Excellence. Responsibility. Innovation.
Hermes Property Unit Trust
Annual Report and Financial Statements 2015
www.hput.co.uk Contents
Introduction Key Features and Statement of Principles 1 Financial Highlights 2 Chairman’s Report 3
Trust Manager’s Report Strategic Overview 4 Trust Manager’s Report 7 Direct Property Portfolio 14
Governance Responsibilities and Governance 19 Appointments Committee and Trust Management Team 20 Advisors 21
Financial Statements Audited Financial Statements 22 Valuers’ Report to the Trust Manager 31 Independent Auditors’ Report to the Unit Holders 32 Independent Auditors’ Disclaimer Letter 33
Investor information Information about the Trust 34 Notice of Annual General Meeting 35 Distribution Analysis 36 Unit Holder Information 37 Further information 38
Front cover: Plantation Wharf, Battersea, London SW11 Annual Report and Financial Statements 2015 1
Key Features and Statement of Principles INTRODUCTION
The Trust is an unauthorised, tax exempt open-ended property unit trust Statement of Principles and an Alternative Investment Fund (“AIF”) as defined in the UK Alternative Investment Fund Managers Regulations 2013 (SI 2013/1773). It was created Hermes Property Unit Trust operates under the following core principles: in 1967 to enable Unit Holders to participate mutually in a professionally ■■The Trust observes high standards of integrity and fair dealing at all times, in managed scheme investing in real property without prejudicing their tax accordance with the obligations set out in the Trust Deed for the benefit of exempt status whilst also freeing them from the burden of management. Unit Holders. The objective of the Trust is to achieve investment returns consistent with a ■■The Trust maintains an open dialogue with Unit Holders. As part of this diversified and actively managed UK property portfolio. it provides Unit Holders with timely information enabling them to make Key Features informed decisions about the Trust. The Trust is a balanced property unit trust which owns a diversified portfolio of ■■The Trust seeks to enhance the capital and income potential of its assets in real estate investments on behalf of underlying Unit Holders. Its key features a manner consistent with its risk objectives and investment policy. are as follows: ■■Performance objective – To outperform the benchmark by 50 basis points ■■The Trust will manage its assets taking into consideration the relevant per annum on a three year rolling basis. environmental and socioeconomic risks and opportunities which contribute to the potential of an investment to deliver long term investment ■■Investment philosophy – A core/satellite approach to portfolio construction. performance for Unit Holders. This reflects a core portfolio of property investments expected broadly to match property market returns, but with prospects for enhanced ■■The Trust actively engages with its occupiers to develop long term returns through exposure to higher risk/return investments in the satellite relationships in order to maximise portfolio value for its Unit Holders. component. ■■The Trust complies with The Association of Real Estate Funds’ Code of ■■Fees – To ensure alignment between the Trust Manager and returns to Unit Practice and with relevant codes or standards in force that apply to the Trust. Holders, the Trust Manager receives a base fee which is augmented with a ■■ performance fee for outperformance against the Trust’s benchmark. Fees The Trust is committed on a sound commercial basis to embedding payable to the Trust Manager are capped. the principles of responsible property investment in all of its real estate investment and asset management practices. ■■The Appointments Committee is wholly independent of the Trust Manager and is responsible for the appointment, removal and remuneration of both Further information about the Trust including its Strategy and Objectives the Trust Manager, the Trustee and the independent Auditors, each subject and Constraints is available in the General Information Memorandum at to ratification by Unit Holders and the independent valuers. www.hermes-investment.com/hput/en-gb/publications.aspx. Further information on the Appointments Committee and Trust Manager is set ■■ The Trust Manager is the legal operator of the Trust. out on page 20. 2 Hermes Property Unit Trust
Financial Highlights Year to 25 March 2015
Over a 10 year period the Trust is the top performing fund in its benchmark
Unit holders’ funds £1,120 million (2014: £901 million)
Total return to unit holders 19.1% (2014: 13.9%)
Net asset value per unit £5.49 (2014: £4.80)
Distribution per unit 20.8 pence (2014: 23.3 pence)
Performance for the year 1.9% ahead of benchmark*
*Relative performance calculated on a geometric basis.
Unit holder performance – total returns for the period (% p.a.) As at 25 March 2015
20% 19.1 16.9 15%
12.1 10% 10.8 9.5 8.6 5% 6.5 4.0 3.1 3.0 0% One Quarter One Year Three Years Five Years Ten Years
HPUT IPD UK Balanced PUTs Weighted Average Returns
Source: IPD UK Quarterly Property Funds Indices. Annual Report and Financial Statements 2015 3
Chairman’s Report INTRODUCTION
Performance existing investors. The Trust’s debt facility expired In the interim financial statements I reported to on 20 April 2015; alternative funding arrangements you that the Trust had a strong six months; this has will be considered in due course to ensure the Trust continued through the second half of the financial Manager has flexible financing in place at times year. The Trust has delivered a top quartile return when there is no formal waiting list. of 19.1% for the year to 25 March 2015 compared with its benchmark, the IPD UK Other Balanced Appointments Committee Property Fund Index, which delivered a return of Phillip Rose will be retiring from the Appointments 16.9%. Importantly, the Trust continued to deliver Committee at the AGM on 5 July 2015. I would long term sustainable performance for unit holders like to thank Phillip for his valuable contribution over many years; he has also been a member of Simon Melliss – it was the top performing fund in its peer group both the Audit and Asset Plan Committees, and Chairman, Appointments Committee over the five and ten year periods to 25 March 2015 and in the top quartile over the one and three recently was very involved in the restructuring year periods. The distribution for the year ended 25 of the Trust following the introduction of the March 2015 was 20.8 pence per unit compared to Alternative Investment Fund Managers Directive. The Trust continued 23.3 pence per unit for the previous year. This fall is In my interim report I welcomed Sue Clayton and largely driven by asset management activities. Paul Clark as new members of the Committee; to deliver long they will each be members of the Asset Plan Property Portfolio Committee and are proposed for election at our During the year the Trust acquired six properties forthcoming AGM. Sue will also be a member of term sustainable for £66 million and made four disposals, details the Audit Committee. Further details on Sue and of which are included in the Trust Manager report. Paul are set out on page 20. performance for unit The most significant disposal is an asset with development potential where the Trust will be Outlook holders – it was the able to share in the potential profits from the Confidence in the UK economy and the property development without taking on undue risk. market looks set to remain strong in the coming top performing fund year. The Trust is well positioned to continue its The void rate in the portfolio has increased excellent performance through a combination in its peer group over during the year as a result of certain key asset of a greater exposure to London and the South management initiatives which are expected to East than the benchmark, the asset management the five and ten year bring long term benefits to the portfolio and initiatives already underway and the ability to be accretive to future income returns. The Trust undertake acquisitions that will be beneficial to the Manager has set out some examples on page 10 overall portfolio. periods of the intensive asset management activities that have been taking place.
Investors and financing arrangements Since 26 March 2014 £86.3 million of new units have been created allowing the Trust to welcome new unit holders who had been on the waiting Simon Melliss list. The waiting list reflects strong demand from Chairman investors and enables the Trust to purchase new investments whilst protecting the interests of 28 May 2015
Unit holder performance – total returns for the period (% p.a.) Years ending 25 March 2011 to 25 March 2015
20% 19.1 16.9 15% 13.9 12.2 10% 10.3 9.0 7.6 5% 5.4 3.8 0.3 0% 2011 2012 2013 2014 2015
HPUT IPD UK Other Balanced Property Fund Index
Source: IPD UK Quarterly Property Fund Indices.
15%
13.5 13.9 12% 12.2 10.9 10.3 9% 9.0 7.6 6% 5.4 3% 3.8
0.3 0% 2010 2011 2012 2013 2014 4 Hermes Property Unit Trust
Trust Manager’s Report – Strategic Overview
1. Performance 2. Portfolio Activity
The Trust aims to outperform the benchmark The Trust Manager continues to focus on asset by at least 50 basis points but with an management to maximise the long term value emphasis on long term sustainable returns. of assets including change of use, extension and refurbishments and regearing of leases Aim to maximise income from existing tenants. Acquisitions and disposals are carefully planned to maximise opportunities and to minimise risk. Chris Mathew Fund Director
During the year the Trust has delivered total During the year the Trust has been a net returns of 19.1% compared to a benchmark investor, with six new properties acquired. return of 16.9% which has placed the Trust as Significantly, planning consent was obtained the top performing fund in its peer group over for the redevelopment of the office building in a ten year period. This has been driven by an Slough which was then sold with an element income return of 5.0% and capital return of of contingent consideration dependent on 15.0%. The distribution per unit has decreased the future value of the asset enabling the from 23.3 pence per unit for the year ended Trust to partake in some of the development Activity 25 March 2014 to 20.8 pence per unit in this upside whilst maintaining a low level of risk. financial year. The Trust has grown in this period There have been significant levels of asset by £219 million driven by new investment of management activity with a number of tactical £86.3 million and strong capital growth with a voids created especially in the first half of the continued emphasis on maintaining returns for year leading to an increase in the void rate existing investors through prudent acquisitions. albeit temporarily. This has enabled a number of refurbishments to take place and new leases at higher rental values therefore agreed.
Increasing confidence across the market is Pressure on pricing in the investment market expected to continue to be reflected in strong will lead to a continuing emphasis on asset tenant demand and increasing income yields. management activities to create value. As a result, UK real estate will continue to be an attractive asset class for both UK and international investors, with the competitive Outlook environment therefore persisting.
Yields on cash are currently low however the Driving performance through asset Trust’s cash balances together with its waiting management has been the Manager’s focus list enable the Trust Manager to act nimbly for some time now. The portfolio has various when potential investment opportunities opportunities and all assets are acquired with arise. The Manager is cognisant of the need to a view to their asset management potential. protect performance for existing unit holders The Trust’s void rate, whilst higher than last Risks & and this is borne in mind when drawing in new year end, is tactical and expected to decrease Opportunities investment from the waiting list. once refurbishments and relettings have been successfully achieved. One of the key opportunities for the properties in the portfolio remains development and the Trust Manager continues to identify ways of exploiting these opportunities without taking on undue risk. Annual Report and Financial Statements 2015 5
Trust Manager’s Report – Strategic Overview continued
3. Portfolio Attributes 4. RPI
The Manager aims to position the portfolio The Trust Manager integrates responsible to continue to deliver strong long term property investment into its investment and performance for unit holders whilst asset management processes. maintaining a low risk profile. TRUST MANAGER’S REPORT
Activity during the year has been focussed on The Trust Manager has been recognised as a positioning the portfolio for the future. The leading organisation in the management of Manager has crystallised profits from planning the environmental and social performance of permissions without exposing the Trust to its client’s portfolios by the Global Real Estate development risk. Acquisitions and disposals Sustainability Benchmark (GRESB) Foundation. during the period have led to a geographical HPUT received a Green Star 2014 for its exposure of 82.5% in London and the South performance in GRESB, ranking 5th among East compared to 50.7% in the benchmark 20 in its peer group of UK diversified funds. reflecting the expected strong growth in these The Trust Manager has taken a proactive areas compared to the rest of the UK. approach in obtaining Energy Performance Certificates for its properties to be able to manage the risks presented.
The Trust’s portfolio is considered to be well RPI has an ever increasing importance positioned for the future given where the amongst investors and legislation continues concentration of growth and opportunity is to demand more from the landlord. The new expected. A number of asset management legislation on Minimum Energy Performance activities are expected to improve the income Standards (MEPS) means that as of 2018 yield and void rate over the next year as tactical commercial property below a minimum Energy voids decrease through lettings or property Performance Certificate (EPC) level will not disposals. be allowed to be let as is, requiring either a refurbishment or a sale.
The Trust has continued to position itself The Trust has mitigation strategies in place to control risk and take advantage of for all properties categorised as F or G rated opportunities for growth. As a result, the to ensure that the Trust is able to continue Trust has higher geographical weightings leasing them. Mitigation strategies are also to the South East as economic growth and being developed for assets that are E rated. performance is expected to continue to be The Trust Manager is continuing to assess stronger here. The Trust has a well diversified the developing regulations and ensuring portfolio and tenant base with good covenants compliance with these. to secure the future income profile. 6 Hermes Property Unit Trust
Elliot House, Manchester
The off-market acquisition of a freehold office and restaurant building situated directly opposite the Spinningfields business district, reflecting a capital value of £300 per sq.ft. The office space has undergone a full refurbishment and the ground floor restaurant is pre-let and is undergoing a full refurbishment. Annual Report and Financial Statements 2015 7
Trust Manager’s Report
I am pleased to present the Trust Manager’s Report earlier, together with property specific issues on The Trust continued for the 12 months to 25 March 2015. During this particular transactions that meant they did not period, the Trust continued to outperform its proceed, the pace of investment has been lower to outperform its benchmark and recorded a total return to unit than the level anticipated. holders of 19.1%. For the same period the Trust’s benchmark and benchmark, the IPD UK Other Balanced Property ■■Transactional activity. The Trust made six Fund Index, recorded a total return of 16.9% purchases for £66.3 million and four disposals and so the Trust outperformed by 1.9% on a for £20.4 million over the reporting period. A recorded a total TRUST MANAGER’S REPORT geometric basis. number of the investments the Trust Manager has targeted for investment since the Interim return to unit In September’s Interim Report, I noted the strong Report are expected to contract before the end capital growth that had been experienced both of June 2015 and the investment pipeline is holders of 19.1% in the Trust’s assets and also in the wider UK strong in spite of modest activity in the second property market. As anticipated at that time, half of the Trust’s financial year. the momentum in capital gains continued and the Trust’s unit price increased by 6.8% over the ■■Asset Management. During the period of this second half of the Trust’s financial year. The Trust’s report there has been significant activity in the overall value increased to £1.12 billion at 25 March asset management of investments owned by 2015 and a waiting list continued to operate the Trust. This has been directed at adding rental given the challenging conditions in the underlying income and maximising the capital potential of property market for the prudent deployment of assets held within the Trust’s portfolio through capital. The strong and continuing demand for gaining planning permission. The Trust’s void rate real estate investments, combined with a limited has reduced from 6.9% at 29 September 2014 supply of good quality investments and investor to 6.5% at 25 March 2015, and this is expected expectations of further rises in capital and rental to reduce further as agreements for lease values has made it a particularly challenging become unconditional. environment in which to invest to generate good long term returns. The Trust Manager’s pace of ■■Responsible Property Investment. In investment has therefore been more modest than September 2014, the Trust was awarded it had anticipated in the Interim Report as it has a ‘Green Star’ in the Global Real Estate held to its rigorous and prudent approach. Sustainability Benchmark in recognition of the During the financial year, there have been a number Trust’s ongoing emphasis on sustainability. of key activities which are noted below with further The Trust was ranked fifth out of 20 funds in detail on each provided later on in this report. its peer group. ■■Subscriptions. During the period of the Report, HPUT Performance Attribution £86.3 million of new units were created with Over the 12 month period covered in this report we both new and existing unit holders making have considered the principal drivers and detractors of investments into the Trust. A waiting list is in performance within the Trust’s investment portfolio. In operation in order to regulate the pace of new the chart below we illustrate the relative performance investment and to ensure the Trust Manager of each sub-sector – this analysis is relative to the is not a forced buyer. In the Interim Report Trust’s property portfolio return. the Trust Manager anticipated the average At sub-sector level, Rest of UK Offices delivered the pace of subscriptions to be £30 million – £40 strongest contribution towards the Trust’s annual million per quarter, but as a consequence of the performance followed by West End Offices and challenging market conditions that we identified
HPUT Valuation Summary As at 25 March 2015 Directly Held Properties Valuation Net Income Initial Yield ERV Reversionary Yield (£m) (£m) (%) (£m) (%)
Unit Shops 52.1 3.0 5.4 3.5 6.4 Supermarkets 61.7 3.3 5.0 3.3 5.0 Shopping Centres 33.4 1.9 5.5 2.2 6.3 Retail Warehouses 149.3 9.2 5.9 9.1 5.8 Offices 438.6 17.4 3.7 24.5 5.3 Industrials 194.2 11.7 5.7 13.3 6.5 Leisure/Other 106.3 5.5 4.9 5.5 4.9 Sub Total 1,035.6 52.0 4.8 61.4 5.6 Note: Valuations exclude adjustments for tenant incentives of £0.5 million as shown in note 8 on page 27. 8 Hermes Property Unit Trust
Trust Manager’s Report – continued
City of London Offices. At property level, the assets in the first instance, although this position will be The Trust’s total which had a particularly beneficial impact on the reviewed regularly. overall portfolio return include Camden Works and investment Cavendish Square in London which have both seen Sector Weightings notable capital value increases over the 12 month The Trust’s portfolio weightings versus the period following letting activity. benchmark are shown in the chart on page 11. portfolio now When comparing the structure of the Trust against The largest detractors of portfolio performance the benchmark it is worth noting a few key points. includes 86 direct came from the Retail Warehouses and Supermarkets ■■ sub-sectors which is consistent with market The Trust continues to have an overweight holdings with a movements as measured by the IPD UK Monthly position to Central London Offices, representing Index and reflects the difficult market conditions 22.2% of the Trust’s portfolio compared with net asset value of which have affected retailers generally and the large 13.4% for the benchmark. The Trust Manager supermarket chains, particularly. At property level, is comfortable with this position given the £1,035.6 million the assets which have reduced the Trust’s portfolio characteristics of the Trust’s underlying property return the most over the 12 month period include investments, a good proportion of which are Maybird Shopping Centre in Stratford-upon-Avon let at relatively low rental levels, so providing where there are a number of lease renewals in good performance potential in the context negotiation and Sainsbury’s in Beaconsfield where of a rising rental market. Additionally three there is an outstanding rent review which has been of the Trust’s five West End investments have referred to an arbitrator for determination. planning consent for future change of use to more valuable residential use. The Trust’s Central Portfolio Value and Debt London weighting is likely to be beneficial for The Trust’s total investment portfolio now includes the Trust’s performance in the short term, but 86 direct holdings with a net asset value of £1,035.6 the Trust Manager expects to moderate this million which includes two deferred receipts from overweight position in 2015/16. asset sales with a total value of £22.2 million as at 25 March 2015. Over the last 12 months, the total ■■Overall, the Trust continues to have an portfolio value has increased by £196 million from underweight exposure to the retail sub-sectors the £839.6 million as at 25 March 2015. The Trust including Unit Shops, Shopping Centres and held one joint venture which represented 2.7% of the Retail Warehouses. The Trust Manager is cautious total portfolio value as at 25 March 2015. The Trust about the increasing impact of changing trends in Manager continues to have a strategic preference the retail sector and especially the impact of the towards directly held investments. internet on the type and size of modern occupier requirements. The Trust owns two Supermarket On 25 March 2015, the Trust held cash for investments let to Sainsburys (Beaconsfield and investment of £63.6 million, representing 5.7% Cheltenham). Both are located in dense urban of the Trust’s portfolio which is higher than the settings and are let on long leases with passing benchmark level of 4.3%. rents set at market levels. The Trust held no debt as at 25 March 2015 ■■ and no debt was drawn during the course of the Although the Trust’s industrial exposure has financial year. The average level of gearing in the increased during the period (rising from 14.3% Trust’s benchmark was 2.1% at year end. The Trust’s to 17.3%) it continues to be underweight when existing £75.0 million debt facility expired in April compared with the benchmark. The Trust has a 2015, and will not be renewed as the Trust Manager marginally higher weighting towards the South intends to draw subscriptions from the waiting list East industrial sub-sector (15.9% of portfolio value versus 13.9% in the benchmark) which has
Attribution of HPUT sub-sector returns relative to Trust portfolio performance Year to 25 March 2015 (%)
1.2% 1.1 0.9% 1.0 0.9 0.6%
0.3% 0.2 0.0% -0.3 -0.4 -0.2 -0.9 -1.4 -0.3%
-0.6%
-0.9%
-1.2%
-1.5% West End City Rest of UK Industrial Other Shopping Unit Super- Retail Offices Offices Offices Centres Shops markets Warehouses
Source: Hermes Real Estate Investment Management. Attribution data is relative to the Trust’s property return and is not relative to the benchmark. Annual Report and Financial Statements 2015 9
Trust Manager’s Report – continued
good medium-term return prospects. The Trust this recently completed mixed-use building for The Trust continues continues to have a lower exposure to the regional £10.2 million, reflecting an initial yield of 7.0% industrial market where occupiers have been, and (increasing to 7.4% upon the letting of a vacant to acquire assets are expected to continue to be, more challenging. retail unit). The property has a total floor area of The Trust Manager will continue to consider 53,570 sq ft and has serviced apartments, a gym with good asset regional opportunities on a selective basis. and vacant retail unit. The serviced apartments and gym are let on long leases with rent reviews Transactions referenced to inflation. The property is part of a management TRUST MANAGER’S REPORT Over the last 12 months, the Trust has continued wider residential development and benefits from to acquire assets with good asset management being located just a five minute walk away from potential and potential and completed on a number of strategic Maritime Greenwich and a two minute walk sales in order to deliver strong returns for from Greenwich train station. completed on a investors. During the course of the year, purchases amounted to £66.3 million and disposals totalled ■■Summit Centre, Bath Road, Heathrow – in number of strategic £20.4 million, which included the disposal of a September 2014, the Trust acquired this 1980s number of the Trust’s smaller investments. industrial investment for £11.8 million reflecting sales in order to a low capital value per sq ft of £67 and a net Purchases initial yield (with income guarantees on void deliver strong During the last financial year there have been six units) of 8.8%. The estate is located in a good acquisitions which have completed as noted below strategic position on the Bath Road and there is returns for investors (purchase prices are net of fees): good occupier demand as is noted in the asset ■■Centrus Industrial Estate, Hertford – in May management section of this Report. 2014, a freehold multi-let industrial estate was acquired for £8.0 million reflecting an initial ■■Elliot House, Deansgate, Manchester – during yield of 7.0%. This industrial estate includes a October 2014 the Trust completed the off- range of modern industrial units in Hertford’s market purchase of a freehold office and well established central business location. restaurant building situated directly opposite the Spinningfields business district. The purchase ■■Madelayne Court, Chelmsford – the Trust reflected a capital value of £300 per sq ft. The purchased the freehold in this single-let purpose office space has undergone a full refurbishment built care home in May 2014 for £12.3 million and the ground floor restaurant is pre-let and is reflecting an initial yield of 5.7%. The property undergoing a full refurbishment. benefits from good access to local amenities and planning consent for the construction of 223 Disposals dwellings to the rear of the property. There were four disposals during the year which are described below: ■■ LGC Complex, Fordham – in June 2014, the ■■1 Brunel Way, Slough –in February 2015 the Trust purchased a freehold industrial and office Trust Manager contracted to sell a long lease investment for £15.9 million reflecting an initial in this property to a developer and retain the yield of 7.5%. The Estate comprises 35 acres and freehold. The developer is obliged to redevelop is located to the south of Fordham in an area the property in accordance with a planning which has established itself as an industrial and consent. The price achieved was £12.4 million, distribution hub. of which £10.4 million has been deferred until completion of the business plan. The Trust ■■ Block E, Greenwich High Road, London – in July will receive 5% per annum as income on the 2014, the Trust acquired the freehold interest in deferred amount, together with the potential HPUT capital growth by sub-sector (excludes purchases and sales) Year to 25 March 2015
All Property 14.9 Shopping Centres 2.8 Rest of UK Offices 21.7 Retail Warehouses 3.4
Unit Shops 8.9 Industrial 15.2 Supermarkets -0.3 Other 11.8 City Offices 34.1
West End Offices 24.6
-5% 0% 5% 10% 15% 20% 25% 30% 35%
Note: Data excludes assets purchased or sold during the year. Source: Hermes Real Estate Investment Management. 10 Hermes Property Unit Trust
Asset Management Activity
Carlson Court, Putney, London SW15 St Martins Centre, Caversham
Planning permission was granted in March for extension and conversion of the Planning permission was received in March for a mixed-use refurbishment and Trust’s 45,000 sq.ft office building. The consent provides for 53 residential extension of this district shopping centre. This will provide the opportunity for apartments and 22,000 sq.ft of office accommodation. the existing Waitrose supermarket to be extended, and also provides for the development of 40 flats and 11,000 sq ft of leisure space, a decked car park and improvements to the public realm.
Elstree Distribution Park, Borehamwood 2 Cavendish Square, London W1
The agreement for lease at Borehamwood is subject to obtaining vacant In June 2014, the 4th floor was let to Mayfair Capital Investment Management possession of unit 4 where notice has been served and the letting is comprising 3,145 sq ft on a 10-year lease at a rental of £267,325 per annum anticipated to complete in August 2015. (£85.00 per sq ft). In a second transaction, in September 2014, the refurbished 1st floor (4,542 sq ft) was let to Coach Stores Ltd on a new 10-year lease at a rental of £ 367,902 per annum (£81.00 per sq ft). Simultaneously on the Lower Ground Floor (3,870 sq ft), where Coach Stores Ltd is an existing tenant, a new reversionary 7-year lease was agreed at a rental of £180,000 per annum (£46.50 per sq ft). The property is now fully let. Annual Report and Financial Statements 2015 11
Trust Manager’s Report – continued
for an overage depending on the success of Ltd is an existing tenant, a new reversionary Over the past 12 the project. The 62,600 sq ft property was 7-year lease was agreed at a rental of £180,000 acquired by the Trust in September 2012 and per annum (£46.50 per sq ft). The property is months, there have the Trust Manager received planning consent now fully let. for a refurbished and extended building of 104,000 sq ft in February 2014. ■■Camden Works, London – letting of 57a & b been a number of to Triyoga for 15-year term from June 2014, ■■The Trust Manager disposed of three smaller £332,200 per annum (£40.00 per sq ft), 12 TRUST MANAGER’S REPORT good outcomes from investments during the financial year. Lunar months rent free (6 months rent free, 12 months House in Marlow, a small office investment at half rent). asset management was sold for £3.1 million in December. Unit 6, Horsfield Way in Bredbury, a small industrial ■■Summit Centre, Heathrow / Elstree Distribution activity which investment was sold in July for £1.5 million. Park, Borehamwood – in a connected One of the Trust’s public houses, the Green transaction, terms have been agreed to let four helped to drive Dragon in Winchmore Hill was sold in industrial units to Travis Perkins and agreements February for £3.4 million. for lease were executed on 24 December 2014. returns for the Trust The agreement for lease is subject to obtaining Asset Management planning consent at Heathrow for external Over the past 12 months, there have been works, but this will release significant value at a number of good outcomes from asset both properties when the transactions become management activity which have helped to drive unconditional. At Heathrow, 55,252 sq ft of returns. Asset management includes not only vacant industrial space will be let on a 15 year all activities connected with maintaining and lease and this will generate a rent of £540,000 improving the rental income from a property per annum. At Borehamwood, 31,068 sq ft will investment, but also the refurbishment, extension be let on a ten year lease and this will generate and repositioning of assets especially through £264,000 per annum. The Summit Centre was achieving planning consent. The most significant acquired by the Trust in September 2014. of these are set out below: ■■Boundary House, Farringdon – the freehold ■■1 Sekforde Street, London – in June 2014, the interest in this office property was acquired in entire property comprising 24,423 sq ft was February 2014 and subsequently a number of let to FCC Limited on a new 10-year lease at a the office floors have been refurbished to create rental of £892,183 per annum. The letting which a specification of office accommodation that is arranged over basement to 3rd floor equates better fits the requirements of occupiers. At end- to a rental value of £41.50 per sq ft, and will rise December 2014 agreements for lease had been to a minimum of £47.50 per sq ft from the year signed on three floors of offices totalling 11,562 five rent review. FCC Limited are also contracted sq ft and generating an annual rent of £534,860 to undertake a circa £2.6 million refurbishment per annum. The agreements for lease became and improvement works to the building. unconditional in early January 2015, and this has led to the strong performance of this asset over ■■ 2 Cavendish Square, London – in June 2014, the the period. 4th floor was let to Mayfair Capital Investment Management comprising 3,145 sq ft on a 10- ■■Horndon Industrial Park, West Horndon – letting year lease at a rental of £267,325 per annum of 47,000 sq ft industrial unit for a 5 year term (£85.00 per sq ft). In a second transaction, in with a mutual break option at year three to September 2014, the refurbished 1st floor (4,542 provide the Trust with an opportunity for the sq ft) was let to Coach Stores Ltd on a new 10- redevelopment of the wider site. Additionally, year lease at a rental of £ 367,902 per annum land has been let on a five year lease, with a (£81.00 per sq ft). Simultaneously on the Lower mutual break option at year three, at just over Ground Floor (3,870 sq ft), where Coach Stores £40,000 per annum. Sector weighting (%) – gross value basis As at 25 March 2015
25% 23.2
20% 17.3 17.3
15.0 14.5 15% 13.3 11.8 11.5 9.8 10.2 10% 9.3 7.2 5.7 5.5 4.9 5% 4.6 4.3 3.0 3.4 3.6 2.2 2.4 0% Unit Shops Supermarkets Shopping Retail City Offices West End South East Rest of Industrial Leisure/Other Cash Centres Warehouses Offices Offices UK Offices HPUT IPD UK Other Balanced Property Fund Index
Source: IPD UK Quarterly Property Fund Indices. 12 Hermes Property Unit Trust
Trust Manager’s Report – continued
■■St Martins Centre, Caversham – planning values many owners are deferring sales both to Property market permission was received in March for a secure further gains, but also to avoid the need mixed-use refurbishment and extension of to reinvest capital into a market where there are conditions have this district shopping centre. This will provide limited good investment opportunities. Thirdly, the opportunity for the existing Waitrose that market conditions support the sale of weaker proven challenging supermarket to be extended, and also provides investments: many owners have taken advantage for the development of 40 flats and 11,000 of the opportunity to sell investments to reduce sq ft of leisure space, a decked car park and future risks within their portfolios and so the for the prudent improvements to the public realm. quality of the stock available for purchase has generally been of lesser quality. investment of ■■Carlson Court, Putney – approval at Committee during March 2015 for redevelopment proposal The wider economic background and especially the capital for conversion of 45,000 sq ft office building continuing low level of interest rates, together with into 53 residential apartments and 22,000 sq ft tangible rental growth and good occupier demand of commercial space. in the property market, all suggest that the trend in capital growth will continue during 2015. Income and Voids The Trust Manager’s particular focus for the coming At 25 March 2015 the net initial yield on the Trust’s year will be in the following areas. direct portfolio was 4.8% and the reversionary yield was 5.6%, whilst yields in the IPD UK Monthly ■■Net investment – to continue to be a prudent Index stood at 5.3% and 6.3% respectively. The net investor into the property market. void rate in the direct property portfolio was 6.5% of estimated rental value as at 25 March 2015, ■■Pace of investment – to continue with a target significantly lower than the void rate of 9% in the investment of £30 million – £40 million per IPD UK Monthly Index. quarter. At this level of investment the Trust Manager believes it will be able to satisfy the The chart below illustrates the Trust’s lease expiry requirements of both existing and new investors profile and shows that as at 25 March 2015, the seeking to invest into the Trust, without diluting Trust had an average unexpired lease term of 9.0 the performance potential of the Trust’s years (adopting IPD assumptions) compared to the investment portfolio. benchmark which was marginally lower at 7.8 years. The Trust continues to have a marginally higher ■■Distribution per unit – through a combination of exposure to lease expiries in the next five years with asset management and transactional activity the 45.4% of the Trust’s income due to expire, however Trust Manager will seek to increase the rate of a significant proportion of this relates to those distribution per unit. investments where there is a higher alternative value for change of use. Outlook As noted in the introduction, property market conditions have proven challenging for the prudent investment of capital although the Trust Manager’s work during the second half of the financial year has built a good pipeline of investments that meet the Manager’s criteria. There have been three particular challenges: first the intense competition for stock from a wide range of investors seeking to gain further property exposure. Secondly, the relatively low volumes of stock being offered to the market: against a background of rising capital
Income security – lease expiry profile As at 25 March 2015 (%)
0-5 years 45.4
5-10 years 27.9
10-15 years 8.9
15-20 years 1.4
20+ years 16.5
Average 9.0
0% 10% 20% 30% 40% 50% Hermes Property Unit Trust Source: IPD. Annual Report and Financial Statements 2015 13
Trust Manager’s Report – continued
The Trust’s portfolio has been strategically The Trust’s positioned both to control risk and enable opportunities for growth in the following ways. portfolio has ■■Geographical weightings: the Trust has a strategic higher exposure to assets in London and the South been strategically East of England where economic growth and property performance is expected to be stronger positioned to control than the rest of the UK in the medium-term. The TRUST MANAGER’S REPORT Trust currently has 83% of assets by capital value risk and enable located in London and the South East compared with 51% in the Trust’s benchmark. The Manager opportunities for is nevertheless reviewing assets across the UK to growth seek out the best investment opportunities. ■■Income profile: the Trust’s income is secured against a well diversified portfolio of properties which are generally let to good tenant covenants on relatively long lease terms. The Trust has a slightly lower distribution yield at 3.9% than the benchmark average at 4.0%, and a higher average unexpired lease term. The void rate for the Trust was 6.5% as at 25 March 2015, but this is expected to reduce through new lettings in the void units.
■■Core / satellite approach: the Trust has a good balance of risk and return within its portfolio.
■■Gearing and cash: the Trust has no gearing and has cash holdings which are slightly higher than that of the benchmark.
■■Asset specific projects – the Trust’s portfolio has a good balance of investments with the potential for change of use for more valuable alternative uses. Given the pressure to deliver further housing in the UK, this should provide unit holders with the opportunity to secure above average returns over the medium / long term.
Hermes Alternative Investment Management Limited 28 May 2015
Core/Satellite approach to deliver optimum risk/return
March 15 Target Strategy & Medium Term Target Weighting GAV Outperformance
Income returns to Core Strategies – 65% underpin 71% 0-0.5% distribution yield
Exploit value Added Value – 25% enhancing 24% +1% opportunities
Higher risk Higher return Opportunistic Strategies – 10% Non-core sectors 5% +2% Specialist assets 14 Hermes Property Unit Trust
Direct Property Portfolio
The Trust has a portfolio bias to London and the South East with almost 80% of investment held in these regions. This is expected to be beneficial for the future performance of the Trust. A full list of properties and locations can be found in the Property Listing on pages 16-18.
Percentage of portfolio value by region
3.1% 1.0% 3.4%
10.0%
58.1%
24.4% n Industrials n Offices Shopping Centres n Unit Shops/Supermarkets n Retail Warehouses n Leisure/Other
North 3.1% Central London 24.4% Industrials 1.5% Industrials – Offices 1.6% Offices 24.0% Shopping Centres – Shopping Centres – Unit Shops/Supermarkets – Unit Shops/Supermarkets – Retail Warehouses – Retail Warehouses – Leisure/Other – Leisure/Other 0.4%
North East 1.0% South East (excl. London) 58.1% Industrials – Industrials 17.2% Offices – Offices 15.7% Shopping Centres – Shopping Centres 3.2% Unit Shops/Supermarkets – Unit Shops/Supermarkets 8.8% Retail Warehouses 1.0% Retail Warehouses 3.7% Leisure/Other – Leisure/Other 9.5%
West 10.0% South West 3.4% Industrials – Industrials – Offices – Offices 1.0% Shopping Centres – Shopping Centres – Unit Shops/Supermarkets 0.2% Unit Shops/Supermarkets 2.0% Retail Warehouses 9.8% Retail Warehouses – Leisure/Other – Leisure/Other 0.4% Annual Report and Financial Statements 2015 15
Direct Property Portfolio – continued
Distribution of the Trust's property holdings in the London area. This highlights 61 of the Trust's 86 assets which represent 64% of total property portfolio by value. TRUST MANAGER’S REPORT
n Industrials n Offices Shopping Centres n Unit Shops/Supermarkets n Retail Warehouses n Leisure/Other
M25
n Industrials n Offices Shopping Centres n Unit Shops/Supermarkets n Retail Warehouses n Leisure/Other 16 Hermes Property Unit Trust
Property Portfolio – continued
£30 million & over
Sector Property Principal Tenants
Office 27 Soho Square, London W1 Barclays Bank Freehold property comprising 30,418 sq ft of office accommodation Results International Palantir Technologies
8/10 Great George Street, London, SW1 Secretary of State for Communities and Freehold multi-let West End office building comprising 54,494 sq ft Local Government Finmeccania (UK) Ltd Liberal Democrats (Trustees) Ltd Hamilton Lane (UK) Ltd Broken Wharf House, London, EC4 Netik LLC Multi-let office investment is located on the north bank of the Thames United Wineries Hurley Palmer Flatt Ltd
Plantation Wharf, London, SW11 Alternative Networks Ltd Mixed-use leasehold office building located on a prime riverside site in Battersea Direct Produce Supplies Plc Cherwell New Homes Ltd
2 Cavendish Square, London, W1 Orion Capital Managers Leasehold office building behind a period façade, comprising 30,000 sq ft over eight floors Muse Developments Ltd Sharp Electronics (UK) Ltd
Hythe House, Hammersmith Espresso Group Ltd Computational Freehold, multi-let modern office building over 56,280 sq ft located in Hammersmith Dynamics Maruho Europe Ltd
Retail Maybird Shopping Park, Stratford-upon-Avon Matalan Freehold retail warehouse park of 128,000 sq ft of open A1 consent and 65,000 sq ft of ground floor retail Asda warehouse Boots M&S Simply Food Argos
Sainsbury’s, Beaconsfield Sainsbury’s Foodstore with a 30 year lease to Sainsbury’s
Christopher Place, St Albans Ask 85,000 sq ft freehold shopping centre situated in an affluent part of the South East Carluccio’s Fitness First Hobbs
£10 – £30 million
Sector Property Principal Tenants
Office Camden Works, London, NW1 Max Fordham LLP Freehold, high yielding multi-let office Triyoga (UK) Ltd
Regency House, London, W1 Russells Solicitors Freehold office building located in a prominent position close to Regent Street A3D2 Limited ‘The Warwick’
Boundary House, Charterhouse Street, London, EC1 Gioma (UK) Limited Freehold office property in Clerkenwell. The property comprises 32,336 sq ft over basement, ground Inrix Media Ltd and six upper floors used as office space on upper floors and retail units on the ground floor including IFG Management UK Ltd Gaucho Grill
Blackhorse Tower, Cockfosters Lloyds Banking Group A mid-1960s office complex of 117,500 sq ft on 2.37 acres, situated next to Cockfosters underground NHS Pension Scheme station
1 Sekforde Street, London, EC1 Future Cities Catapault Ltd 25,000 sq ft freehold office building which is currently occupied as serviced offices, situated in Clerkenwell. Purchased in August 2011 Carlson Court, Putney Beyond Analysis Ltd Freehold multi-let office investment in an established Greater London location GR Atkinson Ltd Annual Report and Financial Statements 2015 17
Property Portfolio – continued
£10 – £30 million – continued
Sector Property Principal Tenants
Office – continued Eastgate House, London, W1 Eleqtra (Infraco) Ltd Long leasehold multi-let office building Moddex Ltd
SP Fashion Ltd TRUST MANAGER’S REPORT
Skandia Point, Southampton Skandia Life 67,000 sq ft freehold office building, purchased in November 2011
31 Great George Street, Bristol PWC Well configured office building located in Clifton.
Retail Sainsbury’s, Cheltenham Sainsbury’s Foodstore with a 30 year lease to Sainsbury’s
51-53 Church Street, Caversham Waitrose Food anchored retail asset in the south east let off low rents. Opportunities for extension and repositioning Iceland Frozen Foods WY and SF Ltd/Costa Ltd
The Broadway, Wimbledon DSG International Freehold, constructed in 2000, retail terrace of six units over ground, first and second floors together with a public HMV house to the rear. Approximate area 49,600 sq ft Slug and Lettuce Maplin Electronics Ltd
Homelands, Chelmsford B&Q Freehold retail warehouse scheme of 105,000 sq ft. Jointly owned in a limited partnership with BT Pension Scheme
Hurricane Way, Clifton Moor, York B&Q Freehold retail warehouse constructed in 1992 with garden centre totalling approximately 51,900 sq ft
12 Brighton Road, Redhill Pet City Three freehold retail warehouses constructed in 1993 totalling 32,000 sq ft Lookers Southern Halfords
Industrial Horndon Industrial Park, West Horndon Franco Vago (UK) Ltd Multi-let 26 acre industrial park offering quick access to central London Roomes Stores Ltd Den Marketing Ltd
1/15 Thomas Road, London, E14 April Wing Ltd Multi-let Greater London Industrial Estate with good short to medium-term rental prospects The BSS Group Hobby Homes Ltd
Charlton Gate, London Net-a-Porter Standard industrial property with planning potential for trade counter use. Currently fully let with two separate Spaces Personal Storage tenants
Arcadia Hayes Road, Southall Allport Cargo Services Ltd Freehold distribution warehouse of approximately 105,000 sq ft, located near to Heathrow Airport
Reading Metropolitan Network Rail Property occupying a five acre site situated immediately to the north of Reading station
Mitcham Road, Croydon B&G Heating and Plumbing A modern industrial estate of approximately 88,000 sq ft comprising five units Selco Trade Centres
Elstree Distribution Park, Borehamwood Home Delivery Network Ltd Freehold distribution warehouse park close to M25 motorway, units range in size from 15,000 – 72,000 sq ft Gailarde Ltd Charter Broadcast
Peterwood Park, Beddington Farm Road, Croydon Day Lewis Medical Ltd A modern freehold industrial estate of five units, ranging in size from 9,000 – 23,000 sq ft Vodafone Long Tall Sally
Summit Centre, Heathrow Medequip Assistive Technology Ltd Prime Heathrow industrial estate located on Bath Road (A4) which connects Central London to the M25 Presstek Europe Ltd Motorway and the M4 Motorway leading to Maidenhead and Reading
LGC Complex, Fordham LGC Bioresearch Ltd Freehold industrial and office estate located to the south of Fordham in an area which has established itself as an industrial and distribution hub 18 Hermes Property Unit Trust
Property Portfolio – continued
£10 – £30 million – continued
Sector Property Principal Tenants
Other Premier Inn, Greenwich Premier Inn Freehold hotel property let on a long lease and situated close to Greenwich rail and DLR stations Block E, Greenwich High Road Pure Gym A recently completed development of serviced apartments, a gym and vacant retail unit with a total floor area of StayCity 53,570 sq.ft Madelayne Court, Chelmsford Runwood Homes Ltd Freehold single-let purpose built care home which benefits from good access to local amenities
Under £10 million
Sector Property Principal Tenants
Office Park View House, Victoria Road South, Chelmsford Royal & Sun Alliance Freehold office investment located in an established South East location The Anchorage, Bridge Street, Reading Pitmans Solicitors A prominent five storey detached freehold office building in Reading town centre, totalling 29,000 sq ft Willis Ltd Citygate Court, Manchester Barclays Bank Freehold 47,000 sq ft city centre office investment. Occupied as offices with ground floor banking hall, purchased in September 2011 18/20 St John Street, London, EC1 ASM (Thayer) Ltd Freehold office building which adjoins another HPUT holding – Boundary House 7 Things Media Sheppard Architects LLP Wellington Gate, Church Road, Tunbridge Wells Buss Murton LLP Refurbished freehold office accommodation over seven floors, totalling 28,000 sq ft Coutts and Co The Newspaper Licencing Agency Elliot House, Manchester Bruntwood Freehold office and restaurant building situated directly opposite the Spinningfields business district British Sky Broadcasting Retail St Albans Retail Park I, St Albans Matalan Freehold retail warehouse scheme of 62,560 sq ft, let to a variety of tenants jointly owned in a limited partnership Halfords with BT Pension Scheme Carpetright plc McDonalds
St Albans Retail Park II, St Albans Homebase Freehold retail warehouse scheme of 60,141 sq ft, let to Homebase. Jointly owned in a limited partnership with BT Pension Scheme North End Road, Croydon Vision Express Two freehold unit shops, approximately 13,000 sq ft Burger King TUI 135 & 137 High Street, Bromley Bank Two freehold shop units forming part of a retail terrace in a prime pitch on the pedestrianised high street C and J Clark 5/9 & 10 Church Street, Cardiff Pearl Restaurants Four freehold retail units with ancillary accommodation above plus a basement club on a pedestrianised street Kitchens Ltd 19 & 21 French Row, St Albans Freehold retail unit in close proximity to Christopher Place Shopping Centre Industrial Centrus Industrial Estate, Hertford FT Solutions Freehold multi-let industrial estate which includes a range of modern industrial units in Hertford’s well established Power Valves International central business location AA & AR Goodman Westgate Industrial Estate, Bedfont Bridgestone Aircraft Tyre Two refurbished industrial units, close to Heathrow airport, comprising over 40,000 sq ft
Guinness Road Trading Estate, Manchester Redhall Jex Ltd Substantial multi-let industrial estate comprising 22 units, totalling 235,000 sq ft providing a good range of small MW Insulation Ltd to medium size units Perfume Click Ltd
Belleknowes Industrial Estate, Inverkeithing Iron Mountain Freehold multi-let industrial estate of approximately 140,000 sq ft National Oilwell Varco Ecosteel Ltd
Other Enterprise Inns Portfolio 1 Enterprise Inns 16 public houses in London and the South East Enterprise Inns Portfolio 2 Enterprise Inns 17 public houses located in affluent areas of London, the South East and the South West of England Annual Report and Financial Statements 2015 19
Responsibilities and Governance
Appointments Committee The Nominations Committee – whose membership is Simon Melliss The Appointments Committee is appointed to act on behalf of Unit Holders – (Chairman), David Nicol and Caroline Burton, met once during the year to it is responsible for the appointment, removal and remuneration of the Trust consider replacements for both Phillip Nelson, who formally retired in October Manager, the Trustee, the independent auditors, and the independent valuer, 2014 and Phillip Rose, who is to retire this year. each subject to ratification by Unit Holders. The Appointments Committee is also required by the Trust Deed to approve the financial statements of the Trust Trust Manager at the end of each annual accounting period – such financial statements are The Trust Manager is required to manage and administer the Trust in considered by the Unit Holders annually at the Trust’s Annual General Meeting. accordance with the Trust Deed and has responsibility for all portfolio and The Appointments Committee has taken all reasonable steps to ensure risk management matters. It is responsible for the approval of amounts to be compliance with its responsibilities. distributed and for the issuance of financial statements subject to approval by the Appointments Committee. New members of the Appointments Committee are appointed by Unit Holders at the Trust’s Annual General Meeting; at least one third of the members In June 2013, the Trust Manager formed the HPUT Committee through which are considered for re-election each year. Phillip Nelson retired from the it considers certain matters on behalf of Unit Holders including investment Appointments Committee in October 2014. Two new members, Sue Clayton constraints. It comprises only the members of the Appointments Committee and Paul Clark have been appointed during the period, their appointments and met four times during the period. are subject to the approval of unit holders at the AGM. The Appointments The HPUT Committee is supported by the Asset Plan Committee. The Asset Plan Committee met five times during the period. Committee’s duties include the detailed review of the investment process and of The Appointments Committee is supported by the following two Committees: the strategic property plans for each individual asset within the Trust’s portfolio. Its membership consists of Phillip Rose (Chairman), Sue Clayton and Paul Clark. The Audit Committee – duties include the review of external audit arrangements, The Asset Plan Committee met twice during the period. Following Phillip Rose’s external audit reports and review of the auditors' statements on effectiveness of retirement, Paul Clark will act as Chairman. systems for internal control and risk management. It is also responsible for the review of interim and annual financial statements before submission for approval Trustee by the Appointments Committee. The Audit Committee met twice during the The role of the Trustee includes: financial period to review the financial statements. ■■ensuring that the Trust is managed by the Trust Manager in accordance with The Audit Committee’s principal responsibilities include: the Trust Deed and that proper accounting records have been maintained; GOVERNANCE ■■monitoring and reviewing the auditor’s independence, objectivity and ■■safeguarding the property of the Trust and the rights attaching thereto by effectiveness of the audit process, and considering the appointment of the way of segregation and identification of assets; and auditor; ■■taking all reasonable steps to ensure the investment and borrowing powers ■■discussing and agreeing the scope of the audit and reviewing the auditor’s are complied with. response to changes in the regulatory requirements; Governance ■■reviewing the interim and annual financial statements prior to submission The Appointments Committee and the Trust Manager are committed to a high to the Appointments Committee including advice on whether they are fair, standard of corporate governance in the operation of the Trust. balanced and understandable; Regulation and Legislation ■■discussing issues and management recommendations that arise with the The Trust Manager is responsible for dealing with its regulator, the Financial external auditors; Conduct Authority, in an open and co-operative manner. The Trust Manager will inform the regulator promptly of anything concerning the Trust which ■■agreeing any non-audit services; and might reasonably be expected to be disclosed. The Trust Manager is also responsible for ensuring that all applicable legislation ■■ considering major findings from any controls reports produced by external and regulations including but not limited to the Bribery Act 2010 are complied or internal auditors. with by the Trust. It is required to maintain adequate procedures that ensure compliance with such legislation and it monitors that such procedures are During this financial year, the Audit Committee discussed and considered: adhered to. ■■ the scope of the audit and the risks identified by the auditors during the Conflicts of Interest planning stage; The Appointments Committee and the Trust Manager will seek to avoid any conflict of interest arising. Should a conflict arise, they have a duty to ensure ■■the re-appointment of the external auditors; fair treatment of all Unit Holders. ■■the significant risks to the financial statements and the audit response to Appointment of Auditors these concluding that this response is appropriate and that no errors or The Appointments Committee has reviewed the auditor quality and issues have been identified arising from these; and independence and has determined that it is not necessary to tender the audit contract. PricewaterhouseCoopers LLP do not audit the Trust Manager. ■■the output from the Audit & Assurance Faculty (AAF) report produced by external auditors, Deloitte LLP.
As a result of this activity the Audit Committee were able to conclude that the interim and annual financial statements were fair, balanced and understandable. The Audit Committee consists of David Nicol (Chairman), Phillip Rose and Caroline Burton. Following Phillip Rose’s retirement, Sue Clayton will join the Committee. 20 Hermes Property Unit Trust
Appointments Committee
Simon Melliss BA, FCA – Chairman (Appointed 4 February 2004) Simon retired from his role as Group Finance Director of Hammerson plc in July 2011 after twenty years with the company. He is a non-executive director of Whitbread plc and a member of Council and Treasurer at University College London.
Caroline Burton MA (Appointed 4 March 2005) Formerly Executive Director of Investments, Guardian Royal Exchange plc, Caroline is currently an investment advisor to a number of local authority pension funds and holds non-executive positions at LV= and TR Property Investment Trust.
Paul Clark BA (Hons), MPhil (Appointed 3 December 2014) Paul has been Director of Investment and Asset Management for The Crown Estate’s substantial portfolio since 2007, prior to that he ran the Church Commissioners global real estate investment portfolio. He is also a non-executive Director of Ronson Capital Partners and sits on various industry bodies including the Policy Committee of The British Property Federation.
Sue Clayton BSc FRICS (Appointed 9 December 2014) Sue is an Executive Director at CBRE, the global property advisers, where she has specialised in UK investment markets for over 25 years. She is a Trustee of the Reading Real Estate Foundation and chairs its Development Committee.
David Nicol BA (Hons) CA (Appointed 16 July 2012) David is a Chartered Accountant and worked for Morgan Stanley from 1984 until 2010 taking various senior operational roles. He was chair of Morgan Stanley Pension Trustee Limited and non-executive chair of the audit committee of Morgan Stanley International until the end of 2011. He is currently Chief Executive of Brewin Dolphin plc, on the board of the Chartered Institute for Securities & Investment and a member of the Council of ICAS.
Phillip Rose MA (Law) (Appointed 27 August 2002) Phillip has over 30 years experience in the real estate, funds management and banking industries in Europe, the USA and Australasia. He has been the Head of Real Estate for ABN AMRO Bank, Chief Operating Officer of European shopping centre investor and developer TrizecHahn Europe and Managing Director of Lend Lease Global Investment. He was previously a non-executive director of Great Portland Estates plc.
Appointments Committee Fees The Appointments Committee is remunerated in respect of each accounting period an amount that will not exceed 0.05% of the gross asset value of the Trust. The Chairman is paid £40,000 per annum and other members of the Appointments Committee are each paid £27,500 per annum. The members of the Appointments Committee are paid out of the assets of the Trust and receive no additional remuneration for their appointment on the HPUT Committee. Trust Management Team
Chris Mathew Chris has been Fund Director of the Trust since July 2006 having previously been the Trust’s Investment Manager. Chris qualified as a chartered surveyor in 1995 and prior to joining Hermes in July 2002 was an associate partner in the valuation consulting team of Drivers Jonas. Before joining Drivers Jonas, Chris worked at King Sturge and the Investment Property Databank.
Emily Mousley Emily is Finance Director of Hermes Real Estate and is responsible for the financial oversight, risk and control environment, systems and operations. She was previously responsible for pension scheme and private equity accounting within Hermes. Emily joined Hermes from Ernst & Young in 2002 where she had qualified as a Chartered Accountant.
Brad Weston Brad joined Hermes Fund Managers in December 2009 and became Head of Client Relations in March 2012. He joined from Schroders, where he was responsible for managing client relationships with UK pension funds, financial institutions and insurance companies. Annual Report and Financial Statements 2015 21
Advisors
Trustee and Depositary Trust Manager Trust Legal Advisors HSBC Bank plc Hermes Alternative Investment Management Limited Berwin Leighton Paisner LLP 8 Canada Square Lloyds Chambers Adelaide House London E14 5HQ 1 Portsoken Street London Bridge Registered in England no.14259 London E1 8HZ London EC4R 9HA Authorised and regulated by the Financial Conduct Authority. The Trust Manager delegates Independent Auditors Trustee enquiries should be made to: certain property activities to Hermes Real Estate PricewaterhouseCoopers LLP HSBC Bank plc Investment Management Limited (the Real Estate 7 More London Riverside Fund Services Investment Manager). London SE1 2RT Trustee & Depositary Services 8 Canada Square London E14 5HQ Independent Valuers Managing Agents Knight Frank LLP Jones Lang LaSalle Authorised by the Prudential Regulation Authority 55 Baker Street 40 Bank Street and regulated by the Financial Conduct Authority London W1U 8AN Canary Wharf and the Prudential Regulation Authority. London E14 5EG Banker Workman & Partners Real Estate Investment Manager The Royal Bank of Scotland plc Hermes Real Estate Investment Management Rivergate House Financial Institutions Corporate Service Team 70 Redcliff Street Limited Aldgate Union Lloyds Chambers Bristol 10 Whitechapel High Street BS1 6AL 1 Portsoken Street London E1 8DX London E1 8HZ GOVERNANCE 22 Hermes Property Unit Trust
Audited Financial Statements For the year ended 25 March 2015
Consolidated Statement of Total Return 2015 2014 Note £000 £000
Net gain on investments 2 137,602 68,590
Rental income receivable 50,975 50,795 Service charge income 3,758 6,619 Ground rent (215) (174) Property expenses 3 (17,684) (17,741) Net property income 36,834 39,499
Management expenses 4 (1,671) (1,497) Net operating income 35,163 38,002
Interest receivable 1,110 1,478 Finance costs – interest payable 5 (291) (334)
Net income before taxation 35,982 39,146
Taxation 6 (2,072) (8,925)
Net income after taxation 33,910 30,221
Total return for the year before distributions 171,512 98,811
Finance costs – distributions to unit holders 5, 7 (38,852) (34,205)
Change in unit holders' funds attributable to unit holders 132,660 64,606 Annual Report and Financial Statements 2015 23
Audited Financial Statements – continued For the year ended 25 March 2015
Consolidated Balance Sheet 2015 2014 Note £000 £000 Fixed assets Property investments 8 1,035,168 837,513
Current assets Debtors 10 30,781 34,854 Cash and deposits 94,846 66,835 Total current assets 125,627 101,689
Current liabilities Creditors 11 (31,235) (30,412) Amounts payable to unit holders 5 (10,019) (8,134) Total current liabilities (41,254) (38,546)
Net current assets attributable to unit holders 84,373 63,143
Net assets 1,119,541 900,656
Represented by:
Capital of unit holders Units in issue 13 684,732 598,507 Less: Capital expenses (26,481) (21,539) 658,251 576,968 FINANCIAL STATEMENTS Net realised profits on sales of property 260,282 257,025 Unrealised profit 201,008 66,663
Unit holders' funds 1,119,541 900,656
Capital employed 1,119,541 900,656
These financial statements were approved by the Appointments Committee on 28 May 2015 and signed on its behalf by:
Simon Melliss
David Nicol 24 Hermes Property Unit Trust
Audited Financial Statements – continued For the year ended 25 March 2015
Consolidated Cash Flow Statement 2015 2014 Note £000 £000
Net cash inflow from operating activities 15 42,922 46,944
Taxation Income tax paid (5,879) (8,824)
Capital expenditure Property additions (79,188) (127,320) Capital expenses (3,922) (3,318) Disposal of properties 24,040 73,338 (59,070) (57,300)
Returns on investment and servicing of finance Interest and finance costs paid (291) (334) Interest received 1,071 1,412 Distributions paid (36,967) (34,995) (36,187) (33,917)
Financing New units issued 86,314 52,848 Units redeemed (89) (109) 86,225 52,739
Increase/(decrease) in cash 28,011 (358)
Reconciliation of net cash flow to movement in net funds
Increase/(decrease) in available cash during the year 28,011 (358)
Increase/(decrease) in net funds during the year 28,011 (358)
Opening cash and deposits attributable to unit holders 66,835 67,193
Closing cash and deposits attributable to unit holders 94,846 66,835 Annual Report and Financial Statements 2015 25
Notes to the Financial Statements For the year ended 25 March 2015
1. Accounting policies
Basis of Accounting The financial statements have been prepared on a going concern basis in accordance with the historical cost convention as modified by the revaluation of investments and in accordance with applicable UK generally accepted principles and the Trust Deed. Basis of Consolidation The Trust holds certain property investments through joint arrangements. Such investments are proportionately consolidated by including the Trust’s share of the assets, liabilities and income. Investments held through subsidiary undertakings are fully consolidated in the financial statements. Statement of Total Return The Trust has no recognised gains and losses other than those included in the results above and therefore no separate statement of total gains and losses has been presented. Valuation of Investments The freehold and leasehold investment properties were valued independently by the Trust’s independent valuer, Knight Frank LLP, as at 25 March 2015, on the basis of Market Value in accordance with RICS Appraisal and Valuation Standards. Knight Frank LLP value the investment properties on a monthly basis. Income and Expenditure Rental income, interest and expenditure are accounted for on an accruals basis. Rental income is recognised on a straight-line basis over the term of the lease (or until the first rent review or break option, if sooner), even if payments are not made as such. Lease incentives are recorded within debtors and a corresponding reduction is made to property valuations. Valuation fees and performance fees payable to the Real Estate Investment Manager are treated as capital expenses. They are reported within property expenses in the Consolidated Statement of Total Return but are not taken into account in determining the Trust’s distributable income, instead being taken to the capital expenses reserve. The effect of this treatment is to increase income distributions and reduce the Trust’s Net Assets by the value of such expenses each year. Transaction costs are capitalised and reported as part of the net gain or loss on investments in the Consolidated Statement of Total Return. Income from other investments is accounted for on an accruals basis. The fees of the manager are charged to income. Expenses include irrecoverable VAT where applicable. Distributions It is the policy of the Trust to distribute all income net of expenses to the unit holders on a quarterly basis. In accordance with FRS25 (Financial Instruments: Presentation), distributions have been classified as finance costs. Purchases and Sales Property purchases are accounted for on exchange of unconditional contracts. Sales are accounted for on completion. Depreciation No depreciation is charged on freehold or leasehold investment properties. Cash and Deposits Cash and deposits includes cash at bank, cash in hand and overnight deposits. Bank Borrowings
Interest bearing bank loans are recorded at proceeds received, net of direct issue costs. Finance charges, including direct issue costs, are recognised on an accruals FINANCIAL STATEMENTS basis. Issue costs are amortised over the period to the date of expiry of the facility agreement. Significant Accounting Estimates The Trust’s key source of estimation relates to the valuation of the property portfolio where external valuations are obtained from the Trust’s independent valuers as outlined in their report on page 31. Estimates are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.
2. Net gain on investments 2015 2014 £000 £000
Proceeds from sales of investments 20,410 73,958 Historical cost of investments sold (17,153) (58,247) Profit realised on investments sold 3,257 15 ,711 Revaluation loss/(gain) recognised in prior years 582 (1,816)
Gain for the year on investments sold 3,839 13,895
Net unrealised gain on revaluation 133,763 54,695
Net gain on investments 137,602 68,590 26 Hermes Property Unit Trust
Notes to the Financial Statements – continued For the year ended 25 March 2015
3. Property expenses 2015 2014 Note £000 £000
Trust Manager Base fee 14 3,123 2,585 Performance fee 14 4,686 3,764 Service charge expenses 6,362 8,328 Other expenses 3,257 2,844 Valuation fees 256 220
17,684 17,741
Performance fees and valuation fees are treated as capital items and added back to income for distribution purposes. Trust Manager base fees represent the portion of base fees payable to the Trust Manager for the management of the portfolio and are calculated at 0.30% per annum of the net asset value.
4. Management expenses 2015 2014 Note £000 £000
Appointments Committee fees 170 163 Trustee fees 126 114 Trust Manager base fees 14 1,041 862 Professional fees 245 278 Audit fees 89 80
1,671 1,497
Trust Manager base fees represent the portion of base fees payable to the Trust Manager for the management of the Trust and calculated as 0.10% per annum of the net asset value.
The Trustee is entitled to receive a fee based on the Trust’s net asset value, which is calculated and paid quarterly in arrears. The Trustee’s fee entitlement is 0.030% per annum on the first £100 million, 0.015% per annum on the next £200 million and 0.010% per annum of the Trust’s net asset value over £300 million. The terms of this fee arrangement are subject to review on an annual basis by the Appointments Committee.
5. Finance costs 2015 2014 £000 £000
Interest payable 291 334
Interim distributions - June quarter 7,805 8,322 - September quarter 10,480 9,103 - December quarter 10,548 8,646 Final distribution payable 10,019 8,134
38,852 34,205 Annual Report and Financial Statements 2015 27
Notes to the Financial Statements – continued For the year ended 25 March 2015
6. Taxation 2015 2014 £000 £000
Factors affecting tax charge
Net income and gains on investment before taxation 173,584 107,736
Income tax at standard rate of 20% 34,717 21,547 Exemption from tax on capital gains (27,520) (13,718) Permanent differences of disallowable expenses (5,125) 1,096
Income tax charge 2,072 8,925
On 26 August 2014, the Trust was approved as an Exempt Unauthorised Unit Trust by HMRC, so it is not required to withhold tax from unit holders. Tax was withheld from the distribution paid on 15 July 2014.
7. Reconciliation of distribution to net income 2015 2014 £000 £000
Net income after taxation 33,910 30,221 Expenses transferred to capital 4,942 3,984
Distributions 38,852 34,205
8. Fixed assets The movement in fixed assets during the year is set out below.
Lease Property Freehold Leasehold Incentives Investments £000 £000 £000 £000 Valuation
At 26 March 2014 774,325 65,250 (2,062) 837,513 FINANCIAL STATEMENTS Additions at cost 76,580 3,883 – 80,463 Transfer from freehold to leasehold (11,330) 11,330 – – Proceeds from disposals (4,900) (15,510) – (20,410) Profit on disposals 1,720 2,119 – 3,839 Revaluation gain 109,830 22,328 1,605 133,763 Valuation at 25 March 2015 946,225 89,400 (457) 1,035,168
Historical cost at 25 March 2015 786,543 47,013 – 833,556
The Trust’s investment properties including indirect properties at 25 March 2015 were valued by Knight Frank LLP, qualified valuers, on a market value basis at £1,035,625,000. The valuations were carried out in accordance with the RICS Valuation– Professional Standards January 2014, Global and UK Edition, issued by the Royal Institution of Chartered Surveyors (the “Red Book” including the international valuation standards).
Property valuations reconcile to the independent valuers’ report as follows: 2015 2014 £000 £000
Directly held properties valued by Knight Fank LLP 1,007,475 812,700 Tower Hill Retail Limited Partnership (50%) 28,150 26,875 Property per valuers’ report 1,035,625 839,575 Lease incentives (457) (2,062)
Total property investments 1,035,168 837,513 28 Hermes Property Unit Trust
Notes to the Financial Statements – continued For the year ended 25 March 2015
9. Principal subsidiaries and joint arrangements Share of Country of Entity registration
Subsidiaries Capital Hill Limited Partnership 100% UK
Joint Arrangements Tower Hill Retail Limited Partnership 50% UK
10. Debtors 2015 2014 £000 £000
Rental income 4,289 2,883 Prepayments and accrued income - due within one year 378 1,217 - due after more than one year 254 906 Other debtors 3,710 4,068 Deferred consideration 22,150 25,780
30,781 34,854
Deferred consideration relates to the sale of 19 Bolsover Street and One Brunel Way, Slough, which completed in January 2012 and February 2015 respectively. The remaining proceeds for the former are due to be received on 28 July 2015 and interest is received at 8.0% p.a. (2014: 6.0% p.a.), and the latter are due to be received by 24 February 2020 and interest is received at 5.0% p.a.
11. Creditors 2015 2014 Amounts falling due within one year £000 £000
Deferred income 12,344 11,745 Income tax payable 753 4,560 VAT 1,309 659 Other creditors and accruals 16,829 13,448
31,235 30,412
12. Bank borrowings
At 25 March 2015 the bank loan facility was undrawn (2014: nil).
In 2008, the Trust entered into a £75m loan facility with Munchener Hypothekenbank eG, which had expired on 20 April 2015. The loan was secured on certain properties of the Trust and interest was payable at a rate of the London Interbank Offered Rate (LIBOR) plus 0.68%. A commitment fee was also payable at a rate of 0.25% p.a. of the undrawn commitment. The Trust’s borrowing limit at 25 March 2015 calculated in accordance with the Trust Deed was £335.9 million. Annual Report and Financial Statements 2015 29
Notes to the Financial Statements – continued For the year ended 25 March 2015
13. Units in issue Number of Value units £000 000
At 25 March 2014 188,162 598,507 Issued in the year 16,165 86,314 Redeemed in the year (18) (89) At 25 March 2015 204,309 684,732
14. Related party disclosures
During the year there were transactions with the following related parties: The fees payable to Hermes Investment Management Limited, the Trust Manager, for the period, including irrecoverable VAT, were:
2015 2014 Note £000 £000
Trust Manager base fee – property expenses 3 3,123 2,585 Trust Manager base fee – management expenses 4 1,041 862 4,164 3,447
Trust Manager performance fee 3 4,686 3,764
The Trust Manager is entitled to receive a fee of 0.10% per annum of the quarterly net asset value of the Trust, subject to a minimum fee of £400,000 per annum in relation to its duties as Trust Manager other than in respect of Real Estate Related Services. This fee is included in management expenses in note 4. The Trust Manager is also entitled to receive a fee of 0.30% per annum of the quarterly net asset value of the Trust, subject to a minimum fee of £900,000 per annum in respect of Real Estate Related Services. In addition, the Trust Manager may receive performance related fees for Real Estate Related Services if the performance of the Trust exceeds the average weighted total return of the agreed benchmark, being the average return on the IPD UK Other Balanced Property Fund Index Weighted Average Returns, on a three year rolling average basis. The amount of the fee is calculated as 17.5% of the out-performance generated. Fees for Real Estate Related Services are capped at 0.70% of the net asset value of the Trust at the end of the calendar year and are included in note 3. The Trust Manager delegates Real Estate Related Services to Hermes Real Estate Investment Management Limited. FINANCIAL STATEMENTS
2015 2014 £000 £000 The amounts outstanding at the end of the year were: Trust Manager base fee – property expenses 820 676 Trust Manager base fee – management expenses 274 225 1,094 901
Trust Manager performance fee 5,436 4,416
BT Pension Scheme The BT Pension Scheme wholly owns Hermes Fund Managers Limited, the holding company of both Hermes Real Estate Investment Management Limited and Hermes Alternative Investment Management Limited. The BT Pension Scheme held 698,669 units (0.34%) in the Trust at 25 March 2015.
The BT Pension Scheme co-invests with the Trust in the Tower Hill Retail Limited Partnership. 30 Hermes Property Unit Trust
Notes to the Financial Statements – continued For the year ended 25 March 2015
15. Reconciliation of net income to net cash inflow 2015 2014 £000 £000
Net income before taxation 35,982 39,146 Interest payable 291 334 Interest receivable (1,110) (1,478) Expenses transferred to capital 4,942 3,984 Decrease in debtors 443 3,316 Increase in creditors 2,374 1,642
Net cash inflow from operating activities 42,922 46,944
The Trust’s counterparties for cash balances at the year end were Royal Bank of Scotland Plc, HSBC Bank Plc and Lloyds Plc.
16. Commitments 2015 2014 £000 £000
Committed property investment activity 4,704 3,762
Relates to capital commitments in respect of approved capital expenditure on properties within the Trust’s portfolio. Annual Report and Financial Statements 2015 31
Valuers’ Report to the Trust Manager
In accordance with our appointment dated 13 May 2011, we have prepared the We set out below the respective total valuations for the directly held properties, following short Valuation Report. We are instructed as Independent Valuers to allocated by tenure. provide the Trust Manager with our opinion of the Market Value of all freehold, heritable and leasehold properties, held by Hermes Property Unit Trust, for Directly Held Properties:- Freehold Leasehold Total financial reporting purposes. £ £ £ We are of the opinion that the aggregate of the Market Values of the freehold Hermes Property Unit Trust and leasehold properties as at 25 March 2015 was £1,035,625,000 (One Held as Investments 946,225,000 89,400,000 1,035,625,000 Billion and Thirty Five Million, Six Hundred and Twenty Five Thousand Pounds). We confirm that the valuation has been undertaken by us as qualified valuers in accordance with the RICS Valuation – Professional Standards (January The valuer, on behalf of Knight Frank LLP, with the responsibility for this report is 2014), Global and UK edition, issued by the Royal Institution of Chartered Hazel E Morris, MRICS, RICS Registered Valuer. Parts of the valuation have been Surveyors (the “Red Book”). The properties have been valued individually on the undertaken by additional valuers as listed on our file. We confirm that the valuer basis of Market Value as defined in the Red Book as: and additional valuers collectively meet the requirements of RICS Valuation – Professional Standards VPS 3 having sufficient current knowledge of the “The estimated amount for which an asset or liability should exchange on the particular market and the skills and understanding to undertake the valuation valuation date between a willing buyer and a willing seller in an arm’s length competently. transaction after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.” We confirm that Knight Frank LLP meets the requirements of the Trust in the role of Independent Valuer having been appointed in 1996. The signatory of As agreed with Hermes Real Estate Investment Management Limted, our this report has been responsible for this instruction since June 2014. We further valuations are based on information provided by them, upon which we have confirm that in relation to Knight Frank LLP’s preceding financial year the relied and which has not been verified by us. Our assumptions (as defined in the proportion of the total fees paid by the Trust to the total fee income of Knight RICS Red Book) relating to this information are set out below. Frank LLP was less than 5%. We recognise and support the RICS rules of conduct The valuer’s opinion of Market Value was primarily derived using recent and have procedures for identifying conflicts of interest. comparable market transactions on arm’s length terms, where available, and In accordance with our standard practice, we must state that this Valuation appropriate valuation techniques (the Investment Method). Report is for the use only of the party to whom it is addressed and no We have assumed there to be good and marketable titles to the properties. The responsibility is accepted to any third party for the whole or any part of its properties have been valued individually, not as part of a portfolio. We have contents. made oral enquiries of the appropriate planning authorities and have taken into If our opinion of value is disclosed to persons other than the addressees of this account, insofar as we are aware, unusual outgoings, planning proposals and Report, the basis of valuation should be stated. Neither the whole nor any onerous restrictions or local authority intentions which affect the properties. part of this Valuation Report nor any reference thereto may be included in any No allowance has been made in our valuation for expenses of realisation or published document, circular or statement nor published in any way whatsoever for taxation which may arise in the event of development or disposals and our whether in hard copy or electronically (including on any web-site) without our valuations are expressed exclusive of any VAT that may become chargeable. prior written approval of the form and context in which it may appear. Our valuations reflect usual deductions in respect of purchaser’s costs and, in particular, full liability for UK Stamp Duty as applicable at the valuation date. We have been provided with copies of headleases and leases. In respect of Yours faithfully recent purchases we have been provided with copies of the Trust’s solicitors’ reports on title. The portfolio is valued by us on a monthly basis for unit pricing purposes and the properties are re-inspected on a regular basis. FINANCIAL STATEMENTS
Our valuations are based on measurements which have been provided by Hazel E Morris MRICS RICS Registered Valuer Hermes Real Estate Management Limited and which were carried out in For and on behalf of accordance with the RICS Code of Measuring Practice. In some cases the areas Knight Frank LLP are provided following rent review or letting. Independent Valuer We have not carried out structural surveys on the portfolio and are unable to report that the properties are free of any structural fault, rot, infestation or defect of any other nature, including inherent weakness due to the use in 28 May 2015 construction of materials now suspect. No tests were carried out on any of the technical services. We have assumed, except where we have been informed to the contrary, there to be no adverse ground or soil conditions or environmental contamination which would affect the present or future use of the properties and that the load bearing qualities of the site of each property are sufficient to support the buildings constructed or to be constructed thereon. Save as otherwise disclosed, it has been assumed for the purpose of valuation that the relevant interests in the properties are free of mortgage, charge or other debt security and no deduction has been made for such charge or debt. Our valuations assume that the properties would, in all respects, be insurable against all usual risks including terrorism, flooding and rising water table at normal, commercially acceptable premiums. Those properties previously held within the Tower Hill Retail Partnership are now reported at 50% interest directly within HPUT. 32 Hermes Property Unit Trust
Independent Auditors’ Report to the Unit Holders
Report on the financial statements In addition, we read all the financial and non-financial information in the Annual Our opinion Report and Financial Statements to identify material inconsistencies with the In our opinion the financial statements, defined below: audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge ■■ give a true and fair view of the financial position of the Trust as at 25 March acquired by us in the course of performing the audit. If we become aware 2015 and of the net revenue and the net gains of the scheme property of the of any apparent material misstatements or inconsistencies we consider the Trust for the year then ended; and implications for our report. ■■have been properly prepared in accordance with United Kingdom Generally Responsibilities for the financial statements and the audit Accepted Accounting Practice and the Trust Deed. Our responsibilities and those of the Trust Manager and the Appointments Committee This opinion is to be read in the context of what we say in the remainder of this As explained more fully in the Responsibilities and Governance Statement set out report. on page 19, the Trust Manager is responsible for the preparation of the financial statements and the Appointments Committee is responsible for being satisfied that What we have audited they give a true and fair view. The financial statements, which are prepared by Hermes Property Unit Trust, comprise: Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and ISAs (UK & Ireland). Those standards require us ■■the Consolidated Balance Sheet as at 25 March 2015; to comply with the Auditing Practices Board’s Ethical Standards for Auditors. ■■the Consolidated Statement of Total Return for the year then ended; This report, including the opinion, has been prepared for and only for the Unit Holders of the Trust as a body in accordance with the Trust Deed and for no other ■■the Consolidated Cash Flow Statement for the year then ended; and purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose ■■the notes to the financial statements, which include a summary of significant hands it may come save where expressly agreed by our prior consent in writing. accounting policies and other explanatory information.
The financial reporting framework that has been applied in their preparation is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice). PricewaterhouseCoopers LLP Chartered Accountants In applying the financial reporting framework, the Trust Manager has made London a number of subjective judgements, for example in respect of significant accounting estimates. In making such estimates, they have made assumptions 28 May 2015 and considered future events. What an audit of financial statements involves We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) (“ISAs (UK & Ireland)”). An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: ■■whether the accounting policies are appropriate to the Trust’s circumstances and have been consistently applied and adequately disclosed;
■■the reasonableness of significant accounting estimates made by the Trust Manager; and
■■the overall presentation of the financial statements. Annual Report and Financial Statements 2015 33
Independent Auditors’ Disclaimer Letter
PRIVATE AND CONFIDENTIAL
The Appointments Committee Hermes Property Unit Trust Lloyds Chambers 1 Portsoken Street London E1 8HZ
Dear Sirs Request for access to our audit report dated 28 May 2015 of this letter is disclosed with such information so that the other party You have asked us to agree to you providing to potential customers (each receiving the information is on written notice of the terms on which the a “recipient”) a hard copy of your financial statements for the year ended recipient itself had access to it; and ii) where legally permissible inform us 25 March 2015 together with our audit report to you dated 28 May 2015 promptly of the specific requirement to disclose and before making any (the “Report”). disclosure. To ensure that the recipient has a clear understanding of the terms Notwithstanding our consent to the release of the Report to the recipient, under which the Report is being provided to them, a copy of this letter the Report remains addressed to you and it is a matter for you to decide should be attached to the Report. whether the release of the Report is appropriate in the circumstances. We confirm that we give our consent to you doing so on the clear In consideration for PricewaterhouseCoopers LLP consenting to you understanding that the Report was addressed to you and was prepared providing the Report to the recipient, you agree that you will not hold on your instructions as set out in our agreement dated 27 January 2015 PricewaterhouseCoopers LLP responsible for the consequences of us doing and therefore the Report will not address or reflect the interests or so; accordingly PricewaterhouseCoopers LLP, its members, partners, staff circumstances of the recipient or any other third party. Furthermore, we and agents shall have no liability to you, whether in contract or in tort accept no duty or responsibility and deny any liability to the recipient and (including without limitation negligence or breach of statutory duty) or FINANCIAL STATEMENTS to any other third party, whether or not the Report influences the decision in any way whatsoever, for any loss, damage, cost or expense suffered by or action of the recipient or any other party. you as a result of the provision of the Report to the recipient. Without conferring any greater rights than you would otherwise have at law, we If our Report is given to the recipient, it should be made clear that receipt accept that this does not exclude any liability we may have for death or of the Report should not be a substitute for enquiries the recipient should personal injury or for the consequences of our own fraud. undertake for its own purposes and any independent advice it should obtain. You should also point out to the recipient that it will be bound by This letter shall be governed and construed in accordance with the laws of a duty of confidentiality to PricewaterhouseCoopers LLP, as well as to you, England. The Courts of England and Wales will have exclusive jurisdiction [and that in respect of any Personal Data in the Report, they are required to settle any claim, dispute or difference which may arise out of or in to comply with the Data Protection Act 1998]. Consequently, the Report, connection with this letter. and information obtained from it, must not be made available or copied, in whole or in part to any other person without our prior written permission which we may, at our discretion, grant, withhold or grant subject to Yours faithfully conditions (including conditions as to legal responsibility or absence thereof). Where disclosure of the Report or information contained in the Report is required by law or regulation, the recipient should i) ensure that a copy PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP, 7 More London Riverside, London, SE1 2RT T: +44 (0) 20 7583 5000, F: +44 (0) 20 7212 7500, www.pwc.co.uk
PricewaterhouseCoopers LLP is a limited liability partnership registered in England with registered number OC303525. The registered office of PricewaterhouseCoopers LLP is 1 Embankment Place, London WC2N 6RH. PricewaterhouseCoopers LLP is authorised and regulated by the Financial Conduct Authority for designated investment business. 34 Hermes Property Unit Trust
Information about the Trust
Investment Strategy and Objectives Investment Constraints The investments of the Trust consist primarily of The Trust Manager may invest in property and Further information about freehold and leasehold land and buildings. It is property related investments, the latter to include the Trust including its the policy of the Trust Manager to spread these shares, units, bonds or debentures or other interests investments over a wide range of properties, so in any company or collective investment scheme Units Dealings is available as to maintain a balanced investment portfolio whose principal business is property investment in the General Information with capital growth potential and beneficial or development. The Trust Manager may also yield. Properties may also be acquired, developed enter into Derivative Transactions where such Memorandum at or otherwise dealt with jointly alongside other investments derive their value from Property or are www.hermes-investment.com/ investors, particularly where these provide Unit based on a property return index. The aggregate Holders with exposure to property assets of a type of any such Derivative Transactions entered into hput/en-gb/publications.aspx or size that would not be appropriate for the Trust’s must not exceed 15% of the value of the Trust’s portfolio if they were to be held directly. Deposited Property in accordance with the terms of the Trust Deed. The Trust Manager follows policies and practices designed to enhance property returns whilst The Trust Manager sets constraints on the minimising risk. These are summarised as follows: proportions that may be invested in indirect vehicles, developments and joint vehicles. These ■■ The portfolio of properties held by the Trust are monitored regularly by the HPUT Committee, will be diversified between sectors dependent and the Real Estate Investment Manager must upon the potential returns from each sector. comply with these constraints in the investment The Trust may also invest in non-core sectors management of the Trust but subject to HPUT of the property market which display beneficial Committee discretion. A summary of the performance characteristics. investment constraints is set out below: ■■The Trust may invest alongside other investors ■■Co-investment – not more than 10% of gross in pooled investments where these provide asset value to be held in investments alongside exposure to assets of a size, type or location other investors. that are expected to provide enhanced returns. The amount of exposure to jointly held assets is ■■Debt – no more than 30% of gross asset value. carefully controlled in accordance with the Trust’s There are also constraints on the level of gearing investment restrictions. set out in the Trust Deed.
■■Properties will be acquired where the ■■Development – exposure to be no more than characteristics of the investment itself indicate 10% of gross asset value. outperformance through a combination of above average rental growth prospects and ■■Cash – usually no more than 10% of gross advantageous movements in capitalisation yield. asset value, or subject to a waiting list for new investors to be implemented from time-to-time. ■■Properties acquired will mainly be let to tenants of a good financial covenant where risk of default ■■Maximum relative property size – 10% of gross is considered to be low, although this will be asset value. balanced with acquisition of investments which offer the potential of future value enhancement ■■Approval is required for any purchase of as a result of active management. leasehold interests with an unexpired term of less than 50 years, non-standard sectors and for the ■■There will be a continuing programme of purchase of listed or indirect investments. upgrading existing properties to improve rental growth prospects and capital values wherever ■■The aggregate value of any Derivative appropriate by refurbishment, redevelopment or Transactions entered into must not exceed 15% lease restructuring. of gross asset value. Any derivative transactions will be approved by the HPUT Committee. ■■Before developments are undertaken, either directly or in association with third parties, a Membership careful review of the risk to reward ratio of the The Trust Deed restricts the holding of Units to potential development will take place to ensure Exempt Funds. An “Exempt Fund” is defined in an acceptable balance for that project and for the Trust Deed to mean any person (including a the Trust as a whole, and that development body of persons or body corporate), trust, fund or will be compliant with the Trust’s investment unincorporated association that is wholly exempt restrictions. (otherwise than by reason of residence) from capital gains tax or corporation tax on capital gains in the ■■The Trust can enter into derivatives transactions United Kingdom or which may hold Units in the Trust which reference property or property return without prejudicing the total exemption of the Trust indices. The Trust cannot extend its derivatives from tax on capital gains under Section 100(2) of exposure beyond 15% of the value of the Trust’s the Taxation of Chargeable Gains Act 1992 including, Net Assets. Derivatives transactions would be as the context may require, any person or persons used to hedge or increase the Trust’s exposure in whom the assets comprised in any such trust, to property when it could be better achieved fund or unincorporated association are from time by the use of derivatives than by conventional to time vested or the persons having the conduct or investment transactions. The Trust can also enter administration thereof. into ancillary derivatives transactions such as interest rate swaps. Annual Report and Financial Statements 2015 35
Notice of Annual General Meeting
Notice is hereby given that the Annual General Meeting of the unit holders of A unit holder entitled to attend and vote at the Meeting may appoint a proxy Hermes Property Unit Trust will be held at Lloyds Chambers, 1 Portsoken Street, to attend and vote in his place and a unit holder, being a Corporation, may London E1 8HZ on Friday 3 July 2015 at 12 noon for the following purposes: authorise any person to be its representative at the Meeting. 1. To receive the Reports of the Trust Manager and Auditors and Statement of A proxy card is enclosed. As the quorum required for the passing of the Accounts for the year ended 25 March 2015. Resolutions, without adjournment, is holders present in person or by proxy representing not less than one tenth of all the units for the time being in issue, 2. To elect members of the Appointments Committee: you are particularly asked to complete and return the proxy card. This will not preclude you from attending and voting at the Meeting if you so wish. 2.1 Caroline Burton retires, and being eligible, offers herself for re-election. To be effective, forms of proxy must be deposited at the office of the Trust Manager – Hermes Property Unit Trust, Hermes Investment Management 2.2 Paul Clark, being eligible, offers himself for election. Limited, Lloyds Chambers,1 Portsoken Street, London E1 8HZ, not later than 48 hours before the time appointed for holding the meeting. 2.3 Sue Clayton, being eligible, offers herself for election. 3. To re-appoint PricewaterhouseCoopers LLP as auditors of the Trust, to hold office until the conclusion of the next annual general meeting at which Financial Statements are laid before the unit holders and that their remuneration be fixed by the Appointments Committee. INVESTOR INFORMATION 36 Hermes Property Unit Trust
Distribution Analysis
Quarterly distribution Quarter to Quarter to Quarter to Quarter to Total 24 Jun 2014 29 Sep 2014 25 Dec 2014 25 Mar 2015 £000 £000 £000 £000 £000
Net income before tax 9,877 10,480 10,548 10,019 40,924 Tax (2,072) – – – (2,072) Net distribution 7,805 10,480 10,548 10,019 38,852
Distribution per unit Quarter to Quarter to Quarter to Quarter to Total 24 Jun 2014 29 Sep 2014 25 Dec 2014 25 Mar 2015 pence pence pence pence pence
Net income before tax 5.220 5.383 5.256 4.909 20.768 Tax (1.095) – – – (1.095) Net distribution 4.125 5.383 5.256 4.909 19.673
Date paid 15 Aug 14 15 Nov 14 15 Feb 15 15 May 15
The gross yield on net asset value at 25 March 2015 was 3.9%. The yield on offer price at 25 March 2015 was 3.7%. On 26 August 2014, HMRC approved the Trust’s status as an Exempt Unauthorised Unit Trust under Regulation 6(4) of the Unauthorised Unit Trusts (Tax) Regulations 2013. After this date, the Trust is no longer required to withhold tax on distributions to unit holders.
Gross distribution per unit Yield on offer price at opening of year As at 25 March As at 25 March
25p 7% 24.3 23.6 23.7 23.3 6% 20p 20.8 19.7 5% 5.0 5.0 5.0 4.8 15p 4% 3.7 10p 3% 2% 5p 1% 0p 0% 2010 2011 2012 2013 2014 2015 2011 2012 2013 2014 2015
Source: Hermes Real Estate Investment Management. Source: Hermes Real Estate Investment Management. Net income is distributed quarterly on 15 February, 15 May, 15 August and 15 November for the periods ended 25 December, 25 March, 24 June and 29 September respectively, or the business day prior to those dates. Income accrues monthly to unit holders to each registration date (usually 26th of each month). Distributions are made net of income tax and management expenses. The Trust Manager has no ability to defer/suspend contributions.
Total expense ratios 25 March 2015 25 March 2014 Cost during % of average Cost during % of average period £000 NAV p.a. period £000 NAV p.a. Fund Management Fees 4,164 0.41% 3,447 0.41% Fund Operating Expenses 886 0.09% 855 0.10% Total Expense Ratio 5,050 0.50% 4,302 0.51% Property Expense Ratio 5,900 0.58% 3,795 0.45% Real Estate Expense Ratio 10,950 1.08% 8,097 0.96% Transaction Costs 3,593 N/A 6,191 N/A Performance Fees 4,686 0.46% 3,764 0.45% The Trust’s portfolio turnover ratio was 1.07% (25 March 2014: 17.7%). The total expense ratios are calculated in accordance with AREF principles, which are available from www.aref.org.uk. Fund management fees include fees paid to the Trust Manager. Total fees payable to the Real Estate Investment Manager in a calendar year are capped at 0.70% of the December net asset value as described in note 14. Property expenses represent other expenses per note 3, (excluding bad debt expense) and service charge shortfalls. Fund operating expenses represent management expenses and valuation fees less Trust Manager fees (per notes 3 and 4). The performance fees as a percentage of average net asset value for the year can exceed 0.40% because they are calculated, and the fee cap is applied based on a net asset value at the end of a calendar year as described in note 14 to the financial statements whereas the Trust’s year end is 25 March. All the costs above are borne from the Fund and paid from income, with the exception of performance fees which is paid from capital. The Trust retains no commission and service charge rebates. Annual Report and Financial Statements 2015 37
Unit Holder Information
Net Asset Value Per Unit Distribution Per Unit
£ 6 25p 24.3 23.6 23.7 23.3 £5.49 5 20p 20.8 £4.80 £4.41 £4.50 £4.44 4 15p
3 10p
5p 2 5.5 5.3 5.3 5.0 3.8
1 0p 2011 2012 2013 2014 2015
Distribution, pence per unit (gross of tax, net of expenses) 0 2011 2012 2013 2014 2015 Gross yield on closing NAV (%)
During the year 16,165,105 units were created.
Bid Offer Price Variation NAV and total number of units as at 25 March (million)
£ 6 1200 £5.76
5 £5.03 1000 £4.64 £4.75 £4.71 £4.77 £4.36 £4.38 £4.38 4 £4.17 800
3 600
2 400
1 200
0 0 2011 2012 2013 2014 2015 2011 2012 2013 2014 2015 Highest issue price Lowest cancellation price NAV (£) No. of units
The fund’s bid and offer prices and the NAV have been determined in accordance with AREF’s Fund Pricing Recommendations (August 2014). The fund is priced at the ‘Standard NAV’ for all investors.
The proportion of total number of units in issue Unit Prices
Number of Total Offer Bid Ownership unit holders Holding (%) Month (£) (£) < 3% 108 53.8% March 15 5.757 5.423 3% – 10% 10 46.2% February 15 5.698 5.367 INVESTOR INFORMATION 10% – 20% 0 0.0% January 15 5.676 5.342 > 20% 0 0.0% December 14 5.637 5.307 Total 118 100.0% November 14 5.504 5.174 Number of Total October 14 5.442 5.115 unit holders Holding (%) September 14 5.400 5.073 Internal investors 2 1.3% August 14 5.303 4.986 External investors 116 98.7% July 14 5.268 4.948 Total 118 100.0% June 14 5.183 4.868 Largest investor 1 7.4% May 14 5.122 4.817 Ownership held by top 5 investors 5 26.7% April 14 5.069 4.772 38 Hermes Property Unit Trust Annual Report and Financial Statements 2015 38
Further Information
For more information about the Trust go to www.hput.co.uk or contact:
Brad Weston Director – Client Relations Tel: +44 (0)20 7680 8079 Email: [email protected]
Hermes Property Unit Trust Lloyds Chambers 1 Portsoken Street London E1 8HZ Tel: (020) 7702 0888 Fax: (020) 7702 9452 www.hput.co.uk
CM153120
Certified ISO 14001 Environmental Management Cert no. SA-COC-001662