Capital & Counties Properties PLC

Transcription

1 THIS DOCUMENT AND ANY ACCOMPANYING DOCUMENTS ARE IMPORTANT AND REQUIRE YOUR IMMEDIATE ATTENTION. If you are in any doubt as to the action you should take, you are recommended to seek immediately your own personal financial advice from your stockbroker, CSDP, bank manager, solicitor, accountant, fund manager or other appropriate independent financial adviser, who is authorised under the Financial Services and Markets Act 2000 if you are in the UK or, if not, from another appropriately authorised independent financial adviser. The distribution of this document into jurisdictions other than the UK and South Africa may be restricted by law. Persons into whose possession these documents come should inform themselves about and observe any such restrictions. Any failure to comply with these restrictions may constitute a violation of the securities laws of any such jurisdiction. No action has been or will be taken by the Company that would permit possession or distribution of this document or any other offering or publicity material relating to the Ordinary Shares, other than in the UK and South Africa. Unless otherwise stated, defined terms in this document have the meaning given to them in Part X: Definitions. This document, which comprises a prospectus relating to the Ordinary Shares prepared in accordance with the Prospectus Rules of the UKLA made under Section 73A of FSMA and a pre-listing statement relating to the Ordinary Shares prepared in accordance with the JSE Listings Requirements, has been approved by the Financial Services Authority in accordance with Section 85 of FSMA and the JSE, and has been made available to the public in accordance with Rule 3.2 of the Prospectus Rules and the JSE Listings Requirements. Application will be made to the UKLA and to the London Stock Exchange for the Ordinary Shares to be admitted to the Official List and to trading on the main market for listed securities of the London Stock Exchange, respectively. Subject to all conditions being fulfilled, the JSE has approved the listing of the Ordinary Shares on the main board of the JSE. It is expected that dealings will commence in the Ordinary Shares on the London Stock Exchange at 8.00 a.m. on Monday 10 May 2010 on a when issued basis and that UK Admission will occur at 8.00 a.m. on Monday 17 May All dealings between 8.00 a.m. on Monday 10 May 2010 and 8.00 a.m. on Monday 17 May 2010 on the London Stock Exchange will be on a when issued basis and at the risk of the parties concerned. If UK Admission does not occur by 8.00 a.m. on Monday 17 May 2010, these dealings will be of no effect. It is expected that dealings will commence in the Ordinary Shares on the JSE at 9.00 a.m. (South African time) on Monday 10 May All of the Ordinary Shares are to be issued to existing shareholders of Liberty International and no Ordinary Shares have been marketed to, nor are any available for purchase, in whole or in part, by, the public in the UK or elsewhere in connection with the Demerger or the Admission. This document is not an offer or invitation to the public to subscribe for Ordinary Shares but is issued for the purpose of providing information to existing shareholders of Liberty International with regard to the Company. This document has been prepared in connection with the demerger of the Capital & Counties business from Liberty International and, unless the context otherwise requires, assumes that the special resolutions proposed in connection with the Demerger which are set out in the Circular will be passed at the Liberty International Extraordinary General Meeting to be held on Wednesday 7 April 2010 and that the Demerger is effected. A more detailed description of the Demerger is set out in Part VII: Further Details of the Transaction Agreements and the Reductions of Capital. The Company and the Directors, whose names are set out on page 29 of this document, accept responsibility for the information contained in this document. To the best of the knowledge and belief of the Company and the Directors (who have taken all reasonable care to ensure that such is the case), the information contained in this document is in accordance with the facts and does not omit anything likely to affect the import of such information. You should read the whole of this document. Shareholders and any other persons contemplating an investment in the Ordinary Shares should review the risk factors set out on pages 10 to 25 of this document. Capital & Counties Properties PLC (incorporated and registered in England and Wales with registered number ) Introduction of up to 633,956,783 Ordinary Shares of 80 pence each and admission to the Official List and to trading on the London Stock Exchange and the main board of the JSE Ordinary Share Capital upon Admission* Expected issued and fully paid or credited as fully paid Number Amount Ordinary Shares of 80 pence each ,828, ,462, * This is an estimate based on the number of Liberty International Ordinary Shares in issue as at 12 March UK Sponsor South African Sponsor N M Rothschild & Sons Limited N M Rothschild & Sons (South Africa) (Proprietary) Limited Investors should only rely on the information contained in this document. No person has been authorised to give any information or make any representations other than those contained in this document and, if given or made, such information or representation must not be relied upon as having been so authorised by the Company, the Directors, Rothschild or Rothschild SA. The Company will comply with its obligation to publish a supplementary prospectus containing further updated information if so required by law or by any regulatory authority but assumes no further obligation to publish additional information. Apart from the responsibilities and liabilities, if any, that may be imposed on Rothschild (which is authorised and regulated in the UK by the FSA) and Rothschild SA (which is an authorised financial services provider (FSP 8435) and is regulated by the Financial Services Board in South Africa) by FSMA, no representation or warranty, express or implied, is made by Rothschild and Rothschild SA or any person affiliated with Rothschild and Rothschild SA as to the accuracy, completeness or verification of the information set forth in this document, in connection with the Company, the Ordinary Shares or the Demerger, and nothing contained in this document is, or shall be relied upon as, a promise or representation in this respect, whether as to the past or the future. Rothschild and Rothschild SA have not, nor has any person affiliated with Rothschild and Rothschild SA, assumed responsibility for the accuracy, completeness or verification of this document and accordingly they disclaim, to the fullest extent permitted by applicable law, any and all liability whether arising in tort, contract or otherwise which they might otherwise be found to have in respect of this document or any such statement. Rothschild and UBS Limited are acting exclusively for Liberty International and the Company and no one else in connection with the Demerger and Admission and Rothschild SA, which is regulated in terms of the Listings Requirements, is acting exclusively for Liberty International, the Company and the JSE and no one else in connection with the Demerger and Admission and neither Rothschild, Rothschild SA nor UBS Limited will regard any other person (whether or not a recipient of this document) as a client in relation to the Demerger and Admission, nor will they be responsible to anyone other than Liberty International and the Company for providing the protections afforded to their respective clients or for providing advice in connection with the Demerger and Admission, any transaction or arrangement referred to in this document or the contents of this document.

2 The Ordinary Shares have not been and are not required to be registered under the US Securities Act. The Ordinary Shares have not been approved or disapproved by the US Securities and Exchange Commission, any state securities commission in the United States or any US regulatory authority, nor have any of the foregoing authorities passed upon or endorsed the merits of the offering of the Ordinary Shares or the accuracy or adequacy of this document. Any representation to the contrary is a criminal offence in the United States. NOTICE TO NEW HAMPSHIRE RESIDENTS: NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A LICENSE HAS BEEN FILED UNDER CHAPTER 421-B OF THE NEW HAMPSHIRE REVISED STATUTES WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE OF NEW HAMPSHIRE THAT ANY DOCUMENT FILED UNDER RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER ANY SUCH FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A SECURITY OR A TRANSACTION MEANS THAT THE SECRETARY OF STATE HAS PASSED IN ANY WAY UPON THE MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON, SECURITY OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANY PROSPECTIVE PURCHASER, CUSTOMER OR CLIENT ANY REPRESENTATION INCONSISTENT WITH THE PROVISIONS OF THIS PARAGRAPH. The holding of Ordinary Shares by an employee benefit plan subject to the US Employee Retirement Income Security Act of 1974 or a plan subject to Section 4975 of the US Internal Revenue Code of 1986, as amended, or by any entity whose assets are treated as assets of any such plan, could result in severe penalties or other liabilities for the holder, the Company and the Directors. Each holder and subsequent transferee of an Ordinary Share will therefore be deemed to have represented and warranted that it is not such a plan or entity, unless otherwise agreed by the Company. This document does not constitute an offer to sell, or a solicitation of an offer to buy, any Ordinary Shares offered by any person in any jurisdiction in which it is unlawful for such person to make such an offer or solicitation. This document does not contain financial product advice and nothing in this document should be taken to constitute a recommendation or statement of opinion that is intended to influence an Australian investor in making a decision to accept any offer contained in this document. This document does not take into account an Australian investor s objectives, financial situation or needs. Before acting on the information contained in this document, or making a decision to accept any offer contained in this document, an Australian investor should seek professional advice as to whether it is appropriate for them in light of their own circumstances. 2

3 TABLE OF CONTENTS SUMMARY... 4 RISK FACTORS IMPORTANT INFORMATION WHERE TO FIND HELP DIRECTORS, COMPANY SECRETARY, REGISTERED OFFICE AND ADVISERS EXPECTED TIMETABLE OF PRINCIPAL EVENTS PART I INFORMATION ON THE GROUP AND BUSINESS OVERVIEW PART II DIRECTORS, SENIOR MANAGEMENT AND CORPORATE GOVERNANCE PART III OPERATING AND FINANCIAL REVIEW OF THE GROUP PART IV HISTORICAL FINANCIAL INFORMATION PART V PRO FORMA STATEMENT OF NET ASSETS PART VI VALUATION REPORTS AS AT 12 FEBRUARY PART VII FURTHER DETAILS OF THE TRANSACTION AGREEMENTS AND THE REDUCTIONS OF CAPITAL PART VIII TAXATION AND EXCHANGE CONTROL PART IX ADDITIONAL INFORMATION PART X DEFINITIONS Page 3

4 SUMMARY The following summary information should be read as an introduction to the more detailed information appearing elsewhere in this document. Any investment decision relating to the Ordinary Shares should be based on the consideration of the document as a whole and not solely on this summarised information. Where a claim relating to the information contained in this document is brought before a court in a member state of the European Economic Area, the claimant may, under the national legislation of that member state where the claim is brought, be required to bear the costs of translating this document before legal proceedings are initiated. Civil liability attaches to those persons who are responsible for this summary, including any translation of this summary, but only if this summary is misleading, inaccurate or inconsistent when read together with other parts of this document. 1 Introduction On 9 March 2010 Liberty International PLC announced its intention to separate into two businesses, Capital & Counties and Capital Shopping Centres. The separation will be effected by way of a demerger of Liberty International s central London focused property investment and development division, to a new company called Capital & Counties Properties PLC, from the rest of the Liberty International Group comprising predominantly the UK shopping centres business. Liberty International will be renamed Capital Shopping Centres Group PLC. The Demerger is expected to become unconditional on Friday 7 May Capital & Counties Properties PLC will own Liberty International s existing central London interests consisting of Covent Garden London, Earls Court & Olympia (including the Empress State Building) and GCP, along with Liberty International s Chinese fund investments. If the Demerger proceeds, Liberty International PLC s shareholders will receive one share in Capital & Counties Properties PLC for each ordinary share in Liberty International PLC that they own immediately prior to the Demerger and will continue to own their existing Liberty International shares. Capital & Counties Properties PLC and Capital Shopping Centres Group PLC will both have premium listings on the Official List, will be admitted to trading on the London Stock Exchange and will have secondary listings on the JSE. 2 Background to and reasons for the Demerger Capital & Counties and Capital Shopping Centres are distinct businesses with different risk and reward profiles and capital requirements. The Demerger will create distinct entities with separate strategic, capital and economic characteristics and management teams: Capital & Counties Properties PLC, a central London focused, non-reit property company focusing on total return opportunities in London s real estate market; and Capital Shopping Centres Group PLC, a prime regional shopping centre focused UK REIT, aiming to deliver strong long-term returns through income and capital growth. The Demerger will enable existing shareholders of Liberty International to continue to participate in both of the businesses with the same initial economic weighting whilst providing flexibility for investors to select their own weighting to each of Capital & Counties and Capital Shopping Centres over time. Each business will be able to attract the most appropriate shareholder base to provide optimal support to continue its own strategic development. 3 Overview of the Business Upon Demerger, the Company will be one of the largest listed central London focused investment and development property companies, with 81 investment properties held directly or through joint ventures, located predominantly in West London and the West End and with limited exposure to the City and Midtown. Capital & Counties share of these properties was valued at 1.2 billion as at 31 December

5 The Group has a concentration of assets in three landmark estates in the central London real estate market, with the potential for substantial active asset management to drive superior total returns for Shareholders. The Group s assets principally comprise: Covent Garden London, which has property assets of 548 million (as at 31 December 2009); Earls Court & Olympia, an exhibition business with property assets of 340 million (as at 31 December 2009), which is wholly owned by the Group following the recent buyout of its partners shares; a 50 per cent. interest in the Empress State Building, an office building adjacent to Earls Court, which is held in a joint venture with Land Securities Group plc, with a value of 94 million (as at 31 December 2009), for the Group s interest; and a 50 per cent. interest in GCP, a joint venture with GPE focused predominantly on the West End, particularly Regent Street and Piccadilly, with the Group s share of property assets valued at 247 million (as at 31 December 2009). The Group also has investments in two real estate investment funds focused on China valued at 46 million as at 31 December The Company will not initially be a REIT. The Directors believe that the business will have greater operating flexibility as a listed non-reit property company. On a pro forma basis, adjusting for the Demerger, as at 31 December 2009, the Group had borrowings of 726 million in the form of debt facilities secured against specific property assets, cash balances of 263 million, amounting to net debt of 463 million, giving a group loan-to-value ratio of around 37 per cent. 4 trading and prospects Throughout the economic downturn, central London has continued to demonstrate growth in visitor numbers and a stronger level of consumer spending than the rest of the UK. Investment property values are showing signs of stability following the recovery in the period to 31 December 2009 from the trough in values around the middle of Although EC&O EBITDA increased in 2009 by benefiting from tight control of costs, the UK exhibition and conference sectors came under pressure in 2008 and 2009 as businesses cut back their marketing budgets owing to the economic recession. The Group has continued to make progress in the year to date in pursuing the planning consent for the comprehensive redevelopment of Earls Court. The Directors believe that GCP is well positioned to benefit from economic recovery owing to its strategic focus on prime located properties with added value potential. Occupancy levels at Covent Garden London have been maintained since the year end whilst footfall has improved on 2009 levels in 2010 to date. 5 Property valuations As at 31 December 2009, the market value of the Group s properties was 1,239.5 million. As at 12 February 2010, the date of the Valuation Reports, the Properties were valued at 1,241.6 million, representing an increase of 2.1 million since 31 December February 2010 Market Value 31 December 2009 Nominal equivalent yield 12 February December 2009 ( m) Covent Garden % 5.42% Earls Court (1) GCP % 5.96% Total... 1, ,230.5 Other Total... 1, ,239.5 (1) Includes Earls Court & Olympia, valued at million at 12 February 2010, and the Group s 50 per cent. interest in the Empress State Partnership, valued at 94.4 million (100 per cent million) as at 12 February

6 6 Selected financial information on the Group The table below sets out the Group s summary financial information for the years ended 31 December 2007, 31 December 2008 and 31 December 2009 and has been extracted, without material adjustment, from the audited financial information in Part IV: Historical Financial Information except that the amounts as at 31 December 2009 for the balance sheet, as detailed in Note 2, have been extracted from Part V: Pro Forma Statement of Net Assets, and is based on the historical financial information of the Group m m m Income statement Net rental income Administration expenses... (18.5) (28.0) (18.5) Net interest payable (1)... (19.1) (44.2) (47.6) m m m Balance sheet Investment and development properties... 1, , ,240.5 Borrowings... (658.4) (878.4) (726.4) Cash (2) Net debt... (637.5) (861.9) (463.1) (2) Net asset value... 1, (3) Adjusted net asset value... 1, (3) Adjusted net asset value per share p 122p 127p (3) Loan to value... 36% 53% 37% (2) Notes (1) Represents interest payable net of interest receivable and does not include changes in the fair value of derivative financial investment and other finance costs. (2) Includes an amount of 244 million of cash to be transferred from Liberty International to the Group prior to completion of the Demerger. (3) Includes the impact of the cash transfer in Note 2 and the impact on the Group of the costs of the Demerger. 7 Directors and Senior Management The Directors and the Senior Management of the Group are set out below: Name Directors Ian Durant Ian Hawksworth Soumen Das Gary Yardley Ian Henderson CBE David Fischel Graeme Gordon Andrew Huntley Andrew Strang Senior Management Donald Grant Bob Tattar Ruth Pavey Nigel Nathan Bill Black Michael Vaughan-Johns Gavin Mitchell Andrew Hicks Beverley Churchill Position Chairman Chief Executive Finance Director Investment Director Deputy Chairman and Senior Independent Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director Financial Controller Commercial Controller Company Secretary Group Managing Director, EC&O Venues Property Director, Earls Court Director of Portfolio Management Director of Project Management Property Director, Covent Garden Director of Marketing and Communications 6

7 8 Summary of risk factors Prospective investors should carefully consider the following key risks: Risks relating to the Group: Impact on valuation of the Group s property of declines in the UK commercial real estate market and economic conditions; Impact on rental income of deterioration in the real estate market and general economic conditions; Impact on rental income of deteriorating retail consumer spending during periods of economic uncertainty; Impact on rental income of deteriorating office tenants business performance in periods of economic uncertainty; Concentration of the Group s properties in central London; Events beyond the control of the Group in central London; Events which damage or diminish London s status as a global financial and business centre; Significant and sustained public transport disruption or failure in London; Currency exchange rate movements affecting visitor numbers in London; The valuation of the Group s properties being subjective and uncertain; General risks relating to property investment and development activities; Market risk from interest rate fluctuations; Counterparty credit risk; Effect of fluctuations in the value of the Group s properties on the Group s consolidated balance sheet and income statement; Real estate investment market illiquidity compared to other asset classes; Competition from other property investors and other organisations active in the central London property and exhibition centres market; Failure to undertake developments on commercially favourable terms; Failure to integrate acquisitions successfully; Failure to identify and acquire suitable development and investment property and difficulties in obtaining planning permissions; Material planning, development and listing risks relating to Earls Court; TfL and Network Rail Limited s rights under head leases for the Earls Court site; Decline in exhibition bookings in the EC&O business; General risks relating to joint ventures and other forms of co-ownership; Risks associated with having investments in China; Ability to make scheduled debt payments in the longer term affected by a range of factors; Credit facilities containing various covenants which could require accelerated repayment; Borrowings are secured on Group assets; Inability to access credit markets, or only being able to access them on unfavourable terms; Indebtedness limits financial and operational flexibility; Restrictions or liabilities under laws and regulations; Potential claims relating to leasing, selling and developing real estate; Disputes with tenants and other commercial parties; Insufficient insurance against losses, damage and limitations of use of its properties; Liability for any uninsured loss or injuries to visitors at the Group s premises; Liability for environmental issues; 7

8 Funding costs related to EC&O s defined benefit pension obligations; Potential treatment as a passive foreign investment company for US federal income tax purposes; Non-REIT status could put the Group at a competitive disadvantage when bidding for new assets; Tax and other risks associated with REIT status should the Group become a REIT; and Attraction and retention of key personnel. Risks relating to the Ordinary Shares: No prior trading record; Potential impact on share price from significant trading volumes of shares post-demerger; Future share issues could dilute ownership and reduce share price; No guarantee that dividends will be paid; Exchange rate fluctuations on payment of dividends to non-sterling based Shareholders; Changes to tax treatment of Shareholders if legislation not introduced on payment of dividends from distributable reserves following reduction of share capital; Participation in future share issues may be restricted; and Limited ability of Overseas Shareholders to bring actions or enforce judgments against the Company or the Directors. Risks relating to the Demerger: Failure to meet challenges of operating as a stand-alone business; Failure to realise anticipated benefits; The Demerger may not complete; and Potentially significant indemnification obligations in favour of Capital Shopping Centres. 9 South African Exchange Control The secondary listing of the Company on the JSE will be, for South African exchange control purposes, an inward listing and the listing of the Ordinary Shares on the JSE will be treated as foreign assets in the hands of South African resident Qualifying Shareholders with the following consequences: (i) South African resident investors who are individuals, corporate entities or trusts may continue to hold, sell or buy Ordinary Shares on the SA Register without restriction; and (ii) South African resident institutional shareholders may only hold Ordinary Shares as part of their foreign portfolio allowances. South African resident institutional investors who are Qualifying Shareholders and who receive their Ordinary Shares as a direct consequence of the Demerger, which results in their foreign portfolio allowances being exceeded, will be, in terms of the approval received from the exchange control department of the South African Reserve Bank, granted 24 months to realign their portfolios following their receipt of the Ordinary Shares. 8

9 10 Key Events Timetable Below is the current expected timetable for the principal Demerger events: 2010 Liberty International Extraordinary General Meeting a.m. on Wednesday 7 April 2010 Last day to trade Liberty International Ordinary Shares on the LSE and the JSE under the old name of Liberty International PLC cum entitlement to participate in the Demerger... Friday 7 May 2010 Liberty International Reduction of Capital becomes effective... Friday 7 May 2010 Change of name of Liberty International to Capital Shopping Centres Group PLC...close of business on Friday 7 May 2010 Commencement of dealings in the Ordinary Shares on the LSE on a when issued basis and listing of and commencement of dealings in the Ordinary Shares on the JSE a.m. on Monday 10 May 2010 First day of dealings in Liberty International (now Capital Shopping Centres) Ordinary Shares ex entitlement to participate in the Demerger... Monday 10 May 2010 Record Time for purposes of determining holders of Liberty International Ordinary Shares entitled to participate in the Demerger and the South African record date for the name change p.m. on Friday 14 May 2010 Admission to trading, listing of and commencement of dealings in the Ordinary Shares on the London Stock Exchange a.m. on Monday 17 May 2010 Settlement on the LSE and the JSE a.m. on Monday 17 May 2010 Capital & Counties Reduction of Capital becomes effective... Tuesday 18 May 2010 All times shown in this document are UK times unless otherwise stated. South African time will be one hour ahead of UK time from 28 March

10 RISK FACTORS The following risks should be considered carefully by Shareholders and prospective investors before making any investment decision. This section addresses the existing and future material risks to the Group s business, the Ordinary Shares and the Demerger. The risks below are not the only ones that the Group will face. Some risks are not yet known and some that are not currently deemed material could later turn out to be material. All of these risks could materially affect the Group, its income, operating profits, earnings, net assets, liquidity and capital resources. In such a case, the market price of Ordinary Shares may decline and Shareholders could lose all or part of their investment. Shareholders and prospective investors should read this section in conjunction with this entire document. Risks relating to the Group Declines in the UK commercial real estate market and economic conditions have impacted and could continue to have an adverse impact on the Group s business, financial condition and results of operations. The Group is subject to the risks of ownership, development and management of property in the UK. Economic and market conditions have adversely affected the value of properties since summer 2007 and valuations could fall further if economic conditions deteriorate again. In particular, the decline in the performance of the global and UK economies as a result of the economic downturn has reduced tenant demand, net rental income and occupancy levels in property markets in the UK, including in central London. Restricted availability of credit for consumers and businesses may lead to lower levels of consumer spending, a higher level of business failures and difficulties for new tenants in raising start-up capital which in turn may impact the Group s ability to secure new tenants and retain existing tenants for its properties. All of these factors may have an adverse impact on the valuations of the Properties. Any further decline in the valuation of the Properties would have an adverse impact on the Group s business, reputation, financial condition and/or operating results. Deterioration in the real estate market and general economic conditions could have an impact on the Group s rental income. Returns from an investment in property depend largely upon the amount of rental income generated from the property versus the expenses incurred in the construction or redevelopment and management of the property, as well as changes in its market value. The Group s ability to generate revenues from its portfolio is linked to occupancy levels and the scope for rental increases. These factors are themselves determined by the underlying performance of the tenants that rent space in those properties, which is influenced by a number of general economic factors outside of the Group s control, including, but not limited to: the solvency of businesses, the availability of consumer credit, the level of consumer indebtedness, levels of employment, business and consumer confidence, gross domestic product growth, infrastructure quality, financial performance and productivity of industry, availability of lending, interest rates, trends in house prices, fluctuations in weather, taxation, regulatory changes and oil prices. A negative change in the financial condition of a significant number of the Group s tenants, including actual tenant failure as experienced in 2008 and 2009, could result in a substantial decrease in the Group s rental income, which would have an adverse impact on the Group s business, financial condition and/or operating results. Retail tenants, who provide a significant portion of the Group s rental income, are exposed to deteriorating consumer spending during periods of economic uncertainty. The Group derives a substantial portion of its rental income from retail tenants whose revenues are exposed to declining consumer spending in periods of economic uncertainty. Approximately 33 per cent. of the income from the Group s investment properties in the UK was from the retail sector, as at 31 December Retail sales are affected by, among other things, general economic conditions and the resulting levels of consumer spending, consumer confidence in the face of an economic downturn, seasonal earnings and increasing competition from discount and internet retailers. Changes in each of these factors are beyond the Group s control and could adversely affect retail tenants who may no longer be able to pay rent to the Group and/or who may request 10

11 different rent payment arrangements. This could have an adverse impact on the Group s business, financial condition and/or operating results as well as on the rental income generated by the Group. Rental income generated from the Group s office tenants, who provide a significant portion of the Group s rental income, is exposed to deteriorating tenants business performance in periods of economic uncertainty. Income from office buildings in central London represents a significant proportion, approximately 33 per cent. as at 31 December 2009, of Group income. The Group s ability to generate revenues from its office portfolio is linked to occupancy levels and scope for rental increases. These factors are themselves determined by the underlying performance of the tenants operations, which is influenced by a number of general economic factors outside of the Group s control, including, but not limited to: gross domestic product growth, levels of employment, business confidence, availability of lending, interest rates, taxation, regulatory changes and oil prices. Changes in each of these factors, especially in periods of economic uncertainty, could have an adverse impact on the Group s business, financial condition and/or operating results as well as on the rental income generated by the Group. The concentration of the Group s properties in central London means risk is not diversified across a number of geographical areas. Substantially all of the Group s properties are located in central London. As a result of this concentration, the Group is more exposed to events that threaten visitor security or health and safety or lead to public transport disruption and any other events that might otherwise adversely affect the desirability or popularity of central London as a location or destination than a group whose assets are spread over a broader geographical area, which would thereby enjoy a greater spread in its risk. Any significant decrease in the popularity or status of central London could have an adverse impact on the value of the Group s portfolio. Such concentration may also lead to greater volatility in terms of operations, financial results and funding requirements. External events beyond the control of the Group may have a negative impact on the Group s central London properties. The occurrence of events such as an earthquake, an outbreak of an infectious disease, such as avian flu or H1N1 (Swine Flu), or any other serious public health concern, could result in a reduction of demand for the Group s retail premises, offices and exhibition space. Furthermore, terrorist attacks or war could damage infrastructure or otherwise inhibit or prevent access to central London or harm the demand for and the value of the Group s properties. Further, terrorist attacks could discourage consumers from shopping in public places like central London. In July 2005, central London was the site of terrorist attacks, and it may in the future be a target of actual or threatened terrorist attacks. Such actual or threatened attacks may discourage visitors, particularly international tourists, from shopping in the Group s retail properties, and discourage businesses from choosing central London offices or exhibition space. To the extent that the Group s tenants are impacted by such attacks, their ability to continue to honour obligations under their existing leases could also be adversely affected. A decrease in consumer retail demand, retailer tenancy demand or the demand for offices could make it difficult for the Group to renew leases, or re-lease properties, at lease rates equal to or above historical rates or then prevailing market rates. Any of the foregoing could have an adverse impact on the Group s business, reputation, financial condition and/ or operating results. Events which damage or diminish London s status as a global financial and business centre could affect the Group s ability to let vacant space and reduce the value of the Group s properties. The value of the Group s current and future properties in central London, in particular its office properties, may be adversely affected by events which damage or diminish London s status as a global financial and business centre, such as a reduction in London s attractiveness to skilled persons as a result of regulation, taxation or otherwise, an increase in costs or other adverse changes in the regulatory environment for financial services, actual or threatened acts of terrorism, economic recession or otherwise. If London s status as a global financial and business centre were damaged or diminished, tenant demand for commercial office space in central London could decrease. The resulting increase in vacancies in the market could reduce the ability of the Group to let vacant space and cause property values in central London to decrease, both of which could have an adverse impact on the Group s business, reputation, financial condition and/or operating results. 11

12 Significant and sustained public transport disruption or failure in London could reduce the volume of visitors to central London, which could result in a decline in occupancy levels and tenancy demand for the Group s retail and exhibition properties. Public transport services are essential in bringing into central London the large numbers of visitors on which the Group s EC&O and Covent Garden London businesses depend. The failure of any one of London s transport services, significant and sustained disruption (in excess of normal course delays) to these services and/or any detrimental change to local or national policy in respect of transport may lead to a significant and potentially sustained drop in the volume of visitors to central London, which could adversely affect trading conditions for the Group s Covent Garden London tenants and EC&O business. Any such deterioration in trading conditions could have an adverse impact on the Group s business, financial condition and/or operating results. Currency exchange rate movements could affect the volume of overseas visitors to central London, or the relative attractiveness of London as a leisure destination for UK-based visitors, compared with other overseas cities. Overseas visitors are an important element of the local economy in central London. If sterling strengthens against other currencies, the cost of visiting London for overseas tourists would increase, likely leading to a decrease in visitor numbers and spending. In addition, if sterling strengthens against other currencies, it would also become less expensive for UK-based visitors to visit overseas cities, which could lead to a decline in domestic visitor numbers and spending in central London. Any such decline could have an adverse impact on the Group s business, financial condition and/or operating results. The valuation of the Group s property is inherently subjective and uncertain and is based on assumptions which may prove to be inaccurate. The valuation of the Group s commercial real estate properties is inherently subjective due to, among other factors, the individual nature of each property, its location and the expected future rental revenues from that particular property. The Group s properties have been valued as at 12 February 2010 on the basis of Market Value in accordance with the Valuation Standards (Sixth Edition) published by the RICS, defined as the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm s-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion. In determining Market Value, valuers are required to make certain assumptions. Such assumptions may prove to be inaccurate. Incorrect assumptions or flawed assessments underlying a valuation report could negatively affect the Group s financial condition and potentially inhibit the Group s ability to realise a sale price that reflects the stated valuation. In addition, the valuations of the Group s properties speak only as of their valuation date, and any market volatility after the date of this document may cause further significant declines in the value of the Group s properties since such date. Despite recent signs of stabilisation in the UK property market, there can be no assurance that any valuations will be reflected in the actual transaction prices, even where any such transactions occur shortly after the relevant valuation date, or that the estimated yield and annual rental income will prove to be attainable. Further, if the Group acquires properties based on inaccurate valuations, the Group s net assets and results of operations may be adversely affected. There can be no assurance that the valuations of the Group s current and prospective properties will be reflected in the actual transaction prices, even where any such transactions occur shortly after the relevant valuation date, or that estimated yield and annual rental income will prove to be attainable. In addition, property valuations are dependent on the level of rental income received and anticipated to be received on that property in the future and, as such, continuing declines in rental income could have an adverse impact on revenue and the value of the Group s properties. Furthermore, the recent crisis in the global financial system, including the failure or rescue of major banks and financial institutions, has created a significant degree of uncertainty in markets (including commercial real estate markets) across the world. Despite some evidence of stabilisation, if this period of uncertainty continues and economic conditions deteriorate further, it is possible that real estate prices and values could continue to decrease and/or go through a further period of heightened volatility. Any of the foregoing factors could have an adverse impact on the Group s business, reputation, financial condition and/or operating results. 12

13 The Group faces inherent general risks relating to property investment and development activities. Revenue earned from the properties held by the Group, the value of properties held by the Group and the operating expenses of the Group are subject to a number of inherent general risks, which include, among others: (i) increases in business rates; (ii) increases in payroll expenses and energy costs; (iii) a competitive rental market, which may affect rental levels or occupancy levels at the Group s properties; (iv) the amount of rent and the terms on which lease renewals and new leases are agreed being less favourable than current leases; (v) the periodic need to renovate, repair and re-lease space, and the cost thereof; (vi) the Group s ability to collect rent and service charge payments from tenants on a timely basis or at all; (vii) the Group s ability to manage increases in the cost of services provided by third party providers and/or increases in the cost of maintaining properties including, but not limited to, unforeseen capital expenditure; (viii) tenants seeking the protection of bankruptcy laws which could result in delays in receipt of rental and other contractual payments, inability to collect such payments, the termination of a tenant s lease or the failure of a tenant to vacate a property, all of which could hinder or delay the sale or re-letting of a property; (ix) whether the Group s properties are perceived as attractive, convenient and safe; (x) changes in laws and governmental regulations in relation to real estate, including those governing permitted and planning usage, taxes and government charges (including those relating to health and safety and environmental compliance). Such changes may lead to an increase in management expenses or unforeseen capital expenditure to ensure compliance. Rights related to particular properties may also be restricted by legislative actions, such as revisions to existing laws or the enactment of new laws; and (xi) the Group s ability to obtain adequate maintenance or insurance services on commercial terms and at acceptable premiums or at all. To the extent that these factors generate an increase in operating and other expenses that is not matched by an increase in revenues or are not recoverable from tenants, they could have an adverse impact on the Group s business, reputation, financial condition and/or operating results. The Group is exposed to market risk from interest rate fluctuations. An increase in interest rates or an increase in the margins on which finance can be obtained may increase the Group s financing costs. The Group has a number of different borrowing facilities and arrangements in the UK and overseas and has entered into a range of interest rate derivatives to protect itself against fluctuations in interest rates. As a significant proportion of the Group s indebtedness has been hedged at a fixed rate of interest, the Group will not fully benefit from the current low interest rate environment. However, the market value of these instruments can fluctuate significantly as can the fair value of these instruments and if such values decrease this would be negatively reflected in the Group s income statements. If there is a substantial decrease in the fair value of any of the Group s derivative instruments, this could have an adverse impact on the Group s business, financial condition and/or operating results. Further, to the extent that the Group incurs variable rate indebtedness which is unhedged, increases in interest rates may increase the cost of borrowing, which could have an adverse impact on the Group s business, financial condition and/or operating results. The Group will be exposed to counterparty credit risk. The Group will be exposed to counterparty credit risk in respect of the surplus funds it places on deposit and financial derivatives used to hedge interest rate risk. There is a risk of a loss being sustained by the Group as a result of payment default by the counterparty with whom the Group places funds on deposit or enters into hedging transactions to hedge its interest rate risks. The extent of the Group s loss could be the full amount of the deposit or, in the case of hedging transactions, the cost of replacing those transactions. Under the Group s treasury risk management policy, the Group only deals with counterparties with certain minimum credit ratings and has set its maximum exposure to each of them with regard to credit ratings. There can be no assurance, however, that the Group will successfully manage this risk or that such payment defaults by counterparties will not have an adverse impact on the Group s business, financial condition and/or operating results. 13

14 The Group s consolidated balance sheet and income statement may be significantly affected by fluctuations in the fair market value of the Group s properties as a result of revaluations. In accordance with IAS 40, as adopted in the European Union, the Group s properties are independently revalued on a half-yearly basis, and any increase or decrease in the value of its properties is recorded in the Group s income statement in the period during which the revaluation occurs. As a result, the Group can have significant non-cash revenue gains and losses from period to period depending on the change in fair market value of its properties, whether or not such properties are sold, and could have difficulty maintaining its internal target debt to asset ratio and other financial measures. Any such fluctuations could have an adverse impact on the Group s business, reputation, financial condition and/or operating results. The market for real estate investments is relatively illiquid compared to other asset classes (such as cash, gilts or listed securities) and may result in low disposal prices or an inability to sell certain properties. The Group s existing commercial real estate properties, and those in which the Group may invest in the future, are relatively illiquid compared to certain other asset classes in that there may not be ready buyers with financing or who are willing to pay fair value at the time the Group desires to sell. In addition, in the case of leasehold properties, consents are often required from landlords and management companies to transfer such properties. Such relative illiquidity may affect the Group s ability to dispose of, or liquidate part of, its portfolio in a timely fashion and at satisfactory prices in response to changes in economic, real estate market or other conditions. In the case of an accelerated sale or a sale required for compliance with financing covenants, or in the event of enforcement of security by a lender under one of the Group s financings, there may be a significant shortfall between the carrying value of the property on the Group s consolidated balance sheet and the price achieved on the disposal of such property, and there can be no assurance that the price obtained from such a sale would cover the book value of the property sold. Periods of reduced liquidity in the capital markets may also mean that it may be very difficult to achieve the sale of property assets at prices reflecting the Group s property valuations. In addition, any lack of relevant transactional evidence may increase the possibility of being unable to achieve successful sales of properties at an acceptable price. Failure to achieve successful sales of properties in the future at acceptable prices could have an adverse impact on the Group s business, financial condition and/or operating results. The Group faces competition from other property investors and other organisations active in the central London property and exhibition centres market. The Group operates in the competitive environment of the central London property and exhibition centres markets. Such competition may lead to an oversupply of space through overdevelopment and refurbishments. Competitors include not only London focused investors with in-depth knowledge of the local markets, but also other property portfolio companies, including funds that invest nationally and internationally, institutional investors, foreign investors and other exhibition centre operators. Competition may also cause difficulty in achieving rents in line with the Group s expectations and may result in increased pressure to offer new and renewing tenants or exhibitors financial and other incentives. The Group competes with a large number of real estate investors, owners and developers, including in some cases its joint venture partners, some of which may be willing to accept lower returns on their investments, may be less leveraged than the Group and have more liquidity with which to take advantage of acquisition opportunities, or may have properties that are better located with a higher quality of facilities than the Group s properties. Such competition may adversely affect the Group s ability to increase the occupancy levels at its properties, to maintain or grow utilisation rates at its exhibition centres, to maintain or grow rental income or to obtain tenants for its development projects, all of which may have an adverse impact on the Group s business, reputation, financial condition and/or operating results. The Group may not be successful in undertaking developments on commercially favourable terms. Development projects may require substantial capital expenditure for land acquisition and construction and it usually takes a considerable amount of time before projects are completed and become income generating. Certain general risks affect development and refurbishment activities, including risks relating to completion, the possibility of construction overruns (both in terms of time and budget), the risk of not obtaining, or delays in obtaining, necessary administrative permits, statutory consents and planning permissions and risks relating to the financing of the development. Inaccurate assessment of a development opportunity or a decrease in occupier demand due to competition from other residential or commercial real estate properties or adverse market or economic conditions, could result in a substantial proportion of the development remaining vacant after completion and exert pressure on the Group to provide incentives to tenants or purchasers. 14