Schroder Exempt Property Unit Trust

Transcription

1 Annual Report 2010 Cover 15/6/10 6:06 pm Page 2 31 March 2010 Schroder Exempt Property Unit Trust ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS 31 March 2010 Schroders Exempt Property Unit Trust 31 Gresham Street, London EC2V 7QA Schroder Exempt Property Unit Trust Annual Report and Audited Financial Statements

2 Annual Report 2010 Cover 15/6/10 6:06 pm Page 4 Schroder Exempt Property Unit Trust ( SEPUT or the Trust ) was established in 1971 as an open ended property unit trust under UK law. The investment objective of the Trust is to achieve a blend of income and capital growth for investors through investment in UK property. Risk is diversified by the Trust holding a mixed portfolio of retail, office, industrial and other property (including leisure and alternative investments such as student accommodation) throughout the UK. The Trust may also hold land and undertake developments as well as use moderate levels of gearing from time to time. Front cover: York, Monks Cross Shopping Park Investment Objective and Policy The Trust incorporates a blend of direct and indirect investment strategies. Indirect investments provide further diversification by accessing distinct areas of the UK property market, such as fashion parks, some larger properties, and specialist management associated with the alternative sectors. The Trust seeks to provide a return of 0.5% per annum (net of fees) above its benchmark (Investment Property Databank UK Pooled Property Fund Indices All Balanced Funds Median) over rolling three year periods. The Trust may be suitable for UK tax exempt pension funds and charities who wish to hold a direct property portfolio without the commitment of considerable trustee oversight and management expertise. The property in the Trust is professionally and actively managed by chartered surveyors employed by the Property Manager, Schroder Property Investment Management Limited. The Manager welcomes the opportunity to meet unitholders, potential unitholders and their advisers to explain more fully the strategy and progress of the Trust. Please see Manager Contacts on page 43. Schroder Exempt Property Unit Trust Schroder Property Investment Management Limited 31 Gresham Street London EC2V 7QA Tel: +44 (0) Further information can be found on the website

3 Contents REPORTS FINANCIAL STATEMENTS Trust Analysis Chairman s Statement Manager s Statement Rent Reviews, Lettings and Lease Renewals Purchases and Sales Portfolio Details Responsibilities of the Manager, Trustee and Supervisory Board Independent Valuer s Report Independent Auditor s Report Statement of Net Assets Income and Expenditure Account Statement of Total Recognised Gains and Losses Cash Flow Statement Notes to the Financial Statements Supervisory Board and Key Service Providers Additional Unitholder Information Debt Analysis General Meeting and General Information 01

4 Trust Analysis Size During the year the net asset value of the Trust increased by million, to 1,151.8 million at 31 March 2010 from 1,022.5 million at 31 March Distribution Yield The Trust s distribution yield was 5.1% at 31 March 2010 compared to 5.4% at 31 March Net Asset Value per Unit The Trust s net asset value per unit was at 31 March 2010, compared to at 31 March 2009, an increase of 2.9%. Rent Reviews Over the twelve months to 31 March 2010, 36 rent reviews were settled at an average of 10.3% above the passing rent, and marginally below estimated rental value. Total Returns Performance % to 31 March 2010 Q (% per qtr) Q Q Q year (% per annum) 3 years 5 years 10 years Twelve month performance % to 31 March Trust Benchmark* IPD UK Pooled Property Fund Indices - All Balanced Funds Index Weighted Average Source: Investment Property Databank (IPD) UK Pooled Property Fund Indices. Performance is calculated on a net asset value (NAV) to NAV price basis plus income distributions accrued for the relevant periods, compounded monthly, net of fees and based on an unrounded NAV per unit. * Benchmark shown is the IPD UK Pooled Property Fund Indices All Balanced Funds Index Median. The Trust benchmark has changed over time and a composite for 10 years is available upon request. The Weighted Average is shown for illustration purposes and is used for detailed analysis of the Trust s property portfolio as the Median does not provide appropriate detail. 02 Schroder Exempt Property Unit Trust Annual Report and Audited Financial Statements 31 March 2010

5 Portfolio by Sector At 31 March 2010 Overweight/underweight relative to benchmark* Standard Retail Shopping Centres Retail Warehouses Central London Offices Rest of UK Offices Industrial Other Cash Absolute Segment SEPUT Benchmark* Standard Retail Shopping Centres Retail Warehouses Central London Offices Rest of UK Offices Industrial Other Cash % -6% -4% -2% 0% 2% 4% 6% 8% Underweight Overweight Source: IPD and Schroders, 31 March 2010 * Positions relative to IPD UK Pooled Property Fund Indices All Balanced Funds Weighted Average. The weighted average has been used as this level of information is not available in the median. Relative positions are measured on a GAV (Gross Asset Value) basis. Portfolio Structure March 2010, % NAV* 23.4% 14.9% 61.7% Portfolio Structure March 2009, % NAV* 26.1% 16.3% 57.6% At 31 March At 31 March Gearing (% NAV)* 16.3% 20.6% Relative distribution yield** (0.19%) (0.52%) Average unexpired lease length 7.9 years 7.6 years NAV* 1,151.8m 1,022.5m Directly owned assets and cash Joint ventures Indirect assets Source: Schroders 31 March 2010 * NAV: net asset value. ** Distribution yield relative to IPD Pooled Property Fund Indices All Balanced Funds Weighted Average. 03

6 Portfolio Profile At 31 March 2010 Top Ten Holdings Holdings Sector % NAV* Hercules Unit Trust Retail Warehouse 6.2 York, Monks Cross Shopping Park Retail Warehouse 5.5 West End of London Property Unit Trust Office 5.4 Bracknell Retail and Office 5.1 Schroder Emerging Retail Property Unit Trust Standard Retail 4.2 London NW10, Matrix, Park Royal Industrial 3.9 Crayford, Acorn Industrial Estate Industrial 3.7 London, Parker Tower Office 3.5 Manchester, Fujitsu Office Complex, Central Park Office 3.4 Cardiff, Mermaid Quay Leisure 3.2 Source: Schroders, 31 March 2010 * NAV: net asset value Top Ten Tenants Tenant % Contracted Rent Fujitsu Services Limited 3.7 British Telecommunications plc 3.1 Regus (UK) Limited 2.4 Exel Limited 2.2 Lloyds TSB Bank plc 2.2 B&Q plc 1.9 TBWA UK Group Limited 1.9 Sportsdirect.com Retail Limited 1.8 Marks & Spencer plc 1.6 DSG Retail Limited 1.4 All other tenants 77.8 Source: Schroders, 31 March 2010 New Lettings 41 lettings were completed over the last twelve months, contracting an additional 3.4 million of income. Void Profile From January 2010 onwards IPD have changed how they calculate void rates. The new calculation assumes where a tenant is in administration and the lease has yet to be disclaimed, that this unit is fully let. The old calculation, and the Trust s preference, assumes they are vacant. The Trust s void rate as shown below is on the new basis of calculation. The Trust s void rate on the old basis for 2010 was 10.7%. At 31 March 2010 SEPUT (%) IPD (%) 2 Void rate (as a % of estimated rental value of total portfolio excluding developments) 1 At 31 March 2009 Void rate (as a % of estimated rental value of total portfolio excluding developments) Source: Schroders, IPD, 31 March Henderson and AH Medical at Q UNITE is excluded. 2 IPD UK Pooled Property Funds weighted average. 04 Schroder Exempt Property Unit Trust Annual Report and Audited Financial Statements 31 March 2010

7 Chairman s Statement The year to 31 March 2010 saw the end of the most severe UK property bear market ever recorded. The trough in market valuations was reached in June 2009, 42.4% below its peak of two years before (Source:IPD). Since then, the market has recovered driven by increased investor demand, attracted in particular by the favourable relative pricing of property compared to UK bonds and cash. The Trust s performance has also improved and there has been demand for new units in the second half of the period under review as well as an active secondary market. The Supervisory Board is aware of the economic and political challenges facing the UK in the coming months and the risk that there will be a further deterioration in economic conditions. While rental values have started to stabilise, occupiers remain under pressure and landlords are subject to potential increases in void rates. Although income levels remain relatively high, extracting returns from UK property will require focus, dedication and skill. Net Asset Value and Performance During the twelve months to 31 March 2010, the net asset value per unit increased by 2.9% to from and the total net asset value of the Trust increased by million (12.7%), to 1,151.8 million from 1,022.5 million. The total return for the Trust for the twelve months under review was 8.7% versus the benchmark, the IPD UK Pooled Property Fund Indices All Balanced Fund Median, which returned 13.2% while the weighted average return of the same index was 11.7%. Since the property market started to recover in June 2009, the Trust has outperformed its benchmark. However, over the past three years (its performance measurement period), the Trust has underperformed. Further detail on the attribution of returns is provided in the Manager s Statement. Units in Issue and Secondary Market At 31 March 2010 the Trust had a total of 38,013,430 units in issue, an increase of 3,284,710 on a year earlier. The high level of demand for the Trust in the second half of the period led to a restriction on the number of units issued following the December 2009 and January 2010 dealing dates. This was necessary to protect the interests of existing unitholders. From February 2010, however, I am pleased to report that the Trust has once again accepted subscriptions in full. The secondary market was also active and units valued at 82.8 million were traded between investors over the twelve month period. Investment and Borrowing Guidelines The Supervisory Board is responsible for ensuring that the Manager operates within the agreed investment and borrowing guidelines. The guidelines have been set in order to protect the interests of unitholders and are reviewed on a regular basis. The guidelines were monitored and maintained during the period under review. The Manager would be pleased to provide details of the guidelines to unitholders on request. Gearing A year ago the Manager confirmed the revised strategy of reducing exposure to indirect holdings in favour of direct holdings. Gearing within the Trust is entirely in the indirect holdings. The Supervisory Board limits the overall gearing to 25% of the net asset value. Gearing fell to 16.3% of net asset value at 31 March 2010 from 20.6% a year before as the strategy started to be implemented. Further sales of geared indirect holdings since the financial year end has seen the Trust s gearing fall further to 14.8% as at 31 May Governance The Supervisory Board is satisfied that the Trust has been managed in accordance with the Trust Deed and agreed guidelines and with due regard to sound governance practice. Supervisory Board Mr van der Klugt retired as Chairman of the Supervisory Board at year end. On behalf of the Supervisory Board and unitholders I would like to thank Mr van der Klugt for his tireless services to the Trust over the past eight years and we wish him continued success in the future. I am pleased to have been invited to take on his responsibilities as Chairman of the Supervisory Board. 05

8 Chairman s Statement (continued) Outlook The Supervisory Board has been supportive of the management team and their efforts to reposition the Trust following a period of underperformance. We are pleased to note the improved returns of the Trust compared with its peer group. The Manager has made good progress in implementing its stated strategy within an enhanced risk control framework, and although economic headwinds remain, we believe that unitholders should be able to look forward to improved and more predictable relative returns in the coming year. James A. Scott Chairman Schroder Exempt Property Unit Trust Supervisory Board 15 June Schroder Exempt Property Unit Trust Annual Report and Audited Financial Statements 31 March 2010

9 Manager s Statement Performance It is disappointing to report that the Trust underperformed its benchmark over the reporting period, and over its three year performance measurement period. The relative underperformance over the past year, however, disguises a marked improvement since the market trough in mid In the nine months since 30 June 2009 the Trust generated a total return of 17.1% against the benchmark of 16.0% (source: IPD). We believe this improvement, as we execute our new investment strategy, marks a turn in the Trust s fortunes. The significant positive and negative drivers of relative return over the full year were as follows: The Trust s sector positioning of assets added 1.2% to relative returns over the past year. The overweight to South East Industrials and underweight to Rest of UK Industrials was a significant positive contributor while in the retail sector, the underweight position to Shopping Centres was similarly beneficial. The Trust s weightings in office sub sectors were marginally accretive to returns. Several of the sector specialist indirect funds performed strongly. This was driven by a combination of the prime nature of the underlying assets and gearing. Hercules Unit Trust s total return was 22.5% in the year to 31 March 2010, while the West End of London Property Unit Trust returned 32.2% (source: IPD). A number of individual assets such as the largest, Monks Cross Shopping Park (342,284 sq ft shopping park joint venture accounting for 5.5% of NAV), saw strong performance of 29.5% for the twelve months. Performance for good quality properties let on long leases such as this have been in demand from investors. As anticipated, the key detractors to performance were the regeneration sites such as SEPUT s 50% ownership of Bracknell town centre and land such as Ruskin Square in Croydon. The City development sites, and refurbishment opportunities such as Parker Tower, have underperformed the market. Although Bracknell has a running yield of over 6%, the lack of income generated by land which at year end amounted to 6.5% of the portfolio - at a time when investors are focused on property s income component - detracted from relative, short term total returns. For these assets, performance should be driven by the recovery of the occupier markets and asset management initiatives, and a recovery in the occupier market which has not yet been captured by the Valuers in their valuations. With the portfolio being repositioned in line with stated strategy and with the latent potential of these value add strategies still to be realised, it is pleasing to see the Trust ahead of its benchmark over the past nine months of volatile recovery. UK Property Market Review and Outlook While it is premature to talk of recovery in the occupier market, there are signs that parts of the market are beginning to stabilise. According to CBRE, the overall vacancy rate in central London offices fell in the fourth quarter of 2009 and continued falling in quarter one 2010 as occupiers withdrew space that they had previously been trying to sublet. This resulted in a stabilisation of prime rents in both the City and West End and landlords were able to cut incentives. Similarly, in the retail sector the rate of insolvencies and pre-pack administrations among major retailers has slowed in recent months. According to IPD, the decline in average rents has slackened markedly since June There is now a clear distinction between large shopping centres, where vacancy rates are around 10% on average, and smaller secondary centres where vacancy rates are closer to 20% (source: Property Market Analysis (PMA)). In keeping with these trends, PMA s latest property forecasts now suggest that 2010 will mark the bottom of the current rental cycle, rather than 2011 as previously predicted. The biggest uncertainty is the outlook for property yields. The improvement in investor sentiment towards property since mid 2009 has been driven by its relatively high income yield versus returns on cash and UK bonds. The associated fall in yields has been the key factor driving the recent revival in capital values and total returns. There is also evidence of an increased appetite from banks to lend against commercial property. While the seminationalised UK banks are still looking to contract their loan books, other UK banks and German banks are more active. According to IPD, the All Property initial yield fell from 7.7% in June 2009 to 6.5% in March 2010 and capital values rose by 14.5% over the same period (although they remain 34% below their peak in 07

10 Manager s Statement (continued) June 2007). Compared with UK Government bonds and cash, Schroders believes UK property still looks a relatively attractive asset class. Strategy With property remaining attractive compared with other asset classes, cash balances are being invested as prudently as possible and in line with strategy. The careful management of cash inflows remains of utmost importance to protect the interests of existing unitholders. The Manager is part way through rebalancing the portfolio to ensure SEPUT has greater ability to perform in line with its stated objective. Since market liquidity improved in the second half of 2009, our investment strategy has been to: Reduce exposure to indirectly owned investments, particularly those with gearing. The exposure to these assets has reduced partly through cash inflows to the Trust and partly through asset disposals. Gearing has been accretive to performance since the second half of 2009, sales of further units have been completed since the end of the reporting period at a sizeable premium to the stated NAV. Improve the quality and duration of income. The focus of acquisitions has been on long lease properties to strong covenants which has resulted in an improved average unexpired lease from 7.5 years in March 2009 to 7.9 years in March 2010, in line with its benchmark. We are now considering a wider range of options with greater asset management opportunities. Sell or manage out existing development opportunities. We are continuing negotiations with planning authorities, joint venture partners and potential tenants on several sites within the portfolio. We believe that this may be the most profitable means of extracting value, and reducing risk, from these assets. Our strategy is being implemented within an enhanced risk management framework which closely monitors risk against its peer group and its investment parameters. Portfolio Activity Seven properties were bought during the year to 31 March 2010, while two direct properties were sold and part of our units in one indirect plus proceeds from the liquidation of two indirect vehicles were received. At the end of the financial year, the cash balance was below 5% of the Trust s net asset value. The common theme of the majority of purchases was on improving the duration and quality of the Trust s rental income, in line with strategy. Purchases included: Fujitsu Office Complex, Central Park, Manchester. The property comprises three office buildings which are let to Fujitsu for a further 15 years with 2.5% pa fixed rental uplifts. It was bought at an initial yield of 6.8%. St William House, Tresillian Terrace, Cardiff. Adjacent to Cardiff central station, the 140,000 sq ft building is let to Lloyds TSB for a further 15 years and was bought at an initial yield of 6.5%. B&Q, Hythe Riverside Park, Colchester. This 102,300 sq ft retail warehouse had an unexpired lease term on purchase of 17 years and is let to B&Q. It was bought at an initial yield of 6.5%. Interchange Retail Park, London Road, Ipswich. This 60,700 sq ft retail park is in an established retail destination with a neighbouring Tesco Extra. It was bought at an initial yield of 6.8%. Albany Park, Frimley. With an initial yield of 8.0% this retail warehouse/industrial park comprises nine fully let units totalling 85,200 sq ft. Quadrant Park, Welwyn Garden City. This property was completed four years ago and has excellent transport connections. The 116,000 sq ft industrial estate offers a number of asset management possibilities and tenants include Screwfix Direct Ltd and Univolt UK. Parker Tower, London. A 20,600 sq ft office adjacent to the existing holdings totalling 72,900 sq ft at Parker Tower was bought. 08 Schroder Exempt Property Unit Trust Annual Report and Audited Financial Statements 31 March 2010

11 The following assets were sold: 10 Furnival Street, London EC4. This mid town office building was sold at above valuation to a private investor. The bulk of income was subject to break clauses within four years Exchange Street, Manchester. Having refurbished and repositioned the retail units in 2008, the Grade B offices above it were seen as a threat. The property was sold at above valuation. Indirect Funds. A total of 26.4 million was received from the liquidation of the Residential Property Unit Trust (RESPUT) and Gresham Property Partners LP. 7.5 million of units were also sold in the Schroder Emerging Retail Property Unit Trust (SERPUT) during the year. Sales totalling 30 million have been made from West End London Property Unit Trust (WELPUT) following the period end at a premium to NAV. Summary The Trust s management team considers the Trust is well positioned to benefit from the continued improvement in the property market owing to its current structure. Now that liquidity has improved in the UK commercial property market, the stated strategy of rebalancing the portfolio more towards direct property holdings is being implemented, but this will take time. In the medium term, the improvement in the quality and duration of the portfolio s income, coupled with a phased reduction in indirectly owned assets (and also gearing), should benefit unitholders in the Trust. I D Mason Fund Manager 15 June

12 Rent Reviews, Lettings and Lease Renewals At 31 March 2010 Rent Reviews In the directly held portfolio 36 rent reviews were settled over the year totalling 6.9 million per annum. This reflects an uplift of 10.3% on the old rent but was -3.6% below the estimated rental value (ERV). Notable rent reviews Old Rent New Rent ERV Property Tenant (per annum) (per annum) (per annum) Park Royal, London NW10 Maple Leaf Bakery UK Ltd 651, , ,900 High Street, Exeter Lloyds TSB Bank plc 407, , ,800 Monks Cross Shopping Park, York* New Look Retailers Limited 383, , ,100 New Lettings In the directly held portfolio 41 new lettings were completed adding 3.4 million per annum to the rent roll. Notable new lettings Old Rent New Rent ERV Property Tenant (per annum) (per annum) (per annum) Capital Point, Slough Lego Company Ltd n/a 678, ,300 Monks Cross Shopping Park, York* Debenhams Properties Ltd n/a 491, ,000 The Arenson Centre, Dunstable Euroex Logistics Ltd n/a 97,320 67,700 *The Trust holds 33.3% of the assets. Lease Renewals In the directly held portfolio 16 leases were renewed totalling 153,012 per annum, reflecting an uplift of 1.9% on the old rent and approximately 3.5% below estimated rental values. 10 Schroder Exempt Property Unit Trust Annual Report and Audited Financial Statements 31 March 2010

13 Purchases and Sales At 31 March 2010 Purchases Name Sector Type Lot size Cardiff, St William House Office Direct Over 25m Manchester, Fujitsu Office Complex, Central Park Office Direct Over 25m Colchester, Hythe Riverside Park Retail Warehouse Direct Between 10m and 25m Frimley, Albany Park Industrial Direct Between 10m and 25m Ipswich, Interchange Retail Park Retail Warehouse Direct Between 10m and 25m Hercules Unit Trust (HUT) 10% Convertible Bond Retail Warehouse Indirect Under 10m London WC2, Craven House, Parker Tower Office Direct Under 10m Welwyn Garden City, Quadrant Park Industrial Direct Under 10m Total 142.3m Sales Name Sector Type Lot size Chancery Exchange, 10 Furnival Street, London EC4 Office Direct Over 25m Manchester, 8-10 Exchange Street Standard Retail Direct Between 10m and 25m Residential Property Unit Trust (in liquidation) Other Indirect Between 10m and 25m Exeter, High Street Standard Retail Direct Under 10m Gresham I (in liquidation) Industrial Indirect Under 10m UNITE UK Student Accommodation Fund Other Indirect Under 10m Schroder Emerging Retail Property Unit Trust (SERPUT) Standard Retail Indirect Under 10m Total 99.8m Source: Schroders, 31 March

14 Portfolio Details At 31 March 2010 Portfolio Holdings Name Lot size Type Standard Retail Schroder Emerging Retail Property Unit Trust (SERPUT) Over 25m Indirect Exeter, High Street Between 5m and 10m Direct Retail Warehouse Hercules Unit Trust (HUT) Over 25m Indirect York, Monks Cross Shopping Park Over 25m JV Cardiff, Cardiff Bay Retail Park Between 10m and 25m JV Colchester, Hythe Riverside Park Between 10m and 25m Direct Henderson UK Retail Warehouse Fund (HRWF) Between 10m and 25m Indirect Ipswich, Interchange Retail Park Between 10m and 25m Direct Hercules Unit Trust (HUT) 10% Convertible Bond Between 5m and 10m Indirect London SE7, 403/433 Woolwich Road Between 5m and 10m Direct Retail and Office Bracknell Property Unit Trust (BPUT) Over 25m JV Central London Offices West End of London Property Unit Trust (WELPUT) Over 25m Indirect London, Parker Tower Over 25m Direct London W14, Kensington Village Over 25m Direct London SE1, Palace House, 3 Cathedral Street Between 10m and 25m Direct London W1, Dean Street Between 10m and 25m Direct London EC3, 68 Lombard Street Between 10m and 25m Direct London, Moorgate Between 10m and 25m Direct London, Mark Lane Between 10m and 25m Direct London EC1, 4-7 Chiswell Street Between 10m and 25m Direct London EC2, 11/12 Appold Street Between 5m and 10m Direct City of London Office Unit Trust (CLOUT) Under 5m Indirect Rest of UK Offices Manchester, Fujitsu Office Complex, Central Park Over 25m Direct Cardiff, St William House Over 25m Direct Chiswick Park Unit Trust (ChisPUT) Over 25m Indirect Croydon, Gateway Site Between 10m and 25m Direct Croydon, AMP House Between 10m and 25m Direct Reading, New Century Place Between 10m and 25m Direct Bracknell, Bracknell Beeches Between 5m and 10m Direct Slough, Capital Point Between 5m and 10m Direct Uxbridge, Oxford, Cambridge and Willowbank Houses Under 5m Direct Cranford, Europa House, Bath Road Under 5m Direct Bracknell, Eagle House Limited Under 5m JV 12 Schroder Exempt Property Unit Trust Annual Report and Audited Financial Statements 31 March 2010

15 Name Lot size Type Industrial London NW10, Matrix, Park Royal Over 25m Direct Crayford, Acorn Industrial Estate Over 25m Direct London E16, Electra, Canning Town Over 25m Direct Hackbridge, Felnex Trading Estate Over 25m Direct Woking, Woking Business Park Between 10m and 25m Direct Dunstable, Chiltern Park, Units A-D Between 10m and 25m Direct Frimley, Albany Park Between 10m and 25m Direct Greenford, Rockware Avenue Between 10m and 25m Direct Birmingham, Deykin Avenue Between 10m and 25m Direct Welwyn Garden City, Quadrant Park Between 5m and 10m Direct Dunstable, The Arenson Centre Between 5m and 10m Direct London SE7, Maritime Industrial Park Between 5m and 10m Direct Teesland idg Sutton Unit Trust (TiDGSUT) Under 5m JV York, Alexandra Court, James Street Under 5m Direct Greenford, Land Under 5m Direct Cannock, Walkmill Lane Under 5m Direct Livingston Land Under 5m Direct Other Cardiff, Mermaid Quay Over 25m Direct West India Quay Unit Trust (WIQUT) Between 10m and 25m JV UNITE UK Student Accommodation Fund (UNITE) Between 10m and 25m Indirect AH Medical Properties plc Between 5m and 10m Indirect Gresham Property Partners LP (Gresham) Under 5m Indirect Hartlepool, Jacksons Landing Under 5m Direct The Residential Property Unit Trust (ResPUT) Under 5m Indirect 13

16 Responsibilities of the Manager, Trustee and Supervisory Board Manager s and Trustee s Responsibilities for the Financial Statements The Trust Deed requires the Manager to prepare Financial Statements for each financial year detailing the state of affairs of the Trust as at the end of the financial year and its income or loss for the financial year. The Manager is responsible for keeping proper accounting records and, along with the Property Manager, for taking reasonable steps to safeguard the assets of the Trust and to prevent and detect fraud and other irregularities. The Trustee is required to hold the underlying property of the Trust for the unitholders and is responsible for the safe custody of that property and any documentation relating to it. Supervisory Board s Responsibilities for the Financial Statements The Supervisory Board is responsible for approving, on the Audit Committee s recommendation, the Financial Statements prepared for each financial year, including the content and the accounting policies adopted, and for reporting any corporate governance issues relating to the Trust or other matters in connection with the Financial Statements. The Manager confirms that suitable accounting policies and appropriate accounting standards have been used and applied consistently and reasonable and prudent judgements and estimates have been made in the preparation of the Financial Statements. The Manager also confirms that the Financial Statements have been prepared on the going concern basis for the year ending 31 March Schroder Exempt Property Unit Trust Annual Report and Audited Financial Statements 31 March 2010

17 Independent Valuer s Report To the Unitholders of Schroder Exempt Property Unit Trust As independent valuer for the Trust, we have valued properties held by the Trust at 31 March 2010 in accordance with The Royal Institution of Chartered Surveyors and International Valuation Standards. The Manager has been provided with a full valuation certificate and report. The properties have been valued on the basis of market value. Details of the nature and extent of the properties, the tenure and tenancies, permitted uses, town planning consents and related matters, have been supplied by the Property Manager, Schroder Property Investment Management Limited (SPrIM). The majority of the properties form the subject of detailed reports from ourselves. We have seen copies of all the leases but we have not examined the title documents and we have therefore assumed that the Trust s interests are not subject to any onerous restrictions, to the payment of any unusual outgoings or to any charges, easements or rights of way, other than those to which we have referred in our reports. We rely upon the Property Manager to keep us advised of any changes that may occur in the investments. We are not instructed to carry out structural surveys nor test any of the service installations. Our valuations therefore have regard only to the general condition of the properties evident from our inspections. We have assumed that no materials have been used in the buildings which are deleterious, hazardous or likely to cause structural defects. We are not instructed to carry out investigations into pollution hazards which might affect the properties and our valuations assume the properties are not adversely affected by any form of pollution. In our opinion the aggregate of the market values of the 38 properties owned by the Trust at 31 March 2010 is million. This figure represents the aggregate of the values attributable to the individual properties and should not be regarded as a valuation of the portfolio as a whole in the context of a sale as a single lot. In the case of the properties in the course of development, our valuations reflect the stage reached in construction and the costs already incurred at the date of valuation. We have had regard to the contractual liabilities of the parties involved in the developments and any cost estimates which have been prepared by professional advisers. No allowance is made in our valuations for the costs of realisation, any liability for tax which might arise on the event of disposal or for any mortgage or similar financial encumbrance over the property. Our valuations exclude VAT. BNP Paribas Real Estate 31 March 2010 On 1 June 2009 BNP Paribas rebranded its global real estate business from Atisreal Limited to BNP Paribas Real Estate Advisory and Property Management UK Limited, to be known as BNP Paribas Real Estate. 15

18 Independent Auditor s Report To the Unitholders of Schroder Exempt Property Unit Trust We have audited the Financial Statements of Schroder Exempt Property Unit Trust ( the Trust ) for the year ended 31 March 2010 which comprise Statement of Net Assets, the Income and Expense Account, the Statement of Total Recognised Gains and Losses, the Cash Flow Statement and the Notes to the Financial Statements. These Financial Statements have been prepared under the accounting policies set out therein. Respective Responsibilities of the Manager and Auditors The Manager s responsibilities for preparing the Annual Report and Financial Statements in accordance with applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice) are set out in the Statement of Responsibilities of the Manager, Trustee and Supervisory Board. Our responsibility is to audit the Financial Statements in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). This report, including the opinion, has been prepared for and only for the unitholders of the Trust 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. We report to you our opinion as to whether the Financial Statements give a true and fair view and are properly prepared in accordance with the Trust Deed. We also report to you if, in our opinion, proper accounting records for the Trust have not been kept or if the Financial Statements are not in agreement with those records, if we have not received all the information and explanations we require for our audit, or if the information given in the Manager s Statement is not consistent with the Financial Statements. We read the other information contained in the Annual Report and consider whether it is consistent with the Audited Financial Statements. This other information comprises only the Supervisory Board and Key Service Providers, the Trust Analysis, the Chairman s Statement, the Manager s Statement, Purchases and Sales, Details of the Portfolio, Rent Reviews, Lettings and Lease Renewals, the Responsibilities of the Manager, Trustee and Supervisory Board, the Independent Valuer s Report to the Unitholders, Additional Unitholder Information, Debt Analysis and General Meeting and General Information. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the Financial Statements. Our responsibilities do not extend to any other information. Basis of Audit Opinion We conducted our audit in accordance with International Standards on Auditing (United Kingdom and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the Financial Statements. It also includes an assessment of the significant estimates and judgements made by the Manager in the preparation of the Financial Statements, and of whether the accounting policies are appropriate to the Trust s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the Financial Statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the Financial Statements. Opinion In our opinion the Financial Statements give a true and fair view, in accordance with United Kingdom Generally Accepted Accounting Practice, of the financial position of the Trust at 31 March 2010 and of the net income and total recognised gains of the Trust for the year then ended and have been properly prepared in accordance with the Trust Deed. PricewaterhouseCoopers LLP Chartered Accountants London 15 June Schroder Exempt Property Unit Trust Annual Report and Audited Financial Statements 31 March 2010

19 Financial Statements 31 MARCH Statement of Net Assets Income and Expenditure Account Statement of Total Recognised Gains and Losses Cash Flow Statement Notes to the Financial Statements 17

20 Statement of Net Assets At 31 March Notes Fixed assets Investment property Freehold property 470, ,021 Leasehold property 102, ,943 2(a) 573, ,964 Development property Sites in the course of development at valuation: Freehold property 15,200 14,150 2(b) 15,200 14,150 Total valuation of investment and development property 2 588, ,114 Investment in property equities 3 6,476 3,047 Investment in subordinated convertible notes 4 9,462 Property related investments 5(b) 506, ,009 Total fixed assets 1,110,614 1,023,170 Current assets Debtors 6 18,190 13,968 Cash at bank and on deposit: Current accounts 16 51,346 13,472 Total current assets 69,536 27,440 Total assets 1,180,150 1,050,610 Current liabilities Bank loans 7 _ 5,000 Creditors 8 19,321 16,271 Taxation 6,371 3,410 Distributions payable 2,652 3,466 Total current liabilities 28,344 28,147 Net assets attributable to unitholders 9 1,151,806 1,022,463 Net asset value per unit The Financial Statements on pages 18 to 36 were approved by the Manager, Schroder Property Investment Management Limited, and the Supervisory Board on 15 June 2010 and signed on their behalf by: W A Hill, Director On behalf of the Manager J A Scott, Chairman On behalf of the Supervisory Board The notes on pages 22 to 36 form part of these Financial Statements. The Independent Valuer s Report is shown on page 15. The Independent Auditor s Report is shown on page Schroder Exempt Property Unit Trust Annual Report and Audited Financial Statements 31 March 2010

21 Income and Expenditure Account For the year ended 31 March Notes Rents receivable 1(f) 36,259 34,297 Other income 1(f) Service charge income 6,098 5,392 Less: property expenses 11 9,312 9,834 Net rental income 33,241 30,110 Income from property related investments 23,379 29,708 Income from subordinated convertible notes 275 Interest receivable on bank deposits 1(h) Less: finance costs: interest payable 12(d) 238 1,234 Net interest income 30 (470) Net income before tax 56,925 59,348 Less: income tax 13(a)(i) 11,385 11,870 Net income after tax 45,540 47,478 Less: Management expenses Supervisory Board remuneration Trustee fee 18(a) Management fees 18(b) 4,896 5,580 Valuation fee Audit fee Printing and stationery Legal and professional fees and other charges Total management expenses 12(b) 5,806 6,891 Net income available for distribution 39,734 40,587 Finance costs: distributions 12(a) (42,182) (43,377) Retained deficit for the period 14 (2,448) (2,790) There is no difference between the net income available for distribution as stated above and its historical cost equivalent. All items dealt with in arriving at the net income available for distribution relate to continuing operations. The notes on pages 22 to 36 form part of these Financial Statements. The Independent Valuer s Report is shown on page 15. The Independent Auditor s Report is shown on page

22 Statement of Total Recognised Gains and Losses For the year ended 31 March Notes Realised profit/(loss) on: Investment property sold (2,735) Property related investments sold 14 1,591 7,163 Movement in revaluation reserve for retained: Investment property 14 28,660 (171,690) Sites in the course of development (13,082) Property related investments 14 (323) (326,349) Property equities 14 3,429 (2,571) Capital surplus/(deficit) for the year 35,007 (509,264) Net income available for distribution 39,734 40,587 Total recognised gains/(losses) 74,741 (468,677) The notes on pages 22 to 36 form part of these Financial Statements. The Independent Valuer s Report is shown on page 15. The Independent Auditor s Report is shown on page Schroder Exempt Property Unit Trust Annual Report and Audited Financial Statements 31 March 2010

23 Cash Flow Statement For the year ended 31 March Notes Net cash inflow from operating activities 15 49,917 58,423 Returns on investment and servicing of finance Interest received Interest paid (238) (1,208) Distributions paid (43,030) (43,724) (43,108) (44,163) Tax paid (8,231) (17,386) Capital expenditure and financial investment Sale of investment property: Freehold 55,917 65,801 Leasehold 9,185 Purchase of investment property: Freehold (133,153) Property related investments: Purchases (10,128) (6,912) Sales 37,113 35,910 Subordinated convertible notes: Purchase (9,462) Other capital expenditure (3,166) (8,581) (53,694) 86,218 Cash inflow before financing (55,116) 83,092 Financing Issue of units ,133 Units redeemed 10 (7,143) (2,262) Loans repaid 7 (5,000) (90,000) Loans received 15,000 92,990 (77,262) Increase in cash 16 37,874 5,830 The notes on pages 22 to 36 form part of these Financial Statements. The Independent Valuer s Report is shown on page 15. The Independent Auditor s Report is shown on page

24 Notes to the Financial Statements 1. Accounting policies The Financial Statements have been prepared in accordance with the historical cost convention, as modified by the revaluation of property fixed assets, property related investments and property equities, as explained in notes 1(a), 1(b) and 1(c) below, and in accordance with applicable United Kingdom Accounting Standards and the Trust Deed. In accordance with Financial Reporting Standard (FRS) 18, the Trust s accounting policies are reviewed annually to confirm that they remain appropriate and are in accordance with the requirements of Accounting Standards, Urgent Issues Task Force (UITF) abstracts and the Trust Deed. The principal accounting policies adopted in these Financial Statements, which have been applied consistently, are: (a) Properties owned by the Trust, including investments in properties owned through partnerships and trusts for land, are independently valued on a market value basis having regard to whether they are let or unlet at the date of valuation. Development properties in the course of development are independently valued having regard to the stage reached in the construction and taking account of any agreed letting and of any contractual liabilities to advance further monies. Where legal completion of a purchase is not fully executed at the date of the Statement of Net Assets, but takes place subsequently, or in the case of development properties purchased for development where no work has yet taken place, the property is shown at cost unless, in the opinion of the Manager, there may be a material difference between cost and valuation on completion. (b) Property related investments are valued at the net asset value as provided by the relevant managers, in accordance with industry practice. (c) Investments in Subordinated Convertible Notes are held at cost until conversion. (d) Property equities are valued at bid price, using the exchange price at the year end. (e) Where the Trust makes advances to developers by reference to the stage of completion reached on developments, interest on these advances is rolled up during the period of development and is paid to the Trust on completion. This interest is credited to the Income and Expenditure Account during the period of the development. (f) Rental income and other income are recognised in the Income and Expenditure Account on an accruals basis. Rental income includes the Manager s best estimates for unsettled rent reviews. Provisions are made where, in the opinion of the Manager, amounts are deemed likely to be irrecoverable. Income from property related investments comprises distributions receivable gross of any related tax withheld and is accounted for on a receivable basis. (g) Fees are recognised on an accruals basis and are charged in full to the Income and Expenditure Account. The Manager has allocated 50% of the management fees to income and the remaining 50% to capital for the calculation of distributable income. (h) Interest receivable and payable are accounted for on an accruals basis. (i) Benefits to lessees in the form of rent free periods and other incentives are treated as a reduction in the overall return on the leases and, in accordance with UITF 28, Operating Lease Incentives, are recognised on a straight line basis over the shorter of the lease term or the period up to the initial rental review date. The valuation of investment property is reduced by all lease incentives. Any remaining debtor incentive balances in respect of property disposed of are included in the calculation of the profit or loss arising on disposal. (j) In accordance with FRS 25, income distributions are classified as finance costs and are accounted for on an accruals basis. (k) Unrealised surpluses less unrealised deficits on valuation of property fixed assets, property related investments and property equities are credited directly to the revaluation reserve in accordance with SSAP 19. Realised profits, less realised losses, determined by reference to carrying value at the commencement of the accounting period, are credited to the realised profit/loss on sale reserve and disclosed in the Statement of Total Recognised Gains and Losses. Realised prior period revaluations are taken to the realised profit/loss on sale reserve, as a reserve transfer. (l) In accordance with SSAP 19 no depreciation or amortisation is provided in respect of freehold properties or leasehold properties which have unexpired lease terms in excess of twenty years. (m) Acquisitions and disposals of investment properties, property related investments and property equities are recognised where, by the end of the accounting period, there is a legally binding, unconditional and irrevocable contract. Investments in property equities are recognised on a trade date basis. (n) Income tax is provided for on income taxable in the period at the basic rate of tax. Deferred tax is accounted for on an undiscounted basis at expected tax rates on all timing differences. A deferred tax asset is only recognised where it is more likely than not that the asset will be recoverable in the foreseeable future out of suitable taxable income from which the reversal of timing differences can be deducted. (o) Profits or losses that arise on disposal of units in any property related investments or equities are calculated on a First In, First Out basis. 22 Schroder Exempt Property Unit Trust Annual Report and Audited Financial Statements 31 March 2010

25 2. Fixed assets Freehold Leasehold Total (a) Investment property Valuation at 1 April , , ,964 Additions to existing properties at cost 2, ,199 Cost of properties purchased 133, ,153 Value of properties sold (55,750) (9,100) (64,850) Movement in revaluation reserve 30,366 (1,706) 28,660 Valuation at 31 March , , ,126 (b) Development property Valuation at 1 April ,150 14,150 Additions at cost Revaluation reserve at 31 March Valuation at 31 March ,200 15,200 Total valuation of investment and development property 485, , ,326 Reconciliation to market valuation Market valuation at 31 March , , ,300 Unamortised tenant incentives (1,097) (877) (1,974) Valuation at 31 March , , ,326 The valuation of investment and development property valued by the independent valuer, BNP Paribas Real Estate Advisory and Property Management UK Limited, was million at 31 March

26 Notes to the Financial Statements (continued) 2. Fixed assets (continued) The following investments are included within the valuation of investment properties: (c) Investments in trusts for land Valuation at 31 March March The percentage ownerships below remain unchanged from the previous year end: (i) 50.0% interest in a trust investing in Cardiff Bay Retail Park 24,300 19,100 (ii) 33.3% interest in a trust investing in properties in York 63,250 51,000 87,550 70, Investment in property equities Movement in Percentage revaluation holding at Valuation at reserve for Valuation at 31 March 1 April Addition retained 31 March at cost investments 2010 % AH Medical Properties plc ,047 3,429 6,476 The Trust held a 29.6% (31 March 2009: 29.6%) interest in AH Medical Properties plc, a PLUS listed property investment company. The valuation of the Trust s holding at 31 March 2010 stood at 6.5 million, 34.0 pence per share (31 March 2009: 3.0 million, 16.0 pence per share). 24 Schroder Exempt Property Unit Trust Annual Report and Audited Financial Statements 31 March 2010