ANNUAL REPORT. Royal London Property Fund Annual Report for the year ended 31 December 2017 ASSET MANAGEMENT

Transcription

1 Please note: On pages 7-8 in the Annual Report for the (the Fund ) for the year ended 31 December 2017, there was an error in the return before operating charges figures in the comparative tables that resulted in an overstatement of the closing net asset value per share by 7.35m and 3.16m, in Class A and Class B shares, respectively. Consequently, the return after charges figures were overstated by 1.08% and 1.06%, respectively. The opening comparative figures for December 2017 have therefore been re-stated in the Fund s Interim Report for the half-year ended 30 June The financial statements for Fund were not affected by this error nor were the financial statements and comparative tables for the feeder fund, the Royal London Property Trust.

2 ANNUAL REPORT Annual Report for the year ended 31 December 2017 ASSET MANAGEMENT

3 FUND INFORMATION Contents Page Fund Information 2 Directors Report* 3 Manager s Investment Report* 4 Portfolio Statement* 5 Summary of Material Portfolio Changes 6 Comparative Tables 7 Statement of Authorised Corporate Directors Responsibilities* 9 Statement of the Depositary s Responsibilities 10 Report of the Depositary 10 Independent Auditors Report 11 Statement of Total Return 13 Statement of Change in Net Assets Attributable to Shareholders 13 Balance Sheet 14 Statement of Cash Flows 15 Notes to the Financial Statements 16 Distribution Tables 26 Fact File 27 Remuneration Policy (unaudited) 28 General Information 29 * The Manager s report comprises of these items. Fund Registered in England with Company Number IC Registered office: 55 Gracechurch Street, London, EC3V 0RL Authorised Corporate Director (the ACD ) The ACD is Royal London Unit Trust Managers Limited which is the sole director. Place of business and Registered office: 55 Gracechurch Street, London, EC3V 0RL Authorised and regulated by the Financial Conduct Authority; a member of The Investment Association (IA). T: F: Directors of the ACD Directors: A.S. Carter R.A.D. Williams P.A.C. Hillier (resigned 28 July 2017) A. Hunt (appointed 4 July 2017) R.S. James (resigned 31 December 2017) R. Kumar (appointed 20 June 2017) J.B. Platt (resigned 28 July 2017) S. Spiller (appointed 17 July 2017) C.R. Read (appointed 11 January 2018) Investment Adviser Royal London Asset Management Limited Place of business and Registered office: 55 Gracechurch Street, London, EC3V 0RL Authorised and regulated by the Financial Conduct Authority. Depositary National Westminster Bank plc 280 Bishopsgate, London, EC2M 4RB Authorised and regulated by the Financial Conduct Authority. Registrar DST Financial Services Europe Ltd The Register may be inspected at: DST House, St Nicholas Lane, Basildon, Essex, SS15 5PD Authorised and regulated by the Financial Conduct Authority. Standing Independent Valuers Cushman & Wakefield LLP 43/45 Portman Square, London, W1A 3BG Property Manager Jones Lang LaSalle Limited 30 Warwick Street, London, W1B 5NH Jones Lang LaSalle Limited took over management of the Royal London Property Fund from Capita with effect from 1 May Independent Auditors PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors 7 More London Riverside, London, SE1 2RT 2

4 DIRECTORS REPORT We are pleased to present the Annual Report for the ( the Fund ), covering the year from 1 January 2017 to 31 December is an open-ended investment company with variable capital (ICVC) and is authorised by the Financial Conduct Authority. It is a standalone, non-undertaking for Collective Investments in Transferrable Securities (non-ucits) retail scheme and qualifies as an Alternative Investment Fund within the meaning of AIFMD. The shareholders are not liable for the debts of the Fund. This report has been prepared in accordance with the requirements of the Collective Investment Schemes Sourcebook as issued and amended by the Financial Conduct Authority. For and behalf of Royal London Unit Trust Managers Limited Authorised Corporate Director A.S. Carter (Director) R.A.D. Williams (Director) 23 April

5 MANAGER S INVESTMENT REPORT Fund performance for 12 months to 31st December month total return % 6.68 AREF/IPD UK Quarterly Property Fund Index Other balanced property fund index Source: MSCI, as at 31 December Returns are net of management fees. It should be remembered that past performance is not a reliable indicator of future performance and that the value of shares, and the income derived from them, can vary. Portfolio commentary The property portfolio is currently valued at m, held in 37 properties with 150 tenants, a portfolio income yield of 4.30% and a reversionary portfolio yield of 4.74%. During the year, the Fund made three disposals, an Industrial Estate in Glasgow, for 4.70m, an Industrial Estate in Cirencester for 8.40m and a retail asset in York for 6.75m. The Fund made one purchase over the year, Lodge Farm Trade Park in Northampton, acquired in September for 10.42m. For the twelve months to 30 December 2017 the Fund had a return of 6.68% as measured by AREF/IPD UK Quarterly Property Fund Index. The Other Balanced Fund Index, comprising 20 Funds, showed a return of 10.58% in the same period. Consensus view is that Central London offices will see further rental falls and on average will underperform. Importantly, this is a market consensus view of the subsector and may not be indicative of individual assets. Part of this is cyclical, with some rents already high compared to historical averages. This position is in large part due to Brexit uncertainty, which has weighed on occupier demand and has delayed corporate decision making. Nevertheless, one area of the market benefitting from this has been flexible or shared workspace providers, who have grown very rapidly and increased their footprint on the landscape. To summarise, last year exceeded expectations. With a shortage of good product and other asset classes remaining expensive, we could see a repeat in 2018, but a number of the risks from twelve months ago have not disappeared and stock selection will remain paramount. Market commentary Looking back at 2017, in spite of a number of headwinds, the UK economy was surprisingly resilient. Despite ongoing uncertainty surrounding Brexit, a snap general election and heightened geo-political tensions in parts of the world, the UK economy delivered steady, if unspectacular growth. Twelve months ago we had anticipated that 2017 could be a difficult year for the UK real estate market. At the time, we believed the increasingly uncertain macroeconomic environment could dampen investor sentiment. Despite these concerns, commercial property in the UK delivered a relatively strong year, with total returns of 11.24%, as reported by the IPD Monthly Index. On average, capital values have increased by 5.44% when compared to twelve months ago. One of the main drivers of this capital appreciation, and a key component has been the continued wave of overseas investment into UK real estate. While total investment turnover at 56bn for the year did not match the level seen in 2015, it was up slightly on The proportion of investment involving overseas capital continues to grow and is a particularly dominant trend in the UK market. As an asset class, real estate remains very popular. As the hunt for yield persists and investors seek income, many global institutions have increased their allocation to the sector. We expect these trends to continue in the near term. The major cities of the UK remain attractively priced in a global context, and also when compared to domestic bond yields. Stephen Elliott Fund Manager 26 January 2018 Royal London Asset Management The views expressed are the author s own and do not constitute investment advice and are not an indicator of future Fund performance. Source: RLAM, unless otherwise stated. Following the end of the reporting period, the fund manager of the RL Property Fund, Stephen Elliott, who has managed the Fund since 2007, has left RLAM on 30 March 2018 to pursue other opportunities. Gareth Dickinson, RLAM s Head of Property, will take over the RL Property Fund on an interim basis, working closely with Andrew Johnston who has been Deputy Fund Manager for many years. Another feature of 2017 was the outperformance of the industrial sector, which surged ahead in both capital and rental terms. Supply and demand dynamics still look favourable and should support further growth. While momentum could cool and returns could therefore decline, we expect the sector to outperform the market average again this year. 4

6 PORTFOLIO STATEMENT AS AT 31 DECEMBER 2017 Investments Direct Properties Direct Properties Market Values up to 10m Aberdeen Badentoy Avenue Aylesford Bellington Way Bracknell 1 The Braccens Brighton 16/19 East Street Cambridge 24/26 Hills Street Cheltenham 20/22 The Promenade Cirencester The Corinium Centre Colchester Axial Way Eastleigh St Georges Industrial Estate Edinburgh 37 George Street Edinburgh 67/69 George Street Edinburgh Rose Street Ellesmere Port Junction 8 Business Park Glasgow Kingston Bridge Guildford 59 High Street Halifax The Pennine Shopping Centre Hove 154 Old Shoreham Road Leeds 83 Briggate Manchester Fabrica, Great Ancoats Retail Park Phase 2 Manchester Geat Ancoats Block B Newbury Newbury Trade Park Northampton Swan Street Reading 37 Broad Street South Shields Waterloo Square Tamworth Unit 2 Alpha Park Winchester 18/20 High Street York Swinegate East, Swinegate Court Sector Industrial Industrial Offices Retail Offices Retail Industrial Alternatives Industrial Retail Retail Alternatives Industrial Industrial Retail Development Retail Warehouse Retail Development Offices Industrial Alternatives Retail Retail Warehouse Industrial Retail Retail Market value () 31 December December 2016 Total net assets Market value (%) () Total net assets (%) Total Direct Properties Market Values up to 10m 148, , Direct Properties Market Values between 10m and 20m Ascot Kings Ride Park Industrial Chessington Compass Business Park Industrial Leamington Spa Regent Square House Retail Leeds Spring Ram Retail Park Retail Warehouse Loughborough Southfield Road Alternatives Manchester Fabrica, Great Ancoats Retail Park Alternatives Northampton Lodge Farm Trade Park Industrial Total Direct Properties Market Values between 10m and 20m 82, , Direct Properties Market Values over 20m London EC3M 41 Eastcheap London W Rathbone Place London W Lexington Street Maidenhead Luminaire, Concord Road Milton Keynes Cairngorm Retail Park Raynes Park Coombe Lane Offices Offices Offices Offices Retail Warehouse Retail Total Direct Properties Market Values over 20m 140, , Portfolio of investments 370, , Fair value adjustments (4,057) (1.02) Net other assets (including cash) 29, , Net Assets 395, ,

7 SUMMARY OF MATERIAL PORTFOLIO CHANGES FOR THE YEAR ENDED 31 DECEMBER 2017 Significant Purchases Significant Sales Price Northampton Lodge Farm Trade Park 10,450 Subtotal 10,450 Total purchases for the year 10,450 Proceeds Cirencester The Corinium Centre 8,400 York Swinegate East, Swinegate Court 6,750 Glasgow Kingston Bridge 4,700 Subtotal 19,850 Total proceeds from sales for the year 19,850 Portfolio Capital Expenditure Cost London W Rathbone Place 422 Northampton Lodge Farm Trade Park 655 London EC3M 41 Eastcheap 114 Cirencester The Corinium Centre 82 Glasgow Kingston Bridge 74 York Swinegate East, Swinegate Court 65 Leamington Spa Regent Square House 22 Halifax The Pennine Shopping Centre 1 Subtotal 1,435 Total capital expenditure for the year 1,435 The purchases, sales and capital expenditure detail the material changes in the portfolio during the period. 6

8 COMPARATIVE TABLES Class A Accumulation Change in net assets per share 31/12/17 (p) 31/12/16 (p) 31/12/15 (p) Opening net asset value per share Return before operating charges* Operating charges (10.14) (9.58) (9.66) Return after operating charges* Distributions on accumulation shares (18.66) (16.56) (14.19) Retained distribution on accumulation shares Closing net asset value per share * after direct transaction costs of: Performance Return after charges 7.07% 4.30% 7.67% Other information Closing net asset value () 346, , ,841 Closing number of shares 47,758,317 48,749,685 48,526,193 Operating charges excluding property expenses 0.83% 0.76% 0.70% Property expenses 0.64% 0.66% 0.86% Operating charges 1.47% 1.42% 1.56% Direct transaction costs 0.23% 0.02% 0.40% Prices Highest share price Lowest share price Due to a change in the presentational update issued by The IA on the comparative table, distributions are now reported gross regardless of gross or net payment. It should be remembered that past performance is not a reliable indicator of future performance and that the value of shares, and the income derived from them, can vary. 7

9 COMPARATIVE TABLES (CONTINUED) Class B Income Change in net assets per share 31/12/17 (p) 31/12/16 (p) 31/12/15 (p) Opening net asset value per share Return before operating charges* Operating charges (4.36) (4.23) (4.36) Return after operating charges* Distributions on income shares (8.13) (7.39) (6.48) Closing net asset value per share * after direct transaction costs of: Performance Return after charges 4.25% 4.56% 7.68% Other information Closing net asset value () 53,929 53,236 65,654 Closing number of shares 17,317,820 17,822,130 22,447,469 Operating charges excluding property expenses 0.83% 0.76% 0.70% Property expenses 0.64% 0.66% 0.86% Operating charges 1.47% 1.42% 1.56% Direct transaction costs 0.23% 0.02% 0.40% Prices Highest share price Lowest share price Due to a change in the presentational update issued by The IA on the comparative table, distributions are now reported gross regardless of gross or net payment. It should be remembered that past performance is not a reliable indicator of future performance and that the value of shares, and the income derived from them, can vary. 8

10 STATEMENT OF AUTHORISED CORPORATE DIRECTORS RESPONSIBILITIES The Open-Ended Investment Companies Regulations 2001 (SI 2001/1228) ( the OEIC Regulations ) and the Financial Conduct Authority s Collective Investment Schemes Sourcebook (COLL) require the Authorised Corporate Director to prepare financial statements for each accounting period which give a true and fair view of the financial position of the Fund for the year. The financial statements are prepared on the basis that the Fund will continue in operation unless it is inappropriate to assume this. In preparing the financial statements the Authorised Corporate Director is required to: select suitable accounting policies and apply them consistently; make judgements and estimates that are reasonable and prudent; comply with the disclosure requirements of the Statement of Recommended Practice for Authorised Funds issued by the Investment Management Association (now referred to as The Investment Association) in May 2014 (the 2014 SORP); comply with the disclosure requirements of the prospectus; follow generally accepted accounting principles and applicable accounting standards; keep proper accounting records which enable it to demonstrate that the financial statements as prepared comply with the above requirements; and take reasonable steps for the prevention and detection of fraud and other irregularities. The Authorised Corporate Director is responsible for the management of the Fund in accordance with its Prospectus and the FCA s rules. 9

11 STATEMENT OF DEPOSITARY S RESPONSIBILITIES IN RELATION TO THE FINANCIAL STATEMENTS OF THE FUND The Depositary must ensure that the Fund is managed in accordance with the Financial Conduct Authority s Collective Investment Schemes Sourcebook, the Investment Fund Sourcebook, the Open Ended Investment Companies Regulations 2001 (SI 2001/1228) (the OEIC Regulations), as amended, the Financial Services and Markets Act 2000, as amended, (together the Regulations ), the Fund s Instrument of Incorporation and Prospectus (together the Scheme documents ) as detailed below. The Depositary must in the context of its role act honestly, fairly, professionally, independently and in the interests of the Fund and its investors. The Depositary is responsible for the safekeeping of all custodial assets and maintaining a record of all other assets of the Fund in accordance with the Regulations. The Depositary must ensure that: the Fund s cash flows are properly monitored and that cash of the Fund is booked into the cash accounts in accordance with the Regulations; the sale, issue, redemption and cancellation of shares are carried out in accordance with the Regulations; the values of shares of the Fund are calculated in accordance with the Regulations; any consideration relating to transactions in the Fund s assets is remitted to the Fund within the usual time limits; the Fund s income is applied in accordance with the Regulations; and the instructions of the Alternative Investment Fund Manager ( the AIFM ) are carried out (unless they conflict with the Regulations). The Depositary also has a duty to take reasonable care to ensure that the Fund is managed in accordance with the Scheme documents and the Regulations in relation to the investment and borrowing powers applicable to the Fund. REPORT OF THE DEPOSITARY TO THE SHAREHOLDERS OF THE ROYAL LONDON PROPERTY FUND Having carried out such procedures as we consider necessary to discharge our responsibilities as Depositary of the Fund, it is our opinion, based on the information available to us and the explanations provided, that in all material respects the Fund, acting through the Authorised Corporate Director: (i) has carried out the issue, sale, redemption and cancellation, and the calculation of the price of the Fund s shares and the application of the Fund s revenue in accordance with the COLL Sourcebook and, where applicable, the OEIC regulations and the Instrument of Incorporation and Prospectus of the Fund; and (ii) has observed the investment and borrowing powers and restrictions applicable to the Fund. National Westminster Bank plc 23 April

12 INDEPENDENT AUDITORS REPORT TO THE SHAREHOLDERS OF THE ROYAL LONDON PROPERTY FUND Report on the audit of the financial statements Opinion In our opinion, the s financial statements: give a true and fair view of the financial position of the Company and its sub-fund as at 31 December 2017 and of the net revenue and the net capital gains on the scheme property of the Company and its sub-fund for the year then ended; and have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland, and applicable law), the Statement of Recommended Practice for UK Authorised Funds, the Collective Investment Schemes sourcebook and the Instrument of Incorporation. The (the company ) is an Open Ended Investment Company ( OEIC ) with a single sub-fund. The financial statements of the company comprise the financial statements of its sub-fund. We have audited the financial statements, included within the Annual Report (the Annual Report ), which comprise: the balance sheet as at 31st December 2017; the statement of total return, the statement of change in net assets attributable to shareholders and statement of cash flows for the year then ended; the distribution table s; the accounting policies; and the notes to the financial statements, which include a description of the significant accounting policies. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) ( ISAs (UK) ) and applicable law. Our responsibilities under ISAs (UK) are further described in the Auditors responsibilities for the audit of the financial statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We remained independent of the company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, which includes the FRC s Ethical Standard, and we have fulfilled our other ethical responsibilities in accordance with these requirements. Conclusions relating to going concern We have nothing to report in respect of the following matters in relation to which ISAs (UK) require us to report to you when: the Authorised Corporate Director s use of the going concern basis of accounting in the preparation of the financial statements is not appropriate; or the Authorised Corporate Director has not disclosed in the financial statements any identified material uncertainties that may cast significant doubt about the company s or its sub-fund s ability to continue to adopt the going concern basis of accounting for a period of at least twelve months from the date when the financial statements are authorised for issue. However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the company s or the sub-fund s ability to continue as a going concern. Reporting on other information The other information comprises all of the information in the Annual Report other than the financial statements and our auditors report thereon. The Authorised Corporate Director is responsible for the other information. Our opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except to the extent otherwise explicitly stated in this report, any form of assurance thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If we identify an apparent material inconsistency or material misstatement, we are required to perform procedures to conclude whether there is a material misstatement of the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report based on these responsibilities. Director s Report In our opinion, the information given in the Director s Report for the financial year for which the financial statements are prepared is consistent with the financial statements. 11

13 INDEPENDENT AUDITORS REPORT TO THE SHAREHOLDERS OF THE ROYAL LONDON PROPERTY FUND (CONTINUED) Responsibilities for the financial statements and the audit Responsibilities of the Authorised Corporate Director for the financial statements As explained more fully in the Statement of Authorised Corporate Director s Responsibilities in Relation to the Financial Statements of the Fund set out on page 9, the Authorised Corporate Director is responsible for the preparation of the financial statements in accordance with the applicable framework and for being satisfied that they give a true and fair view. The Authorised Corporate Director is also responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the Authorised Corporate Director is responsible for assessing the company s and its sub-fund s ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the Authorised Corporate Director either intends to wind up or terminate the company or its sub-fund, or has no realistic alternative but to do so. Auditors responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council s website at: responsibilities. This description forms part of our auditors report. Use of this report This report, including the opinions, has been prepared for and only for the Company s shareholders as a body in accordance with paragraph of the Collective Investment Schemes sourcebook as required by paragraph 67(2) of the Open-Ended Investment Companies Regulations 2001 and for no other purpose. We do not, in giving these opinions, 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. Other required reporting Opinion on matter required by the Collective Investment Schemes sourcebook In our opinion, we have obtained all the information and explanations we consider necessary for the purposes of the audit. Collective Investment Schemes sourcebook exception reporting Under the Collective Investment Schemes sourcebook we are also required to report to you if, in our opinion: proper accounting records have not been kept; or the financial statements are not in agreement with the accounting records. We have no exceptions to report arising from this responsibility. PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors London 23 April

14 FINANCIAL STATEMENTS Statement of Total Return for the year ended 31 December 2017 Note 31 December December 2016 Income Net capital gains 8 12,847 6,294 Revenue 9 18,355 17,167 Expenses 10 (5,682) (5,424) Net revenue before taxation 12,673 11,743 Taxation 11 Net revenue after taxation 12,673 11,743 Finance lease amortisation 16 (783) Total return before distributions 24,737 18,037 Distributions 12 (12,673) (11,743) Change in net assets attributable to shareholders from investment activities 12,064 6,294 Statement of Change In Net Assets Attributable To Shareholders for the year ended 31 December December December 2016 Opening net assets attributable to shareholders 383, ,495 Amounts receivable on issue of shares 1,478 2,473 Amounts payable on cancellation of shares (9,862) (14,191) (8,384) (11,718) Change in net assets attributable to shareholders from investment activities 12,064 6,294 Retained distribution on accumulation shares 9,109 8,062 Closing net assets attributable to shareholders 395, ,133 13

15 FINANCIAL STATEMENTS (CONTINUED) Balance Sheet as at 31 December 2017 Note 31 December December 2016 ASSETS Fixed assets: Investments , ,500 Current assets: Debtors 13 6,754 7,503 Cash and cash equivalents 14 29,771 19,402 Total current assets 36,525 26,905 Total assets 402, ,405 LIABILITIES Creditors: Other creditors 15 5,147 4,038 Finance lease payable Distribution payable 1,091 1,234 Total liabilities 7,021 5,272 Net assets attributable to shareholders 395, ,133 The notes on pages 16 to 25 are an integral part of these financial statements. 14

16 FINANCIAL STATEMENTS (CONTINUED) Statement of Cash Flows for the year ended 31 December 2017 Note 31 December December 2016 Net cash inflow from operating activities 17 13,739 7,408 Servicing of finance Distributions to shareholders (3,707) (3,537) Interest received 9 97 Net cash outflow from service of finance (3,698) (3,440) Taxation Financial investment Payments to acquire investments (11,689) (10,720) Receipts from sale of investments 22 19,618 8,590 Net cash inflow/(outflow) from financial investment 7,929 (2,130) Net cash inflow before financing 17,970 1,838 Financing Amounts received from creation of shares 1,478 2,473 Amounts paid on cancellation of shares (9,862) (14,191) Finance lease payments Net cash outflow from financing (7,601) (11,718) Net increase/(decrease) in cash during the year 10,369 (9,880) Cash and cash equivalents balance brought forward 19,402 29,282 Cash and cash equivalents balance at the end of the year 29,771 19,402 15

17 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER General information About the Fund (the Fund ) is an open-ended investment company with variable capital (ICVC) and is authorised by the Financial Conduct Authority and was authorised by the FCA with effect from 28 May The FCA s product reference number (PRN) for the Fund is Statement of compliance The individual financial statements of the Fund have been prepared in compliance with the Financial Conduct Authority s Collective Investment Schemes Sourcebook and in accordance with the United Kingdom Accounting Standards, including Financial Reporting Standard 102, The Financial Reporting Standard applicable in the United Kingdom and the Republic of Ireland ( FRS 102 ), the Statement of Recommended Practice (SORP) for Financial Statements of Authorised Funds issued by the Investment Association in May 2014 (the 2014 SORP ) and the Prospectus. 3. Summary of significant accounting policies The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. The company has adopted FRS 102 in these financial statements. Basis of preparation These financial statements are prepared on a going concern basis, under the historical cost convention, as modified by the revaluation of land and buildings and certain financial assets and liabilities measured at fair value through profit or loss. The preparation of financial statements in conformity with FRS 102 requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the company s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in note 4. Going concern The Fund meets its working capital requirements through its positive cash inflows including rental income and new subscriptions. The Fund s forecasts and projections, taking account of reasonably possible changes in investment performance, show that the Fund should be able to operate within the level of its current working capital and credit facilities. After making enquiries, the directors of the ACD have a reasonable expectation that the Fund has adequate resources to continue in operational existence for the foreseeable future. The Fund therefore continues to adopt the going concern basis in preparing its financial statements. Exemptions for qualifying entities under FRS 102 FRS 102 allows a qualifying entity certain disclosure exemptions. The Fund has not taken advantage of any available exemption for qualifying entities. Recognition of revenue Revenue is measured at the fair value of the consideration received or receivable and represents the amount receivable for goods supplied or services rendered, net of returns, discounts and rebates allowed by the Fund and value added taxes. The Fund recognises revenue when (a) the significant risks and rewards of ownership have been transferred to the buyer; (b) the company retains no continuing involvement or control over the goods; (c) the amount of revenue can be measured reliably; (d) it is probable that future economic benefits will flow to the entity and (e) when the specific criteria relating to the each of company s sales channels have been met, as described below. Rental income Rental income is recognised in the statement of total return on an accrual basis. Revenue from unsettled rent reviews is not accrued until the negotiations are finalised due to the unpredictable nature of the outcome of negotiations. Benefits to leases in the form of rent free periods are treated as a reduction in the overall return on the lease. Lease incentives are now spread over the full lease term. Interest income Interest income is recognised as they are received. Dividend income Dividend income is recognised when the right to receive payment is established. Expenses recognition Expenses are recognised on an accrual basis. All expenses other than those relating to purchase, sale, capital expense and SDRT from purchase or sale of shares are included in expenses on the statement of total return. Taxation Income tax has been provided for at an appropriate rate for distribution to shareholders and the calculation of the share price is net of tax. Investment properties Investment properties are those properties, owned by the Fund, that are held either to earn rental income or for capital appreciation or both. Acquisitions and disposals of investment properties are recognised where, by the end of the accounting period, there is a legally binding, unconditional and irrevocable contract. Additions to investment properties consist of costs of a capital nature. After initial recognition, investment property is carried at open market value, after deduction of lease incentive, rent free debtor and finance lease adjustments. 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 the statement of total return as a valuation gain or loss within the net capital gains figure. Leased assets At inception the company assesses agreements that transfer the right to use assets. The assessment considers whether the arrangement is, or contains, a lease based on the substance of the arrangement. Finance leased assets Leases of assets that transfer substantially all the risks and rewards incidental to ownership are classified as finance leases. Finance leases are capitalised at commencement of the lease as assets at the fair value of the leased asset or, if lower, the present value of the minimum lease payments calculated using the interest rate implicit in the lease. Where the implicit rate cannot be determined the company s incremental borrowing rate is used. Incremental direct costs incurred in negotiating and arranging the lease, are included in the cost of the asset. Assets are depreciated over the shorter of the lease term and the estimated useful life of the asset. Assets are assessed for impairment at each reporting date. The capital element of lease obligations is recorded as a liability on inception of the arrangement. Lease payments are apportioned between capital repayment and finance charge, using the effective interest rate method, to produce a constant rate of charge on the balance of the capital repayments outstanding. Operating leased assets Leases that do not transfer all the risks and rewards of ownership are classified as operating leases. Payments under operating leases are charged to the profit and loss account on a straight-line basis over the period of the lease. 16

18 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 31 DECEMBER Summary of significant accounting policies continued Lease incentives Incentives received to enter into a finance lease reduce the fair value of the asset and are included in the calculation of present value of minimum lease payments. Incentives received to enter into an operating lease are credited to the profit and loss account, to reduce the lease expense, on a straight-line basis over the period of the lease. Investments Investment in collective investment schemes (CIS) is held at fair value with changes recognised in statement of total return. Cash and cash equivalents Cash and cash equivalents includes cash in hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities. Financial instruments The company has chosen to adopt the Sections 11 and 12 of FRS 102 in respect of financial instruments. Financial assets Basic financial assets, including trade and other receivables, cash and bank balances and investments in commercial paper, are initially recognised at transaction price, unless the arrangement constitutes a financing transaction, where the transaction is measured at the present value of the future receipts discounted at a market rate of interest. Such assets are subsequently carried at amortised cost using the effective interest method. At the end of each reporting period financial assets measured at amortised cost are assessed for objective evidence of impairment. If an asset is impaired the impairment loss is the difference between the carrying amount and the present value of the estimated cash flows discounted at the asset s original effective interest rate. The impairment loss is recognised in profit or loss. If there is decrease in the impairment loss arising from an event occurring after the impairment was recognised the impairment is reversed. The reversal is such that the current carrying amount does not exceed what the carrying amount would have been had the impairment not previously been recognised. The impairment reversal is recognised in profit or loss. Other financial assets, including investments in equity instruments which are not subsidiaries, associates or joint ventures, are initially measured at fair value, which is normally the transaction price. Such assets are subsequently carried at fair value and the changes in fair value are recognised in profit or loss, except that investments in equity instruments that are not publically traded and whose fair values cannot be measured reliably are measured at cost less impairment. Financial liabilities Basic financial liabilities, including trade and other payables are initially recognised at transaction price, unless the arrangement constitutes a financing transaction, where the credit instrument is measured at the present value of the future receipts discounted at a market rate of interest. Trade payables are obligations to pay for goods or services that have been acquired in the ordinary course of operations from suppliers. Accounts payable are classified as current liabilities if payment is due within one year or less. If not, they are presented as non-current liabilities. Trade payables are recognised initially at transaction price and subsequently measured at amortised cost using the effective interest method. Financial liabilities are derecognised when the liability is extinguished, that is when the contractual obligation is discharged, cancelled or expires. Shares Shares are classified as equity. Incremental costs directly attributable to the issue of new share are shown in equity as a deduction, net of tax, from the proceeds. Shares have no par value and, within each Class subject to their denomination, are entitled to participate equally in the profits arising in respect of, and in the proceeds of, the winding up of the Fund. Shares do not carry preferential or pre-emptive rights to acquire further shares. Distribution to shareholders Dividends and other distributions to the Fund s shareholders are recognised as a liability in the financial statements in the period in which the dividends and other distributions are approved by the Fund s Depositary. These amounts are recognised in the statement of changes in net assets attributable to shareholders. Related party transactions The Fund discloses transactions with related parties which are not wholly owned with the same group. It does not disclose transactions with its parent or with members of the same group that are wholly owned. 4. Critical accounting estimation uncertainty Critical accounting estimates and assumptions The Fund makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are addressed below. Impairment of debtors The Fund makes an estimate of the recoverable value of trade and other debtors. When assessing impairment of trade and other debtors, management considers factors including the current credit rating of the debtor, the ageing profile of debtors and historical experience to make provisions for bad and doubtful debts. See note 13 for the net carrying amount of the debtors and associated impairment provision. Financial assets are derecognised when (a) the contractual rights to the cash flows from the asset expire or are settled, or (b) substantially all the risks and rewards of the ownership of the asset are transferred to another party or (c) control of the asset has been transferred to another party who has the practical ability to unilaterally sell the asset to an unrelated third party without imposing additional restrictions. 17

19 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 31 DECEMBER Distribution policies Basis of distribution Revenue is generated by the Fund s investments during each accounting period. Where revenue exceeds expenses, the net income of the Fund is available to be distributed to shareholders. In order to conduct a controlled distribution flow to shareholders, interim distributions will be made at the ACD s discretion, up to a maximum of the distributable income available for the period. All remaining income is distributed, at share class level, to the shareholders in accordance with the Fund s prospectus. Revenue attributable to accumulation shareholders is retained at the end of the distribution period and represents a reinvestment of revenue. Expenses In determining the net revenue available for distribution, expenses related to the purchase and sale of investments are ultimately charged to the Capital of the Fund. Performance fee In addition to the AMC, the Fund also operates a performance fee. This performance fee will only be paid if the Fund meets certain performance objectives, as set out below. The performance fee is payable monthly in arrears based on the performance of the Fund over the prior twelve months. The performance fee will only be charged based on the formula shown below and depending on the Fund s relative performance within the benchmark index. The Fund s quartile ranking against the IPD PPFI Index for the most recently available year will be taken and applied as follows: If performance as compared to the IPD PPFI Index falls into the fourth (bottom) quartile of the index, then the performance fee will be negative at -0.10% (Any negative performance fee will be deducted from the AMC and will not result in a rebate to you). If performance falls into the third quartile of the index, then no performance fee will be payable. If performance falls into the second quartile of the index, then a performance fee of 0.10% will be payable. If performance falls into the first (top) quartile of the index, then a performance fee of 0.30% will be payable. The performance fee will be calculated, and paid out of scheme property on a monthly basis, at each monthly valuation point and will be paid to the Investment Adviser at the same time as the periodic management charge is also paid to the ACD. The performance fee will be charged irrespective of the performance being positive or negative in absolute terms. Once a performance fee is charged to the Fund it is not repayable by the Fund, should the Fund subsequently underperform. The performance fee (if any) will be paid and be taken into account in the calculation of the price of shares on each monthly Dealing Day (i.e. that for the purchase of shares). The performance fee will be paid to the Investment Adviser monthly in arrears on the sixth business day following the last day of each calendar month. 6. Risk Management policies In accordance with its investment objective, the Fund holds financial instruments such as UK properties. The risks are summarised below and these risks remain unchanged from the prior year. Further details can be found on page 23. Market price risk and valuation of property The exposure to market risk arising from the prevailing general economic conditions and market sentiment, may affect the balance sheet and total return of the Fund. Immovable property and immovable property-related assets are inherently difficult to value due to the individual nature of each property. As a result, valuations are subject to uncertainty and are a matter of an independent valuers opinion. There is no assurance that the estimates resulting from the valuation process will reflect the actual sales price even where a sale occurs shortly after the valuation date. Market risk is minimised through holding a geographically diversified portfolio that invests across various property sectors. The Manager adheres to the investment guidelines and investment and borrowing powers established in the Prospectus, instrument of incorporation and in the rules governing the operation of open ended investment companies. Credit risk and liquidity risk The Fund can be exposed to credit risk arising from the possibility that another party fails to fulfil its obligations and liquidity risk surrounding its capacity to meet its liabilities. Investments in immovable property are relatively illiquid and more difficult to realise than most equities or bonds. If an asset cannot be liquidated in a timely manner then it may be harder to attain a reasonable price. The liquidity risk, derived from the liability to shareholders, is minimised through holding cash which can meet the usual requirements of share redemptions. However, in times of poor liquidity, the ACD may permit deferral of redemptions for up to one month where a validly submitted redemption notice is received and accepted for a redemption exceeding 5% of the Net Asset Value. Currency risk All financial assets and financial liabilities of the Fund are in Sterling, thus the Fund has no exposure to currency risk at the balance sheet date. Interest rate risk The Fund has the ability to borrow up to 10% of the value of the Fund, but it did not take advantage of this. However, the Fund held 29.7m (31/12/16: 19.4m) cash at the end of the year and this is exposed to interest rate risk. 7. Changes to how interest will be distributed from investment funds in the UK Following changes announced in the March 2016 Budget, interest distributions from authorised investment funds may be paid without deducting income tax (currently 20%). The is a Property Authorised Investment Fund. Distributions from the fund comprise three streams of income: Property Income Distributions, Interest Income and Dividend Income. As a result of the changes, prices for the share classes of the have been calculated without an accrual for the deduction of income tax on interest distributions from 1 March The performance of the Fund and payment of the performance fee is measured and determined entirely by reference to the performance of the Fund against the benchmark index in the past year only. In that respect, there is no high water mark and the Investment Adviser is not required to match or exceed the previous best performance of the Fund. 18

20 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 31 DECEMBER Net capital gains The net capital gains during the year comprise: 31 December December 2016 Investment property realised gains 866 1,260 Investment property unrealised gains 11,981 5,034 Net capital gains 12,847 6, Revenue 31 December December 2016 Property rental income 18,346 17,070 Bank interest 9 97 Total revenue 18,355 17, Expenses Payable to the Authorised Corporate Director or associates of the Authorised Corporate Director and their agents: 31 December December 2016 Authorised Corporate Director's fee 3,127 2,672 Payable to the Depositary, associates of the Depositary and their agents: Depositary's fee Other expenses Surveyor's fee Valuation fee Non recoverable expenditure Legal and lettings fees Insurance expense 179 (121) Bad and doubtful debts (209) 496 Audit fee Other 1,168 1,199 2,478 2,676 Total expenses 5,682 5,424 19

21 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 31 DECEMBER Taxation The Fund qualifies as a Property Authorised Investment Fund (PAIF) for tax purposes. Accordingly, the income generated by its property investment business will be exempt from tax. Any dividend income it receives from United Kingdom companies or, in general, from non-united Kingdom companies will also be exempt from tax. The Fund would, however, be subject to corporation tax in the unlikely event that there should be a net balance of other income, which will generally consist of interest but could include other property income, less deductible expenses. Under the PAIF regulations, the Fund makes distributions net of basic rate of income tax for the relevant income streams. a) Analysis of charge for the year 31 December December 2016 Corporation tax Current tax charge b) Factors affecting the current tax charge for the year The tax assessed for the year is lower (31/12/16: lower) than the standard rate of corporation tax in the UK for Open Ended Investment Companies (20%). The differences are explained below: Net revenue before taxation 12,673 11,743 Corporation tax at 20% 2,535 2,349 Effects of: Revenue not subject to taxation (2,535) (2,349) Current tax charge for the year c) Deferred tax There was no provision required for deferred tax at the balance sheet date (31/12/16: same). 12. Distributions Accumulation shares 31 December December 2016 First Interim 1,665 1,984 Second Interim 2,582 2,160 Third Interim 2,967 2,018 Final 1,851 1,965 Income shares 9,065 8,127 First Interim Second Interim Third Interim Final ,429 1,497 Add: Income tax withheld on distributions 2,179 2,119 Net distributions for the year 12,673 11,743 Details of the distribution per share are set out on page