authority. The retail property in Kaiserslautern, Germany is the most stable investment owned by the Group and is let to high quality tenants on the high street. It is a good investment and the Group has now committed to an extension of the ground lease at the property, which is expected to improve the liquidity of the asset in the investment market.

4 EUROPEAN REAL ESTATE INVESTMENT TRUST LIMITED PAGE 4 INVESTMENT MANAGER S REPORT Forward looking statement This report has been prepared solely to provide additional information to enable shareholders to assess the Group s strategies and the potential for these strategies to succeed. The report should not be relied on by any other party or for any other purpose. This report contains certain forward-looking statements with respect to the financial condition, results of operations and businesses of the Group. These statements are made in good faith based on the information available to the Investment Manager up to the time of its approval of this report. However, such statements should be treated with caution as they involve risk and uncertainty because they relate to events and depend upon circumstances that will occur in the future. There are a number of factors that could cause actual results or developments to differ materially from those expressed or implied by these forward looking statements. The continuing uncertainty in global economic outlook inevitably increases the economic and business risks to which the Group is exposed. Nothing in this report should be construed as a profit forecast. Investment objective The Company s investment objectives reflect the Board s intention to dispose of all of the Group s assets. The assets of the Group will be realised in an orderly manner, that is, with a view to achieving a balance between: (i) returning cash to shareholders at such times and in such manner as the Board may (in its absolute discretion) determine; (ii) reducing the Group s existing liabilities; (iii) maximising the disposal value of the Group s assets. The Group may not make new acquisitions of real estate assets except where required to preserve and/or enhance the disposal value of its existing assets. Performance As at 31 December 2014 the Group s Net Asset Value ( NAV ) was 53.8 million, reflecting a decrease of 13.6 million or 20.3% over the period. The decrease largely resulted from a fall in the portfolio value of 4.3 million ( 5.3 million), foreign exchange losses of 4.3 million and the return of capital by way of a compulsory partial redemption of shares of 6.4 million ( 8.2 million) in July The table below provides a reconciliation of the factors contributing towards this reduction: m NAV attributable to equity shareholders as at 31 December Valuation change on investment property (4.3) Realised loss on disposal of investment properties (0.3) Return of capital to investors (6.4) Exchange differences on translation of foreign operations (4.3) Net income 1.7 NAV attributable to equity shareholders as at 31 December Portfolio Update There were two sale transactions during In June the Group completed the sale of the parking garage located in Kaiserslautern, Germany for a price of 5.0 million. The sale price was in line with the Group's December 2013 valuation and represented 7.4% of the portfolio value as at 31 December The opportunity was taken to reduce the Group s exposure to its investment in Germany by separating the retail and the car parking interests. On 30 December 2014, the Group completed the sale of the property at Murcia to Panrico. 1.9 million will be received by the Group from Panrico in instalments over a period of 18 months. This amount, combined with the sum received from the insurance company ( 1.3 million) as a settlement following the fire that occurred in Summer 2013, is in line with valuation as at 30 June 2014 and represented 5.7% of the Group's portfolio by value at 30 June 2014.

5 EUROPEAN REAL ESTATE INVESTMENT TRUST LIMITED PAGE 5 INVESTMENT MANAGER S REPORT Following the sale of 8.2million of properties during 2014, the Group owned five property investments valued at 53.7 million as at 31 December These are located in Germany, France and Spain comprising retail, office and industrial assets respectively. The independent valuation of the property portfolio undertaken in accordance with the Royal Institution of Chartered Surveyors (RICS) Appraisal and Valuation Standards as at 31 December 2014 was 41.7 million ( 53.7 million). This represents a like-for-like fall of 10% in euro terms (18.9% in sterling) from the 31 December 2013 values. Valuations are produced by the independent valuer and show the Market Value assuming an asset sale of each property. The portfolio is let to five tenants and produces a current annual rental income of 5.1 million ( 6.5 million) reflecting an income yield on the current valuation of 12.7%. The Group is currently cash flow positive. As at 31 December 2014 the portfolio had a weighted average lease length of 11.5 years. The table below provides further detail of the remaining tenants in the portfolio, their contracted rents, risk bands and unexpired lease terms: Rank Tenant Location Risk band 3 31 Dec 2014 annual rent 4 ( million) Proportion of annual contracted rent Weighted lease term (until first break/ expiry Years) 1 Panrico 1 Spain (3 locations) High % IBM Nice, France Negligible % Peek & Cloppenburg Kaiserslautern, Germany 4 Hennes & Mauritz 2 Kaiserslautern, Germany 5 Ernstings Family GmbH & Co.KG Kaiserslautern, Germany Low % 8.0 Low % 8.6 Low - medium 0.1 1% Cash guarantee for 12-months held. 2 Swedish parent company guarantee 3 IPD risk band based on D&B failure score 4 Contracted rents excluding turnover rents. Property asset management and realisation process % 11.5 There is further asset management to be undertaken on the remaining properties to prepare them for sale and maximise the return of capital to shareholders achievable in the current market environment. The improving investment environment may assist the Company in achieving the realisation objective however the completion of the various management initiatives on the portfolio is likely to take some time to achieve. The high street retail property in Kaiserslautern, Germany is fully income producing and generates a stable revenue for the Group, supported by a long weighted average lease length of 8.3 years. The Group has committed to an extension of the ground lease at Kaiserslautern. This will change the ground lease from a renewable ten year arrangement to a fixed duration of 99 years, at a total cost to the Group of 0.5 million. There will be no other changes to the ground lease and the rent payable to the freeholders remains the same. This extension is expected to improve the liquidity of the asset in the investment market. The lease extension is expected be completed in May IBM will vacate our property in Nice during the course of 2015 and detailed negotiations are underway to facilitate their exit once their new, smaller property is ready for occupation. IBM are in occupation of our property on a lease arrangement whereby they can give 6 months notice to vacate. We continue to review the options available for the asset in Nice once IBM vacates the property. We are conscious of the impact on cash flow should the asset be vacant for any significant period. The location of the building lends itself to a number of potential uses and we are in discussions with the local authority to determine which options they would support. We are also engaging a project team consisting of a developer partner and architect to explore the most viable options. This will be a longer term project but we believe that the versatility of the land and buildings will result in a favourable solution for the Group in due course.

6 EUROPEAN REAL ESTATE INVESTMENT TRUST LIMITED PAGE 6 INVESTMENT MANAGER S REPORT The Spanish properties are bespoke in nature and well suited to the occupation by Panrico. A comprehensive re-negotiation of their lease obligations was agreed during the year as part of their substantial cost reduction exercise and formal insolvency process. The progress made in their corporate strategy has given us a degree of comfort with regards to their ability to respect the lease obligations and we continue to monitor their business activities as they re-commence operations. Should Panrico s financial situation not improve and lead to a permanent default on its lease obligations, the impact on the value of the properties, and hence the NAV of the Group, would be material. Asset disposals will be effected wherever possible and in the best interests of shareholders. Market overview We expect the eurozone economy to continue to grow in 2015, although growth will be modest and uneven. Several countries have high levels of outstanding government debt, and France and Italy need to implement further supply-side reforms to improve their competitiveness, tempering growth prospects. Moreover, the Ukraine crisis and political uncertainty in Greece have depressed business confidence and investment. However, there are also several positives. Consumers are benefiting from the fall in energy and food prices, exporters should start to gain from the euro s depreciation, the eurozone s big banks have been re-capitalised and Portugal and Spain are now seeing growth in employment following earlier supply-side reforms. We expect Germany and Spain to grow by % p.a. through , while growth in France and Italy is likely to be weaker at % p.a. Provisional figures suggest the value of investment transactions in continental Europe grew by 15% last year to around 150 billion (source: JLL, Schroders). Although the fall in oil prices is likely to restrain Middle Eastern and Russian buyers, the most active foreign investors over the last twelve months have been from Asia and the US. The weight of capital means that prime office and retail yields have fallen to 4-5% in most major cities in northern Europe. Debt facilities At 31 December 2014 the Group had no debt facilities in place. Summary Following an extremely active and transformational year for the Company in 2013, the last twelve months have been a period of taking stock and working steadily through the business plan to realise the remaining investments. Inevitably a realisation strategy results in the less liquid assets remaining in the portfolio for a longer period of time and it is important to focus on implementing the key asset management initiatives at this time. In parallel with preparing the assets for sale we will continue to work with the Board in streamlining the Group and seeking all opportunities by which to maximise Shareholder value. Schroder Real Estate Investment Management Limited (formerly known as Schroder Property Investment Management Limited) Investment Manager 20 March 2015

7 EUROPEAN REAL ESTATE INVESTMENT TRUST LIMITED PAGE 7 BOARD OF DIRECTORS Stephen Coe, aged 49, Chairman Mr Coe qualified as a Chartered Accountant with Price Waterhouse in 1990 and remained in audit practice, specialising in financial services, until From 1997 to 2003 he was a director of the Bachmann Group of fiduciary companies and Managing Director of Bachmann Fund Administration Limited, a specialist third party fund administration company. From 2003 until 2007, Mr Coe was a director with Investec in Guernsey and formerly Managing Director of Investec Trust (Guernsey) Limited and Investec Administration Services Limited prior to becoming self-employed. He is a director of a number of listed and unlisted investment funds and offshore companies including Raven Russia Limited, Trinity Capital Limited, Weiss Korea Opportunity Fund Limited and Kolar Gold Limited for which he is the Chairman of the Audit Committees. He has been involved with offshore investment funds and investment managers since 1990 with exposure to emerging markets, property and private equity investment. Wessel Hamman, aged 42, Non-executive Director, Chairman of Audit Committee Mr Hamman is a co-founder and Chief Executive of Clearance Capital LLP, which specialises in the management of real estate securities funds. Prior to this, Mr Hamman was the Chief Financial Officer of the Equities Division and Head of the Corporate Arbitrage business unit at Rand Merchant Bank, a division of FirstRand Bank Limited. He is also a director of the following listed companies: Karoo Investment Fund S.C.A. SICAV-SIF, Clearance Real Estate Equity Fund and Sirius Real Estate Limited. Jan van der Vlist, aged 60, Non-executive Director Mr van der Vlist is currently Principal of Klockensteijn B.V. a Dutch consultancy company. The company has received mandates from European Real Estate Investment Trust Limited, NIBC Bank N.V. and Barrage Vastgoed B.V. He is a board member of Bouwinvest Real Estate Investment Management B.V. and their related real estate funds. He is also chairman of the Supervisory Board of Holland Property Group B.V. Until 1 January 2012, he was Managing Director of NIBC Bank N.V. and head of Investment Management, a business unit of the bank that focuses on Private Equity, Real Estate, Infrastructure and Leveraged Loans. Previously Mr van der Vlist was Director of Structured Investments of PGGM. Prior to that he was Director of Real Estate, as well as Deputy Director of Real Estate and head of investments in real estate funds, of PGGM and also served PGGM as Chief Financial Officer of Investments. Before joining PGGM in 1982, Mr van der Vlist headed the accounting department and real estate management department of a subsidiary of Verenigde Bedrijven Bredero N.V., which was a major international real estate development and construction company. His former board positions and membership of Advisory Committees include a board seat with Equity Office Properties Trust, the largest US office REIT, a board seat with Societe Fonciere des Pimonts, a French office fund, a board seat with Amvest, a Dutch private real estate company, a membership of the managing board of the European Public Real Estate Association (EPRA) and a membership of the Advisory Board of Real Estate Publishers.

8 EUROPEAN REAL ESTATE INVESTMENT TRUST LIMITED PAGE 8 DIRECTORS REPORT The Directors present their report and audited Financial Statements of the Company and the Group for the year ended 31 December Business Review Business of the Group The Company was incorporated on 21 December 2005 as an openended collective investment scheme and on 8 May 2006, an unlimited number of participating redeemable preference shares of no par value were admitted to the Official List of the Channel Island Securities Limited Exchange, ( CISE ). The Company was converted to a closed-ended Guernsey registered investment company with limited liability on 25 April Subsequently, the shares were also admitted to the Official List of the United Kingdom Listing Authority ( UKLA ) on 4 June 2007 and are now traded on the London Stock Exchange. A review of the business during the year is contained in the Chairman s Statement and the Investment Manager s Report. Investment objective Prior to 5 August 2011, the Group s underlying objective was to provide shareholders with an attractive level of income return, together with the potential for income and capital growth, through investment in European property. At an Extraordinary General Meeting held on 5 August 2011, shareholders approved a change in investment policy to enable the Group to effect an orderly disposal programme and return surplus capital to shareholders. Investment Manager On 5 September 2012, Schroder Real Estate Investment Management Limited (formerly known as Schroder Property Investment Management Limited) (the Investment Manager ) was appointed, for a two year period, to manage the Group. Under the terms of an Investment Management Agreement, the Investment Manager is responsible for advising the Group on the overall management of the Group s investments and for managing those investments in accordance with the Group s investment objective and policy, subject to the overall supervision of the Directors. On 8 October 2014, the Investment Management Agreement was extended for a further two years and now terminates on 8 October 2016, save that it may be extended by mutual agreement. If extended, the Investment Management Agreement may be terminated by either party on not less than six months notice. Principal risks and uncertainties The Group considers its strategic, operational and financial risks and identifies actions to mitigate these risks and uncertainties. The principal risks and uncertainties which faced the Group during the year are summarised below and are primarily referred to in the Chairman s Statement, Investment Manager s Report and note 5 of the Consolidated Financial Statements: Property values; Risks associated with movements in exchange rates; Risks associated with credit exposure to tenants. The Group expects the same risks and uncertainties to apply in 2015 and has not identified any new principal risks or uncertainties. Results, dividends and return of capital The results for the year are set out in the Financial Statements. No dividends were paid in the 2014 calendar year (2013: nil). On 11 July 2014 the Group returned capital of 6.4m (2013: nil) to shareholders via the redemption of 3,515,003 of the Company s issued share capital. Investment Management fees Details regarding the fees payable to the Investment Manager are given in note 28. Administrator On 2 May 2006 the Company entered into an Administration agreement with Investec Administration Services Limited ( Investec ) for the provision of administrative and secretarial services. Following the sale of Investec to the Praxis Group in March 2009, Investec changed its name to Praxis Property Fund Services Limited. On May Praxis Property Fund Services Limited merged with Praxis Fund Services Limited. The Administration Agreement may be terminated by either party giving not less than 90 days written notice. Going Concern As the Directors intend to return all capital to shareholders of the Company they have not prepared the Financial Statements on a going concern basis. This has not had any impact on the carrying value of the Group s assets or liabilities. Creditor payment policy It is the Group s policy to ensure settlement of supplier invoices in accordance with stated terms. Anti-Bribery policy The Board acknowledge that the Group's international operations may give rise to possible claims of bribery and corruption. In considering The Bribery Act 2010, enacted in the UK in 2012, at the date of this report the Board had conducted an assessment of the perceived risks to the Group arising from bribery and corruption to identify aspects of business which may be improved to mitigate such risks. The Board has adopted a zero tolerance policy towards bribery and has reiterated its commitment to carry out business fairly, honestly and openly.

9 EUROPEAN REAL ESTATE INVESTMENT TRUST LIMITED PAGE 9 DIRECTORS REPORT Directors The Directors of the Company are detailed below: Appointed Stephen Coe Jan van der Vlist Wessel Hamman Crispian Collins and Roger Phillips resigned as Directors on 30 June At each annual general meeting of the Company, any Director who was elected or last re-elected a Director at or before the annual general meeting held in the third calendar year before the current year shall retire by rotation. A retiring director shall be eligible for reappointment. Jan van der Vlist, whose term expired last year, was re-elected at the Annual General Meeting held 1 May Wessel Hamman s term expires this year and he has chosen to stand for re-election at this year s Annual General Meeting. No director shall be required to vacate his office at any time by reason of the fact that he has attained any specific age. Directors interests The beneficial interest held by the Directors, who held office as at 31 December 2014, in the shares of the Group is detailed below: 31 December December 2013 Stephen Coe 4,293 4,801 Jan van der Vlist 20,614 23,062 Wessel Hamman - - There have been no changes to the directors shareholdings since 31 December Wessel Hamman is also director of Karoo Investment Fund S.C.A. SICAV-SIF which holds 17.5% of the Group s shares through a nominee company, HSBC Global Custody Nominee (UK) Limited. Jan van der Vlist is the beneficial owner of Klockensteijn B.V. which provides consultancy services to the Group (see below). Directors remuneration During the year the Directors received the following emoluments in the form of fees from the Group: 31 December December Crispian Collins Stephen Coe Jan van der Vlist* Wessel Hamman - - Roger Phillips * In October 2011 the Group engaged Klockensteijn B.V, a company of which Jan van der Vlist is the beneficial owner, to provide consultancy services. During the year the Group paid Klockensteijn B.V 44,325 (2013: 302,363). Further details regarding this engagement are given in note 28. Substantial shareholding Shareholders with holdings of more than 3 per cent of the issued shares of the Company as at 17 February 2015 were as follows: Name of Investor No. of shares % held Vidacos Nominees Limited* 6,555, % HSBC Global Custody Nominee 5,184, % (UK) Limited Transact Nominees Limited 1,464, % * These holdings are for various different beneficial owners. Disclosure of information to Auditor All of the current directors have taken all steps that they ought to have taken to make themselves aware of any information needed by the Group s auditor for the purposes of their audit and to establish that the auditor is aware of that information. The Directors are not aware of any relevant audit information of which the auditor is unaware. Independent Auditor BDO Limited has expressed its willingness to continue in office as auditor and a resolution to reappoint them will be proposed at the forthcoming Annual General Meeting.

10 EUROPEAN REAL ESTATE INVESTMENT TRUST LIMITED PAGE 10 DIRECTORS REPORT Directors responsibilities statement Company law requires the Directors to prepare Financial Statements for each financial year, which give a true and fair view of the state of affairs of the Company and Group at the end of the year and of the profit and loss of the Company and Group for that period. In preparing those Financial Statements, the Directors are required to: (1) select suitable accounting policies and then apply them consistently; (2) make judgements and estimates that are reasonable and prudent; (3) state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the Financial Statements; and (4) prepare the Financial Statements on the going concern basis unless it is appropriate to assume that the Group will not continue in business (as detailed in the Going Concern paragraph above, and also note 2 of the Financial Statements, these Financial Statements have not been prepared on a going concern basis). The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy, at any time, the financial position of the Company and of the Group and enable them to ensure that the Financial Statements comply with the Companies (Guernsey) Law, The Directors are also responsible for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors confirm that they have complied with the above requirements in preparing the Financial Statements. Each of the Directors, whose names and functions are listed on page 7, confirms that to the best of each person s knowledge and belief: (1) the Financial Statements, prepared in accordance with the International Financial Reporting Standards, as adopted by the EU ( IFRS ) in accordance with the requirements of the London Stock Exchange ( LSE ), give a true and fair view of the assets, liabilities, financial position and loss of the Group and Company; and (2) the Investment Manager s Report includes a fair review of the development and performance of the business and the position of the Group and Company together with a description of the principal risks and uncertainties they face. In common with many other externally managed funds of similar size and nature to EREIT, the Group depends substantially on the external functions provided by Schroder Real Estate Investment Management Limited ( Schroders ), MGR Weston Kay LLP ( MGR ), Praxis Fund Services Limited ( Praxis ) and Saltgate S.A ( Saltgate ), amongst others in the provision of effective systems of internal controls and procedures. On behalf of the Board Stephen Coe Director 20 March 2015

11 EUROPEAN REAL ESTATE INVESTMENT TRUST LIMITED PAGE 11 CORPORATE GOVERNANCE As a Guernsey registered company with a standard LSE listing, the Company is not required to comply with the UK Corporate Governance Code. However, the Company complies with the Code of Corporate Governance issued by the Guernsey Financial Services Commission ( GFSC ) which became effective on 1 January Copies of the GFSC Code of Corporate Governance can be found at As a self-managed non-eea Authorised Investment Fund, the Alternative Investment Fund Managers Directive is not relevant to the Company due to it not being marketed within the EEA. Role of the Board The Board, which consists entirely of non-executive directors, has determined that its role is to consider and determine the following principal matters which it considers are of strategic importance to the Group: Review the overall objectives of the Group and the strategy for fulfilling those objectives; The capital structure of the Group and; The appointment of the Investment Manager, Administrators and other appropriately skilled service providers and monitor their effectiveness through regular reports and meetings. Board decisions The Board makes decisions on, amongst other things, the principal matters set out under the paragraph headed Role of the Board. Issues associated with implementing the Group s strategy are generally considered by the Board to be non-strategic in nature and are delegated to either the Investment Manager or Administrator unless the Board considers there will be implementation matters significant enough to be of strategic importance to the Group and should be reserved to the Board. Board performance evaluation During 2014 the Board undertook a review of its performance. The review concluded that the Board was operating effectively. Following the resignations of Crispian Collins and Roger Phillips the remaining directors considered the number of directors and composition of the Board. The Board agreed that the composition was sufficient and adequate at this time. Board meetings and attendance The Board meets no less than quarterly and as required from time to time to consider specific issues reserved for the Board. During the financial year it met on 6 occasions. The table below shows the attendance at Board and Audit Committee meetings for the year to 31 December Board Audit Committee Crispian Collins 3 1 Stephen Coe 6 2 Jan van der Vlist 6 - Wessel Hamman 5 2 Roger Phillips 3 - Audit Committee The Audit Committee, which is chaired by Wessel Hamman, meets a minimum of two times a year and consists of non-executive directors. During the financial year it met on two occasions. The Audit Committee is responsible for: Monitoring the integrity of the Financial Statements of the Group, including reviewing significant financial reporting issues and judgements which they contain; Reviewing the effectiveness of the Group s internal controls and risk management systems, and any statements included in the annual report concerning internal controls and risk management; Considering and making recommendations to the Board in relation to appointment, re-appointment and removal of the Group s external auditor; and Overseeing the relationship with the external auditor, including approval of their remuneration, terms of engagement, audit plan, reviewing the findings of the audit and assessing annually the effectiveness of the audit process. The Board has not established a Nominations or Remuneration Committee as it does not consider it to be appropriate for the size and nature of the Group. Information flows All Directors receive, in a timely manner, relevant management, regulatory and financial information and are provided on a regular basis, with key information on the Group s policies, regulatory requirement and internal controls. The Board receives and considers reports regularly from the Investment Manager and other key advisors. Ad hoc reports and information are supplied to the Board as required. Directors liability insurance During the year, the Group has maintained insurance cover for its Directors under a liability insurance policy. Relations with shareholders The Board places great importance on communication with Shareholders and the representatives of the Board make themselves available at all reasonable times to meet with key shareholders and sector analysts.

12 EUROPEAN REAL ESTATE INVESTMENT TRUST LIMITED PAGE 12 CORPORATE GOVERNANCE The Board is also kept appraised of market commentary on the Group by the Investment Manager and other professional advisors. The Chairman and the Investment Manager will ordinarily be available at the Annual General Meeting to answer any questions that shareholders attending may wish to raise. Valuer The Group gives the valuer and external auditor access to each other. These advisers have a dialogue and exchange of information which is entirely independent of the Group. In line with the Carlsberg Committee report the Group has a fixed fee arrangement with the valuer CBRE Limited. The proportion of total fees paid by the Group to total fee income of the valuer was less than 5%. Audit and internal controls The Group depends substantially on the systems and controls of its key service providers: Schroders, MGR, Praxis and Saltgate. The Board discusses with these service providers the results of their own audits and regulatory inspections to determine if there are any matters arising from those audits and inspections that are relevant to the activities of the Group. The Board has not established an Internal Audit function as it does not consider it to be appropriate for the size and nature of the Group, as an externally managed property fund. Risk management The Board reviews key risks and associated mitigation on a quarterly basis. External Auditor The Group has policies and procedures in place to monitor and maintain the objectivity and independence of the external auditor, BDO Limited. The policy requires regular review by the Audit Committee of all non-audit services provided by BDO Limited. The external auditor reported to the Audit Committee that they remained independent and had maintained internal safeguards to ensure their objectivity.

13 EUROPEAN REAL ESTATE INVESTMENT TRUST LIMITED PAGE 13 INDEPENDENT AUDITOR S REPORT To the members of European Real Estate Investment Trust Limited We have audited the financial statements of European Real Estate Investment Trust Limited for the year ended 31 December 2014 which comprise the Group and Parent Company Statements of Financial Position, the Group and Parent Company Statements of Comprehensive Income, the Group and Parent Company Statements of Changes in Equity, the Group and Parent Company Statements of Cash Flows and the related notes 1 to 29. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union. This report is made solely to the Parent Company's members, as a body, in accordance with Section 262 of the Companies (Guernsey) Law, Our audit work is undertaken so that we might state to the Parent Company's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Parent Company and the Parent Company's members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of the directors and auditor As explained more fully in the Directors' Responsibilities Statement within the Directors' Report, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Financial Reporting Council s (FRC s) Ethical Standards for Auditors. Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the group's and parent company s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the annual report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent misstatements or inconsistencies we consider the implications for our report. Opinion on the financial statements In our opinion the financial statements: give a true and fair view of the state of the group's and of the Parent Company's affairs as at 31 December 2014 and of the group and the Parent Company's loss for the year then ended; have been properly prepared in accordance with IFRSs as adopted by the European Union; and have been properly prepared in accordance with the requirements of the Companies (Guernsey) Law, Emphasis of matter - going concern Without modifying our opinion, we draw attention to note 2 in the financial statements which explains that the financial statements have not been prepared on a going concern basis. Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies (Guernsey) Law, 2008 requires us to report to you if, in our opinion: proper accounting records have not been kept by the parent company; or the financial statements are not in agreement with the accounting records; or we have failed to obtain all the information and explanations, which, to the best of our knowledge and belief, are necessary for the purposes of our audit.... Justin Marc Hallett FCA For and on behalf of BDO Limited Chartered Accountants and Recognised Auditor Place du Pré, Rue du Pré St Peter Port Guernsey Date: 20 March 2015

14 EUROPEAN REAL ESTATE INVESTMENT TRUST LIMITED PAGE 14 STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 2014 Group Group Company Company Notes Non-current assets Investment property portfolio 17 25,709 30, Investments in subsidiary undertakings ,136 60,966 Total non-current assets 25,709 30,768 43,136 60,966 Current assets Trade and other receivables 21 3,850 9, ,469 Cash and cash equivalents 22 14,653 14,912 10,267 5,755 18,503 24,202 10,772 7,224 Properties held for sale 17 16,006 23, Total current assets 34,509 47,254 10,772 7,224 Total assets 60,218 78,022 53,908 68,190 Current liabilities Trade and other payables 23 6,437 10, Total liabilities 6,437 10, Net assets 53,781 67,439 53,759 67,368 Equity attributable to owners of the parent Share capital Special reserve , , , ,847 Translation reserve 25 15,325 19,572 44,998 49,245 Revenue reserve 25 (169,014) (166,053) (198,689) (195,724) Total equity attributable to owners of the parent 53,761 67,366 53,759 67,368 Non-controlling interests Total equity 53,781 67,439 53,759 67,368 Net asset value per share (basic) (pence) The notes on pages 18 to 37 form an integral part of these Financial Statements. The Financial Statements have been authorised for issue and approved by the Board on 20 March 2015 and were signed on its behalf by: Stephen Coe Director

15 EUROPEAN REAL ESTATE INVESTMENT TRUST LIMITED PAGE 15 STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2014 Revenue Group Group Company Company Notes Rental income 5,714 25, Property operating expenditure (1,589) (6,262) - - Net rental income 7 4,125 19, Management fee within the group ,485 Other income ,316 Total income 4,125 19, ,801 Administrative expenses 11 (2,737) (3,235) (1,052) (2,313) Impairment of goodwill 18 - (1,466) - - Exchange rate differences (1,880) 261 (1,876) Impairment of investments in subsidiaries (2,469) (3,646) Total administrative expenses 11 (2,480) (6,581) (3,260) (7,835) Exchange gains realised on liquidation of subsidiaries - 1, Loss on disposal of property (313) (4,610) - - Net deficit on revaluation of investment properties 17 (4,305) (10,243) - - Operating loss (2,973) (1,107) (2,966) (4,034) Finance income Discount on early repayment of LBG facilities 12-14,483-12,209 Total finance income 5 14, ,209 Finance expense 12 - (11,759) - (753) Movement in fair value of interest rate swap contracts 12-4, Movement in fair value of exchange-rate derivative contracts 12 - (2,007) - (2,007) (Loss)/profit before tax (2,968) 4,124 (2,965) 5,415 Tax 13 (30) (967) - - (LOSS)/PROFIT FOR THE YEAR FROM CONTINUING ACTIVITIES (2,998) 3,157 (2,965) 5,415 Other comprehensive income: Items that will be re-classified to profit or loss: Exchange differences on translation of foreign operations (4,247) 1,397 (4,247) 1,260 Exchange gains realised on liquidation of subsidiaries - (1,184) - - Other comprehensive (loss)/income for the year, net of tax (4,247) 213 (4,247) 1,260 TOTAL COMPREHENSIVE (LOSS)/INCOME FOR THE YEAR (7,245) 3,370 (7,212) 6,675 (Loss)/profit attributable to: Owners of the parent (2,961) 3,158 (2,965) 5,415 Non-controlling interests (37) (1) - - (2,998) 3,157 (2,965) 5,415 Total comprehensive (loss)/income attributable to: Owners of the parent (7,208) 3,371 (7,212) 6,675 Non-controlling interests (37) (1) - - (7,245) 3,370 (7,212) 6,675 (Loss)/earnings per share - Basic and diluted (pence) 15 (9) 10 The notes on pages 18 to 37 form an integral part of these Financial Statements.

16 EUROPEAN REAL ESTATE INVESTMENT TRUST LIMITED PAGE 16 STATEMENTS OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2014 Group Share capital Special reserve Translation reserve Revenue reserve Sub Total Noncontrolling interest Total Equity At 31 December ,847 19,359 (169,211) 63, ,069 Profit for the year ,158 3,158 (1) 3,157 Other comprehensive income At 31 December ,847 19,572 (166,053) 67, ,439 Return of capital - (6,397) - - (6,397) - (6,397) Loss for the year (2,961) (2,961) (37) (2,998) Other comprehensive loss - - (4,247) - (4,247) - (4,247) Partial acquisition of non-controlling interest (16) (16) At 31 December ,450 15,325 (169,014) 53, ,781 Company Share capital Special reserve Translation reserve Revenue reserve Total Equity At 31 December ,847 47,985 (201,139) 60,693 Profit for the year ,415 5,415 Other comprehensive income - - 1,260-1,260 At 31 December ,847 49,245 (195,724) 67,368 Return of capital - (6,397) - - (6,397) Loss for the year (2,965) (2,965) Other comprehensive loss - - (4,247) - (4,247) At 31 December ,450 44,998 (198,689) 53,759 The notes on pages 18 to 37 form an integral part of these Financial Statements. A description of the nature and purpose of each reserve is included within note 25.

17 EUROPEAN REAL ESTATE INVESTMENT TRUST LIMITED PAGE 17 STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2014 Group Group Company Company Notes Net cash inflow / (outflow) from operating activities 26 3,273 13,536 (102) 1,982 Cash flows from investing activities Payments to enhance properties (134) (62) - - Partial acquisition of non-controlling interest (16) Cash proceeds from sale of properties 3, , Proceeds on disposal of investments ,435 6,093 Net cash inflow from investing activities 3, ,034 11,435 6,093 Cash flows from financing activities Return of capital (6,397) - (6,397) - LBG liabilities repaid - (173,397) - (2,233) Repayment of foreign exchange derivative contract - (3,226) - (3,226) Finance costs paid - (9,726) - (753) Net cash outflow from financing activities (6,397) (186,349) (6,397) (6,212) Net increase in cash and cash equivalents 624 4,221 4,936 1,863 Opening cash and cash equivalents 14,912 12,337 5,755 5,642 Effects of exchange rate changes on cash and cash equivalents (883) (1,646) (424) (1,750) Closing cash and cash equivalents 14,653 14,912 10,267 5,755 The notes on pages 18 to 37 form an integral part of these Financial Statements. Included within the Group s closing cash and cash equivalents is 2.3 million (2013: 2.4 million) held as rent guarantees against future rental receipts which are refundable to tenants. The corresponding creditor is shown within trade and other payables in note 23.

18 EUROPEAN REAL ESTATE INVESTMENT TRUST LIMITED PAGE General information European Real Estate Investment Trust Limited ( EREIT or the Company ) is a company incorporated and registered in Guernsey. The consolidated and Company Financial Statements for the year ended 31 December 2014 were approved and authorised for issue by the Board of Directors on 20 March Basis of preparation The consolidated Financial Statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ) and International Financial Reporting Interpretations Committee ( IFRIC ), interpretations as endorsed by the European Union ( EU ) and with those parts of the Companies (Guernsey) Law, 2008 applicable to companies reporting under IFRS. The Financial Statements have been rounded to the nearest thousand and prepared in sterling, which is the presentational currency of EREIT and all its subsidiaries (the Group ). The entities of the Group use a different functional currency, being the currency in the primary economic environment in which the entity operates. The Financial Statements are prepared under the historical cost convention, as modified by the revaluation of land and buildings. Note 3 sets out a description of the significant accounting policies of the Group. The accounting policies are consistent with those applied in the year ended 31 December 2013, as amended to reflect the adoption of the new standards, amendments to standards or interpretations which are mandatory for the first time for the financial year ended 31 December (a) Going Concern Following the Extraordinary General Meeting held on 5 August 2011, the Group s investment policy was revised to effect an orderly disposal programme and return surplus capital to shareholders. As the Directors intend to return all capital to shareholders of the Company they have not prepared the Financial Statements on a going concern basis. This has not had any impact on the carrying value of the Group s assets or liabilities. (b) Standards, interpretations and amendments to published standards adopted in the period There has been various, amendments and interpretations to published standards, during the period but none have had an impact on the Group. (c) Standards, amendments and interpretations to published standards not yet effective Certain new standards, amendments and interpretations to existing standards have been published that are mandatory for the Group's accounting periods beginning after 1 January 2015 or later periods and which the Group has decided not to adopt early. These are: - IFRS 9 Financial Instruments (effective for periods beginning on or after 1 January 2018 still to be endorsed). - IFRS 14 Regulatory Deferral Accounts (effective for periods beginning on or after 1 January 2016). - IFRS 15 Revenue from Contracts with Customers (effective for periods beginning on or after 1 January 2017).

19 EUROPEAN REAL ESTATE INVESTMENT TRUST LIMITED PAGE Significant accounting policies (a) Basis of consolidation The Group s consolidated Financial Statements for the year ended 31 December 2014 incorporates the Financial Statements of the Company and its subsidiaries. The Group s subsidiaries are those entities which it controls. The Group controls entities when it has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The Financial Statements of subsidiaries are included in the consolidated Financial Statements from the date that control commences and until the date control ceases. Intra-group balances and any unrealised gains and losses arising from intra-group transactions are eliminated in preparing the Financial Statements of the Group. (b) Acquisitions and business combinations Where properties were acquired through a corporate acquisition, consideration was given to whether this represented a business. Where there were no significant assets or liabilities other than property, the acquisition was treated as an asset acquisition. In all other cases the acquisition was accounted for as a business combination, in which case, the assets and liabilities of a subsidiary were measured at their estimated fair value at the date of acquisition. The cost of acquisition was measured as the fair value of the consideration given together with any liabilities incurred or assumed at the date of acquisition, plus costs directly attributable to the acquisition. The excess of the cost of acquisition over the fair value of the Group s share of the identifiable net assets acquired is recorded as goodwill. (c) Investment properties Investment properties are those properties that are held either to earn rental income or for capital appreciation or both. Investment properties are measured initially at cost, including directly attributable costs of acquisition. After initial recognition at cost, investment properties are carried at their fair value based on professional valuation at each reporting date representing the market value assuming an asset sale of each property. Properties are treated as acquired at the point when the Group assumes the significant risk and returns of ownership and as disposed when these are transferred to the buyer. The difference between the fair value of an investment property at the reporting date and its carrying amount prior to re-measurement is included in profit or loss in the Statement of Comprehensive Income as a valuation gain or loss. When the Group begins to redevelop an existing investment property for continued future use as an investment property, the property remains an investment property and is accounted for as such. (d) Properties held for sale Properties are classified as held for sale if their carrying amount will be recovered by sale rather than by continuing use in the business. For this to be the case, the asset must be available for immediate sale in its present condition; management must be committed to and have initiated a plan to sell the asset (and such a plan is unlikely to have significant changes made to it or be withdrawn); an active programme to locate a buyer has been initiated; the asset is being marketed at a reasonable price in relation to its fair value, and the asset is expected to sell within twelve months. Property assets that are classified as held for sale are measured at fair value. (e) Investments in subsidiary undertakings in the Company Financial Statements Investments in subsidiary undertakings are stated at cost less any provision for impairment in value. (f) Trade and other receivables Trade and other receivables are recognised initially at fair value and subsequently at amortised cost. An allowance for impairment is established where there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables concerned. (g) Cash and cash equivalents Cash and cash equivalents comprise cash balances, deposits held at call with banks and other short-term highly liquid investments with original maturities of three months or less from inception.