Annual
Report
’06
Annual Report ’06
Financial Statements
Business Analysis
18 Performance overview
99 Financial statements and business
analysis contents
100 Five year summary
101 Income statement
101 Statement of recognised income
and expense
102 Balance sheets
103 Cash flow statements
104 Notes to the financial statements
137 Directors’ report
20 Chairman’s statement
24 Operating and financial review
37 Understanding our numbers
under IFRS
38 Financial review
44 Investment property business
48 Retail
58 London Portfolio
68 Property Outsourcing –
Land Securities Trillium
76 Urban Community Development
78 Board of directors
80 Corporate responsibility
85 Corporate governance
89 Risk management
90 Remuneration report
97 Directors’ responsibilities
98 Independent auditors’ report
139 Introduction
140 Investment property business –
Combined portfolio
142 Investment property business –
Retail
146 Investment property business –
London Portfolio
150 Investment property business –
Combined portfolio analysis
153 Property Outsourcing –
Land Securities Trillium
158 Investor information
159 Glossary
160 Index
Ibc Contact details
“Everyone knows what a bicycle looks like.
“So draw one, from memory.
We’ll even give you a head start...
“Hard isn’t it?
Don’t worry if you got it wrong – 80% of people do.
“To draw a bicycle correctly, you have to look
at one, to understand how it works.
“As you can see, the pedals don’t drive both wheels.
“In Autumn last year we sent six hundred
children from 14 towns across Britain into
their local surroundings to draw...
“Working with professional illustrators,
they learned to look at their worlds, to
understand their environments, and how
they could be a creative part of them.
“It’s a process we understand.
We are a creative part of those environments too.
“Take the Bullring in Birmingham. Where others
saw a roundabout, we saw an opportunity. And
with our partners we created a new retail heart for
Birmingham, moving the city to the number two
spot in the retail hierarchy rankings.
“Sometimes it’s about identifying basic
human needs.
“At lunchtime, St Paul’s, London is one of the most
densely populated areas of Britain...but there
are no shops (unless you live on sandwiches).
It’s amazing what gets overlooked.
“So, we are going to develop One New Change
into the largest office and retail site the City of
London has ever seen.
“And because we don’t want to miss out on
the view of St Paul’s Cathedral, we’ve cut
our development in half to ensure those
inside can experience the breathtaking views.
“Would you like a gherkin with that?
“Remaining the number one property company
in the UK means thinking creatively, spotting
new opportunities and keeping an open mind.
Recent developments like Cardinal Place,
Whitefriars Canterbury and the project for
Norwich Union are testament to our expertise
in making property work.”
Annual Report ’06
18 Performance overview
20 Chairman’s statement
24 Operating and financial review
37 Understanding our numbers
under IFRS
38 Financial review
44 Investment property business
48 Retail
58 London Portfolio
68 Property Outsourcing –
Land Securities Trillium
76 Urban Community Development
78 Board of directors
80 Corporate responsibility
85 Corporate governance
89 Risk management
90 Remuneration report
97 Directors’ responsibilities
98 Independent auditors’ report
17
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s
Land Securities Annual Report 2006
18
Performance overview
Pre-tax profit
up 80.4%
Revenue profit
up 8.2%
Total dividend
up 8.0%
£2,359.2m
£391.3m
46.70p
Includes revaluation surplus as well as
Our measure of the underlying pre-tax profit
Final proposed dividend of 28.55p together with
exceptional items including profit of £293.0m
on sale of Telereal joint venture
the paid interim dividend of 18.15p. Over two
years the dividend has increased by 25%
reflecting confidence in the business
Net assets per share
up 23.5%
Adjusted diluted net assets per share
up 28.5%
Combined portfolio valuation surplus
15.3%
1597p
1912p
£12.9bn
Net assets with full provision for deferred tax on
Impressive portfolio valuation surplus combined
Strong contribution from development activities
revaluation surpluses
with exceptional profit from sale of Telereal
as well as rental growth and continued yield shift
joint venture
Net assets per share (p)
UK GAAP
Dividends per share (p)
02
03
04
05
Basic
Adjusted diluted
IFRS
05
06
Basic
Adjusted diluted
1151 1157
1188
1219
1294
1331
1419
1460
02
03
04
05
1293
1488
1597
1912
06
34.00
35.50
37.10
43.25
46.70
xxx
Land Securities Annual Report 2006
19
Performance overview continued
Welcome. We’ve had an excellent year and
we hope that you enjoy reading the 2006
Annual Report to discover more about
our achievements.
Our accounts explained
To help you understand our accounts we
detail here some of the key terms we use and
conventions we have adopted, with an
explanation of their meaning:
Financial highlights
Gross property income (including joint ventures)
Revenue profit: Profit before tax, excluding
profits on the sale of fixed asset and trading
properties, profits on long-term development
contracts, revaluation surpluses, mark-to-
market adjustments on interest rate swaps and
similar instruments used for hedging purposes,
31/03/06
31/03/05
% change
Retail
London Portfolio
Other investment portfolio
Property outsourcing
Total
Operating profit
Pre-tax profit
Revenue profit
Earnings per share
Adjusted diluted earnings per share
Dividends per share
Diluted net assets per share
Adjusted diluted net assets per share
Combined portfolio valuation
Net borrowings
Equity shareholders’ funds
Gearing (net)
£371.8m
£514.0m
£88.8m
£298.1m
£358.1m
£165.2m
£1,013.6m
£1,054.8m
£1,988.2m
£1,876.2m
£2,443.4m
£1,404.8m
£2,359.2m
£1,307.5m
£391.3m
357.95p
70.47p
46.70p
1590p
1912p
£361.8m
227.32p
66.87p
43.25p
1289p
1488p
£12,892.9m
£9,365.8m
£3,685.9m
£2,438.1m
£7,493.9m
£6,050.3m
49.2%
40.3%
+24.7%
+43.5%
-46.2%
-3.9%
+6.0%
+73.9%
+80.4%
+8.2%
+57.5%
+5.4%
+8.0%
+23.4%
+28.5%
+37.7%
+51.2%
+23.9%
the adjustment to interest payable resulting
from the amortisation of the bond exchange
de-recognition, the one-off pension credit and
any exceptional items
Adjusted diluted earnings per share: These
are based on revenue profits plus profits on
trading properties and long-term development
contracts after tax
Adjusted diluted net assets per share: This
is often used to evaluate the performance of
a property company and is calculated by
dividing equity shareholders’ funds, adjusted
primarily for deferred tax arising on revaluation
surpluses and capital allowances and the bond
exchange de-recognition, by the number of
shares in issue
Combined portfolio: The combined portfolio,
see page 150, is our wholly-owned investment
portfolio combined with our share of the value
of properties held in joint ventures. Unless
stated these are the pro-forma numbers
we use when discussing the investment
property business
Retail: This business unit includes shopping
centres, retail warehouses, shops outside
London, shops held through the Metro
Shopping Fund LP, regional offices and
sundry other regional properties
London Portfolio: This business unit includes
all London offices and London retail, but
excludes those assets held in the Metro
Shopping Fund LP
Other investment portfolio: This comprises
all other investment properties not included
in Retail or London Portfolio
Land Securities Annual Report 2006
20
Chairman’s Statement
“We’ve delivered a total business return of 32.4%,
demonstrating a strong performance from all areas
of the business.”
Peter Birch
Chairman
The outstanding performance of Land Securities over the past 12 months can be summed up by the
28.5% growth in adjusted diluted net assets per share, driven largely by the 15.3% valuation surplus
on our investment portfolio and the £293.0m profit on the sale of Telereal. Growth in net assets is
one of the leading financial measures against which we are benchmarked and I am delighted with
this result in a year which was exceptional for both Land Securities and the property industry. Under
International Financial Reporting Standards (‘IFRS’) our pre-tax profit was £2,359.2m and now
includes revaluation surpluses as well as exceptional items, providing a simple measure of the value
we have created for shareholders. Revenue profit, our measure of underlying pre-tax income, was up
8.2% to £391.3m and we are recommending a final dividend of 28.55p per share. Over the year we
have delivered a total business return of 32.4%.
Benchmarking
We have reported against key benchmarks for three years now, allowing you to evaluate our
performance against our major competitors and the underlying commercial property market.
Once again this year the Group outperformed all its key benchmarks and, given the important
role benchmarks play, I hope you will not mind if I expand a little on these here.
Total shareholder return
Total shareholder returns
Total shareholder return is the most widely recognised way to compare returns from one publicly
quoted company against another. As a constituent of the FTSE100 we compare our performance
against both this and the FTSE Real Estate Index, over the 12 month period under review and
since 1 April 2000 when we embarked upon the reinvigoration of the business. This year we
produced a total shareholder return of 54.3% compared to 25.5% for the FTSE100 and 48.6% for
FTSE Real Estate Index. The returns over the six years since 1 April 2000 are even more impressive
recording 224.4% for Land Securities compared to 9.8% for the FTSE100 and 210.9% for FTSE
Real Estate.
Land Securities
FTSE100
FTSE Real Estate
Source: Datastream
% return
for year to
31/03/06
% return
for six
years to
31/03/06
54.3
25.5
48.6
224.4
9.8
210.9
Investment Property Databank
The next benchmark we employ is an external commercial property benchmark, known as the
Investment Property Databank (‘IPD’). By participating in this benchmark, which is the industry
standard, we are able to compare the performance of our underlying property portfolios against
the commercial property industry average. It also enables us to set key performance indicators
for our Retail and London Portfolio business units. Our ungeared total investment portfolio return
was 23.3% as compared to 20.6% for the IPD quarterly benchmark.
Total property returns
Year to 31/03/06
LS%(i)
IPD%(i)
Relative
return %(ii)
Total portfolio
23.3
20.6
2.2
Source: IPD quarterly benchmark to March 2006
(i) includes acquisitions, sales and developments
(ii) Relative return relates to the geometric (not arithmetic)
difference between Land Securities and IPD
Land Securities Annual Report 2006
Weighted average cost of capital (‘WACC’)
We also compare our return on average capital employed against our WACC which reflects the
cost of the Group’s equity and debt capital. As well as providing a minimum hurdle rate for our
investment decisions this also provides a sharp focus on the returns we make from our property
investment, development and outsourcing activities.This is essential in a capital intensive industry.
Over the past year our pre-tax WACC moved to 7%, which is half a percent lower than it was a year
ago as a result of a lower cost of debt. Our returns significantly exceeded our cost of capital with a
return on average capital employed of 26.4% and a return on average equity of 35.5%.
Performance highlights
In a year of high activity, I find it extremely hard to pick key highlights to demonstrate to you why
I believe that this business is truly different to the organisation I joined when I became Chairman
some eight years ago. I have, therefore, chosen three examples which not only demonstrate links
to our sources of competitive advantage of scale, financial strength and skills but also ones which
link clearly to our values.
The first is our acquisition of Tops Estates PLC which was the first acquisition of a publicly-quoted
company made by us for over 35 years. The fact that we could purchase a business for over £0.5bn
(including debt) and finance this out of existing resources is testament to our financial strength,
particularly as we also invested a further £1.8bn across our business in the same year.We now own
30 shopping centres, which receive some 300 million visits per annum and provide some 5.8% of
the retail accommodation across our core markets. This represents scale in a fragmented industry
and can only be of benefit to our customers, the retailers. However, the reason that this acquisition
so manifestly fulfils our values criteria is because the founder Chairman and majority shareholder
of Tops Estates, Everard Goodman, had sufficient confidence in our Company values that he
recommended the sale to us of a business that he had spent a lifetime creating.
Second on my list is the completion of two of our substantial developments, namely the mixed-use
development at Cardinal Place, London SW1 and Whitefriars retail scheme in Canterbury. To date,
we have invested a total of £369.8m in developing these two schemes and our development and
project management teams delivered 46,580m2 of retail space and 51,130m2 of office space.
The return on our investment, including acquisition costs, was 46.3%. Cardinal and the Whitefriars
Quarter are now in the top ten properties in our £12.9bn combined portfolio. These schemes
created 2,400 retail jobs and, at Cardinal Place, we will provide new accommodation for some
4,000 office workers. The link here with our values? Our values underpin our approach to
development enabling us, in complex and difficult circumstances, to create attractive and
economically thriving environments.
The third example is the sale of Telereal, which generated £293.0m of profit for shareholders.While
it is always difficult to sell out of successful ventures, we made this decision in anticipation of future
reinvestment opportunities. The profit generated speaks volumes about the value Land Securities
Trillium has created for the Group, leaving it poised for further growth from new business, the
winning of which is supported by the excellent reputation for customer service that this business
has developed.
The Board
We are fortunate to identify and recruit individuals to the Board with wide-ranging and
complementary skills, who provide clear strategic direction, strong guidance and leadership to
the Group. It is our primary responsibility to support and challenge executive management as they
pursue our strategic objective of creating long-term sustainable returns for shareholders as well
as ensuring the governance of the business on your behalf.
I would like to welcome our new finance director, Martin Greenslade (41) who joined the Board
earlier this year from BAE Systems and has supported the organisation through the transition to IFRS.
21
Chairman’s Statement continued
Land Securities’ returns (%)
Years ended 31 March
40
35
30
25
20
15
10
5
.
0
0
0
00
01
02
03
04
05
06
0
■ Return on average equity
■ Return on average capital employed
■ Weighted average cost of capital (all figures are pre-tax)
* Excludes exceptional charge
Note: 2002/03 weak London office market
Our values
Integrity
Respect for the individual
Excellence
Customer service
Innovation
Land Securities Annual Report 2006
Communicating
We launched our new occupier portal, a
property management tool, which has been
well-received by retailers, further evidence
of the importance we place on making life
easy for our customers.
22
Chairman’s Statement continued
Strategic direction
Six years ago we set out a new strategic direction and embarked upon a series of business initiatives
aimed at the transformation of the Land Securities Group. The ambition was to create a modern,
dynamic property business with a strategic focus on the customer and on income as well as asset
value growth.We have been very successful in our ambitions.We have re-invigorated the investment
property business, through an active sales and acquisitions programme, creating two highly-focused
business units which, through scale, are now meaningful providers of accommodation to retail and
London-based office occupiers.We have also invested in our property outsourcing business, Land
Securities Trillium, creating the market-leading property solutions provider. This represents real
innovation in an industry which can be slow to accept change.We have also become a more
demanding employer, focusing our people with stretching performance-based reward schemes
and challenging many to adopt new ways of working and new skills.
Outlook
We have made considerable progress on all fronts this year and, in particular, have positioned
our London Portfolio business to benefit from the strong growth that the London office market
is enjoying and which, we believe, it will continue to enjoy. Our Retail business has a scale and
quality of assets positioning it to generate ongoing income growth in a more challenging retail
environment, and Land Securities Trillium is now pursuing a wider range of new business
opportunities than at any time in the past.
However, over the next 12 months we expect certain aspects of our environment to be more
challenging. The Department for Work and Pensions, the largest of our property outsourcing
customers, has started to use its flexible accommodation allowance, so, as expected, income from
that contract will decrease over the next few years.We also do not believe that the unprecedented
levels of growth in property values will continue at the same rate or necessarily be sustainable
across all property types, particularly more secondary buildings. This growth occurred against
a background of low interest rates which have increased recently in both Europe and America
and it is for this reason that I sound a note of caution. At this time in the cycle we need to be
particularly astute when purchasing standing investments and also take the opportunity to capture
value through selective sales. However, if growth should slow or stall, we are in a strong financial
position to be acquisitive once more while at the same time continuing to use our skills to create
value from within our portfolio.We can also invest more in development and property outsourcing,
which rely more heavily on our skills to deliver value to shareholders rather than the forces of
investment markets.
We now also have the prospect of a thriving Real Estate Investment Trust (‘REIT’) sector in the UK
and we are enthusiastic about the opportunities this will present to us. Our preliminary assessment
is that the regulations being introduced with REITs will not adversely inhibit flexibility and we
believe that our existing strategy and mix of business can be accommodated within them.While we
will not announce any final decision on REITs in advance of enacted legislation, our view at present is
that we are ideally positioned to benefit from this status. I would hope to announce our intentions
and the implications for shareholders in the coming months and, subject to any unforeseen
obstacles, am of the view that it will be in shareholders’ interests to convert as soon as is practical
after 1 January 2007.
Land Securities has enjoyed a year of strong growth helped by continuing low interest rates. The
outlook is positive for the business with a strong development pipeline, a high quality investment
portfolio and an outsourcing business which has growth potential. I would like to congratulate
everyone who has made this possible, most especially our people.
Land Securities Annual Report 2006
Piccadilly lights, London
We look after many important properties,
but Piccadilly Circus is such a national
icon and global tourist attraction that
the advertising generates more income
than the buildings.
Who would have thought that the lights
would be worth more than the bricks?
Land Securities Annual Report 2006
24
Operating and Financial Review
“An increase in the adjusted net assets of the Group of just
under 30% in a year is of some significance. This value
creation was founded upon an exceptionally high level of
activity with over £3.5 billion of capital turnover in the year.”
Francis Salway
Group Chief Executive
Twelve months ago we reported that there was a real sense of achievement across the Land
Securities Group as we delivered a very strong performance. This remains the case as we continue
to deliver across all areas of the business. Our combined portfolio outperformed the IPD quarterly
benchmark by 2.2%, we completed 161,000m2 of new development and Land Securities Trillium
made a substantial contribution to Group profit.
So what is different? We are about to enter into a new environment for the quoted property sector
with the introduction of REITs, which are widely expected to benefit both us and the industry. In
addition, we believe that the property yield shift is almost complete, and therefore, the creation of
value will come from development and asset management activity rather than market-determined
valuation movements. One of our most important groups of customers, retailers, are facing more
difficult trading conditions and we will need to continue to work assiduously to ensure that we
provide them with the best possible trading environment. After an outstanding year in terms of
profit performance, Land Securities Trillium expects profits to decline as the Department for Work and
Pensions (‘DWP’) uses part of its flexible accommodation allowance and as we invest in new business.
We also report our numbers differently this year; so we have tried to communicate clearly the
principal changes under IFRS so that you understand fully the Group’s financial position.We
endeavour to be at the forefront of reporting and this year we have also officially adopted the
principles of the Operating and Financial Review (‘OFR’) which we have been anticipating for the
past two years.We are delighted to report that our efforts on this front were recognised by the
award for the second consecutive year of the EPRA (‘European Public Real Estate Association’)
Annual Report Trophy for best annual report in the European quoted property sector. The demands
of IFRS and the OFR have this year resulted in a longer report so, in order to minimise our impact on
the environment, we are encouraging investors to sign up for online shareholder services, including
online reports, further details of which are on page 158.
Core purpose and strategy
At Land Securities our core purpose is making property work. This simple statement masks
the enormous influence we have on the day-to-day lives of thousands of people across the UK.
For occupiers and clients it means providing buildings and services which help them to operate
successfully every day. For communities, it means providing the buildings and places where
people live, work and relax. For our people, it is the satisfaction of the positive impact we have
on communities. For shareholders it is the superior investment returns that we have generated.
Our strategy is pragmatic. It is to invest in commercial property in sectors where we have expertise
and operational skills which give us competitive advantage. In these sectors we will apply our risk
management skills and actively recycle capital in order to deliver total returns in excess of our cost
of equity. To deliver this strategy, the business is focused on three core sectors of the UK property
market: retail property, London offices and property outsourcing.
Land Securities Annual Report 2006
Active capital management (£bn)
Investment
Receipt Investment
Receipt
06
05
04
03
02
01
1.5
2.0
1.0
0.5
2.5
■ LS Trillium disposals ■ Disposals
■ Property investment expenditure ■ Development expenditure
■ LS Trillium acquisitions ■ Corporate acquisition ■ Capital returns
-0.5
-1.0
-1.5
-2.0
0
-2.5
Making property work
Mark Collins (left)
Chief Operating Officer
Martin Greenslade (right)
Group Finance Director
We discuss the financial strategy for our business later on in the review, but it is worth noting here
that we operate in a capital intensive industry and our performance, therefore, is linked closely to
the investment decisions taken by management. One of the key decisions we made on this front
was to invest more into development and property outsourcing activities and we are pleased to note
that this strategic shift of focus has resulted in enhanced returns for shareholders.
Our investment property business comprises two business units operating in the retail and London
property markets. Combined, these businesses produced £469.7m of our underlying operating profit,
representing approximately 85% of the total. Their activities include property investment,
development and management and, in our core markets of retail property and London offices, we
provide about 5.8% and 4% respectively of the market floorspace. Land Securities Trillium, our
property outsourcing business which provides bespoke property solutions incorporating the
provision of property accommodation and related property services, produced £96.6m of our
operating profit. This relatively young business has a proven track record for returns and profit
growth, having met its target of contributing 25% of Group operating profits in 2005, two years
ahead of plan. Last financial year we took capital out of the BBC contract through the sale of White
City and this financial year we disposed of our interest in Telereal.These actions have left us well
positioned to invest in the new opportunities Land Securities Trillium is currently pursuing.
The property outsourcing business offers the Group opportunities for growth in a market which is
not exposed to the property cycle or the economy in the same way as our traditional investment
property business. It is also a market which offers significant growth opportunities through
Government outsourcing and Public Private Partnerships (‘PPP’) procurement.With this growth
opportunity and diversification in mind, we apportion capital between our investment property
business and property outsourcing. In addition, following publication of the proposed REIT
legislation, we believe that the Land Securities Trillium business is capable of being included,
with the rest of our business, in a REIT.
Our markets
Regulatory
The Government published its proposed legislation for the introduction of REITs in the UK in April
2006. The legislation is likely to be enacted in the Finance Act in July 2006 allowing REITs to be
formed from 1 January 2007. UK-REITs will be publicly listed, limited liability companies resulting
in no change in the corporate status for quoted property companies such as Land Securities.
Conversion to a REIT will involve a change in tax status, and is the means by which the Government
intends to create a level playing field in terms of taxation between owning shares in a quoted
property company and direct ownership of property. In return for paying a conversion charge,
equal to 2% of the gross value of qualifying property assets, REITs will then be exempt from both
corporation and capital gains tax on their qualifying property activities. Dividends paid by REITs
will be subject to withholding tax.
Operating and financial review continued
25
Developing property
We have the potential to deliver
some 880,000m2 of new commercial
accommodation across the UK by 2010.
Floorspace – million m2
3.3
1.9
1.0
Retail
London Portfolio
Land Securities Trillium
Other
Land Securities Annual Report 2006
26
Operating and financial review continued
As detailed in the Chairman’s Statement we are waiting for final legislation to be enacted, following
which we will announce whether the Board believes conversion to a REIT will be in the interest of
our shareholders. At present, we consider it likely to be so. Should the Board decide to make a
positive recommendation we will need to alter our Memorandum and Articles of Association
which will need the approval of our shareholders at an Extraordinary General Meeting.
Competitive landscape
Land Securities operates wholly in the UK commercial property market.We are the largest quoted
property company in Europe measured by market capitalisation, which at £8.4bn represents 21%
of the UK quoted property sector.We have a diversified business model, focused on retail property,
London offices and property outsourcing.Within these core sectors, our activities include property
management, investment, development and the provision of property related services.We are one
of only two quoted property companies which operate on a significant scale in the property
outsourcing market.
In the past year the investment property market has become even more competitive, with
enormous domestic and overseas investor appetite for UK property. This has been driven by the low
cost of finance, economic and political stability and the UK’s long-term lease structure (described in
more detail in the ‘Owning property’ section of this review). Our response has been to pursue more
opportunities in development and property outsourcing where we see prospects to achieve higher
returns, and to acquire property not openly available on the investment market.While we
are selective in our acquisitions, we have also been able to acquire portfolios of property through
corporate acquisitions, benefiting from our financial strength and the cost efficiencies of corporate
as opposed to asset specific acquisitions.
We believe that the scale of our business will continue to be a source of competitive advantage, as
evidenced by our ability to finance large scale development and investment projects at a lower cost
of debt than many others in the industry.We also have a relatively large market share of the sectors
in which we invest, providing competitive advantage in terms of relationship management with key
customers. Over time we plan to capitalise on this to increase further our market share in each of
our core markets.
In 1988, at its peak, the property sector represented 5.65% of the FTSE Index.Today it represents only
2.25% as a result of the growth in the size of other sectors together with a number of quoted property
companies becoming private. However, with the expected removal of the tax inefficiencies of holding
property in a quoted vehicle through the introduction of UK-REITs, we are anticipating growth in the
quoted property sector.We expect to see, over time, the emergence of substantial new quoted
companies as owner-occupiers and pension funds use this opportunity to reduce their direct property
holdings in exchange for UK-REIT shares which will be more liquid and less management intensive.
Land Securities combined portfolio value
at 31/03/06
£12.9bn
Last year we reported that the UK commercial property market had a total value of nearly £500bn,
excluding Government-owned property, with 50% of this market held by owner occupiers. Of the
balance, which comprises the property investment market, only 14% is held by the quoted sector.
Experience in other countries following the introduction of REIT structures suggests that it is
reasonable to anticipate a doubling of the size of the quoted sector in the medium-term even if,
as we expect, only a small proportion of pension funds and other property investors take advantage
of the UK-REIT opportunity.
Commercial property market value
£500bn
Source IPF: The size of the UK commercial property markets 2003
Business
Although diversified in terms of our activities, there are some common elements to our business
environment which impact on the business as a whole.
Land Securities Annual Report 2006
Buchanan Galleries
Glasgow is the third biggest retail destination
in the UK, and Buchanan Galleries is its premier
retail development. We were keen to establish
a major presence, so through a complex joint-
venture transaction, we swapped a portfolio
of industrial assets for shopping centre assets.
Others might see competition.We saw a partnership.
28
Operating and financial review continued
While it is easier to predict the supply side for the property market by examining trends on new
floorspace under construction, it is our experience that the demand side, whether it be business
expansion or consumer expenditure trends, is a more important factor in determining growth in
rental values.
Consumer trends are influenced by earnings growth, unemployment levels and interest rates. Trends
in consumer expenditure also impact growth prospects for an increasing proportion of business in
the UK.While macro-economic conditions have remained reasonably stable over the past year, there
is evidence of a weakness in consumer spending as the impact of tax increases, higher energy costs,
personal debt and, in some regions, concerns about job security impact on the retail sector’s
prospects.With continued growth in average earnings and unemployment still at relatively low
levels, we do not expect severe weaknesses in the retail property sector, but rental growth prospects
are likely to moderate.
By contrast, employment growth in London has been strongly buoyed by the performance of the
financial services sector, which has generated rental growth for our London office portfolio and will
continue to do so as vacancy rates for London offices reduce to low levels.
There is also a correlation between property and interest rates or bond yields. Last year we felt there
was little scope for further yield shift. The past twelve months have proven us wrong as bond yields
continued to fall during the 2005 calendar year.We benefited from the buoyancy of the property
investment market both in terms of the underlying value growth of our portfolio and through our
sales programme. In 2006, however, property yields have continued to fall whereas bond yields have
risen. These contrasting trends make it unlikely that we will see sustained ongoing capital growth in
property purely through yield shift, although the weight of money still looking to be invested in the
sector means that yield shift may continue for a few more months.
Our business model
Later in the operating and financial review we examine in detail each of our separate business units
but we thought it would be useful to review here some of the common activities undertaken by
our business.
Owning property
At the core of our activities is the ownership of commercial property. One of the fundamental
changes over the past few years is that we have concentrated our portfolio on larger assets which
provide better opportunities for us to benefit from our scale and asset and property management
skills.We now own 220 investment properties across the country with an average property value of
£58.6m compared to £24.5m five years ago. The combined portfolio, which includes our share of the
value of assets held in joint ventures, was valued at £12.9bn at 31 March 2006 by Knight Frank, our
external valuers. In addition, through Land Securities Trillium, we manage or own over 2,500
buildings. Those we own are held as operating properties on our balance sheet at £0.6bn. One of the
differences between our investment and operating properties is that, with the former, we are free to
sell the buildings when we like, whereas with the latter we can only sell when they are surplus to our
clients’ requirements.We hold the operating properties on our balance sheet at depreciated book
cost and do not revalue them in the balance sheet, unlike the investment property portfolio which is
independently valued twice each year.
Efficiently financed and actively managed, investment in well-let property is reasonably low risk
and the vast majority of our portfolio is just that. This is particularly true if the property benefits
from the traditional UK lease structure which has two unique attributes from an international
perspective. The first is the long-term nature of the leases which usually last more than 10 years and
in many instances can be as long as 25 years. The second is that most leases include an upward-only
Land Securities Annual Report 2006
Investment portfolio outlook (%) yield pricing
7
6
5
4
3
2
1
0
Jul
05
Jun
05
Sep
05
Oct
05
May
05
Jan
Aug
Apr
06
05
05
■ Property equivalent yield ■ 10 year gilt yield
■ Difference between above yields
Source: IPF and Reuters
Nov
05
Dec
05
Feb
06
Mar
06
Combined portfolio valuations £bn as at 31 March
6
7
.
3
5
.
8
4
.
5
4
.
6
3
.
9
3
.
0
3
.
5
3
.
.
5
23
3
.
02
03
04
05
06
■ Total retail property ■ London offices
rent review clause.This has and continues to create controversy between the owners of property and
occupiers and we explain later in the review what we have been doing to address this particular issue.
We expect our activities to generate investment returns in excess of our cost of capital with target
returns of 8-9% on investment property, before taking borrowing into account, and slightly higher
returns from our property outsourcing and development activities reflecting the higher degree of
risk in these activities. In Table 1 we list some of the key risks we believe are involved in
property investment.
Table 1: Property investment risk management
Risk
Description
Market cycles
Property markets
are cyclical
Property risk
Asset value
concentration
Impact
Mitigation
Underperformance of investment
portfolio impacting on
financial performance
Diversified business model – outsourcing is less impacted
by market cycles
Secure income flows under UK lease structure
Annual investment appraisals
Poor performance of a single asset
having material impact on overall
performance
Diversified portfolio
Largest property represents only 4.6% of combined portfolio
Average investment property lot size of £58.6m
Tenant risk
Tenant concentration
Impact on revenue if a major
occupier fails
Health, safety and environment risk
Impact on reputation or potential
criminal proceedings resulting in
financial impact
Responsibility for
the safety of
visitors to our
properties and
our environmental
performance
Diversified tenant base
Government largest single customer representing 9.4% of
gross rents, the next largest represents only 2.1%
Of our income 74% is derived from tenants which make less
than a 1% contribution to rent roll
Annual cycle of health and safety audits
Quarterly Board reporting
Dedicated specialist personnel for environment and
health and safety
Established policy and procedures including award-winning
health and safety system and BS8555 certified
environmental system
Active environment programme addressing key areas of
impact (energy and waste)
Developing property
One of Land Securities’ key differentiators is our ability to deliver large, complex, mixed-use
developments both on our own behalf and for third party clients.We are one of only a handful of
UK companies today which has these capabilities. Our target investment return for development
activities is between 11% and 14% depending upon whether the project is started with or without
any lettings in place.
Through development we continue to renew our portfolio and create assets of a quality seldom
available on the open investment market. It is an activity where our achievements demonstrate
real competitive advantage, especially if you consider that negotiating the labyrinthine planning
system in the UK is but one element of an enormously complex regeneration process.
Table 2 shows all the development currently being planned by us. In the year under review we spent
£488.7m on development activity and we expect this level of spend will continue at similar levels as
compared to an average annual spend of some £250m in the previous five years.
Operating and financial review continued
29
Table 2: Group development activity
No of
projects
Floorspace
m2
TDC
£m
620
456
221,070
143,110
364,180
1,076
211,250
1,172
89,820
883
301,070
2,055
157,610
55,360
n/a
n/a
ERV
£m
43
32
75
101
61
162
n/a
n/a
Retail
Programme
Proposed
development
Total pipeline
London Portfolio
Programme
Proposed
development
Total pipeline
Land Securities
Third party
8
4
12
5
3
8
3
Land Securities Trillium
2
Third party
TDC: Total development cost
ERV: Estimated rental value
Land Securities Annual Report 2006
30
Operating and financial review continued
Our ability to deliver complex development projects relies upon a range of skills built up over a
number of years which incorporate site assembly, design, project management, public consultation
and change management capabilities.We now have a team of 80 people involved in the delivery of
development projects addressing the numerous requirements of our stakeholder groups.
Stakeholder groups
Stage
Site assembly
Design
Development is one way to create additional value for shareholders with our ongoing developments
contributing £317.6m (32.9% valuation surplus) this year to the uplift in our valuation. However we
have to manage the risks inherent in this activity as described in Table 3.
Public consultation
Table 3: Development risk management
Risk
Description
Impact
Mitigation
Site assembly risk
Third party interests
in part of site cannot
be acquired
Planning risk
Development
proposals fail to gain
sufficient support
and therefore
planning consent
Construction risk
Construction cost
over-runs or poor
management of
construction
Letting risk
Development
remains unlet
after completion or
fails to meet
lettings target
Unable to progress development either
at all or within budget for site assembly
Policy of buying into all or part of future development sites
early as income-producing investments
Experience of Compulsory Purchase Order procedures
Unable to progress
developments in a
timely manner
Development expertise including:
Skilled development management teams
Public consultation and change management capabilities
Long-standing relationships with key development
stakeholders
Reputation
Returns are eroded by cost
overruns or project completion
is delayed
Transfer of risk to specialist contractors
Skilled project management teams
Impact on profit
Health, safety and environment risk
Impact on reputation or potential
criminal proceedings resulting in
financial impact
Construction is a
high risk activity
in terms of health
and safety; and
the environmental
performance of
a building is
increasingly important
Experienced and skilled in-house leasing teams
Risk evaluation model to ensure that dividend remains
covered by forecast earnings in the unlikely situation that
all our London developments remain 100% vacant and
retail schemes are only 65% let
Advanced health and safety training programme
in place, working in conjunction with our contractors
All our office development schemes are subject to BREEAM
(energy performance) ratings with a target rating of Very
Good
Implementation of sustainable development process checklist
(see below)
Stakeholder
Adjacent owners
Local authorities
CABE
Energy consultants and BREEAM
Heritage bodies
Local authorities
Businesses
Local authorities
Residents
Schools and other community
organisations
Transport
Department for Communities
and Local Government
Local authorities
Local communities
Contractors
Design team
Local communities
Agents
Occupiers
Planning
Construction
Letting
Sustainable development
We are very aware of the long-term impact of development activities, both economically and
environmentally, on the communities these developments support.We address this issue in greater
detail in both our recently published 2006 Corporate Responsibility Report and our sustainable
development brochure which are available on our website and which detail the key aspects we
consider when planning a major new project as described below:
Regenerating
With restrictive planning policies in the
UK, the majority of our activities are
on brownfield sites helping to drive the
regeneration of our towns and cities.
Significant environmental aspects
Other sustainability issues
Mitigation of local environmental import
Economic regeneration and attracting inward investment
Re-use and recycling of demolition waste and use of
recycled materials in construction
Community/stakeholder involvement in decision-
making process
Habitat enhancement to promote biodiversity
Reduction of carbon emissions of developments through
design, energy efficient technology and use of renewable
energy sources
Inclusion of facilities for the storage and collection of
waste to facilitate recycling
Transport surveys and integration of developments with
public transport systems
Design and integration into existing communities, including
uses and housing
Building an effective social infrastructure
Employment creation and skills training
Crime prevention – through better design of public spaces
Use of local labour, suppliers and materials
Land Securities Annual Report 2006
New Street Square, London
We recycled 93% of the waste that was
created when we demolished the original
building and gave 180 tonnes of carpet tiles
to social projects.
When it comes to recycling
we don’t just stop at paper
Property outsourcing
2
m
3.32 million
Commercial accommodation
under management
32
Operating and financial review continued
Property outsourcing
Property outsourcing is probably the largest transformation our industry has seen in the past
10 years. Land Securities Trillium, the market leader in property outsourcing, is now responsible
for providing business accommodation across 3.32 million m2 of property as well as a wide range
of property related services, including:
Release of capital through sale of freehold properties
Transfer of leasehold property risks
Estate and asset planning
Facilities management
Maintenance and life-cycle capital investment
Property development
Property outsourcing differs from property investment in that it offers a tailor-made solution to a
client in terms of their commercial accommodation requirements. In the past an occupier has had
to purchase or lease its business accommodation, procure separately all the services that it needs to
maintain, manage and run that accommodation and retain a property team to manage its activities.
Through property outsourcing, an occupier can transfer the entire responsibility for this to the
property outsourcing company, releasing it from the responsibility of running a property business.
The client will receive a capital sum for any freehold properties that are transferred while the
property outsourcing provider will receive an annual index-linked all inclusive payment (called the
unitary charge). This provides our clients with predictability of pricing.We also offer clients flexibility
with the ability to vacate a proportion of their accommodation on a pre-priced basis and at a timing
of their choice. Land Securities Trillium has a different risk profile to the investment property
business and detailed in Table 4 are its principal risks together with our mitigating activities.
Table 4: Property outsourcing risk management
Impact
Mitigation
Risk
Description
New business risk
Winning attractive
new deals
Service partners risk
Performance of
service partners
Unable to establish new
business pipeline and close
deals impacts on growth
strategy
Impact on reputation and
potential financial penalties
should service partners not
deliver to agreed standards
Vacation of space risk
Clients space remains
unlet after vacation
Impact on income as a result of
shortfall of rental income
Dedicated new business team
Established bid process framework
Regular Investment Committee review
Regular assessment of service partners’ performance
Ongoing suppliers performance reviews
Contingency plan set up with alternative suppliers
where appropriate
Specialist national disposals team manages surplus space
Head rent growth risk
Inflation on head
rents payable higher
than increases in
unitary charge
Growth of head rent on leasehold
properties with negative effect
on income statement
Budgetary forecasts to asset level
Lease restructuring/rent review processes
Freehold buy-ins
Hedging income from freehold against leasehold properties
Health, safety and environment risk
Responsibility for the
health and safety and
environmental risks
on behalf of clients
and their employees
Impact on reputation or potential
criminal proceedings resulting in
financial impact
Annual cycle of health and safety audits
Quarterly and annual board reporting
Dedicated specialist personnel for environment and
health and safety
Established policy and procedures including Award winning
health and safety system and ISO14001 certified
environmental system
Active environment programme addressing key areas of
impact (energy and waste)
Land Securities Annual Report 2006
Operating and financial review continued
33
Our customers
We are responsible for providing business accommodation to over 2,000 organisations across our
three million m2 investment property business and have a total of 5,000 separate leases with
occupiers as well as six property outsourcing clients. The majority of our relationships are long-term,
with an average lease length of 8.7 years and an average property outsourcing contract length of
15.2 years.
Our investment portfolio customers fall into two main groups: occupiers of retail accommodation
and occupiers of commercial accommodation in London. Our tenants include multi-national
retailers, leisure and restaurant operators, Government departments, financial service and banking
organisations, law firms and consultancy practices, major corporations as well as small independent
retailers and office occupiers.
Over the past few years we have seen enormous changes to the contractual relationship between
occupiers and property owners. The key drivers to these changes are global businesses seeking more
flexible ways to procure accommodation in line with practices overseas, together with occupier
dissatisfaction with certain aspects of the typical UK lease structure. In response to this our business
units have developed a wide variety of different products for occupiers which include:
Property outsourcing
Landflex
Index-linked leases
Outsourced service contracts
Turnover-linked retail leases
The majority of these products are focused on the office occupier but we continue to develop new
leasing products for retail occupiers who have different occupational needs.We believe that there
will still be demand for traditional leases but, as the demands of modern business change, so will the
dynamics of the way in which we provide accommodation. The challenge for us is to ensure that we
satisfactorily blend the introduction of new products with more traditional leases, which we believe
will continue to be the preferred option for occupiers and for us in many situations.
Landflex
At the forefront of innovation we
introduced Landflex. This offers occupiers
lease flexibility, service guarantee and
price certainty.
New business
Our new business activities incorporate the acquisition of single buildings or portfolios together
with corporate acquisitions; the creation and expansion of joint ventures; identification and entry
into new markets; the letting of new developments as well as the securing of lettings and renewal
of leases across the investment portfolio and the winning of new property outsourcing contracts.
Much of this activity is conducted at business unit level. For example, our Retail and London
Portfolio businesses have leasing, asset and investment professionals who are focused on securing
lettings across the development programme as well as ensuring that we minimise the levels of
vacancy across the portfolio. This year we have let 83,600m2 of new developments, attracting seven
new occupiers to the portfolio. This represents future annual income of £31.7m.
Three years ago we created a Group business development team to assist with more complex
corporate or portfolio transactions and to examine opportunities for expansion into new non-core
activities. Since formation it has been instrumental in the completion of some £2.3bn of
transactions, including the property swap with Slough Estates, the corporate acquisitions of
Tops Estates and LxB and the creation of our joint ventures with British Land and Delancey.
We report on Land Securities Trillium’s new business activities later on in this review, since these
are carried out by a dedicated team within this business unit.
Land Securities Annual Report 2006
34
Operating and financial review continued
Our people
The Chairman remarked that we were becoming “a more demanding employer” which has resulted
in a period of sustained change for our 1,800 employees. In response to this, the past year has seen
the Group make considerable progress in terms of the way in which it delivers its human resources
strategy which has now been structured into four core areas:
Employee satisfaction
81%
of employees feel positive about their jobs
Communication and engagement
Rewards and recognition
Learning and development
Succession planning and talent management
People are key to the ongoing growth and success of our business which drives our strategy to
become the employer of choice in the property company sector. Our objective is to attract, retain
and develop high performing employees who can add value to the business and to our stakeholders.
Over the next few months we will be facing the challenge of transferring our Media Services
employees to the BBC’s new facilities management partner.We have implemented change in the
DWP contract as we consolidate the expanded contract and in the investment property business we
have introduced new ways of working, including the implementation of a new accounting system.
We are very pleased by the way in which all our employees have embraced these new circumstances.
Land Securities as an employer
87%
of employees believe Land Securities is a better
employer than other companies
Work/life balance
74%
of employees believe they have a reasonable
work/life balance
Communication and engagement
We have a mobile workforce, with about half our employees located outside our headquarters
or regional offices and we are keen to engage with these employees as well as their office-based
colleagues.We also want to ensure that all employees see communication as a two-way process.
To achieve this we have introduced business exchange forums in advance of legislative
requirements. These forums, which meet every three months, comprise an elected representative
group of employees who meet with senior management. Last year we also took the opportunity
to change our employee survey to provide more scope for employees to comment on business
issues and increase the focus on employee engagement rather than just opinions.We also have
a wide range of communication tools in place, such as newsletters, intranet and videos.
Reward and recognition
To remain competitive and to recruit and retain the people we need, we externally benchmark
remuneration packages against a range of comparable organisations and professional skills areas.
In addition to base salary, the majority of our employees participate in performance related bonus
schemes and are eligible for a range of benefits including defined benefit (now closed to new
members) or defined contribution pension schemes, health and life insurance, and a range of
‘salary sacrifice’ benefits.
We previously received approval from shareholders for a revised bonus and long-term incentive
scheme which was introduced to managers last year. This enables managers at all levels to be
rewarded for their contribution at a personal, business unit and Group level.
In keeping with many companies we have reviewed our final salary pension scheme following
extensive consultation with participating employees. Having received Trustee approval, we have
introduced some changes to this scheme which we describe on page 42 of this review.
Engagement
Business exchange forums allow elected
representatives to meet and engage with
senior management.
Land Securities Annual Report 2006
Eastbourne Terrace, London
While renovating this 1970s block
into highly desirable offices, we drilled
down into London’s water table, and
now pump up grey water for all the
heating and cooling requirements.
You don’t add to a drought problem
if you have your own borehole
36
Operating and financial review continued
Business planning
Land Securities has in place a rigorous business planning process, with a five-year rolling Group
forecast supported by annual Group and business unit plans and balanced scorecards. Every six
months our performance against these is reviewed and communicated to employees.
Business plan
Our business plan is produced annually and updated after six months. It is based on inputs from our
five-year asset based forecast, which reflect the current structure of our business together with our
predictions for market conditions.We then overlay assumptions on target gearing levels and capital
allocation across our core sectors and between investment acquisitions and sales, development and
outsourcing. The objective is to ensure a balance between maximising growth in net asset value and
ensuring ongoing growth in earnings.
Balanced scorecard
We are strong advocates of balanced scorecards which look at quantitative performance measures
across the full spectrum of finance, customer, employee, process and innovation.We have had a
balanced scorecard in place for two years and it has particularly helped us to focus on customer
service and the interaction between our people and customers.We see the results of the non-
financial elements of the balanced scorecard as a lead indicator for the health of the business and
include selected key performance indicators in ‘Our performance’ section below.
Our performance
Before moving on to comment in more detail on our financial performance for the year to 31 March
2006 as well as examining more closely the activities of our individual business units, we thought it
opportune to discuss here the Group’s core business objectives, our key performance indicators
(extracted from the balanced scorecard) and our performance against these as set out in Table 5.
Table 5: Key performance indicators
Business objective
Key performance indicators
Progress
To create sustainable, long-term returns for shareholders
Sustained real growth in earnings per share
to be at least 3% per annum over rolling
three-year periods
Annual revenue profit to exceed budget target
To maximise the returns from the investment portfolio
Normalised adjusted earnings per share growth over three years to
31 March 2006 exceeded RPI by 7.5% per annum
Achieved for this financial year
IPD outperformance in each core sector and
on an overall portfolio basis by 1%
Outperformed all three criteria, but Retail was below our target
performance range (see right)
To complete and let our development programme
>£11m retail development lettings to be completed
>£30m of office development lettings to be
completed
Development to be completed on budget and time
Just under £11m of retail lettings achieved with a further £3m in
solicitors’ hands
>£12m of lettings achieved with a further £8m agreed after year end
Slight delay in achieving practical completion at Cardinal Place, otherwise
schemes completed on schedule
To grow our property outsourcing business by winning new contracts and expanding existing ones
Secure two new business contracts, one with a
new client
Barclays and Norwich Union extensions and Mill Group joint venture
Introduce new products and services which meet the need of our customers
Acquire additional 15,000m2 of accommodation
for Landflex
Develop and introduce occupier portal
Acquired 8,720m2 of new accommodation in one building
Developed during year, introduced shortly after year end
Ensure high levels of customer satisfaction
Overall customer satisfaction in retail and London
to exceed targets
90% satisfaction ratings from outsourcing clients
Achieved in year
Achieved in year
Attract, develop, retain and motivate high performance teams and individuals
Employee engagement to exceed ETS industry
benchmark
Grand mean score of 2.96 compared to benchmark of 2.86 –
this is on a scale of 1 to 4 with over 3 being considered excellent
Land Securities Annual Report 2006
Total property returns year to 31 March 2006
All property
Retail(1)
London Portfolio(1)
Land Securities
% pa
23.3
19.3
28.3
IPD
%pa
20.6
19.1
24.6
Source: IPD Quarterly benchmark to March 2006
(1) Based on Land Securities business unit structure as defined on page 19.
Understanding our numbers under IFRS
Operating and financial review continued
37
statement (the IFRS term for the profit and
loss account) and not as a movement on the
revaluation reserve.
b. Revaluation surplus on those properties held
for the long-term and at an appropriate rate
for those held for disposal, and the tax
related to the suplus period appears in the
income statement. There will be no change
to the amounts of tax we actually have to pay.
c. There is no longer a distinction between joint
ventures and JANEs (‘joint arrangements
that are not entities’) and both are now
reported under one line in the income
statement and balance sheet.
d. We have had to restate how we accounted
for the bond refinancing, described as the
bond exchange de-recognition adjustment,
which took place in November 2004.We
originally presented this as a repayment of
the existing bonds and the issue of new
bonds, but, under IFRS, we need to reinstate
the value of our old bonds and gradually
e.
increase our liability up to the nominal value
of our new bonds. This gradual increase
occurs over the life of the bonds and is
charged through the interest line in the
income statement. There will be no change
to the amounts of interest we actually pay.
IFRS requires that we only recognise
dividends once they are approved at the
Annual General Meeting for the final
dividend or by the Board for the interim.
Therefore proposed dividends are no longer
shown as a liability in the Group balance
sheet, and the change recognised in equity
represents the dividends approved in
the year.
How have the numbers changed?
The following summary picks out the significant
changes from how our results would have been
presented under UK GAAP to how they are now
presented under IFRS. The reference to Notes a
to e refer to the items listed above.
Since this is the first time that we report our
full year’s results under IFRS, we have
reproduced our guide “Understanding our
numbers under IFRS” which we provided at the
half year.
What is IFRS?
From 1 January 2005, all groups in the European
Union that are listed on a regulated stock
exchange are required to report their financial
figures using IFRS.
What impact has this had on Land Securities?
The most important point is that IFRS affects
accounting only. There is no impact on the
underlying business or its cash flows. The main
numerical impacts on the financial statements
are that:
a. The surpluses and deficits arising on the
revaluation of the investment property
portfolio will now appear in the income
Key financial impacts of IFRS
UK GAAP
Description
Gross property income
UK
GAAP
£m
1,982.5
Revaluation
surplus
Note a
£m
–
Profit before interest and taxation
1,063.3
1,579.5
Profit before taxation
844.4
1,579.5
Change of
accounting
for JVs &
Janes
Note c
£m
(159.5)
(158.9)
Amortisation
of bond
exchange
Goodwill derecognition
Note d
£m
impairment
£m
–
(64.5)
–
–
8.5
(64.5)
(28.1)
Deferred
tax
Note b
£m
–
–
–
Dividend
Note e
£m
–
–
–
–
–
Other
£m
5.7
24.0
19.4
IFRS
£m
IFRS
Description
1,828.7 Group revenue
2,443.4 Operating profit
2,359.2
Profit before
tax
Profit for the
financial
period
Basic earnings
per share
Total
shareholders’
equity
Profit after taxation
658.5
1,579.5
(473.9)
14.1
(64.5)
(19.7)
Basic earnings per share (p)
140.65
337.34
(101.21)
3.01
(13.78)
(4.21)
(18.1)
1,675.9
(3.85)
357.95
Shareholders’ funds
8,750.2
–
(1,664.2)
(79.7)
–
375.3
134.0
(21.7)
7,493.9
This represents the valuation surplus
over the 12 months to 31 March 2006.
In profit after tax, the deferred tax
principally represents the charge for
the valuation surplus in the year, while
under shareholders’ equity it
represents the cumulative charge
for all revaluations.
Our acquisition of Tops Estates PLC
gave rise to goodwill because of the
requirement to provide deferred tax
on all historic valuations. This charge
represents our decision to provide
against this goodwill.
This charge shows the effect before
and after tax of gradually increasing
the value of our old bonds to the
nominal value of our new bonds.
Represents the final dividend payable
in July 2006.
We also include a more detailed reconciliation of equity and profit in note 35 to the financial statements.
Land Securities Annual Report 2006
38
Operating and financial review continued
Financial Review
Headline results
Profit before tax increased by 80.4% to £2,359.2m as compared to £1,307.5m for 2005. Revenue
profit, our measure of underlying profit before tax, increased by 8.2% from £361.8m to £391.3m.
Earnings per share were 357.95p, up 57.5% (2005: 227.32p) with adjusted, diluted earnings per
share at 70.47p showing a 5.4% increase on the prior year (2005: 66.87p).
The combined portfolio rose in value from £9.4bn to £12.9bn, which included a valuation surplus
of £1,683.1m or 15.3%. More detail of this performance is contained in the Investment Property
Business review. Net assets per share rose by 23.5% to 1597p from 1293p, with adjusted diluted
net assets per share rising by 28.5% to 1912p (2005: 1488p).
Profit before tax
Under IFRS, profit before tax effectively represents the total pre-tax return to shareholders for
the year, including both realised and unrealised gains and losses on the value of our investment
properties. Previously, unrealised gains and losses were taken directly to reserves without being
recognised in the income statement. In 2006, profit before tax increased by 80.4% to £2,359.2m,
representing a pre-tax return of 39.0% on shareholders’ equity at the beginning of the year. The
principal drivers behind the increase in profit before tax are detailed in Table 6.
ofit
Revenue
Table 6: Profit before tax and revenue profit
Principal changes
Year ended 31 March 2005
Valuation surplus (A)
Profit on disposal of Telereal (B)
Distributions received from Telereal (C)
Impact of Telereal sale 30 September 2005
Profit on disposal of fixed asset properties
Profit on sale of trading properties
Debt restructuring interest saving (D)
Increase in capitalised interest (E)
Amortisation of bond de-recognition (F)
Long-term contract profits (G)
Goodwill impairment (H)
Property outsourcing profit (I)
Net rental income (J)
Exceptional costs relating to debt restructuring (K)
Interest on increased debt
Other
Year ended 31 March 2006
Profit
before tax
£m
Revenue
profit
£m
1,307.5
361.8
787.6
293.0
(53.7)
–
–
–
–
(17.4)
(35.8)
7.2
14.7
9.4
(16.9)
10.3
(51.8)
2.8
50.7
64.6
(30.7)
0.3
–
–
14.7
9.4
–
–
–
2.8
50.7
–
(30.7)
–
2,359.2
391.3
(A) The valuation surplus was £787.6m higher than last year as described in the Investment Property Business section.
(B) The disposal of our interest in the Telereal joint venture was completed on 30 September 2005.
(C) Distributions from Telereal were significantly higher in 2005, reflecting a full year and higher levels of property sales.
(D) This represents a full year’s reduction in interest charges compared to a part year in the prior period resulting from the debt restructuring in
November 2004.
(E) Capitalised interest is higher than last year due to greater levels of investment in developments, principally at Cardinal Place and Bankside 2 and 3.
(F) The debt instruments issued as part of the refinancing in November 2004 do not meet the requirements of IAS 39 as they are not deemed to be
substantially different from the debt they replaced. As a result, the book value of the new instruments is reduced to the book value of the debt it
replaced and the difference is amortised over the life of the new instruments. This year’s charge was for the full year compared to five months in the
prior period.
(G) Higher levels of activity, primarily the recognition of profits from the development contract to build Bankside 1 for IPC.
(H) Goodwill arising on the acquisition of Tops Estates PLC in June 2005, against which full provision has been made, is principally attributable to deferred
tax on the revaluation of its investment properties.
(I) Better performance on DWP contract, largely offset by the lower unitary charge from the BBC contract.
(J) Largely driven by acquisitions and developments coming on-stream.
(K) Costs incurred last year related to the debt refinancing and not repeated in the current year.
Land Securities Annual Report 2006
Revenue profit
Revenue profit is our measure of the underlying pre-tax income of the Group. It is a financial
measure we use internally to report our results and includes the pre-tax results of our joint ventures
but excludes capital and other one-off items such as the valuation surplus and gains on disposals.
For this year end, we have amended our definition of revenue profit to exclude trading profits and
long-term contract income as both of these are considered more capital in nature than revenue.
Furthermore, unlike the majority of our revenue profit, trading profits and long-term contract
income will remain taxable even if we convert to REIT status.
Revenue profit for the year grew by 8.2% from £361.8m to £391.3m. The main reasons for this
increase are detailed in Table 6. Under our old definition, revenue profit including trading profits
and long-term contract income increased by 8.4% from £401.3m to £434.9m.
A reconciliation between profit before tax and revenue profit is shown in Table 7.
Earnings per share
Basic earnings per share grew by 57.5% to 357.95p (2005: 227.32p), the increase being mainly
attributable to the same reasons as set out for profit before tax in Table 6. The growth in earnings
per share, however, has also been impacted by a rise in the tax rate. Reasons for the change in
tax rate are set out in the section on taxation.
In the same way that we adjust profit before tax to remove capital and one-off items to give
revenue profit, we also report an adjusted earnings per share figure, although this includes some
additional adjustments to revenue profit. The adjustments to earnings per share are set out in
note 11 to the financial statements and are based on the guidance given by EPRA with a limited
number of further adjustments to reflect better our underlying earnings. Adjusted diluted earnings
per share rose from 66.87p per share in 2005 to 70.47p per share in 2006, a 5.4% increase. The
growth in adjusted diluted earnings per share is largely due to the items related to changes in
revenue profit as well as the lower profits on sale of trading properties and higher long-term
contract income. Adjusted diluted earnings per share has not grown as strongly as revenue profit
because of the higher current tax rate discussed below.
Dividend
We are recommending a final dividend of 28.55p per share this year, compared to 32.85p in 2005.
Taken together with the interim dividend of 18.15p (2005: 10.40p), the total dividend of 46.70p
represents an increase of 8% over last year’s total of 43.25p. The lower proposed final dividend is
more than offset by this year’s higher interim dividend, which reflected our move to pay
approximately 40% of our total dividend at the interim stage.
This dividend for 2006 is covered 1.5 times by adjusted earnings (2005: 1.6 times). Subject
to approval by shareholders at the Annual General Meeting to be held on 19 July 2006, the final
dividend will be paid on 24 July 2006 to shareholders on the register on 23 June 2006.
The decision to increase our dividend by 8% is both a reflection of the growth in revenue profit
and our view that the introduction of REITs will increase the focus of listed property companies
on dividend payout ratios, irrespective of whether or not they convert to REIT status. Our aim will
continue to be to deliver steady dividend growth, although we recognise the quantum of future
dividends will be influenced by whether or not we choose to become a REIT.
Operating and financial review continued
39
Table 7: Reconciliation of profit before tax to
revenue profit
Profit before tax
Revaluation surpluses – Group
– joint ventures
Fixed asset property disposals
Goodwill impairment
Exceptional costs of debt restructuring
Mark-to-market adjustment on interest
rate swaps
2006
£m
2005
£m
2,359.2
1,307.5
(1,579.5)
(105.5)
(75.3)
64.5
–
2.2
(827.9)
(69.5)
(122.5)
12.7
64.6
2.7
Eliminate effect of bond exchange
de-recognition
28.1
11.2
Credit arising from change in pension
scheme benefits
(8.3)
Profit on disposal of Telereal joint venture (293.0)
Adjustment to restate the Group’s share
of Telereal earnings from a distribution
basis to an equity basis
Joint venture tax adjustment
Revenue profit (old definition)
Profit on sale of trading properties
5.0
37.5
434.9
(21.7)
Long-term development contract income
(21.9)
Revenue profit (new definition)
391.3
–
–
(23.2)
45.7
401.3
(27.9)
(11.6)
361.8
Land Securities Annual Report 2006
40
Operating and financial review continued
Net assets
At the financial year end, net asset value per share was 1597p, an increase of 304p. In common with
other property companies, we also calculate an adjusted measure of net assets, which we believe
reflects better the underlying net assets attributable to shareholders. IFRS has increased the number
and value of these adjustments, the largest of which is to reverse out the requirement under IFRS to
provide deferred tax on valuation surpluses. The adjustments required to arrive at our adjusted net
assets are listed in Table 8.
Table 8: Net assets
Net assets at beginning of year
Profit after tax
Dividends paid
Other
Year ended Year ended
31/03/05
£m
31/03/06
£m
6,050.3
1,675.9
5,152.2
1,060.9
(238.9)
(175.5)
6.6
12.7
The adjusted diluted net assets per share were 1912p at 31 March 2006, an increase of 424p or
28.5% over the previous year end.
Cash flow and net debt
During the year cash receipts totalled £972.6m from property disposals (including the disposal
of our 50% share in the Telereal joint venture). In total we invested £2,353.4m in our properties
including £1,429.2m on direct acquisitions and £579.1m on corporate acquisitions. From our joint
ventures, we received a net £133.8m, largely as a result of new financing that was put in place during
the year. At 31 March 2006, the Group’s net debt was £3,685.9m, some £1,247.8m higher than
2005 (£2,438.1m). The factors contributing to this increase in net debt are shown in Table 9.
Net assets at end of year
7,493.9
6,050.3
Deferred tax on investment properties
145.0
145.0
Deferred tax on net revaluation surpluses 1,739.7
1,180.7
Mark-to-market on interest rate hedges
8.6
3.6
Debt adjusted to nominal value
(375.3)
(395.0)
Adjusted net assets at end of year
9,011.9
6,984.6
Table 9: Cash flow and net debt
Operating cash inflow after interest and tax
Dividends paid
Property acquisitions (including Tops Estates)
Development and refurbishment capital expenditure
Investment in properties
Other capital expenditure
Total capital expenditure
Disposals (including Telereal)
Joint ventures
Other movements
(Increase)/decrease in net debt
Opening net debt
Closing net debt
Year ended
31/03/06
£m
Year ended
31/03/05
£m
375.9
(238.9)
(2,008.3)
(345.1)
(2,353.4)
(26.9)
(2,380.3)
972.6
133.8
(110.9)
(1,247.8)
(2,438.1)
(3,685.9)
216.6
(175.5)
(315.2)
(378.4)
(693.6)
(19.3)
(712.9)
690.4
157.0
(125.0)
50.6
(2,488.7)
(2,438.1)
Although we have continued to invest substantially during the year, increasing net debt by over
50%, gearing levels have only increased modestly. The main reason for this is that the large valuation
uplift has resulted in increased net assets which have largely offset the growth in net debt. Details of
the Group’s gearing are set out in Table 10, which includes the effects of our share of joint venture
debt, although the lenders to our joint ventures have no recourse to the wider Group for repayment.
Financing strategy and financial structure
Our finance strategy is to maintain an appropriate net debt to equity ratio (gearing) to ensure that
asset-level performance is translated into good returns for shareholders as well as optimising our
cost of capital. It has been our stated intention over the last 12 months to increase gearing through
investment in our development programme and suitable investment properties.
As noted above, we have successfully invested in the business but strong growth in the valuation of
our portfolio has limited the increase in gearing. It is important, however, to put our gearing ratio
into context. The gearing ratio only reflects our year end net debt position and not the average net
debt during the period, which was £3.1bn (2005: £2.7bn). Furthermore, the increase in value of our
Land Securities Annual Report 2006
Table 10: Gearing
Gearing – on book value of
balance sheet debt
Adjusted gearing(1)
Adjusted gearing(1) – as above
plus notional share
of joint venture debt
(excluding Telereal)
At
31/03/06
%
At
31/03/05
%
49.2
46.9
40.3
43.0
51.1
44.2
(1) Book value of balance sheet debt increased to recognise nominal value
of debt on refinancing in 2004 divided by adjusted net asset value.
properties is largely driven by yield shift as opposed to increased rental income. The gearing ratio
is not the key measure of our ability to service the increase in debt. The more appropriate measure
is interest cover.
Despite the increase in our year end net debt, our interest cover ratio, excluding our share of joint
ventures, has improved from 2.39 times in 2005 to 2.65 times in 2006. This reflects our higher
earnings, a full year of lower interest costs due to our debt refinancing and a smaller difference in
the average net debt between 2005 and 2006 than the respective year end positions might suggest.
While Land Securities may have lower financial gearing than some other listed property companies,
it has significant operational gearing through its exposure to a large development pipeline.
Developments tend to provide a greater percentage valuation change than conventional investment
properties, with this being magnified by any change in yields or in occupier demand. Developments
also carry a higher risk around timing, cost to completion and subsequent letting.
On the basis of our interest cover ratio and the significant amount of funds available to us we would
be prepared to see our financial gearing rise modestly from its current position. However, given the
recent strong rise in property valuations and our caution about future growth prospects from
investment properties, it may prove difficult for us to find suitable investment properties to acquire
at this stage in the cycle. It is also becoming increasingly difficult to acquire investment properties
with good medium-term prospects which yield above the marginal cost of our debt although we
continue to invest heavily in development and outsourcing activities.
As well as having the right level of debt in the business, we also need to ensure that we have a
financing structure that is both flexible and cost effective. Both of these issues were addressed in
the last financial year with the introduction of a new funding structure as illustrated in Figure 1.
Operational flexibility is afforded through provisions which allow us to buy and sell assets easily
as well as maintain our development programme.
A committed revolving credit facility as part of the funding structure provides us with the financial
flexibility to draw and repay loans at will, and react swiftly to investment opportunities. The cost
effectiveness of the structure is achieved by providing lenders with security over a large proportion
of our investment properties, resulting in lower interest margins than an unsecured structure.
During the course of the year, we issued our first two new sterling bonds within the secured
structure through our £4bn Note programme. The first was an issue of £400m with a fixed coupon
of 4.875% and an expected maturity of 2017. The second was a £300m 4.625% fixed rate bond
with an expected maturity of 2011. To illustrate the efficiency and flexibility of our funding
structure, the more recent of the two bond issues took four working days from Board approval
to pricing at an effective spread to the prevailing LIBOR of 0.09%.
As at 31 March 2006 Land Securities’ total borrowing amounted to £3,701.5m, of which £750.0m
was drawn under our £2.0bn secured bank facility, and £74.6m related to finance leases. Committed
but undrawn facilities amounted to £1,252.0m. The Group also has £123.5m of uncommitted
facilities. The maturity profile of the Group’s debt is shown in Figure 2. The majority of debt in less
than one year relates to drawings under the committed facility which has a final maturity in
November 2009.
Hedging
We use derivative products to manage our interest rate exposure and have a hedging policy which
requires at least 80% of our existing debt plus our net committed capital expenditure to be at fixed
interest rates for the coming five years. Specific hedges are also used in geared joint ventures to fix
Operating and financial review continued
41
Figure 1: Funding structure
C
L
P
p
u
o
r
G
s
e
i
t
i
r
u
c
e
S
d
n
a
L
Secured Group (Total property assets: £9.4bn(3 ))
Land Securities PLC
Subsidiaries of Land Securities PLC
Unsecured
loans(1)
Secured
loans/notes
etc(2)
Other lenders
Secured lenders
Fixed and
floating
charges over
security group
assets to
secure all
secured debt
Asset transfers and
inter-company funding
permitted
Non-restricted Group
Land
Securities
Trillium
Other joint
ventures &
other assets
Dedicated third party funding
or loan from Secured Group
(1) Limited to the higher of £150m or 2% of total collateral value.
(2) The borrower under the Secured Bank facility is LS Property Finance
Company Limited. Notes are issued from Land Securities Capital Markets PLC.
(3) Source: Knight Frank Valuation Report for 31 March 2006.
Figure 2: Expected debt maturities (nominal)
£m
1000
900
800
700
600
500
400
300
200
100
0
1
1-2
2-5
10-15 15-20
>20
5-10
Years
Secured group
Non-restricted group
Joint ventures
Land Securities Annual Report 2006
42
Operating and financial review continued
the interest exposure on limited recourse debt. At the year end we had £858.2m of hedges in place,
and our debt was 92% fixed. Consequently, based on year end debt levels, a 1% rise in interest rates
would increase full year interest charges by only £3.2m.
Future funding
The Group’s modest gearing levels and interest cover provide significant debt capacity to meet its
projected capital requirements. Market capacity remains in Sterling and the Group has the flexibility
if necessary to tap other markets such as the Euro. With £1.25bn of committed but undrawn
facilities, the Group is confident that it will be able to finance its planned capital commitments.
Taxation
The tax charge for the year is £683.3m, giving an effective rate of 29.0% (2005: 18.9%). The lower
tax rate in 2005 was primarily due to higher prior year adjustments and a lower effective rate of tax
on property disposals. The tax rate on profit before exceptional items is lower at 27.8% (2005:
19.2%). The tax rate on exceptional items is higher than the standard rate largely due to the impact
of the Tops Estates’ goodwill impairment, which cannot be offset against taxable profits.
Table 11: Taxation
Effective tax rate
Ordinary
Exceptional
Total
Profit before tax
Tax charge
Effective tax rate
2,130.7
593.3
27.8%
228.5
2,359.2
90.0
683.3
39.4%
29.0%
IFRS requires that full provision is made for the deferred tax liability associated with the revaluation
of investment properties. Accordingly, the tax charge includes deferred tax of £473.9m on
revaluation gains arising in the period (2005: £248.3m).
The current or ‘cash’ tax charge for the year, before tax on exceptional items and property disposals,
is £76.9m. If we adjust this for tax related to prior years and the IFRS bond amortisation which is not
tax deductible, we have an effective rate of 23.2%. This rate reflects the benefits of approximately
£80m of gross capital allowances on developments as well as tax deductions available for capitalised
interest. The equivalent rate for 2005 is not comparable due to the losses generated by the Group
refinancing in the period.
Pension schemes
The Group operates a number of defined benefit pension schemes which are closed to new
members. At 31 March 2006 the schemes had a combined deficit, net of deferred tax of £4.5m
(2005: £7.6m). During the year we made a further special contribution of £1.5m (2005: £11.5m)
to the principal defined benefit pension scheme and we are maintaining our enhanced contribution
rate to address the relatively small deficit. During the year we introduced amendments to the main
scheme which were adopted by the Trustees for active members who have given their consent. As a
result, active members will have their accrued entitlement at 31 March 2006 linked to inflation, with
future benefits accruing according to annual earnings. The effect of this has been a reduction of
approximately £8.3m (£5.8m net of tax) in the Group’s pension liability associated with funding
future anticipated salary increases.
Key financial risks
Table 12 outlines the main tax, treasury and accounting risks facing the business. The first three risks
are discussed elsewhere in the report as indicated in the table. The risk around IFRS mainly relates to
uncertainty within the accounting community on how the new standards should be applied to
specific circumstances. An example of this is our treatment of the goodwill arising on the acquisition
of Tops Estates, where an alternative view of the relevant accounting standard may require us,
initially at least, to retain the goodwill arising on the acquisition as opposed to impairing it
immediately. The potential for uncertainty in accounting treatment, however, is more likely to occur
in Land Securities Trillium where the complicated nature and interaction of the risks being borne
under each contract can result in different views on accounting treatment. On potential new
contracts, differences in interpretation of, or future amendments to, IFRS present some risk to
profit recognition. However, the primary consideration for all new contracts is cashflow which is
unaffected by accounting treatment.
Land Securities Annual Report 2006
Table 12: Financial risk management
Risk
Description
Funding
Impact
Mitigation
Lack of available funds
Unable to progress investment
opportunities
Flexible funding structure. Sizeable committed, undrawn
facilities – see page 42
Interest rates
Exposure to prevailing
market rates
Increased borrowing costs following
interest rate rise
Hedging policy – see page 41
Taxation
Inefficiencies due to
poor tax reporting
and insufficient
planning
IFRS
Higher tax rate and uncertain liability
position
Internal tax specialists and appropriate use of
external advisers
Prudent approach to tax provisions – see note 9 to the
financial statements
Insufficient clarity
on new accounting
standards
Unexpected impact on income
statement and balance sheet. No
impact on cash flows
Internal and external review of IFRS treatment for all
proposed investments
Investor relations
The aim of our communication programme with the investment community is to encourage two-
way dialogue with existing and potential debt and equity investors.We maintain an investor
relations programme which extends beyond legislative requirements and believe that our approach
results in a better understanding of our activities and a more open relationship.
We hold regular financial presentations, site visits and meetings with key audiences, including
institutions, private shareholders, private client intermediaries and both equity and debt analysts.
Our aim is to provide a clear, balanced picture of the Group within the constraints of protecting
price-sensitive information from selective disclosure.
Our objective is to ensure a diversified share register, both in terms of type and geographic location
of holdings.We have placed particular emphasis on helping investors to improve their understanding
of Land Securities Trillium and on increasing the geographic diversity of our share register. One
region which was substantially under-represented on our share register is the USA, although through
our efforts this has improved by 1.35% over the 12 months to 6.85%.
We monitor the effectiveness of our communication programme through feedback to the Company
and independent perception audits, which are commissioned bi-annually. A bond and equity
shareholder audit was conducted by Makinson Cowell in July 2005, which concluded that there were
no material issues of concern to investors in relation to strategy, performance, management or
governance and that the programme conducted over the previous 15 months “represented a high
level of contact by any standard”. The Makinson Cowell audit was presented to the Board, which
also receives quarterly reports and conducts an annual Board review of investor relations.
We re-launched the investor section of the Group website this year and promoted e-communications
via a ‘plant-a-tree’ campaign, where we donate £5 towards tree planting for each investor signing up
for electronic communications.
Legal proceedings
There are no legal proceedings which would have a material effect on the financial position or
operations of the Group.
Operating and financial review continued
43
Geographical spread of equity shareholders
14.8
6.9
6.6
8.2
UK
France
USA
Asia
58.0
Netherlands
Other
Europe other
Unidentified
% by region
Analysis of equity shareholdings
by size of holding
At 31 March 2006
Number
of holdings
Balance at
31/03/06
%
Up to 500
11,453
44.60
3,002,738
501 to 1,000
6,591
25.67
4,853,892
1,001 to 5,000
6,005
23.39
11,856,169
5,001 to 10,000
10,001 to 50,000
50,001 to 100,000
100,001 to 500,000
500,000 to 1,000,000
1,000,001 and above
533
555
134
250
73
85
2.08
2.16
0.52
0.97
0.28
3,805,805
12,490,529
9,460,426
60,419,807
12.87
51,244,379
10.92
%
0.64
1.03
2.53
0.81
2.66
2.02
0.33
312,150,037
66.52
25,679
100.00
469,283,782 100.00
Land Securities Annual Report 2006
Combined portfolio
£12.9bn
4.8
6.9
1.1
Retail
London retail
London offices
Other
44
Operating and financial review continued
Investment Property Business
The performance of our £12.9bn combined portfolio is the responsibility of our Retail and London
Portfolio businesses, with property management and project management skills being provided to
them by the professional services departments headed up by our Chief Operating Officer. The day-
to-day responsibility for the performance of the London retail properties, with the exception of
£234.5m of retail and £14.5m of office assets held in the Metro Shopping Fund, is with the London
Portfolio business.
However, to assist comparison with our performance against the Investment Property Databank
(‘IPD’), we include the performance of our London retail properties under Retail in order to disclose
our portfolio valuation statistics according to the IPD categories.
Performance
The strong performance over the year of the combined portfolio, which includes our share of the
value of joint ventures, reflects not only the continued yield shift but also the value we have created
through our development and asset management activities, with a particularly strong contribution
from development.We revalue our investment portfolio every six months. It was valued at £9.4bn at
31 March 2005, £11.4bn at 30 September 2005 and £12.9bn at 31 March 2006. Part of the 37.7%
increase in the size of the portfolio over the year is attributable to our expenditure on acquisitions
and developments, net of disposals. The like-for-like valuation surplus for the year was £1,047m or
15.9% of which £573.9m or 8.7% occurred in the six months since 30 September 2005.
Shopping centres and shops
Retail warehouses
London retail
London offices
Other
Open
market
value
31/03/06
£m
2,335.1
1,494.1
865.6
2,710.4
292.9
Open
market
value
31/03/05
£m
1,996.3
1,254.6
752.4
2,310.1
264.8
Like-for-like investment portfolio (2)
7,698.1
6,578.2
Completed developments
Purchases
Disposals and restructured interests
Development programme (3)
565.3
3,337.6
–
1,291.9
437.6
970.4
627.5
752.1
Combined portfolio
12,892.9
9,365.8
Adjustment for finance leases
Combined portfolio
–
–
–
–
Rental
income
year to
31/03/06
£m
Rental
income
year to
31/03/05
£m
Rental
income
change
%
140.7
61.7
41.8
167.3
13.1
424.6
26.1
123.0
20.8
19.5
614.0
(13.2)
600.8
133.6
56.6
44.7
172.3
11.2
418.4
12.5
22.5
56.9
16.8
527.1
(10.9)
516.2
5.3
9.0
(6.5)
(2.9)
17.0
1.5
–
–
–
–
16.5
n/a
16.4
Valuation
surplus(1)
%
14.2
18.3
14.7
16.9
11.7
15.9
21.4
7.6
–
32.9
15.3
–
–
(1) The valuation surplus and rental income value are stated after adjusting for the effect of spreading of rents and rent free periods over the duration of leases
in accordance with IFRS but before restating for finance leases.
(2) Properties that have been in the combined portfolio for the whole of the current and previous financial periods.
(3) Development programme comprising projects which are completed but less than 95% let, developments on site, committed developments (approved
projects with the building contract let), and authorised developments (projects approved by the Board, but for which the contract has not yet been let).
As we have previously commented, continued yield shift was one of the factors behind the strong
performance of the investment portfolio this year, which also benefited from 4.8% like-for-like
rental growth.
On the like-for-like portfolio we have seen the strongest total return from our London Portfolio,
which has delivered 24.2%, followed closely by retail warehousing with 21.9% and shopping centres
and shops with a 19.8% total return over the period.
Land Securities Annual Report 2006
Returns are boosted further when the £565.3m of completed developments are included. These
comprise Empress State, SW6;Whitefriars, Canterbury; 40 Eastbourne Terrace,W2 and the Ravenside
Retail Park, Bexhill. In addition, our ongoing extensive development programme, currently valued at
£1.3bn, has delivered a 32.9% valuation surplus, with the largest contribution from Cardinal Place,
SW1. The overall total return from our combined portfolio over the last 12 months, including
acquisitions and developments, was 23.3%.
Our contribution to performance
In terms of ungeared total property return, our combined portfolio outperformed the UK
commercial property market, as represented by the IPD Quarterly benchmark, by 2.2%. Our London
offices outperformed the equivalent sector benchmark by the substantial margin of 4.8% largely as
a result of development profits. Retail delivered a total return slightly ahead of its sector benchmark,
up by 0.2%.While a combination of factors, including yield shift, contributed to the overall portfolio
performance, we illustrate below how the application of skills can drive the creation of value. Table
13 details the top six performing properties in each sector by revaluation surplus together with an
explanation of the key drivers of that performance. It is clear that yield shift played only a part in
the creation of shareholder value. This also demonstrates clearly the strong contribution from
London developments.
Table 13: Key drivers of valuation change
Retail
% valuation
surplus
Meteor Centre, Derby
34.5
Ravenside Retail Park,
Bexhill
Lakeside Retail Park,
West Thurrock
31.3
26.0
White Rose Centre, Leeds
25.5
Retail World, Team Valley,
Gateshead
N1 Shopping Centre,
Islington
24.3
23.1
Description
London
% valuation
surplus
Description
Lettings, rental value growth Cardinal Place, SW1
and yield shift
44.1
Development
Completed development
and new lettings driving
rental growth
New lettings driving
rental growth
Reconfiguration and
new lettings
Reconfiguration and
new lettings
New Street Square,
EC4
43.7
Development
1 Theobald’s Court,
WC1
Devonshire House,
W1
36.7
31.1
Rental value growth and
yield shift
Reconfiguration, new letting
and yield shift
1 Wood Street, EC2
30.1
Development
regions.
Rental value growth and
yield shift
Fenchurch Street
Estate, EC3
26.4
Potential development
Rents are reviewed in five year cycles, as a result of which the current rents on the portfolio can be
less than the estimated rental value of the property (‘ERV’), in which case a property is described as
having reversionary potential. Equally, as happened most recently in the London office markets, if
the ERV drops below the current rent a property becomes over-rented. This, together with the level
of vacancies (‘voids’) across the portfolio, is an important factor both in terms of risk management
and future growth in values.
At the year end the net reversionary potential of the like-for-like portfolio was 6.5% compared
to 3.9% 12 months ago. This improvement has arisen from a reduction in the over-rented element
of London offices, which are now only slightly over-rented, and from continued rental growth on
retail assets, which now have a net reversionary potential of 12.2%. Set against this positive news
on rental growth, voids on the like-for-like portfolio have increased from their historically low
levels to 3.1%, although a proportion are strategic voids where we are keeping units vacant prior
to redevelopment.
Operating and financial review continued
45
Long-term performance relative to IPD
Ungeared total returns – periods to 31 March 2006
Land
Securities
% pa
13.8
12.1
IPD
% pa
12.8
11.1
IPD upper
quartile
% pa
13.4
12.1
10 years
20 years
Source: IPD quarterly and monthly valued funds at March 2006.
Land Securities’ ungeared total property return compared over the last
10 and 20 year periods to 31 March 2006 to the IPD. It can be seen that
Land Securities’ portfolio has outperformed and produced a return which
places it in the top quartile of contributing portfolios over the last 10 and
20 year time periods.
One year performance relative to IPD
Ungeared total returns – period to 31 March 2006
Retail – Shopping centres
Retail warehouses
Shops
Central London offices*
Total portfolio
Land
Securities
% pa
19.1
20.4
18.4
30.0
23.3
IPD
% pa
17.6
22.1
20.3
24.1
20.6
Source: IPD Quarterly benchmark to March 2006.
* Central London defined as West End, City, Mid-town and Inner London
The performance of the Group’s portfolio compared to that of IPD on
a similar basis at sector, sub-sector and total portfolio levels over the
12 month period to 31 March 2006. A key driver of outperformance
was the strong performance from our Central London office holdings,
particularly developments. Shopping centres also recorded higher returns
than IPD. Retail warehouses performed in line with IPD when the impact
of purchases is excluded.
Land Securities Annual Report 2006
46
Operating and financial review continued
Table 14: Investment and development portfolio movements
Investment
£m
Development
£m
Net book value at 31/03/05
Purchases
Disposals
Transfers into development
Transfers out of development
Transfers to trading properties and surrender premiums received
Capital expenditure
Valuation surplus
Capitalised interest
Depreciation
Net book value at 31/03/06
Combined portfolio valuation at 31/03/06
7,484.5
2,006.7
(655.8)
(102.4)
271.6
(84.7)
78.8
1,215.4
–
(2.9)
10,211.2
11,601.0
755.6
24.7
(7.8)
102.4
(271.6)
–
239.3
362.2
24.5
–
1,229.3
1,291.9
Total
£m
8,240.1
2,031.4
(663.6)
–
–
(84.7)
318.1
1,577.6
24.5
(2.9)
11,440.5
12,892.9
Investment
During the year we sold a total of £735.9m of property out of the combined portfolio (including
joint ventures and net of sale costs), generating a profit of £73.4m (11% above book value).We also
had our most active year ever in terms of acquisitions with the purchase of £2.2bn of investment
properties (including assets bought by way of corporate acquisitions and joint ventures), which have
shown a valuation surplus of 5.7% over the period since acquisition. The average yield on the
properties sold was 3.3% (the low figure being explained by the rent free period on 30 Gresham
Street) and the average initial yield on the assets acquired was 5.2% or 5.4% excluding properties
acquired vacant. The purchase activity was principally accounted for by the acquisitions of Tops
Estates, the LxB portfolio, and 15 London office investments.
Development
Our development programme, including our share of joint ventures and those properties completed
and let in the year, produced a valuation surplus of £364.7m of which £181.3m occurred in the
second half of the year. Four schemes were transferred into the investment portfolio from the
development programme. These were 99% let and generated rents of £9.4m in the year under
review. In a full year these will contribute £14.4m of rental income.
Including our share of joint ventures and land acquisitions we spent £313.6m (excluding capitalised
interest) on the development pipeline on projects including Cardinal Place, New Street Square,
Bankside 2 and 3 in London and shopping centre developments in Bristol and Exeter. Cardinal Place
has now reached practical completion and we have therefore stopped capitalising interest on this
project. However, during the year interest of £11.5m on Cardinal Place was capitalised
(2005: £9.0m).We have an estimated further spend of £821m on the projects underway currently
which, when complete and fully let, will produce £144.2m of annual income (at today’s ERV). Capital
expenditure on proposed developments could total £973m if we proceed with these schemes,
which are held as part of the investment portfolio and have a current carrying value of £383.8m.
Land Securities Annual Report 2006
Timing of completion of development pipeline
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London Portfolio –
development pipeline
Operating and financial review continued
47
The figures given on page 46 for capital expenditure represent the Group’s actual or forecast
cash outlays on developments. Including land values and capitalised interest, the total development
cost for the full development pipeline is £3.1bn, of which £1.8bn relates to our current
development programme.
We are currently developing two projects on behalf of the BBC, Pacific Quay, Glasgow and
Broadcasting House, W1. The BBC’s new headquarters in Glasgow is on programme for completion
by the target date of mid-July and within budget. Broadcasting House has shown some slippage,
however, the first phase has now been completed and preliminary works have started on the second
and final phase.We, the BBC and Bovis Lend Lease, our building contractor have agreed in principle
the construction programme and costs for Phase 2 and we have also reached agreement on the final
account on Phase I.
Property management
We are also responsible for the provision of property management services across the communal
areas of buildings in our investment portfolio. These include:
Repairs and maintenance
Security and building reception services
Cleaning
Key services, such as electricity, water and waste
Insurance
Promotional and marketing activity (at shopping centres)
We procure and manage these and charge the related costs back to our occupiers through an annual
service charge. This is potentially an area of contention between an occupier and the property owner
and we have worked hard over the past few years to provide transparent communication on service
charges to our occupiers.
Unlike many of our peer group, we do not outsource the property management of our investment
portfolio. Instead we have developed a strong in-house capability which we believe improves
dialogue and lines of communication with our occupiers and is increasingly a differentiator as we
seek to consolidate those relationships. In the past year we have looked closely at the way in which
we deliver services across our portfolios and the way in which we manage the relationship with our
occupiers. As a result we have restructured the teams responsible for the day-to-day management
of our London multi-let premises and are in the process of introducing changes to the structure of
our retail property management teams.
Managing
Through our in-house team and our service
partners we are responsible for providing a
range of property management services
across both our investment portfolio and
property outsourcing contracts.
At the same time we have recently announced the introduction of a new occupier portal, an online
system which will give occupiers direct access to our internal systems to view property lease and
service charge information. Not only will this improve the availability of data to our occupiers but
we also hope that it will make our organisation more accessible to our customers by providing
details of the individual people an occupier might need to contact about their property needs.
We conduct annual customer satisfaction surveys across our business and believe that willingness
to recommend Land Securities as a landlord is a key measure of our performance. In the last year
we were pleased to note a greater than 94% willingness to recommend us as a landlord by those
customers surveyed.
We believe our approach to property management differentiates Land Securities from other
providers of commercial property accommodation, strengthening our ability to attract new and
retain existing customers and enhancing our market leading reputation.
Land Securities Annual Report 2006
Operating and financial review continued
49
Retail Every year we receive 300 million
customer visits to our 1.9 million m2 retail
portfolio. That’s a lot of footfall – which might
explain why every four seconds one of those
customers will walk away with a pair of new
shoes from one of our100 specialist shoe shops.
Land Securities Annual Report 2006
50
Retail Achievements
Retail share of operating profit £243.7m
Like-for-like valuation surplus of 15.6%
£1.5bn of acquisitions, including the purchase
of Tops Estates and the LxB portfolio
£0.3bn of disposals
Current development programme to provide
221,070m2 of new accommodation
Proposed developments to create 143,110m2
of floorspace
Land Securities Annual Report 2006
48
Retail
Land Securities Annual Report 2006
Retail
Operating and financial review continued
51
“Following a year of unprecedented activity we have now assembled
a retail property portfolio of substantial scale, providing 5.8% of
the retail floorspace in our core markets. This provides real
competitive advantage in a fragmented market place.”
Richard Akers
Managing Director, Retail
Our retail business represents 53.3% of the combined portfolio and produced £193.2m of the
Group’s operating profit together with £50.5m of joint venture profit.We own 1.9 million m2 of
retail accommodation including 30 shopping centres and 30 retail parks which represent a core
market share of 5.8%.We have over 1,600 occupiers across this portfolio. Many of our retail
properties form the central shopping districts of major cities and towns across the UK and
over a year, we estimate that some 300 million visits are made by consumers to our locations.
We are also investing £1bn to create the next generation of retail locations through a 64,000m2
development pipeline.
The retail market
The past year was noticeably tougher for retailers as retail sales growth slowed and rising costs,
price deflation and increasing competition made trading conditions considerably more difficult than
in previous years.The impact of this on like-for-like retail sales has been widely reported.While like-
for-like performance is an important indicator of the underlying health of the retail market the most
important trend indicator for us, as a retail property owner, is absolute sales performance.The
reason is that to grow absolute sales in the face of flat or declining like-for-like sales, a retailer needs
to take on new or improved floor space.The trend here remains positive and our experience to date,
especially when it comes to letting our retail developments, is satisfactory.
There has also been an increasing polarisation of spend away from the traditional high street
towards supermarket and large format stores which provide consumers with more choice and
perceived value for money while providing retailers with more cost effective trading formats.The
internet, which is, for the most part, focused on specific market segments is growing its market
share but still has some way to go in terms of overall impact on retail sales. Recent research from
Verdict showed that in 2005 the internet represented almost half of retail sales growth but that it
still only accounted for around 3% of total retail sales.
Although the long-term economic outlook at present is still reasonably benign, market conditions
remain difficult for retailers. A further indicator of consumer confidence is the housing market and,
while Government statistics show that house price inflation has slowed, the market has not gone
into a period of decline and has recently picked up in London and parts of the south-east.
The UK retail property market
The retail property market extends to some 115 million m2 and is highly diversified both in terms of
ownership and type.This is exemplified by looking at any medium-sized town in the UK where you
will find high street shops, covered parades, a shopping centre and on the edge of town, retail parks
and a supermarket. A number of different owners will be involved too, from private individuals and
owner-occupiers to property companies, pension funds and institutional investors. Furthermore
each retail location is unique, with different catchment populations, transport infrastructure, local
economy and townscape.
Certain retail market sectors are also highly constrained in terms of supply side growth, as a result
of planning restrictions aimed at preventing new development on greenfield sites and the huge
Retail portfolio by value
£6.9bn
2.3
4.2
Shopping centres and shops
Retail warehouses
Other
UK retail sales growth
10
8
6
4
2
0
-2
-4
02
03
04
05
06
Like-for-like sales
Total sales
Source: British Retail Consortium/KPMG
Retail property – floorspace
Market
Type of retail property million m2 million m2
LS % market
share
Shopping centres
Retail parks
Total core markets
Other retail markets
Total
14.9
14.5
29.4
85.5
114.9
1.2
0.5
1.7
0.2
1.9
8.0
3.4
5.8
n/a
n/a
Source: Property Market Analysis/Office of the Deputy Prime Minister
Land Securities Annual Report 2006
52
Retail
complexity of developing town and city centre sites in multiple ownerships. This effectively prevents
the development of new out-of-town retail parks and major regional shopping centres and slows
down in-town development, resulting in a highly competitive investment and development market
for existing assets and development opportunities.
Against this background it is hardly surprising that retailers can experience frustration with the
difficulties of procuring and occupying retail property. It is here that major retail property owners
like Land Securities can benefit both from the way we manage our relationship with retailers as well
as our considerable expertise in urban regeneration.
Our strategy
Over the last year we have continued to strengthen our position as a leading owner of retail
property through:
Investment in dominant retail assets
Regeneration and renewal of the portfolio
Provision of market leading levels of customer service and property management
In pursuit of the above we had an extremely active year.We made a further £1,543.3m of
acquisitions, and sold £336.8m of properties.We invested £76.9m in the development programme
including the redevelopment of Exeter and starting on site at Bristol.We carried out further
customer satisfaction surveys and, as described earlier in the review, developed a new occupier
portal and reviewed the way in which we provide property management services across
the portfolio.
Our performance
In terms of valuation the retail portfolio continued to perform well. On a like-for-like basis this
portfolio increased in value to £4.0bn with a 15.6% valuation surplus over the year. The retail park
portfolio again demonstrated the strongest absolute growth, driven by strong investment demand
for this type of asset and continued supply side constraints.While the continued yield shift was a
factor in the performance of the retail portfolio, rental value growth of 4.0% also made a
contribution. In addition, our skills are also making a difference with the valuation increases of
the five top performing properties being driven by development or asset management activity.
The portfolio is 12.8% net reversionary and void levels remain low at 3.4% on a like-for-like basis.
Retail
31/03/06
31/03/05
Combined portfolio valuation
£6,877.8m £4,750.4m
Like-for-like investment portfolio
valuation
Rental income
£3,978.5m £3,388.9m
£207.4m
£193.1m
Gross estimated rental value
£236.7m
£223.8m
Voids by estimated rental value
Gross income yield
£8.1m
4.9%
£4.9m
5.6%
Combined portfolio extracted from Business Analysis and by reference to the
combined portfolio reconciliation tables on page 150.
Our contribution to performance
Over the past few years we have focused our retail portfolio in response to the longer-term trends
in the retail markets, particularly retailers’ desire for more efficient retail units.We have been
successful in executing this strategy as we discuss in more detail in the sections below.
Investment in dominant retail assets
We have substantially restructured the portfolio which now predominantly comprises larger and
more dominant retail assets. The drivers behind this approach is our belief that these properties will
perform better over the long term and are more likely to benefit from changing consumer trends.
Our research shows that shopping is now the third most popular way that a family will spend time
together, with over 40% of respondents seeing shopping as a way in which they spend quality time
together. It is our view that a great proportion of that time is spent in shopping destinations similar
to those that we own – dominant shopping centres.
Top five retail destinations
Land Securities ownership
London West End
Birmingham
Glasgow
Leeds
Nottingham
Source: Experian Retail Ranking 2004
Oxford Street and
Tottenham Court Road
Bullring
Buchanan Galleries
Leeds Plaza and White Rose
No major ownership
Land Securities Annual Report 2006
Gunwharf Quays, Portsmouth
This sensitive and innovative
development has proved so popular,
even the ocean-going yachts on the
Volvo Round the World Yacht Race
stop over for a spot of retail therapy.
Sometimes shopping isn’t the main attraction…
Shopping
We measure the number of visits to our
shopping centre portfolio and benchmark
this against a national footfall indicator. In
2005 the number of visitors to our portfolio
increased by 1.3% whereas overall the
national footfall indicator registered a
modest decline.
54
Retail
A dominant shopping centre is one which has a large local population (‘catchment’ area) for whom
it is their primary shopping destination. All but one of our shopping centres are located in central
in-town shopping districts, many providing the prime retail accommodation and main consumer
shopping experience. As a result of our portfolio restructuring efforts, we no longer have any
substantial exposure to high street retail in smaller towns, the segment which we believe in the
longer term will be most impacted by the changing retail environment. Over the year we invested
further in shopping centre assets with the acquisition of Tops Estates with a portfolio valued at
£566.7m. This added a further six properties to our shopping centre portfolio after the profitable
disposal of one of the centres. Since acquisition, the Tops Estates properties have shown a combined
increase in underlying value of £43.0m, an uplift of 8%.
A further manifestation of the changed nature of our shopping centre portfolio is our greater
exposure to the leading retail destinations in the UK, which we believe perform better in a less
buoyant retail environment.
We are also keen to create strategic joint ventures to provide enhanced asset management or
development opportunities or to increase our exposure to specific market segments. The Scottish
Retail Property Limited Partnership is an example of the former while the Metro Shopping Fund LP
demonstrates the latter.
In terms of changing consumer trends, consumers have more choice and are more mobile so it is
important to provide an exceptional experience to attract them and encourage longer stays and
repeat visits. At Gunwharf Quays, Portsmouth, for example, the unique environment and mix of uses
has resulted in a 16% increase in net income over the year. In the period under review we acquired a
further designer outlet centre, The Galleria, Hatfield and agreed to forward purchase a development
at Banbridge in Northern Ireland.
Another trend is for convenience, accessibility and good car parking. Here we have invested
significantly in retail parks and supermarkets. Bulky goods retailers have found trade to be more
difficult but high street retailers have been keen to expand into this larger format with lower rents
and operating costs. During the year we acquired the LxB retail park and supermarket portfolio,
comprising 14 properties, all of which benefit from open A1 planning consent. As a result of this
acquisition, together with £108.6m of selective disposals, our retail park portfolio is now 70%
open consent.
Changing demand for retail park accommodation has helped us improve the average passing
rent on this portfolio from £162 per m2 to £177 per m2 and combined with supply side constraints,
make this segment one of the most attractive property investments. This is evidenced by the
14.1% valuation surplus of this portfolio driven partially by yield shift but also by our asset
management activities.
Regeneration and renewal of the portfolio
In a competitive investment market, we are able to use our skills to develop new retail shopping
centres of a calibre seldom available to purchase on the open market.We are fortunate to benefit
here from the development opportunities inherent within the portfolio as well as our approach to
developing in partnership with other leading retail property owners.
Our current development programme will provide 221,070m2 of new retail and leisure
accommodation with a further 143,110m2 of proposed developments in the pipeline.
Land Securities Annual Report 2006
Schemes in progress today include Exeter, a 44,600m2 scheme scheduled to open next year.
Our lettings programme is on target here, with 56% of the retail accommodation already let
or in solicitors’ hands. At Bristol, a 140,000m2 partnership development with Hammerson plc,
due to complete in Autumn 2008, 36% of the retail accommodation is let or in solicitors’ hands.
Christ’s Lane, Cambridge started around 15 months later than originally planned due to delays
in obtaining freeholders’ consent to redevelop. The 7,150m2 mixed-use scheme, comprising eight
shops, a café overlooking Christ’s Piece and 15 residential apartments, has already secured lettings
with H&M, Zara, Bank and Giraffe café ahead of its scheduled completion in Autumn 2007.
We also have three further proposed developments which we are planning to start this year. The
St David’s 2 development, undertaken in partnership with Capital Shopping Centres, will bring the
first John Lewis department store to Wales, anchoring the 103,600m2 retail-led scheme in Cardiff’s
city centre. New retail, cafés, restaurants and 300 homes will be created as well as new public spaces
and amenities which include a state-of-the-art public library.
At Livingston, our proposals will create an additional 32,000m2 of new retail space, 5,670m2
of leisure space, 28 one and two-bedroom flats, including affordable housing, an 84-bed hotel
and new public spaces in the town centre. At Corby our proposals for Willow Place comprise
16,260m2 of retail accommodation in 27 units, the first phase of our regeneration activity in
this high-growth town.
We are also in the process of carrying out development appraisals in Leeds, Liverpool and
Glasgow which could offer a further 100,000m2 of development over the next five years.
These and other schemes at the feasibility stage should provide a continued stream of future
development opportunities, even though, due to the complexities of the UK planning system,
it may be several years until we actually start on site.
In addition to our major new development schemes we carry out smaller scale development
activities across our retail park and shopping centre portfolio to reconfigure and improve these
properties. Such activities covered 26,300m2 of accommodation in the past year. Two prime
examples are:
White Rose, Leeds: we agreed a reduction in the size of the existing Sainsbury’s store from
which an additional 6,720m2 was created in five new units with lettings to Next, River Island,
Zara and Schuh
Ravenside Retail Park, Bexhill: this 24,710m2 park, comprising 14 units, has recently undergone
a 2,720m2 extension and facilities upgrade. These significant improvements attracted fashion
retailer Next to a 930m2 unit. In addition, the main anchor, Tesco, has occupied a 1,115m2
extension. This activity has improved ERV’s by 30%
Provision of market-leading levels of customer service and property management
The final strand of our strategy is our desire to provide market leading levels of customer service
and property management. In addition to the obvious benefits this provides in terms of relationship
management with our direct customer, the retailer, there are also a number of benefits to our
indirect customer, the visitor to our retail assets.
Operating and financial review continued
55
Building
We are already building in Exeter and
Bristol and this year plan to start on further
retail-led development schemes in Cardiff,
Livingston and Corby.
Land Securities Annual Report 2006
56
Retail
Customer satisfaction surveys
Each year we conduct surveys across the occupiers of our shopping centre and retail park portfolios
to establish how we are performing as a landlord.We publish the most pertinent key performance
indicators annually.
Shopping centres
Objective
Understanding needs
Communication
In the shopping centre survey we are very pleased to note that our efforts have resulted in improved
performance across all our key indicators as detailed below. This is our fourth year of conducting this
survey and we are enthusiastic about the benefits to us and our customers.
Willingness to recommend us
Responsiveness
Overall satisfaction
2004
Actual
2005
Target
2005
Actual
3.59
3.84
94%
3.93
3.97
3.80
3.90
92%
3.80
3.75
3.66
3.87
94%
3.85
3.97
Retail parks
Objective
Understanding needs
Communication
Willingness to recommend us
Responsiveness
Overall satisfaction
2004
Actual
2005
Target
2005
Actual
2.98
2.74
84%
3.24
3.27
2.95
2.69
n/a
n/a
n/a
3.03
3.21
89%
3.25
3.33
Note: Customer satisfaction surveys are for calendar year period.
Scale: 1 = very poor, 5 = excellent
It is only the second year of surveying our retail park customer. In terms of management, these are
very different as historically they do not benefit from an on-site management presence.We believe
that this is one of the factors explaining the lower level of customer satisfaction across this portfolio.
We are currently addressing this through a trial using Land Securities Trillium Building Services
Managers to visit a sample of retail parks regularly to provide support and a communication
channel for the retail managers.
We have also conducted a trial whereby retail park occupiers use our customer service centre to
notify us of any problems on site, especially maintenance and security issues. These initiatives are,
we believe, unique to Land Securities and demonstrate the way in which we are benefiting from
Group synergies in terms of service provision.
Evaluating our own performance improves the delivery of services to our customers but it does not
provide an opportunity for us to compare how we perform against our competitors. Last year saw
the introduction of a new benchmark for shopping centre customer service of which we are a
founder member.We hope that as this benchmark becomes established we will also be able to
publish our performance as compared to our peers.
Environment management
We take the impact of our retail activities on the environment seriously and seek to progress
incremental improvements across our retail portfolio each year. To this end we are currently
progressing two projects:
Evaluating how we can benchmark our shopping centres’ carbon footprint and exploring various
avenues to offset this impact
Progressing an MSc research project with Imperial College, to provide a cost benefit analysis of
introducing environmentally friendly cleaning at our shopping centres following our success on
this front at Sunderland, where we have replaced all our cleaning products with ‘green’ products
We are also pleased to have successfully reduced the amount of waste we are sending to landfill
by increasing our recycling ratio across the shopping centre portfolio to 25.8%.
Land Securities Annual Report 2006
Retail continued
Operating and financial review continued
57
Whitefriars, Canterbury
Historic cities cannot live only in
the past; they need new life breathed
into them. Our retail development
in Canterbury has made it a very
successful shopping destination.
Giving an ancient city a new lease of life
58
London Portfolio
Land Securities Annual Report 2006
Operating and financial review continued
59
London Portfolio Our development schemes
neighbour cultural and historic sites as well as
transport and pedestrian links, like London’s
Millennium Bridge which has joined our
Bankside scheme behind Tate Modern
to the City. We’re well connected.
Land Securities Annual Report 2006
60
60
London Portfolio Achievements
London share of operating profit £276.5m
Development valuation surplus of 42.4%
£0.6bn of acquisitions
£0.4bn of disposals
Current development programme to provide
211,250m2 of new accommodation
Proposed developments to create 60,210m2
of office accommodation and 29,610m2 of
retail floorspace
Land Securities Annual Report 2006
London Portfolio
Operating and financial review continued
61
“London development made a substantial contribution to our
returns this year and we have positioned our portfolio to benefit
from the rental growth predicted for our core markets.”
Mike Hussey
Managing Director, London Portfolio
Our London business represents 46.0% of the combined portfolio and produced £276.5m of the
Group’s underlying operating profit.We own 940,000m2 of office accommodation and 90,000m2 of
retail floorspace. Our office portfolio represents approximately 4% of the total central London office
floorspace with over 650 occupiers accommodating more than 50,000 people.We are also investing
£1.5bn on development, responding to our customers’ needs with innovative, relevant buildings and
top quality customer service.
London economy
It is worthwhile considering what it is that makes London so different to the rest of the UK in terms
of its economy. It is undoubtedly one of the world’s leading financial centres but it is also the heart
of Government and a major tourist destination with outstanding cultural, arts and retail experiences.
More than that, it is home to some seven million people as well as numerous businesses and
benefits from a highly-skilled and flexible workforce.
London’s economy is also growing at a faster rate than that of the rest of the UK, being forecast
to grow by 2.7% per annum over the next four years compared to UK growth of 2.4%. As London
grows it will need continued investment in new buildings, homes and infrastructure.We have been
investing in London’s commercial landscape since 1944 and predict that over the next few years we
will invest more in our capital city than at any time previously, timing our investment to benefit
from London’s forecast growth.
London office markets
The London office market extends to some 19.8 million m2 across several geographic locations. The
West End, Mid-town, City, South Bank and Docklands form the core of a highly diversified market.
The majority of our portfolio is located in three of these markets: the West End, Mid-town and the
City, but we have also expanded away from our traditional market place and invested in the South
Bank, on the edge of the City and, more recently, in Docklands.
While the London market is very fragmented in terms of ownership and type of property, it has the
added complexity of a highly diversified occupier base. It provides commercial accommodation to
numerous international and domestic organisations typically located in clusters of similar
businesses across its core markets.
The London office market has been historically more volatile than the retail market. This reflects
general economic conditions and the health of the occupier markets, particularly that of the
financial services industry. It is also affected by the supply of new development stock and vacant
space. In terms of market conditions today, they are much improved compared to the past few
years, particularly 2002 and 2003. As we predicted last year, the West End market now has low
levels of vacancy and positive rental growth is well established. In the City, vacancy levels have
dropped to 10.5% overall, with Grade A stock at 3% or less and there is evidence of emerging rental
growth for good quality accommodation.
London Portfolio valuation breakdown
£5.9bn
1.1
0.7
1.1
0.6
2.4
Inner London offices
West End offices
Mid-town offices
City offices
London retail
Gross domestic product forecast growth
4%
3%
2%
1%
0%
02
01
London GDP
03
04
05
06
07
08
09
UK excluding London (estimated)
Source: Centre for Economics and Business Research Limited
West End and City vacancy rates
16%
14%
12%
10%
8%
6%
4%
2%
0%
00
01
02
03
Jan
04
05
06
West End
City
Source: Knight Frank
Land Securities Annual Report 2006
62
London Portfolio
Office floorspace by market and type of occupiers
Market
current
floorspace
m2
Land
Securities
current
floorspace
(Note 2)
m2
Market
Market
vacancy
31/03/06
%
Market
development
m2
Land
Securities
development
m2
West End
8,247,100
285,600
6.7
258,400
88,960
South Bank
Mid-town
(Note 1)
(Note 1)
City
10,253,200
Sub-total
10,253,200
Docklands
1,253,200
Total
19,753,500
46,500
77,800
263,500
387,800
24,300
697,700
(Note 1)
(Note 1)
478,400
478,400
35,550
62,340
15,020
112,910
n/a
–
736,800
201,870
10.5
10.5
7.1
8.7
Type of occupiers
Government and NGOs,
media technology, telecoms,
HQs, consulting
Media, HQs, consulting
Legal, accountancy and
consulting practices
International and domestic
financial institutions,
related support services
As City
Source of market data – Knight Frank
Note 1 – No separate market data is available analysing the areas and vacancy rates between South Bank, Mid-town, Inner London and City.
Note 2 – Empress State Building, SW6, 41,290m2, is not included within the above analysis.
London retail
We have discussed in detail the market conditions facing retailers at present. It is worth noting,
however, that in London, retail is also dependent on tourism and trends in overseas visitors. So, for
example we expect London retail to benefit from the Olympic Games in 2012 as well as in the
preceding and following years.
Our strategy
Against a background of more volatile markets in London we are seeking to:
Redeploy capital to maximise portfolio growth prospects while realising value as it is created
Enhance returns through development activities
Create strong relationships with occupiers in the London office and retail markets
We have acquired £643.4m and sold £396.3m of property, including the £272.5m sale of our
recently completed development in Gresham Street.We have also made substantial progress on our
development programme; we spent £185.2m over the year on development, started 107,330m2 of
new projects, achieved 38,100m2 of lettings (including those secured after our financial year end)
and submitted planning applications for a further 118,480m2 of commercial accommodation.
Our performance
We were very pleased with the performance of the London Portfolio this year which, on a like-for-
like basis, increased in value to £3,658.2bn representing a 16.3% valuation surplus over the year.
Specific properties within the London office portfolio remain over-rented but the amount of over-
rented income has reduced from 14.0% to 9.3%. Taking into account reversionary income, the net
position is that the like-for-like London office portfolio is now 1.2% over-rented.Void levels have
reduced over the year and stand at 4.5% for London offices on a like-for-like basis. London retail is
10% reversionary and retail voids in London remain low at 3.1% on a like-for-like basis.
Our contribution to performance
We recognised some time ago that the London occupational markets would be returning to a period
of growth and have targeted our activities to benefit from this. This is evidenced by the restructuring
of our portfolio together with our development activities where we were especially pleased to note
that we created a 42.4% valuation surplus over the year.
Land Securities Annual Report 2006
London Portfolio
31/03/06
31/03/05
Combined portfolio valuation
£5,932.4m £4,486.8m
Like-for-like investment portfolio
valuation
Rental income
£3,658.2m £3,131.9m
£213.0m
£221.3m
Gross estimated rental value
£228.8m
£217.8m
Voids by estimated rental value
Gross income yield
£9.5m
5.8%
£9.9m
6.7%
Combined portfolio extracted from Business Analysis and by reference to
the combined portfolio reconciliation tables on page 150.
Cardinal Place, London
We create buildings that appeal to the
people who live and work in and around
them, by providing beautiful gardens,
clean environments, places to meet and
spaces for public art.
Communities welcome new developments
if you invite them to get involved
London office portfolio (1)
London acquisitions (2)
£30.93/ft2 – £333/m2
£30.10/ft2 – £324/m2
£28.50/ft2 – £307/m2
£29.43/ft2 – £317/m2
Average passing rent
Average ERV
(1) Excluding voids and properties in the current development
programme
(2) Acquisitions completed between 1 April and 31 March 2006
ignoring the vacant property acquired at 140 Aldersgate Street, EC1
and the trading property at Wilton Plaza
64
London Portfolio
Redeploy capital to maximise future growth prospects while realising value as it is created
An idiosyncracy of the institutional lease is that, in a market downturn, such that we experienced
in London in 2002/03, the investment value of a property is partially protected by the security
of the underlying rental income, especially where this is higher than the current market rent. As
occupational markets improve, this over-renting creates a drag on future income growth resulting
in lower levels of capital value growth. In anticipation of a return to market growth and particularly
given the very high levels of demand for well-let London office investments, we have made and
will continue to consider selective disposals from the portfolio to enable the redeployment of
capital in properties with better medium-term growth prospects. Examples of this type of capital
redeployment are purchases such as:
Ashdown House, SW1 acquired for £166.9m on a net initial yield of 5.8% and a passing rent on
the offices of £380 per m2
Holborn Gate,WC1 acquired for £85.8m on a net initial yield of 6.2% at an average passing rent
of £360 per m2
6/7 Harbour Exchange and 8/9 Harbour Exchange, E14. These properties were acquired for
£82.6m at a combined net initial yield of 5.9% at an average passing rent of £200 per m2
In total our acquisitions during the year have been at an average initial yield of 5.6% and have low
average rents of only £307 per m2 with good prospects for future rental income growth and asset
management opportunities.
A further strand to our investment approach is our desire to acquire or develop ‘clusters’ of
properties in key locations enabling us to provide managed environments and an enhanced
experience for our occupiers. In Victoria, for example, Ashdown House is strategically located directly
opposite our Cardinal Place development. Not only will the office element of this property benefit
from the rental growth now emerging in this market, but we have the opportunity to improve the
retail element of this scheme taking advantage of the renewed enthusiasm from retailers for this
location as a result of the success of Cardinal Place’s retail offer.
A further example is at New Street Square in Mid-town where we have recently acquired two
properties, IPC Tower and Hill House, that will benefit from our expenditure on the adjacent
development and the subsequent regeneration of this location.
The final strand to our investment approach in London is to ensure that we crystallise value as it is
created. This is demonstrated by Gresham Street where, following the successful letting to Dresdner
Kleinwort Wasserstein, we sold this property to GIC Real Estate.
Enhance returns through development activities
At this stage in the cycle it is also opportune that we have expanded our London development
activities. Over the year, developments underway in London contributed just under a third of the
valuation surplus but represented only 16.4% of the capital employed with a particularly strong
performance from Cardinal Place which has now reached practical completion. Developments
currently on site will provide 143,050m2 of new office accommodation together with some 7,650m2
of retail floorspace. At Cardinal Place, the retail element which opened earlier this year is virtually
fully let with only one unit available. Of the office accommodation, 52% is let or in solicitors’
hands at an average rent of £600 per m2. This is now the only large Grade A newly-developed office
accommodation available in the West End. It is interesting to note that we have attracted a new
and diverse range of occupiers to Victoria including Wellington Asset Management, P&O, 3i and KCCI
and we expect this trend to continue.
Land Securities Annual Report 2006
At New Street Square, we initially started construction of three buildings totalling 43,370m2, two of
which have been pre-let to Deloittes and are due for occupation in Spring 2008. To capitalise further
on improving market conditions, we have also started the fourth and final building comprising
21,950m2 of offices. On the South Bank, we completed Bankside 1 which we forward sold to IPC
and are making good progress with Bankside 2 and 3, where we are creating some 35,550m2 of
speculative office accommodation together with 3,170m2 of retail accommodation in two buildings.
The third development project we started during the year was One Wood Street which we pre-let in
its entirety to Eversheds just after the financial year end. This global law firm has taken an 18-year
lease on all of the 15,020m2 office accommodation and will occupy all eight floors, with an option
to lease back 1,860m2 to Land Securities. In addition to the office space, the building incorporates
1,500m2 of ground floor retail which is being let separately.
As a result of our success to date in terms of both the timing and letting of development, we have
decided to proceed with our development at One New Change, close to St Paul’s Cathedral, a Jean
Nouvel designed scheme which will provide 30,790m2 of office accommodation and 20,550m2 of
retail floorspace. Given the sensitive location of the site and our innovative proposals we were very
pleased to achieve a resolution to grant planning consent for this project.
As we progress our development programme, we are also looking to secure a pipeline of future
projects so that we are in a position to respond to occupier requirements as appropriate. To this end
we are advancing a further 109,000m2 of schemes, in Oxford Street and Fenchurch Street, through
the planning system. At Oxford Street, we have made a planning application for a 30,000m2 mixed-
used scheme incorporating retail, office and residential accommodation. At Fenchurch Street, the
City Corporation is currently considering our application for a 79,000m2 office tower, designed by
Raphael Vinoly.We have also contributed to the Victoria Station Area Planning Brief proposals for
a large site to the north of Victoria Station (Bressenden Place) where we have significant holdings.
We are delighted with our progress to date on development and the level of interest in our current
schemes. As with One New Change, we will only bring a scheme forward if we feel comfortable with
the timing and fundamentals of the project in the context of the market. Securing planning does not
necessarily mean we will develop.
We have described the complexity of developing across the UK. This is particularly pertinent to
London where, as well as the significant planning and consultation issues, sustainability brings a
number of challenges. Many of these can be turned to our advantage, since we believe that the
environmental credentials of buildings will become a more important factor for occupiers,
particularly in relation to energy usage and costs.We report fully on this in our Corporate
Responsibility Report 2006 but highlight here a number of achievements:
We have used borehole technology at Eastbourne Terrace to provide heating and cooling to the
building reducing the need for non-renewable sources of energy
We introduced a Sustainability Charter at New Street Square with external evaluation of our
performance against the Charter provided by Element 4, a specialist construction consultant.
The impact of this has been significant in terms of waste management and procurement
Operating and financial review continued
65
Designing
We develop alongside London’s iconic
architecture, which requires vision and
creativity. As a result we have sought the
world’s leading architects enabling us to
plan a new generation of iconic buildings.
Land Securities Annual Report 2006
66
London Portfolio
We have a dedicated London Community Liaison Manager to manage relationships with the
communities surrounding our London projects
We included £1.0m of specially commissioned public art at Cardinal Place and opened the
SW1 Art Gallery
All of our schemes are rated by BREEAM with a target of Very Good. Of those rated, many of
which are still under construction, seven out of nine achieved this target, with five achieving
a rating of Excellent
Create strong relationships with occupiers in the London office and retail market
The London occupier market is highly competitive. To differentiate Land Securities from other
property owners we have sought to strengthen our relationship with existing occupiers and more
actively target new occupiers through an innovative marketing campaign, Capital Commitment.We
have also introduced new lease terms and new ways for occupiers to procure property services, most
distinctly through Landflex, which offers lease flexibility, service guarantee and price certainty.
Landflex
Our Landflex portfolio now incorporates 65,500m2 of business accommodation across four buildings
and we are actively seeking to acquire more property as we expand this over time to 150,000m2 of
accommodation. The size of letting across this portfolio varies between 250m2 to 43,000m2, with an
average inclusive rent of £400 per m2.
During the year under review we introduced two new Landflex buildings. The first is 140 Aldersgate
Street, an 8,270m2 newly developed, vacant building which we acquired for £40.3m. This building is
now 62% let and provides accommodation to three companies, on a variety of lease lengths ranging
from 10 to 12 years at an average inclusive charge of £520 per m2.
The second is our newly developed building at 40 Eastbourne Terrace,W2, which we completed
and let during the financial year. The letting we achieved here for the entire building demonstrates
how our new approach to occupier management is benefiting the Group. CB&I Limited, a leading
international engineering contractor, are existing occupiers of our neighbouring property at 10-30
Eastbourne Terrace where they occupy about 50% of the available accommodation. CB&I had
expressed a desire for new accommodation in response to which we agreed a new 15-year lease
at a rent of £377 per m2 for the whole of 40 Eastbourne Terrace.We have also agreed to provide
a range of Landflex property services through a separate agreement and to take back the existing
accommodation. This solution to their property requirements has secured the income on the
recently completed building while enabling us to evaluate the possibility of refurbishing 10-30
Eastbourne Terrace as a possible additional Landflex facility.
Customer service
More than 70% of our London Portfolio is multi-let and we provide a full range of management
services to these buildings. The property management restructuring carried out recently
has been implemented to improve the way in which we provide those services.
In addition to the customer service initiatives across the London Portfolio, we are also responsible
for the provision of energy and waste management to our managed properties. This is an area where
we can influence positively the environmental impacts of our portfolio. On the energy front, our
managed office portfolio participates in the carbon trading emissions scheme where, for the fourth
calendar year running, we have beaten our energy reduction target. Given the nature of our occupier
base, it is more difficult to introduce waste management schemes similar to those at the shopping
centres. However, we persevere on this front and have introduced waste recycling schemes at three
of our managed office properties.
Land Securities Annual Report 2006
Working
At the end of a working day in London some
50,000 people will head home having spent
the day in a Land Securities owned office.
Customer satisfaction surveys
– London offices
Objective
Understanding needs
Communication
Willingness to recommend us
Responsiveness
Overall satisfaction
2004
Actual
2005
Target
2005
Actual
3.74
3.77
94%
3.77
3.70
3.50
3.65
92%
3.80
3.75
3.67
3.75
94%
3.88
3.79
Note: Customer satisfaction surveys are for calendar year period.
Scale: 1=very poor 5=excellent
Devonshire House, London
This is on the market demonstrating
our commitment to recycling capital
to reinvest in higher growth activities.
We don’t keep all our trophies in the cabinet forever
68
Property Outsourcing – Land Securities Trillium
Land Securities Annual Report 2006
Operating and financial review continued
69
Property Outsourcing We think warmly
about customers at Land Securities Trillium,
not surprising when we look after nearly 3,000
boilers across 3.3 million m2 of accommodation,
taking pressure off our customers so they can
focus on what is important to them.
Land Securities Annual Report 2006
70
70
Property Outsourcing Achievements
Land Securities Trillium share of
Group operating profit £96.6m
Exceptional profit of £293.0m from
our sale of Telereal
DWP contract performed ahead of
our expectations
Customer satisfaction of 90% across
the DWP contract
55,360m2 of development underway
for clients
Land Securities Annual Report 2006
Property Outsourcing – Land Securities Trillium
Operating and financial review continued
71
“We generated substantial profits for the Group this year through
the sale of Telereal, leaving Land Securities Trillium poised to
grow its business through new contracts in new markets.”
Ian Ellis
Chief Executive, Land Securities Trillium
Land Securities Trillium produced 17% (£96.6m) of the Group’s operating profit. This was a small
decline on last year despite the disposal of Media Village,White City in March 2005 and the sale
of the Telereal joint venture in September 2005. This business has a commercial portfolio totalling
3.32 million m2 and six clients for whom we provide business accommodation services to
175,000 people.
Land Securities Trillium provides innovative property outsourcing solutions offering a more
efficient approach to owning and managing property by eliminating the complexity of property
management and provision of services while reducing the cost. Also known as property
partnerships, we provide property outsourcing solutions to the corporate and the public sector.
Property outsourcing and its markets
Property outsourcing is the transfer of an organisation’s risks and management on some or all
of its property to an expert property partner, converting its property assets and liabilities into an
integrated property contract. This allows organisations to align their property requirements with
their business strategy, so that their accommodation supports their needs.
The target market for property outsourcing is corporate and public sector organisations which are
seeking to optimise their accommodation efficiency and transfer the responsibility and risk of
procuring and running their property estates to a third party. Typically these are organisations who
are seeking to introduce change, either to the way in which they procure, occupy and manage
property or to their business model.While it is not easy to identify the addressable market,
commercial organisations hold more than £250bn of assets while Local Government owns some
£100bn and Central Government owns approximately £70bn. These figures exclude any leasehold
property which may also be included in a property outsourcing contract.
Full property outsourcing has been undertaken by a small number of major public sector
organisations and Land Securities Trillium has won three of the four public sector contracts let
to date. Property outsourcing is also a significant element of many PPP/PFI projects. It is for this
reason that we have increasingly focused on this area and in particular on defence, education and
community assets. Because these are new markets, with non-property activities procured alongside
property, we have used joint ventures to address a number of these opportunities (with QinetiQ
on the Defence Training Review and through Investors in the Community in education and
community assets).
In the corporate sector, there is a wider variety of outsourcing models. Some contracts are relatively
wide-ranging from day one but others have typically included a smaller number of elements with
the potential for the relationship to grow and evolve over time.We expect this to remain the norm
in this sector, with the focus on providing differentiated products and solutions tailored to the
particular needs of the individual client at the time.
Table 15: Contract features
Barclays BBC DVLA DWP NU Telereal II
Freehold transfer
Leasehold transfer
●
●
Estates strategy
consultancy
New building
and workplace
services
Asset management
implementation
Portfolio flexibility
●
●
●
●
●
●
Facilities management
●
●
Management/
provision of
capital works
Price predictability
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
Table 15 illustrates how this business differs from Land Securities’ investment
property business. It demonstrates the unique features of each of the
contracts we currently have under management and the way in which we
tailor our product offering to meet the clients’ individual requirements.
Land Securities Annual Report 2006
72
Property Outsourcing – Land Securities Trillium
Our strategy
Land Securities Trillium has been pursuing a growth strategy and achieved its target of contributing
25% of the Group operating profit in 2005 ahead of plan. It has firmly established itself as the
market leader in property outsourcing in terms of the number of contracts it has won to date and is
seeking to maintain this position by continuing to invest in the development of new property
outsourcing models as well as developing market leading technological and customer service
solutions. Following this year’s sale of our share of the Telereal joint venture, we are now positioned
to continue to grow our business by:
Accessing new opportunities for outsourcing contracts in existing and new markets
Growing our business with existing clients
Leading innovation in the outsourcing industry
Our performance
The financial performance of Land Securities Trillium is measured differently to that of the
investment property business, focusing more on income growth since its operating properties
are not revalued. Once again this business had an excellent year, driven by the sale of its share
of the Telereal joint venture together with a strong performance from the DWP contract.
Land Securities Trillium made a segment profit of £392.5m compared to £128.2m for the year to
31 March 2005. Excluding profit on the sale of fixed assets, net surplus on revaluation and profit on
disposal of Telereal segment profit was £96.6m (2005: £97.7m). This profit level was maintained
despite the anticipated reduction in the BBC profit following the disposal of White City which
generated capital receipts of £321.5m.We achieved a stronger than expected performance from the
Department for Work and Pensions (‘DWP’) contract together with positive contributions from
DVLA, Norwich Union and Barclays in line with our expectations. Following our exit from the Telereal
joint venture, which generated an exceptional profit of £293.0m, after costs, we entered into new
agreements maintaining our relationship with Telereal. These new agreements are called Telereal II
and, over the last six months, have contributed £6.9m to operating profit.
Operating profit from the BBC reduced to £0.5m as a consequence of the sale of Media Village
White City and the subsequent reduction in the unitary charge paid to us by the BBC. As this left
no real estate in the partnership, we agreed with the BBC that it would be better to re-tender the
remaining facilities management services, reflecting the BBC desire for a shorter duration contract.
We did not bid for that business and following a procurement exercise will be transferring our
facilities management responsibilities to a new provider at the end of June 2006. The projects at
Broadcasting House and Pacific Quays are unaffected by this change.
The increase in bid costs reflects the considerable amount of activity on new bids, the largest of
which, the Defence Training Review (‘DTR’), is still in progress.
The DWP has not utilised as much of its vacation allowance as we anticipated 12 months ago and
additional services have also been contracted giving rise to an increase in the unitary charge.While
this delay in using its flexible accommodation allowance has had a positive effect on our results to
date, the impact of this is to create a bigger future allowance which will decrease our income and
profit more steeply as it is used. The DWP has indicated that it intends vacating some 150,000m2
of free flexible space over the next two years and has given notice on 94,000m2 as compared to
26,000m2 this time last year.
Our contribution to performance
When Land Securities acquired Land Securities Trillium, it had one contract as compared to the six
and the Investors in the Community joint venture today. Over the course of the past six years, Land
Land Securities Annual Report 2006
Land Securities Trillium financial results
Contract level operating profit
31/03/06
£m
31/03/05
£m
– Barclays
– BBC
– DVLA
– DWP
– Norwich Union
– Telereal II
Bid costs
Central costs
Profit on sale of fixed
asset properties
Net surplus on revaluation of
investment property
Profit on disposal of joint venture
(Telereal)
Segment profit
Distribution received from Telereal
2.5
0.5
1.0
97.7
5.0
6.9
(7.4)
(9.6)
96.6
1.0
1.9
293.0
392.5
11.7
–
20.6
–
81.4
6.1
–
(2.6)
(7.8)
97.7
30.5
–
–
128.2
65.4
Norwich Union, Norwich
We integrated a group of disparate
buildings under one huge glass atrium,
and built cafés, bars and informal
meeting spaces, that are a magnet for
staff and flooded with natural light.
How do you help staff to be happy and more
productive? Create an inspirational environment.
74
Property Outsourcing – Land Securities Trillium
Securities Trillium’s performance has exceeded our expectations and delivered early on the Group’s
growth ambitions for this part of the business.We believe that this can be attributed to the way in
which Land Securities Trillium pursues its strategic objectives as detailed above.
Accessing new opportunities for outsourcing contracts in existing and new markets
We have developed substantial expertise in the Government outsourcing markets and are now using
that experience to bid for new contracts, examples of which are:
Northern Ireland Civil Service (‘NICS’) Workplace 2010 – a 20 year partnership to transform the NICS
office estate, improve the working environment for staff and facilitate new ways of working to
enhance the delivery of services to the citizens of Northern Ireland. This opportunity is likely to be
delivered through a PFI solution.
Building Schools for the Future (‘BSF’) – the Government intends to invest £40bn in the BSF
programme which is the largest ever Government schools investment initiative.The programme aims
to rebuild or renew every secondary school in England over the next 15 years.To support this initiative,
Land Securities Trillium has made an initial investment of about £20m into a 50/50 joint venture with
the Mill Group called Investors in the Community (‘IIC’). IIC is the preferred bidder for the Peterborough
schools PFI and Bristol BSF projects and is shortlisted on the Leeds and Waltham Forest BSF projects. In
addition, IIC is progressing several further local government and health sector bids.
Defence Training Review (‘DTR’) – DTR is a PPP programme developed to modernise the delivery of
professional and trade training in the military and the continued professional development of the
armed forces. The DTR is being procured by the MoD in two packages, with a combined estimated
total value of about £13bn over a 25-year term. Package 1 is primarily technical training, including
aeronautical engineering and communications and information systems. Package 2 incorporates
logistics, joint personnel administration, security, languages, intelligence and photography as well
as supply training.We are bidding as part of the Metrix consortium, which is a special purpose 50/50
joint venture company between ourselves and QinetiQ. Metrix is the only provider shortlisted in
both packages. The MoD’s timetable currently envisages an announcement of Preferred Bidder in
late 2006.
During the year we were one of two shortlisted parties bidding for MoDEL, a £200m MoD project
to rationalise land holdings in West London. Although unsuccessful in this bid we believe that the
experience gained will assist us in appraising future opportunities arising around surplus land holdings.
Growing our business with existing clients
We have worked with our existing clients to deliver extensions to their contracts to meet their
changing needs. During the year we agreed three contract extensions, the largest of which was the
Telereal II agreement which involves the continued management of leasehold risk on part of BT’s
estate and the provision of other services. The leasehold estate agreement runs until the end of
2031 (although Telereal and Land Securities have the option to terminate the agreement at any
time on or after 31 March 2010 with not less than three months’ notice). Under these new
agreements we will receive annual revenues of approximately £50m leading to anticipated pre-tax
profits of some £14m per annum.
We also extended our relationship with Barclays Bank, where we assumed responsibility for an
additional 16 properties located across the UK, totalling 6,350m2 of accommodation.These are short-
leasehold properties that are surplus to Barclays’ requirements and are largely vacant as a result of
its property rationalisation. Barclays made a capped payment to reflect the letting risk and we have
assumed responsibility for all future benefits and liabilities relating to the transferred interests.
Land Securities Annual Report 2006
During the year we agreed an extension to our current Norwich Union operations to include a
project delivering a new working environment and comfort cooling scheme at their Colegate facility
in Norwich. Our contract with Norwich Union is now completing its second year, and we are
working with them to explore how we might extend further our partnership and service provision.
Leading innovation in the property outsourcing industry
Competitive advantage comes from our ability to deliver a wide range of diverse services across
property portfolios in an efficient and cost-effective manner. Since inception we have built up
internal and external competencies allowing us to do this.We also believe we are unique in the way
that we have structured our model into one integrated business.We discuss below some of
these elements.
Corporate Real Estate Group
The role of our Corporate Real Estate Group is to work in partnership with our clients to develop and
then implement an estate strategy suited to the clients’ business needs. In addition to ongoing asset
management activity, this also extends to the acquisition of new space, the refurbishment of
existing space, and, where appropriate, the disposal of space no longer required. In the past year we
acquired 14,000m2 of new space, while disposing of 49,000m2 and subletting 6,800m2.
Customer service
Our Service Centres are available 24 hours a day throughout the year to receive calls from our
customers, the 175,000 client staff who occupy our buildings. In the past year we responded to over
500,000 customer calls, the majority from our DWP client whose customer satisfaction survey
recorded a 90% overall satisfaction level with our service delivery performance.
Service delivery
Our ability to deliver facilities management services and capital works extends across the UK,
enabling us to respond 24 hours a day to our clients’ property needs. Through our well-established
supply chain we delivered £223m of capital projects during the year, and responded to some
500,000 customer work requests, ranging from setting up meeting rooms or providing additional
security services to the provision of a comprehensive maintenance service.
Health, safety and environment
We are responsible for providing health, safety and environment services to certain of our clients,
most notably the DWP. On this contract we have introduced online interactive health and safety
(‘H&S’) training for all DWP staff. Also in the H&S field, we secured certification under Occupational
Health & Safety Assessment Series 18001 for the DWP contract. This challenging standard, which is
the industry benchmark for H&S Management systems, provides external verification that our
policies, procedures and systems are robust and being effectively applied.
Environment
We focus strongly on the environmental aspects of our business, with our operations on the DWP
contract being certified to ISO14001. In this context we have been instrumental in helping the DWP
achieve its sustainable development targets with 47% of all waste across DWP being recycled
(Government target 40%) and 30% of energy being procured from renewable sources (Government
target 10%).
All our other contracts are run under the scope of our Environmental Management System which is
certified to BS8555.This requires all significant environmental aspects in our business to be identified,
and for each major project we compile an Environmental Compliance Register through which we
audit the project and our supply chain. On our construction project at Norwich Union’s headquarters
we require that all timber is sourced from Forestry Stewardship Council-approved forests, and we
have followed this timber trail through our supply chain back to its sources in Bavaria.
Operating and financial review continued
75
Customer satisfaction survey
DWP
03
04
05
89.6%
93.0%
90.0%
Strong levels of customer satisfaction continue
across expanded portfolio
Land Securities Annual Report 2006
76
Urban Community Development
Our Urban Community Development activities represent long-term investment by Land Securities
in non-core markets which will, we believe, deliver above average returns for shareholders. It is also
an area where we can benefit from our balance sheet strength and development skills. Our activities
here have progressed from a predominantly strategic planning focus to a focus on delivery on the
ground. This is set against a background of lower growth but a stable residential housing market in
the south east.
Kent Thameside
Our efforts have been focused on concluding negotiations with Dartford Borough Council on the
planning gain package for our proposed development in Eastern Quarry, where a resolution to grant
planning permission was awarded in July 2005.
We have also made slow but steady progress in resolving outstanding issues with the Highways
Agency regarding their objections to our application and remain confident that an acceptable
solution will be found.We therefore committed to a £8.6m earth-moving contract which will see
the creation of the new landscape needed for the development of the eastern end of the Quarry.
We also completed the construction of and occupied our new 860m2 marketing and management
centre creating the hub for our future activities in Kent Thameside.
At Ebbsfleet, where we have a 48.5% interest in the land surrounding the new Channel Tunnel Rail
Link station opening in 2007, we have been working towards securing masterplan approval for part
of the site. This will provide the framework against which our development partners, Countryside
Properties, can make a detailed application for the first phase of development of over 300 new
homes at Springhead.
Our other joint venture with Countryside Properties at Waterstone Park continues with the
development of the latest phase of new homes and apartments, which are selling well and achieving
premium values for the location. This supports our commitment to work with partners who share
our aspirations to invest in and deliver innovative and quality design.
We agreed terms for the sale of our remaining interests at Crossways Business Park to Legal &
General enabling a phased handover of the remaining development plots (approx 15% of the overall
area of the park) to take place this year.
Stansted
As part of the review of the Regional Spatial Strategy for the East of England (RSS 14), we have
promoted our 650 hectare (1,625 acre) site at Stansted for a range of uses to serve the future
expansion of Stansted Airport and the growth in housing being forecast by the Government in
respect of the M11 Corridor.We have also entered into a new option agreement with Aggregate
Industries PLC for the rights to extract some four million tonnes of sand and gravel reserves
on the site.
Land Securities Annual Report 2006
Eastern Quarry, Kent Thameside
This is regeneration on a visionary scale.
On a 1,450-acre site we plan to deliver
13,000 new homes, 580,000m2 of
commercial space and 300,000m2
retail, leisure and community space.
Some developments are worth taking time over…
78
Board of Directors
Peter G Birch CBE (68)
Chairman and Non-Executive Director
Appointed a Director in 1997 and Chairman in
July 1998. Chief Executive of Abbey National plc
until March 1998. Chairman of Kensington
Group plc. Senior Independent Director at
Trinity Mirror plc. Non-Executive Director of
Travelex, Sainsbury’s Bank, Dah Sing Financial
Holdings Limited and an advisor at N M
Rothschild & Sons Limited.
Francis W Salway (48)
Executive Director
Joined the Group in October 2000. Previously
an Investment Director at Standard Life
Investments. He was appointed to the Board in
April 2001. Appointed Chief Operating Officer
in January 2003 and Group Chief Executive in
July 2004.
Martin F Greenslade (41)
Executive Director
Joined the Board from BAE Systems as Group
Finance Director in September 2005. Previously
Group Finance Director of Alvis PLC and a
member of the executive committee of
Nordea’s investment banking division and
Managing Director of its UK business.
A Mark Collins (49)
Executive Director
Appointed to the Board in November 2002
after joining the Group in May 2002. Previously
Senior Managing Director at GE Capital Real
Estate. Appointed Chief Operating Officer in
July 2004.
Ian D Ellis (50)
Executive Director
Joined the Board in November 2002. An original
member of the management team which set up
Trillium. Previously Chief Executive of the
investment management division of Insignia
Richard Ellis. Chief Executive of Land Securities
Trillium. Non-Executive Director of Rok plc.
Michael R Hussey (40)
Executive Director
Appointed to the Board in September 2004
after joining the Group as Development
Director in 2002. Previously Head of Leasing
and Marketing at Canary Wharf Group.
Appointed Managing Director, London Portfolio
in July 2004.
Land Securities Annual Report 2006
79
Board of Directors continued
Richard J Akers (44)
Executive Director
Joined the Board in May 2005, following his
appointment as Managing Director, Retail in
July 2004. Joined the Group in 1995 and
previously held the position of Head of Retail
Portfolio Management.
David Rough (55)
Non-Executive Director
Joined the Board as a Non-Executive Director in
April 2002 and appointed Senior Independent
Director in November 2003. Group Director
(Investments) of Legal and General Group PLC
until December 2001. A Non-Executive Director
of Mithras, BBA Group PLC, EMAP Group PLC
and Xstrata Group PLC.
Sir Winfried Bischoff (64)
Non-Executive Director
Appointed to the Board in November 1999.
Chairman of Citigroup Europe, and a Non-
Executive Director of The McGraw-Hill
Companies, USA and Eli Lilly & Company, USA.
Stuart A R Rose (57)
Non-Executive Director
Joined the Board as a Non-Executive Director in
May 2003. Chief Executive of Marks & Spencer
Group plc. Previously Chief Executive of Arcadia
Group until December 2002. Chief Executive of
Booker PLC from 1998 until 2000.
Bo Lerenius CBE (59)
Non-Executive Director
Appointed to the Board as a Non-Executive
Director in June 2004. Group Chief Executive of
Associated British Ports Holdings PLC.
Previously Chief Executive Officer and Vice
Chairman of Stena Line AB until 1999. A Non-
Executive Director of Group 4 Securicor plc.
Alison J Carnwath (53)
Non-Executive Director
Appointed to the Board as a Non-Executive
Director in September 2004. Chairman of
The Vitec Group until December 2004. A
Non-Executive Director of Friends Provident plc,
Gallaher Group plc, Glas Cymru and
Man Group plc.
Land Securities Annual Report 2006
80
Corporate Responsibility
We see Corporate Responsibility (‘CR’) as the driver for our business to achieve the balance between
its environmental, social and economic responsibilities and we recently published our third CR
report which is available on our website.
CR Committee
Committee Chair
Chief Operating Officer of
Land Securities Trillium
Board representative
Group Chief Executive
Customers
Community
Head of Property and Occupier Services
Retail Operations Manager and
Community Liaison Officer
Employees
Group HR Director
Environment
Assistant Director of Environment
Health and safety
Director of Health and Safety and
Environment
Suppliers
Head of Group Procurement
Investors and
Communication
Risk Management
and Internal Audit
Director of Corporate Communication
Business Standards Manager
To help achieve our objectives we have established a representative Group-
wide CR Committee, which seeks to support and provide a framework for the
range of CR initiatives undertaken nationally by all parts of our business.The
CR Committee comprises senior representatives from each area of the
business and is chaired by the Chief Operating Officer of Land Securities
Trillium.The Group Chief Executive is a member of the Committee.
In part, the focus on CR issues over recent years has been driven by Government regulation, but
equally there has been a growing level of shareholder and other stakeholder interest in the non-
financial aspects of a company’s performance.We also recognise that an effective CR programme
can help to identify and manage business risks, generate operational competitiveness through
resource efficiencies, and contribute towards enhancing our reputation and achieving differentiation
in the market place. The nature of Land Securities’ business is such that we are closely aligned with
the communities within which we operate. In designing, specifying and managing our developments
and property portfolio, be they retail or offices, we need to have regard to their impact on the local
environment.We want to create spaces the public enjoy using and employees are delighted to work
in.We want to contribute to our local communities, notably in the areas of education and local
enterprise, and we want our 1,800 staff across the country to be proud to work for Land Securities.
We therefore want to achieve our vision and objectives within a framework of high standards that
takes account of the needs of all of our stakeholders and our impact on the environment and
communities in which we operate.
Stakeholder engagement
The CR Committee also establishes and publishes annual targets for each of the seven streams of
activity we have identified as being key to Land Securities CR performance:
Customers
Community
Employees
Environment
Health and safety
Suppliers
Investors
Our response to CR is organised by these seven work streams as we believe this stakeholder/interest
group structure best reflects the range of issues for a property business and how Land Securities is
structured. It also allows us to place clear responsibility for each group at Senior Management level.
We encourage active and consistent communication with each stakeholder group which we achieve
through satisfaction surveys, benchmarking exercises, audits, conferences, one to one meetings,
participation in industry working groups, the corporate website, and reporting. Our inclusion in
various indices eg Dow Jones, FTSE4Good and Global 100 Most Sustainable Companies;
demonstrates that we continue to lead the property industry with our CR practices and activities.
Social, ethical and environmental (‘SEE’) risks
As a capital intensive company with a relatively low number of employees, we have identified health
and safety, climate change and business ethics as the key SEE risks relevant to our business.
We report on our approach to health and safety on page 83. In respect to the environment and in
particular climate change we report on our activities on page 84 as well as in the business unit
reviews in the OFR.
Employees
The Group has in place a number of policies and procedures including diversity and equal
opportunities (including equal opportunities for disabled employees) as well as the business ethics
policy described on page 82, all of which are published on the Group’s website.We comment in
detail upon our people and our people strategy on page 34.
Land Securities Annual Report 2006
The Bridges, Sunderland
This invigorating development has
given Sunderland a new lease of life and
attracts over 450,000 shoppers a week. It
is cleaned every day with environmentally
friendly products.
450,000 visits a week…that’s a lot of people
to clean up after
82
Corporate Responsibility continued
The Group has in place a statement of business principles and a business ethics policy, which can
be found on our website. It also has a ‘whistle-blowing’ procedure which incorporates a telephone
hotline and e-mail facility. Employees are provided with the business ethics policy on appointment
together with guidance as to raising any concerns in respect to the business. Every six months
managers across the business are audited as to compliance with the Group’s policies in this area
and in the 12 months under review there were no notified infringements. To ensure that employees
remain aware of the policies and procedures in the area from time to time we specifically
communicate to them using the intranet, staff notice e-mail and weekly news update
communication channels.
Community
Land Securities makes grants and donations to charities and community groups through third party
managed charitable funds and its Group charity committee which together have donated over
£600,000.We estimate that through our 30 shopping centres we contribute over £500,000 of free
floor space to charities and other organisations to promote their activities.
Performance highlights
The following examples of performance highlights capture our achievements against 2004/05
targets and further progress in the period 2005/06. They also serve to illustrate the breadth and
range of activities addressed under our CR programme.
We achieved second place ranking in the 2005 Property Environment Group benchmark and were
listed in the FTSE4Good and SAM Dow Jones Indices
Environmental Impact Assessments were produced on all major development projects
A biodiversity survey was undertaken across the entire DWP estate (no other property company
has achieved this across its portfolio)
Recycling improved by 21% against a target of 10%
A process was established to trace back to source all timber used on major developments and
DWP projects
Minimum CR standards were introduced into all supplier selection and evaluation documentation
Community Liaison Managers were appointed on development projects
There was a major increase in the provision of homeworking facilities to Land Securities staff
We became an active member of the Employers’ Forum on Disability
Future outlook – key challenges
All businesses face the inevitable challenge of seeking continuous improvement across their
activities. Land Securities is no different. It has, however, gained invaluable experience from its focus
on the environment where, over the years, through a process of incremental steps and target setting,
it now leads the property sector in environmental management.
This approach has now been adopted across all the CR work streams, where each work stream
manager has been empowered to agree and set targets which will provide the opportunity for
further improvements across our business. And we have learnt from experience. The first targets set
were, with the benefit of hindsight, over-ambitious and for that reason we needed to extend the
timeframe in which to achieve them. Our new targets for the year to 31 March 2007 are different in
two ways.While fewer in number, they are more focused in output and therefore more ‘measurable’.
We look forward to being able to report positively on our achievements next year.
While we can demonstrate that we are making good progress across many areas of our business
activities we still struggle with elements of supply chain management. As a business we have to
balance shareholder value against the economic and practical aspects of supply chain management.
In our CR Report we report on the progress we are making in the major impact areas of construction,
procurement and Land Securities Trillium key supplier chain management.We are looking at how
Land Securities Annual Report 2006
CR Group model
E n v i ronment
E m p loyees
t h and safe
t
y
l
a
e
H
s
r
o
t
s
e
v
n
I
Customers
S
u
p
p
l
i
e
r
s
Community
Customers
Client and occupier satisfaction
Health and safety
Health and safety training
Accident reporting
Risk assessment and audits
Employees
Communication and engagement
Rewards and recognition
Learning and development
Succession planning and talent management
Diversity
Suppliers
Investing in suppliers
Sharing knowledge
Health and safety and the environment
Monitoring supplier performance
Community
Learning and development
Charitable funds
Employee volunteering
Community consultation
Community communication
Investors
Awards
Shareholder analysis
Analysis of investors meetings
CR governance structures
Environment
External benchmarking
Environmental assessments
Recycling and waste management
Energy use, CO2 emissions
Water use, environmental innovation
and when we should apply similar supply chain evaluation criteria more widely across our
investment portfolio.
We have continued our focus on the customer, which brings the challenge of providing new and
better customer focused services and products. It is our people who have anticipated and responded
to this on-going challenge. And in return, we continue and will continue to seek to provide career
and personal development opportunities to ensure that we attract and retain the best people in the
industry, who in turn contribute to our continued success.
Health and safety
The Group’s health and safety policy is published on our intranet and website.We produce a health
and safety plan every year containing measurable objectives and report progress against these
objectives to the Board every month. Health and safety performance is included in the Group’s
‘balanced scorecard’ measurement approach.We increased the number of full-time employees in
the health, safety and environment team from 23 to 28. The team now has 16 health and safety
managers, two environmental managers and 10 health and safety trainers. We achieved Stage One
of the occupational health and safety management system OHSAS 18001 for the DWP estate and
are seeking full accreditation. The Health and Safety Executive asked to feature our approach to
health and safety as a best-practice case study, recognising Land Securities as a leader.We have also
been recognised in the Top 10 FTSE100 companies for reporting health and safety in Annual Reports
and for achieving targets.
There were 295 notifiable incidents under the RIDDOR regulations (2005: 187). This was a
significant increase over the previous year due to new accident reporting processes, the introduction
of a company-wide accident reporting database, additional property outsourcing contracts and
expansion of our investment portfolio.
Key performance indicator
The key performance indicator for health and safety is to ensure that we receive less than five health
and safety improvement and prohibition notices a year.We have received none in the 2006
reporting period. During 2006, health and safety will be introduced as a personal key performance
indicator for all related managers.
Health and safety training
Occupational health and safety training to NEBOSH and IOSH standard was provided to 78
employees. In addition, we trained 1,163 managers and staff, making a total of 1,241 employees
receiving health and safety training.We revised the health and safety induction programme for new
starters and plan to provide this training via an interactive platform in 2006.
Accident reporting
We introduced a new system, SOLAR (‘Safety On-line Accident and Reporting database’), to record
all health and safety incidents, improving reporting and management. SOLAR has been trialled
successfully in the DWP estate and will be extended to the rest of the business during 2006.We
received a Royal Society for the Prevention of Accidents Gold Award for our health and safety
management systems and for the development of SOLAR.
Risk assessment and audits
In 2005, we carried out 340 risk assessments and health and safety audits across our investment and
development portfolios. These assess compliance with legislation – scores across the portfolio were
between 97–100%.We also conducted health and safety audits across Land Securities Trillium’s
contracts in line with contractual requirements.
83
Corporate Responsibility continued
Land Securities Annual Report 2006
84
Corporate Responsibility continued
Construction skills certification scheme
In 2005, we set out to ensure all staff involved in construction related activities were accredited
under the Construction Skills Certification Scheme (‘CSCS’). Approximately 40% are now certified.
We hope that this scheme will improve the competence of the construction industry, make it
possible to measure the competence of site-based staff and make comparisons between
contractors. After 2008 we will only work with CSCS certified contractors.
Environment
Environmental management systems
The Group environment policy is published on its intranet and website.We introduced an upgraded
environmental management system (‘EMS’), across the entire Group. In September 2005 this was
certified to Phase IV of the British Standard BS8555, which helped us win the 2005 Liveable City
award for environmental management.We are now seeking accreditation to ISO14001, which is the
standard we have achieved across the DWP contract (at around 1,800 sites one of the largest global
certifications to date).
Asbestos
We have established an in-house asbestos management team which conducted 2,256 surveys
across our property management and property outsourcing portfolios in 2006 (2005: 1,200).
Energy and waste management
We have a comprehensive energy management system in place which we use to identify
opportunities to reduce energy across our managed portfolios.We gather and report our energy
usage across nearly 2,000 buildings, the results of which are published annually in the autumn on
our website.
CO2 emissions
We are the only property company participating in the voluntary UK Emissions Trading Scheme
with a multi-site portfolio and beat our reductions target for the fourth consecutive year and in
2005 reduced the emissions covered by the scheme by 17%
We participated in a programme of energy audits subsidised by the Carbon Trust, and
implemented many of the recommendations in a year long trial at Regis House, one of our
London managed properties. This scheme was second in the European Energy Trophy and
reduced emission at Regis House by 29% saving £44,000 on the energy bill at that site
Waste management
We have continued to target waste management and overall have made good progress across the
portfolio. At our head offices in London paper consumption has decreased for the third year running,
assisted by the introduction of double sided printers/copiers in 2005.We report further on waste
and energy management throughout the business unit reviews in the OFR.
Biodiversity
We retained our accreditation under the Business and Biodiversity Benchmark scheme run by The
UK Wildlife Trusts. The Stage II survey programme has identified several locations with potential to
enhance the local biodiversity and we are investing £10,000 on these initiatives across the DWP
estate and our retail portfolio.
Climate change
Climate change is one of the challenges facing us and we have established a working group with a
long-term remit to consider the potential impacts of climate change predictions on our business
and how we might mitigate adverse effects or take advantage of new opportunities.
Land Securities Annual Report 2006
Electric car
Our G-Wiz electric car will replace courier
runs between our London offices, thereby
reducing our overall emissions.
85
Corporate Governance
Introduction
The Board is responsible for providing leadership
for the Group and for ensuring that the right
strategy and controls are in place in order to
deliver value not only to shareholders but also
to a wider community of individuals and
organisations which benefit from the Group’s
activities. Land Securities is committed to high
standards of Corporate Governance and
supports the Combined Code on Corporate
Governance (the ‘Code’) published in July 2003.
Further details of how Land Securities complies
with the Code can be found in the Corporate
Governance section of the Company’s website,
together with the terms of reference of the
Audit, Nomination and Remuneration
Committees.
The role of the Board
The Board formulated strategy and monitored
the operating and financial performance of the
Group. It operated in accordance with a written
schedule of matters reserved to the Board, a
copy of which is available on the Company’s
website. Key matters reserved to the Board
include:
authorisation of significant transactions
in excess of £100m
dividend policy
internal controls (via the Audit Committee)
remuneration policy (via the Remuneration
Committee)
shareholder circulars and listing particulars
matters relating to share capital such as share
buy backs
treasury policy and significant fundraising
appointment/removal of directors and
Company Secretary
to support the Company’s strategy, further
details of which are on page 36.
Progress reporting – at Board meetings a
detailed monthly Board report was reviewed
and the heads of business units provided an
update on progress within their areas of
responsibility. In addition, the interim and
final results, together with a comparison of
investment portfolio performance to IPD on
a six-monthly basis, were reviewed in detail.
Compliance and external relationships – at
least annually the Board reviewed investor
relations, HR policy, corporate governance,
health and safety (with quarterly updates),
environmental performance, Board
performance evaluation and corporate
responsibility matters.
The schedule below sets out the number of
principal Board and Committee meetings held
during the year together with individual
attendance by Board members at those
meetings.
Board balance and independence
The roles of the Chairman and Chief Executive
are split, with clear written guidance to support
the division of responsibility. No single
individual has unfettered powers of decision.
As Chairman, Peter Birch was responsible for the
effective working of the Board, ensuring that
all directors were able to play a full part in its
activities. He was also responsible for ensuring
effective communication with shareholders and
making sure that all Board members were aware
of the views of major investors.
Francis Salway, as Group Chief Executive, was
responsible for all aspects of the operation and
management of the Group and its business. His
role included developing, for Board approval, an
appropriate business strategy and ensuring that
the agreed strategy was implemented in a
timely and effective manner.
There existed a strong non-executive element
on the Board which currently consists of the
Chairman, six executives and five non-Executive
Directors. David Rough is the Senior
Independent Director.While the Board regards
each of the five non-Executive Directors as
being independent, Sir Winfried Bischoff is the
Chairman of Citigroup Europe which provides
investment banking services to the Group and
as a result did not fully meet the independence
criteria set out in the Code. However the
unanimous view of his colleagues on the Board
is that, by virtue of his character and experience,
he is robustly independent.
Throughout the majority of the year the Board
was non-compliant with the provision of the
Code which provides that at least half of the
Attendance at Board and Committee meetings
The number of principal Board and Committee meetings attended by each director during the financial year was as follows:
Board
(9 meetings)
Audit
Committee
(4 meetings)
Nominations
Committee
(3 meetings)
Remuneration
Committee
(5 meetings)
The Board used an annual process timetable to
ensure that relevant matters were given due
consideration as follows:
Peter Birch (Chairman)
Francis Salway (Group Chief Executive)
Mark Collins
9
9
9
Strategy – the Board held an annual off-site
meeting at which the Company’s strategy
was reviewed in the context of the macro-
and micro-economic environment, potential
legislative changes, competitor strategies and
the need for the Company to create and
exploit competitive advantage.
Business plans – the Board reviewed at six-
monthly intervals five year forecasts, the
annual budget and business plan and the
balanced scorecard, all of which are designed
Martin Greenslade (appointed 01/09/05)
*6/6
Ian Ellis
Mike Hussey
Richard Akers (appointed 17/05/05)
David Rough (Senior Independent Director)
Sir Winfried Bischoff
Stuart Rose
Bo Lerenius
Alison Carnwath
8
9
*5/7
9
9
9
8
9
Andrew Macfarlane (resigned 05/08/05)
*3/3
_
_
_
_
_
_
_
4
4
4
3
4
_
3
3
_
_
_
_
_
3
_
_
_
_
_
_
_
_
_
_
_
_
5
4
5
4
5
_
* Actual attendance/maximum number of meetings a director could attend as a Board/Committee member
Land Securities Annual Report 2006
86
Corporate Governance continued
Board, excluding the Chairman, should comprise
independent non-Executive Directors. However,
the Board considers that the experience and
independent judgement of its non-Executive
Directors are more important than absolute
numbers. It is therefore satisfied that no
individual or group of directors has unfettered
powers of discretion and that an appropriate
balance exists between the executive and non-
executive members of the Board.
The Chairman holds at least two meetings a
year with the non-Executive Directors without
Executive Directors being present.
The Company Secretary, through the Chairman,
is responsible for advising the Board on
governance matters and for ensuring good
information flows within the Board. All
directors have access to the advice and services
of the Company Secretary, as well as access to
external advice, if required, at the expense
of the Group.
Director induction and training
Directors were provided with training on a
number of subjects, including the impact of
International Financial Reporting Standards on
the Group’s accounts and in the new listing and
disclosure rules regime. In the case of newly
appointed directors, an induction programme,
which includes training on the responsibilities
of a director, occurred prior to or immediately
following their appointment to the Board, if
that appointment was the first occasion that
they have been appointed to the Board of a
listed company. A tailored induction
programme is now provided for non-Executive
Directors on appointment, co-ordinated by the
Company Secretary in accordance with
guidelines issued by the Institute of Chartered
Secretaries and Administrators.
March 2006. The process covered both Board
and Committee performance and the output
from the appraisal was reviewed at a
subsequent Board meeting. Overall the
appraisal process revealed a high level of
satisfaction with the functioning of the Board
and its Committees. In addition, individual
performance as Board directors was appraised,
based on one-to-one interviews with the
Chairman or, where appropriate, the Senior
Independent Director.
Nominations Committee
The Nominations Committee, which comprised
Peter Birch (Chairman), David Rough and Francis
Salway met on three occasions to review Board
structure, size, composition and succession
needs, keeping under review the balance of
membership and the required blend of skills,
knowledge and experience of the Board.While
the membership of the Nominations
Committee was non-compliant with the Code,
all key decisions relating to appointments and
membership of Board Committees are
considered by the full Board which includes
a strong representation of experienced
independent non-Executive Directors. The
Committee reviewed the time required from
non-Executive Directors and the annual
performance evaluation was used to assess
whether non-Executive Directors were spending
sufficient time to fulfil their duties. The
Committee also reviewed succession plans for
Executive Directors and senior managers and
made recommendations to the Board on the
reappointment of non-Executive Directors at
the conclusion of their specified terms of office.
Remuneration Committee
The Committee’s activity is described in the
Remuneration Committee Report on pages
90 to 96.
Board appraisal
The formal annual appraisal of the performance
of the Board, its Committees and individual
directors was undertaken in early 2006. This
process was led by the Chairman with the
assistance of the Company Secretary. The wide-
ranging appraisal questionnaire was based on
the process and questions outlined in the Code
and the results were reviewed by the Board in
Investor relations
Land Securities has a comprehensive Investor
Relations programme which aims to provide
existing and potential equity and bond investors
with a means of developing their understanding
of the Group and raising any concerns or issues
they may have. Further detail on the Group’s
Investor Relations activity is provided in the
OFR on page 43.
The Senior Independent Director attended the
preliminary and interim results meetings to
which investors are invited and his attendance
was notified to investors in advance. In addition,
the Chairman wrote to principal shareholders
offering a clear line of contact with either him
or the Senior Independent Director as
recommended by the code. The Annual General
Meeting provided all shareholders with an
opportunity to question the Company on
matters put to the meeting including the
Annual Report. The results of proxy voting at
general meetings were published on the
Company’s website as requested by the Code.
Annual General Meeting
The Board welcomes the move towards a more
constructive use of Annual General Meetings
and regards the Annual General Meeting as
the principal opportunity to meet private
shareholders. At its Annual General Meeting,
the Company complies with the provisions of
the Code relating to the disclosure of proxy
votes, the separation of resolutions and the
attendance of Committee Chairmen. The
Company arranges for the Annual Report and
related papers to be posted to shareholders
so as to allow at least 20 working days
for consideration prior to the Annual
General Meeting.
Audit committee
The Audit Committee consists of all the
independent non-Executive Directors and
is chaired by David Rough. Although all of
the Committee members are considered as
appropriately experienced to fulfil their role,
Alison Carnwarth is considered as having
significant, recent and relevant financial
experience in line with the Code. Further details
of each of the independent directors are set out
on pages 78 and 79.
The Audit Committee’s written terms of
reference are available on the Group’s website
and its principal oversight responsibilities cover:
internal control and risk management
internal audit
external audit (including auditor
independence)
financial reporting
Land Securities Annual Report 2006
The Committee met four times during the year.
The Audit Committee Chairman invited all other
Group Board directors to attend every
meeting and from time to time other senior
management. In addition, the Director of Risk
Management and Internal Audit and
representatives from the external auditors,
PricewaterhouseCoopers LLP, were also present
at each meeting. The Committee also met
separately with the external and internal
auditors and the valuers.
The Committee undertook the following
activities at these meetings:
reviewed the interim and annual results
and considered any matters raised by
management and the external auditors
reviewed and approved the Company’s
approach to implementing IFRS
reviewed and approved the audit plans
for the external and internal auditors
monitored the scope, effectiveness,
independence and objectivity of the external
audit
discussed the results of internal audit reviews,
significant findings, management’s action
plans and the timeliness of resolution
reviewed the Group’s ‘Turnbull Report’ to
support the Board’s sign-off on the system of
internal control (see below for more details)
reviewed reports on the Group’s risk
management measures and actions
reviewed progress on the project to
replace key finance IT systems
reviewed the plans in place to manage
risks associated with the termination of the
BBC contract
reviewed the approach to periodic valuation
of Land Securities Trillium’s operating
properties using Independent Valuers
reviewed the Group’s approach to developing
a ‘best practice’ OFR, including considering
the advice of external consultants
in conjunction with the Board appraisal
detailed on page 86, the Committee reviewed
its own effectiveness and concluded that it
had continued to operate as an effective
Audit Committee
External auditors
The Audit Committee appraised the
effectiveness of the external auditors and the
external audit process. The evaluation process
included feedback from relevant members of
management and the results were reported to
the Board and Audit Committee.
The Company has procedures in place to
monitor and maintain the objectivity and
independence of the external auditors,
PricewaterhouseCoopers LLP (‘PwC’). The
procedures include guidance on the non-audit
services that PwC can provide after proper
approval. On a six-monthly basis, the Audit
Committee reviewed a summary of all non-
audit work. In addition to the audit related
services, PwC provided the following services
during the year:
accounting advice relating to the debt
restructuring
accounting advice associated with acquisition
of Tops Estates
taxation advice, including planning and
compliance
advice on IFRS accounting
pension fund audit
advice on a number of Land Securities
Trillium bids
advice on the accounting for the disposal
of the Group’s share in Telereal
Details of the amounts paid to PwC are set out
in note 7 to the financial statements.
The external auditors reported to the
Committee that they remained independent
and had maintained internal safeguards to
ensure their objectivity.
Valuers
The Group gives the valuers and auditors access
to each other. These advisers have a dialogue
and exchange of information which is entirely
independent of the Group. The Audit
Committee Chairman attends key valuation
meetings (as do the auditors) to be assured of
the independence of the process.
In line with the Carsberg Committee report we
have a fixed fee arrangement with our Valuers,
Knight Frank LLP. The proportion of total fees
paid by the Company to the total fee income
of Knight Frank was less than 5%.
87
Corporate Governance continued
Financial reporting
The Board seeks to present a balanced and
understandable assessment of the Group’s
position and prospects, and details are given
in the Chairman’s Statement and the OFR.
Going concern
After making enquiries, the directors have a
reasonable expectation that the Company has
adequate resources to continue in operational
existence for the foreseeable future. For this
reason, they continue to adopt the going
concern basis in preparing the accounts.
Internal control
The Board is responsible for the Group’s
system of internal control and for reviewing
its effectiveness. Such a system is designed to
manage rather than eliminate the risk of failure
to meet business objectives and can provide
only reasonable and not absolute assurance
against material misstatement or loss. The
Board confirms that this system is designed to
be in accordance with the Turnbull guidance and
has been in place for the year under review and
up to the date of approval of the Annual Report.
The key features of our system of internal
control include:
(a) Strategic and business planning: the Group
and each business unit produce and agree a
business plan each year, against which the
performance of the business is regularly
monitored. Balanced scorecards are prepared
that set out targets for a wide variety of key
performance indicators, including
risk management
(b)Investment appraisal: capital projects, major
contracts and business and property
acquisitions are reviewed in detail and
approved by the Investment Committee
and/or the Board, in accordance with
delegated authority limits
(c) Financial monitoring: profitability, cash
flow and capital expenditure are closely
monitored and key financial information is
reported to the Board on a monthly basis,
including explanations of variances between
actual and budgeted performance
(d)Systems of control procedures and delegated
authorities: there are clearly defined
guidelines and approval limits for capital
Land Securities Annual Report 2006
88
Corporate Governance continued
and operating expenditure and other key
business transactions and decisions.
Operational and financial procedures and
controls are maintained on the Group’s
intranet
(e) Risk management: we have an ongoing
process to identify, evaluate and manage
the risks faced by the Group. Further details
of our risk management process and our
principal business risks are set out in the
OFR as well as on page 89
(f) Six-monthly assessments: a compliance
questionnaire is completed twice a year
(before external reports are issued), which
is signed off by senior managers, providing
assurances that controls are both embedded
and effective within the business
(g)Internal audit: responsible for reviewing key
business processes and controls, including
following up the implementation of
management actions
The Director of Internal Audit and Risk
Management reports to the Group Chief
Executive and has direct access to the Audit
Committee Chairman. The internal audit
function operates a risk-based audit approach
and provides a summary report on the
operation of the system of risk management
and internal control to support the Board’s
annual statement.
The Audit Committee reviews the effectiveness
of internal audit activities including the scope
of work, authority and resources of the internal
audit function.
The Audit Committee on behalf of the Board
has reviewed the effectiveness of the systems
of internal control and risk management.
The review covered all material areas of the
business including financial, operational and
compliance controls and risk management.
In performing its review of effectiveness, the
Audit Committee took into account the
following reports and activities:
Internal audit reports on reviews of business
processes and activities, including action
plans to address any identified control
weaknesses. The status of these action plans
was also monitored by internal audit and
overdue actions reported to Audit Committee
Management’s own assessments of the
strengths and weaknesses of the overall
control environment in their area, with
action plans to address the weaknesses
External auditor reports on any issues
identified in the course of their work,
including internal control reports on control
weaknesses, which were provided to the Audit
Committee as well as executive management
Risk management reporting, including the
status of actions to mitigate major risks and
the quantification of selected risks
Land Securities Annual Report 2006
89
Risk Management
All organisations face risks as they conduct their
operations and Land Securities is no different.
We need to understand and evaluate the risks in
order to achieve our objective of creating long-
term, sustainable returns for shareholders. This
will allow us to minimise the adverse potential
that measured risk taking presents rather than
prevent us from taking measured risk. Risk
management is an important part of our
system of internal controls and has linkages
with each of the other elements of this business
planning process, particularly the investment
appraisal and financial forecasting processes.
4. Develop action plans to manage risks
5. Reassess risks after mitigating actions have
been taken
6. Report to the Board on risks, extent of
mitigation and status of action plans
At both Group and business unit level we
categorise risks across the four areas of external,
organisational, property and operational.
We rate each of these in terms of probability
of occurrence, its impact on our performance
and we identify mitigating actions, risk control
measures and management responsibility.
We have in place a six step risk management
process:
1. Contextualise risk in terms of the Group’s
business goals and objectives
2. Identify material risks
3. Assess and quantify the risks identified
This year throughout the OFR we provide
detailed disclosure in respect to certain of these
risks particularly those in respect to owning
property; developing property and property
outsourcing as well as our key financial risks.
This disclosure includes commentary on type
of risk, risk impact and mitigating activity.
We believe that these risks have the greatest
potential impact on the organisation should
they occur and for this reason merit comment.
There are also other risks that we face as an
organisation many of which are inherent to all
businesses and which we believe have a lesser
impact on us as an organisation which we refer
to in a less structured fashion throughout the
Annual Report. In respect to Social Ethical and
Environmental risks, our key risks are outlined in
the CR section.
In the table below we list our business risks and
provide a cross reference to the relevant section
of the OFR and to other sources of information
such as our 2006 CR Report. If the risk is not
covered elsewhere we provide a brief
explanation as to mitigating activities.
Risk management process
Business risks
Risk group
External factors
1
Goals and
objectives
2
Identify
5
Reassess
6
Report
3
Assess
4
Action
Type of risk
Explained in
Economic
Regulatory
Market
Planning
Customer
Business environment
Chairman’s statement and competitive environment
Business environment, Retail, London Portfolio and property outsourcing
Developing property
Owning property, Retail, London Portfolio, property outsourcing and
customer section
Organisational
People
Our people, corporate responsibility, 2006 CR Report
Succession planning
We review succession plans on at least an annual basis. We also have in
and talent management
place a learning and development programme to nurture talent across
Property
Asset management
Investment
Development
the organisation
Owning property
Owning property
Developing property
Construction management
Developing property
Supplier management
Property outsourcing
Service delivery
Property management, property outsourcing
Contract mobilisation
Property outsourcing
Operational
Finance
Finance review and notes to financial statements
Customer satisfaction
Retail, London Portfolio and property outsourcing
Health and safety
Owning property, developing property, corporate responsibility
Environment
Corporate responsibility and 2006 CR Report
Information technology
To protect the integrity of our IT system from external threats, we have in
place stringent security controls. In the event of system failures we have
an off-site back-up facility which can be fully operational in 24 hours
Disaster planning
We have in place comprehensive disaster recovery plans which include the
use of off-site facilities. These plans are regularly updated and rehearsed
Ethics
Corporate responsibility
Land Securities Annual Report 2006
90
Remuneration Report
remuneration levels. NBSC has no connection
with the Group other than in the provision of
advice on executive and employee remuneration.
and dialogue with major shareholders. The key
elements of these changes were:
The Chairman, Group Chief Executive and
Group Human Resources Director are generally
invited to attend meetings of the Committee
but no director is involved in any decisions
relating to their own remuneration.
3. Remuneration policy and philosophy
The Group’s remuneration policy which applies
to the year under review and is intended to
apply in all future years seeks to provide
remuneration in a form and amount to attract,
retain and motivate high quality management,
with an emphasis on delivering superior reward
for achieving and exceeding the Group’s
strategic plan. A substantial proportion of the
Executive Directors’ remuneration is delivered
through performance related pay.
The principal components of Executive
Directors’ remuneration are as follows:
Salary
An increase in annual bonus potential for
meeting stretching performance targets
The opportunity to earn substantially higher
bonus payouts for performance above the
annual bonus targets set at the start of the
2005/06 financial year
Shareholders approved a new long-term
incentive plan (‘LTIP’) at the 2005 AGM to
replace the executive share option
arrangements for Executive Directors in the
year under review. The LTIP will also replace
the Performance Share Matching plan from
2006/07 onwards through its facility to make
awards of Matching Shares to encourage
investment by senior executives in the
Company’s shares
An increase in the level of performance
required for long-term incentives for earnings
per share growth and the introduction of a
more focused property index benchmark
Higher shareholding requirements for
Executive Directors
The Committee seeks to set salaries at mid-
market levels compared to a range of UK based
companies of similar size and complexity but
with particular emphasis on the property and
financial sectors.
The chart below illustrates the balance between
‘fixed’ and ‘variable’ pay at the target and
maximum performance levels assuming
maximum participation in the new LTIP in
2006/07.
Target
Maximum
Basic salary (excluding
pension contributions
and benefits)
Performance
related bonus
Value of shares
vesting
Notes
• Target performance delivers a bonus award of 50% of base
salary and 25% vesting under the LTIP
• Maximum performance delivers a bonus award of 300%
of base salary (based on the changes to the annual bonus
arrangements set out below) and full vesting under the LTIP
• 5% per annum share price growth is assumed for target
performance and 10% per annum for maximum performance
• Deferred shares (and any shares invested in the LTIP) benefit
from share price growth
Short-term incentives
The Group’s incentive plans include annual cash
and share bonuses, geared to the achievement
of short-term objectives.
Long-term incentives
These are designed to emphasise and support
the long-term success of the business and
comprise incentives which are measured over
a three year timescale.
Other benefits
These include pension, car, life and medical
insurance cover
4. 2005/06 Directors’ remuneration
During the year, the Group implemented a
number of changes to directors’ remuneration
which were introduced following consultation
1. Introduction and Compliance
In preparing this Remuneration Report, the
Remuneration Committee (‘the Committee’)
has followed the requirements of Section 1 of
the Combined Code on Corporate Governance,
the Companies Act 1985, as amended by the
Directors’ Remuneration Report Regulations
2002, and the Listing Rules of the Financial
Services Authority. This report will be submitted
to shareholders for approval at the Annual
General Meeting to be held on 19 July 2006. The
Regulations require the auditors to report to the
Company’s shareholders on the information in
tables 3, 4, 5 and 6 of this report and to state
whether, in their opinion, those parts of the
report have been properly prepared in
accordance with the Companies Act 1985
(as amended by the Regulations).
2. The Committee
The Committee is chaired by Sir Winfried
Bischoff, with the other members being David
Rough, Stuart Rose, Bo Lerenius and Alison
Carnwath. All members of the Committee are
considered to be independent by the Company.
Sir Winfried Bischoff is a member of the
Management Committee of the Holding
Company of one of the Group’s principal
relationship banks. However, since he does not
participate in any discussions between or
regarding the relationship between these two
parties, the Company does not consider this
relationship to compromise his independence.
The terms of reference of the Committee are
available on the Company’s website at
www.landsecurities.com
The Committee recommends to the Board the
remuneration framework to attract and retain
its Executive Directors. In line with the
Combined Code, it also monitors and makes
recommendations on remuneration for senior
managers across the Group.
The Group Human Resources Director provides
information and advice to the Committee. The
Committee has appointed and receives advice
from New Bridge Street Consultants LLP (‘NBSC’)
and also makes use of various published surveys
to help the Committee determine appropriate
Land Securities Annual Report 2006
91
Remuneration Report continued
The individual components of Executive
Directors’ remuneration are set out below:
Base salary
Executive Directors receive a salary which
reflects their responsibilities, experience and
performance. Salaries are reviewed annually in
July and the review process includes the use of
comparator information and reports from the
Group’s remuneration consultants. The Group’s
policy is to set salary around the mid-market
rate but the Committee is mindful of the need
to treat pay comparisons with caution to avoid
an upward ratchet of remuneration levels with
no corresponding improvement in performance.
It also takes account of pay and employment
conditions across the Group, especially when
determining annual salary increases. The current
salaries of the Executive Directors (and in
brackets, revised salaries to take effect from
July 2006) are as follows:
Francis Salway
Mark Collins
Martin Greenslade
Ian Ellis
Mike Hussey
Richard Akers
£575,000
£350,000
£325,000
£350,000
£340,000
£285,000
(£600,000)
(£390,000)
(£340,000)
(£390,000)
(£390,000)
(£340,000)
The above inflationary salary increase provided
to Richard Akers reflects the increase in his
Group level responsibilities and performance in
post since his promotion to the Board in May
2005. The salary increases awarded to Mark
Collins, Ian Ellis and Mike Hussey reflect the
need to maintain market competitive salary
levels at a time of high performance.
Annual bonuses
The maximum potential bonus opportunity was
set at 100% of base salary for 2005/06 with
25% of any bonus being payable in shares
deferred for three years.
During the year, the Committee approved an
increase in the annual bonus opportunity for
Executive Directors from 100% to 300% of
base salary for the delivery of exceptional
financial returns over and above the levels of
financial performance covered under previous
bonus and LTIP plans. The additional bonus
opportunity is being introduced after dialogue
with our major shareholders. The additional
bonus opportunity is structured to permit
significant reward for significant financial out-
performance in a manner consistent with
remuneration packages now being offered to
executives of high calibre in the sector. No
additional bonus is payable unless financial
performance targets in excess of those set at
the start of the financial year to achieve a
payout of 100% of salary are met. Half of any
additional bonus is payable in shares and
deferred for three years. Any bonus deferral is
normally forfeited on leaving the Group within
the deferral period. In the first year only
following the introduction of the additional
bonus opportunity, a recipient of a cash
payment will be required to repay the net
amount of any such payment if they leave the
Group within 12 months.
Executive Directors are also eligible to participate
in a discretionary bonus pool for all employees
which can amount to up to 30% of salary.
The criteria for Executive Directors’ annual
bonuses are shown in Table 1. For 2005/06
annual bonuses, including bonuses payable
under the additional bonus opportunity and
the discretionary bonus pool described above,
ranged from 59% to 300% of annual salary.
Long-term incentives
Shareholders approved the new LTIP at the 2005
AGM.The LTIP replaced the share option scheme
approved in 2002 for the year under review and
will replace the Performance Share Matching
Plan, also approved in 2002, from 2006/07.
The LTIP consists of the facility to make annual
awards of Performance Shares and Matching Shares.
LTIP Performance Shares
In the year under review, Executive Directors
were eligible to receive conditional awards of
shares of up to 100% of salary and this will
continue to be the case in future years.
LTIP Matching Shares
Executive Directors were not eligible to receive
a Matching Award of shares under the LTIP in
2005/06 since this year is a transitional year in
which, for the final time, Executive Directors
participated in the Performance Matching Share
Plan approved in 2002. In future years Executive
Directors will be eligible to receive awards of
Matching Shares under the LTIP which will be
made at a ratio of up to 2 for 1 on a gross to
net tax basis (up to 100 shares for every 30
purchased out of net income). The maximum
Matching Share award per annum will be over
shares with a value of 100% of salary.
Awards of Performance Shares and Matching
Shares are subject to the same performance
conditions. Half of any award will vest based on
achieving increases in earnings per share (‘EPS’)
measured over three years and the other half
will vest dependent on the Group’s ungeared
total property return (‘TPR’) over three years
equalling, or exceeding, IPD weighted indices
reflecting the sector mix of Land Securities
investment portfolio. The targets are as follows:
EPS target
Growth of RPI + 3% per annum – 12.5%
of the award vests
Growth of RPI + 5% per annum – 50.0% of
the award vests
Straight line vesting occurs between
these points
Table 1: Criteria for directors’ 2005/06 bonuses
F W Salway
Total returns in excess of WACC
Group profit
Performance of all business units
M F Greenslade
Total returns in excess of WACC
Group profit
Performance of group support
functions
Net investment
target
Implementation
of IFRS
A M Collins
Total returns in excess of WACC
Group profit
Project and property management
targets
Corporate and
portfolio acquisitions
I D Ellis
Total returns in excess of WACC
Group profit
Land Securities Trillium profit
M R Hussey
Total returns in excess of WACC
Group profit
Investment performance
New business
wins/opportunities
Office development
lettings
R J Akers
Total returns in excess of WACC
Group profit
Investment performance
Retail leasing
Land Securities Annual Report 2006
92
Remuneration Report continued
TPR
Performance equal to the weighted index –
12.5% of the award vests
Performance equal to the weighted index plus
1% per annum – 50.0% of the initial award
vests, and
Straight line vesting occurs between these
points
The Committee considers EPS and TPR to
be key long-term measures of the Group’s
performance and is committed to reviewing
their appropriateness on an ongoing basis.
As set out above, Executive Directors were
eligible to receive awards under the
Performance Share Matching Plan approved
in 2002 during the year. Under this plan,
executives can receive up to two performance
shares for each deferred share, depending on
the extent to which performance conditions
are satisfied. Similarly to the LTIP, half of these
Matching Performance Shares depend on
achieving a real increase in EPS (defined to be
normalised adjusted diluted EPS (‘NADEPS’))
measured over a three year period, with the
other half depending on the Company’s TPR
equalling, or exceeding, the IPD All Fund
Universe Index over a rolling three year period.
The same sliding scale applies to these
performance conditions as the LTIP with the
only difference being that the NADEPS element
has a threshold vesting level of RPI + 2.5% with
full vesting at RPI + 4% per annum.
The maximum amount of performance shares
which could potentially vest is shown in Table 2.
The Committee determined that the
performance shares linked to NADEPS growth
for the period 1 April 2003 to 31 March 2006
vested in full while the performance shares
linked to IPD return for this period vested to
the extent of 89.5%.
Share options
Land Securities has historically operated share
option arrangements for Executive Directors.
Following the adoption of the LTIP, no further
awards of share options will be made to the
Executive Directors. During the year, a new share
option scheme has been introduced, using market
purchased shares only, for more junior managers.
For grants made over the period 2000 to 2003,
the Committee has determined that the
required level of increase in NADEPS over the
three years to 31 March 2006 was achieved.
Cycle
ending
Award date
Market price at
award date (p)
Shares
awarded
Shares/
value vested
2005
2006
2007
2008
2005
2006
2007
2005
2006
2007
2008
2006
2007
2008
2007
2008
2005
2006
2007
2008
11/07/02
01/07/03
12/07/04
04/07/05
11/07/02
01/07/03
12/07/04
11/07/02
01/07/03
12/07/04
04/07/05
01/07/03
12/07/04
04/07/05
31/03/04
04/07/05
11/07/02
01/07/03
12/07/04
04/07/05
854
787
1159
1405
854
787
1159
854
787
1159
1405
787
1159
1405
1090
1405
854
787
1159
1405
7,142
13,190
12,794
21,234
9,050
13,962
13,034
11,472
10,798
28,290
17,536
8,090
14,174
15,988
20,000
14,600
5,262
3,946
2,506
8,228
3,571
–
–
–
4,525
–
–
5,736
–
–
–
–
–
–
–
–
2,631
–
–
–
Vesting
date
11/07/05
01/07/06
12/07/07
04/07/05
11/07/05
01/07/06
12/07/07
11/07/05
01/07/06
12/07/07
04/07/08
01/07/06
12/07/07
04/07/08
31/03/07
04/07/08
11/07/05
01/07/06
12/07/07
04/07/08
Table 2: Performance shares*
F W Salway
A E Macfarlane
I D Ellis
A M Collins
M R Hussey
R J Akers
*Subject to performance tests (see above).
Land Securities Annual Report 2006
93
Remuneration Report continued
Table 3: Directors’ emoluments (£’000 – amounts received by directors in the respective periods) (audited)
Total emoluments
excluding pensions
Pension
contributions
Deferred
bonus shares(2)
Performance
shares vested
Gain on exercise
of share options
Bonuses
Benefits(1)
2006
2005
2006
2005
2006
2005
2006
2005
2006
2005
Basic salary
and fees
Executive:
F W Salway
A M Collins(3)
I D Ellis(4)
M R Hussey (appointed 30/09/04)
R J Akers(5) (appointed 17/05/05)
M F Greenslade (appointed 01/09/05)
A E Macfarlane(6) (resigned 05/08/05)
537
342
342
323
272
189
127
268
201
212
279
109
–
213
2,132
1,282
Non-Executive:
P G Birch (Chairman)
D Rough
Sir Winfried Bischoff
S A R Rose
B A Lerenius (appointed 01/06/04)
A J Carnwath (appointed 01/09/04)
202
60
50
45
45
45
–
–
–
–
–
–
134
85
96
80
66
47
30
538
98
76
69
58
–
–
83
384
149
112
123
102
57
–
–
543
74
82
164
–
–
–
76
396
50
–
81
–
37
–
64
232
–
–
–
–
–
–
–
–
250
425
310
319
200
–
242
1,746
280
–
151
–
–
–
357
788
13
14
11
12
13
6
1
70
–
–
–
–
–
–
818
557
565
614
394
195
341
560
486
650
282
–
–
502
3,484
2,480
202
60
50
45
45
45
168
51
44
40
38
26
Total
2,579
1,282
70
3,931
2,847
1. Benefits consist of the provision of a company car or car allowance, private medical facilities and life assurance premiums.
2. Deferred bonus shares represent the value ascribed to shares awarded in respect of 2004/05 and 2003/04 financial performance under the deferred bonus plan.
3. In accordance with his service contract and to reflect partially the amount and timing of incentive arrangements which he was eligible to receive from his former employer, A M Collins is due to receive an amount of £208,033 on
30 June 2007 provided he has not left the Group of his own volition or his contract has not been terminated or he has not been given notice of termination other than on grounds of ill-health or redundancy.
4. I D Ellis received fees of £4,936 from Rok plc in respect of his non-Executive Directorship of that company.
5. R J Akers’ capped DB pension contributions are taken at Group average employee DB cost (30%) rather than using specific actuarial assumptions as an individual executive.
6. A E Macfarlane also received fees of £4,500 from Invensys plc in respect of his non-Executive Directorship of that company.
7. When M F Greenslade joined the Company, the Company undertook to award him LTIP shares to the value of 100% of annual salary and, as a consequence, an award of 22,679 LTIP shares was granted in September 2005. In addition,
subject to the purchase and retention by M F Greenslade of shares with a value of 30% of salary, the Company undertook to make an award of matching shares to the value of 100% of salary. An award of 16,666 Matching Shares was
made in September 2005 following an initial purchase of shares by M F Greenslade.
8. Pensions of £90,738 (2005: £130,280) were paid to former directors or their dependants.
9. P G Freeman served as a director of the Company until 14 July 2004 and thereafter served as a consultant advising on matters relating to development projects. Fees paid to P G Freeman amounted to £25,330 in 2004/05 and £27,565
in 2005/06.
Table 4: Directors’ options over ordinary shares (audited)
Granted during year
Exercised during year
Outstanding share options
Exercise Market price
on exercise
(pence)
price
(pence)
No. of
options at
31/03/06
Exercise
price
(pence)
No of options
at 01.04.05
Grant price
(pence)
No.
F W Salway
A M Collins
I D Ellis
M R Hussey
R J Akers
(1)
(3)
(3)
(1)
(3)
(3)
(4)
(1)
(3)
(3)
(4)
(1)
(3)
(3)
(4)
(1)
(3)
(3)
(2)
(4)
30,500
41,250
43,065
70,000
34,375
34,695
2,477
40,000
34,375
41,759
2,546
51,500
20,000
20,500
6,000
7,750
11,500
1,420
747
No.
30,500
66,306
3,694
812
1632
812
812
1420
1415
40,000
812
1587
40,000
7,806
3,694
20,000
10,000
812
812
812
820
869
1415
1455
1581
1434
1650
41,250
43,065
34,375
34,695
2,477
34,375
41,759
2,546
40,000
23,727
1,726
10,500
6,000
7,750
11,500
1,420
747
788
1159
788
1159
677
788
1159
650
788
1159
957
869
812
788
1159
713
957
Exercisable
dates
07/2006-07/2013
07/2007-07/2014
07/2006-07/2013
07/2007-07/2014
09/2010-03/2011
07/2006-07/2013
07/2007-07/2014
08/2007-02/2008
07/2006-07/2013
07/2007-07/2014
10/2009-04/2010
07/2004-07/2011
07/2005-07/2012
07/2006-07/2013
07/2007-07/2014
07/2001-07/2006
07/2004-10/2011
Weighted average exercise price
1. 2000 Executive Share Option Scheme. Vesting of awards is dependent on the Company’s growth in NADEPS exceeding the growth in RPI by 2.5% per year.
2. 1993 Savings Related Share Option Scheme Not subject to performance conditions because it is available to all staff and Inland Revenue rules do not permit performance conditions to be set for this type of scheme.
3. 2002 Executive Share Option Scheme. Vesting of awards is dependent on the Company’s growth in NADEPS exceeding the growth in RPI by at least 2.5% per year.
4. 2003 Savings Related Share Option Scheme. Not subject to performance conditions because it is available to all staff and Inland Revenue rules do not permit performance conditions to be set for this type of scheme.
The range of the closing middle market prices for Land Securities’ shares during the year was 1292p to 2080p. The middle market price at 31 March 2006 was 1928p.
Options over 73,976 shares held by a former director lapsed during the year under review.
Land Securities Annual Report 2006
94
Remuneration Report continued
Table 5: Directors’ interests in shares (audited)
Deferred shares LTIP performance shares**
2006
20,005
36,286
15,877
17,080
500
7,675
8,750
10,000
12,000
6,365
6,670
5,000
2005
20,005
11,986
5,145
7,196
500
7,675
8,750
10,000
8,000
875
2006
–
24,506
19,825
29,425
18,048
–
–
–
–
–
2005
–
13,214
11,268
19,725
10,000
–
–
–
–
–
2006
–
40,464
24,631
24,631
23,927
–
–
–
–
–
4,228*
7,589
3,315*
–*
–
–*
20,056
22,679
2005
–
–
–
–
–
–
–
–
–
–
–*
–*
P G Birch
F W Salway
A M Collins
I D Ellis
M R Hussey
D Rough
Sir Winfried Bischoff
S A Rose
B A Lerenius
A J Carnwath
R J Akers (appointed 17/05/05)
M F Greenslade (appointed 01/09/2005)
* At date of appointment
** Subject to performance conditions (see page 91)
The options granted to, and exercised by,
Executive Directors are shown in Table 4.
The Committee ensures that EPS is calculated
on a consistent basis where there
are accounting standard changes (such as the
introduction of IFRS) over the performance
period for incentives.
Shareholding guidelines
The Committee believes that it is important for
a significant part of the compensation of each
Executive Director to be tied to ownership of
the Company’s shares so that each executive’s
interest in the growth and performance of the
Company is closely aligned with the interests of
our shareholders. The Committee has, therefore,
established share ownership guidelines for the
Company’s Executive Directors. Following the
Committee’s review of remuneration these will
now require the Chief Executive to own shares
with a value equal to twice his base salary and
for other Executive Directors to own shares with
a value equal to 1.5 times their base salary. An
Executive Director must normally satisfy the
guidelines within five years of his date of
appointment or the date of introduction of this
requirement in order to qualify for future
awards of long-term incentives.
In addition, non-Executive Directors are
required to own shares with a value equal to
their annual fees within three years of the date
of their appointment.
Pensions
During the year the Committee reviewed the
pension arrangements applicable to Executive
Directors and senior executives in preparation
for the Government’s tax simplification changes
which came into effect on 6 April 2006. It
concluded, as a general principle, that the
Company would not provide additional
compensation to executives who may be
adversely affected by the tax changes.
With effect from 1 January 1999 a contributory
money purchase pension scheme was introduced
for all staff joining the Group from that date.
Directors may participate in the scheme.
Additional arrangements have been in place for
pension provisions in excess of the HM Revenue
& Customs regulations. Pension contributions
made during the year are shown on page 93.
Richard Akers participates in a non-contributory
defined benefit (‘DB’) pension scheme which
was open to property management and
administration staff until 31 December 1998.
The pension benefits under this scheme are
described below. The scheme also provides lump
sum death-in-service benefits on death before
normal retirement age of four times
Pensionable Salary and pension provision for
dependants of members. Only basic salary is
treated as Pensionable Salary. The benefits
provided to Richard Akers have been based on a
Pensionable Salary which is subject to the
statutory earnings cap.
The transfer values have been calculated on the
basis of actuarial advice in accordance with
Actuarial Guidance Note GN11.The transfer
values of the accrued entitlement in respect of
qualifying service represents the value of assets
that the pension scheme would need to transfer
to another pension provider on transferring the
liability in respect of the directors’ pension
benefits that they earned in respect of qualifying
service.They do not represent sums payable to
individual directors and, therefore, cannot be
added meaningfully to annual remuneration.
“A day” changes
Following the changes in pension tax legislation
from April 2006 the Company made the
commitment that while providing information
to affected executives there would be no tax
advantage given thus ensuring a cost neutral
position for the Company.
The Committee decided that from 1 April 2006:
A scheme specific cap would be introduced
into the Land Securities and Land Securities
Trillium DB schemes commencing at the
current rate of £108,600 and that both caps
will be increased by Inland Revenue
recommendations until 2010 and then by RPI.
The existing cap will be removed for the Land
Securities Defined Contribution (‘DC’)
schemes and all employees, excluding those
affected by the Life Time Allowance, will be
able to increase their contributions to their
full salary
A separate pension arrangement solely for
‘top up’ pensions for the Executive Directors
should not be introduced
The Executive Directors continue to be
entitled to a benefit that is equivalent to 25%
of their total salary and that this could be
invested as individuals are independently
advised and may include:
– pension contributions into the DC scheme
up to the personal level that is advised plus
a cash contribution on the balance
– pension contributions into the DB scheme
up to capped level of £108,600 plus a cash
balance on the remaining amount when
this DB contribution cost is deducted from
25% of total salary. This cash balance can
be paid as a lump sum or into the DC
Land Securities Annual Report 2006
pension arrangement as employer
contributions. This arrangement applies
to Richard Akers only (see below)
– 25% cash payment on total salary to
invest outside Land Securities pension
arrangements
Presentations were made by the Company’s
pension advisers to Executive Directors and
senior executives and a contribution made to
the provision of independent financial advice
for individuals.
With Richard Akers’ appointment to the Board
in May 2005 he became eligible under his new
service agreement, and in line with other
Executive Directors, to a pension benefit
equivalent to 25% of his base salary. Under the
DB pension arrangement his pension benefits
were restricted based on a capped salary of
£105,600 p.a. As the DB cap remains in place
after April 2006 Richard Akers’ DB pension
benefits will remain calculated on the capped
amount increased in line with the Government
sponsored notional cap published until 2010
(then at RPI thereafter). The remainder of his
Executive Director’s pension allowance of 25%
is made available for investment either in the
DC pension scheme or outside Land Securities’
pension arrangements.
In addition with effect from 1 April 2006 the DB
pension scheme has moved to future accrual on
a “CARE” (Career Averaged Revalued Earnings)
basis and either on 1/80th accrual or on 1/60th
accrual subject to an employee contribution.
Richard Akers has chosen to accrue future
benefits on a 1/60th basis with employee
contributions in accordance with the new
scheme provisions of 1% of base salary in
2006, 3% of base salary in 2007 and 5% of base
salary thereafter.
The “Increase in transfer value less contributions
made by directors” differs from the “Transfer
value of increase in accrued benefit” in that it
reflects changes in market conditions over
the year.
Table 6: Defined benefit pension scheme (audited)
Name of director
Accrued benefit at 31 March 2006
Increase in accrued benefits excluding inflation
Increase in accrued benefits including inflation
Transfer value of increase in accrued benefit
excluding inflation
R J Akers
£
19,653
1,193
1,466
12,200
Transfer value of accrued benefits at 1 April 2005
158,600
Transfer value of accrued benefits at 31 March 2006
201,100
Increase in transfer value
42,500
5. Non-Executive Directors
The annual fees of the Chairman of the Board,
Peter G Birch, are determined by the Board
having regard to independent advice. The other
non-Executive Directors each receive a fee
agreed by the Board following a review of fees
paid by comparable organisations. The Board
also takes into account the time commitments
of the non-Executive Directors, which is
reviewed annually as part of the Board appraisal
process. Neither the Chairman nor the other
non-Executive Directors receive any pension
benefits from the Company, nor do they
participate in any bonus or incentive schemes.
Non-Executive Directors are appointed under
letters of appointment which provide for an
initial term of service of three years. A specimen
letter of appointment is available on the
Group’s website at www.landsecurities.com.
6. Service agreements
The Committee’s policy on service agreements
for Executive Directors is that they should
provide for 12 months’ rolling notice of
termination by the Company. As a result, the
unexpired term and the notice periods (both
from the Company and from the Executive
Director) are 12 months, except in the case of
Richard Akers where his notice period to the
Company is six months. Any proposals for the
early termination of the service agreements of
Directors or senior executives are considered by
the Committee.
95
Remuneration Report continued
The dates of appointment and the dates of the
service agreements of the Executive Directors
are as follows:
Name
Date of appointment
Date of contract
F W Salway
5 July 2002
31 May 2001
A M Collins
20 November 2002
13 March 2003
M F Greenslade
1 September 2005
1 September 2005
I D Ellis
20 November 2002
28 January 2003
M R Hussey
30 September 2004
1 January 2006
R J Akers
17 May 2005
19 April 1999
In May 2005, an amendment was made to the
service agreements of the Executive Directors
to provide for phased payments of amounts
payable on termination, in order to mitigate
amounts potentially payable by the Company.
The Chairman and the other non-Executive
Directors do not have service agreements with
the Company.
7. Directors’ interests in shares
The interests of the directors in the shares of the
Company as at 31 March are shown in Table 5.
There have been no changes in the
shareholdings of the directors between the end
of the financial year and 23 May 2006 save that
on 18 May 2006 Martin Greenslade purchased
1,600 shares in the Company.
No director had any other interests in securities
of Land Securities Group PLC or any of its
subsidiary undertakings during the year.
The registers of directors’ share interests and
holdings of options, which are open to
inspection at the Company’s registered office,
contain full details of directors’ interests.
Land Securities Annual Report 2006
9. Performance graph
As required by legislation regarding the
directors’ remuneration report, this graph
illustrates the performance of the Company
measured by total shareholder return (share
price growth plus dividends reinvested) against
a ‘broad equity market index’ over the period
since the 6 September 2002 return of capital.
As the Company is a constituent of the FTSE
All-Share Real Estate sector this index is
considered to be the most appropriate
benchmark for the purposes of the graph.
The Committee also considered that it would be
helpful to provide an additional graph
illustrating performance going back before the
return of capital compared with the FTSE100
index and the FTSE All-Share Real Estate sector
over the previous five years of the Company and
its predecessor company, Land Securities PLC.
Signed for and on behalf of the Board by
Sir Winfried Bischoff
Chairman of the Committee
96
Remuneration Report continued
8. Information regarding senior managers below
Board level
The Group currently employs 36 senior
managers in positions below Board level. None
of these senior managers is paid at a rate higher
than the Executive Directors and the structure
of their remuneration package, including
bonuses, is broadly consistent with that of
Executive Directors. The senior managers are
not eligible to participate in the additional
bonus opportunity for the delivery of
exceptional financial returns described in
section 4 of this report. During the year under
review, bonuses for this group of employees
ranged from 33% to 73% of salary, with an
average bonus of 65% of salary.
Total shareholder return
Source: Thomson Financial
300
250
)
£
(
l
e
u
a
V
200
150
100
50
6 Sep 02
31 Jul 02
31 Mar 03
31 Mar 04
31 Mar 05
31 Mar 06
Land Securities Group PLC
FTSE All-Share Real Estate Index
This graph illustrates the value, by 31 March 2006, of £100 invested in Land Securities Group PLC on 6 September 2002
compared with that of £100 invested in the FTSE All-Share Real Estate Index. The other points plotted are the values at
intervening financial year ends.
Total shareholder return
Source: Thomson Financial
)
£
(
l
e
u
a
V
300
250
200
150
100
50
31 Mar 01
31 Mar 02
31 Mar 03
31 Mar 04
31 Mar 05
31 Mar 06
Land Securities Group PLC
FTSE All-Share Real Estate Index
FTSE100 Index
This graph illustrates the value, by 31 March 2006, of £100 invested in Land Securities Group PLC on 6 September 2002
compared with that of £100 invested in the FTSE All-Share Real Estate Index and in the FTSE100 Index. The other points
plotted are the values at intervening financial year ends.
Land Securities Annual Report 2006
97
Directors’ Responsibilities
The directors are required by company law to
prepare financial statements for each financial
year which give a true and fair view of the state
of affairs of the Company and of the Group as
at the end of the financial year and of their
profit or loss for that period and comply with
the Companies Act 1985.
The directors are responsible for ensuring that
applicable accounting standards have been
followed and that suitable accounting policies,
consistently applied and supported by
reasonable and prudent judgments and
estimates, have been used in the preparation
of the financial statements.
It is also the responsibility of the directors to
prepare the financial statements on the going
concern basis unless it is inappropriate to
presume that the Company and the Group will
continue in business.
The directors confirm that they have complied
with the above requirements in preparing the
financial statements.
The directors are also responsible for
maintaining proper accounting records so as
to enable them to comply with company law.
The directors have general responsibilities for
safeguarding the assets of the Company and
of the Group and for taking reasonable steps
for the prevention and detection of fraud and
other irregularities.
The maintenance and integrity of the
Land Securities Group PLC website is the
responsibility of the Company; the work
carried out by the auditors does not involve
consideration of these matters and, accordingly,
the auditors accept no responsibility for any
changes that may have occurred to the financial
statements since they were initially presented
on the website. Legislation in the UK governing
the preparation and dissemination of financial
statements may differ from legislation in
other jurisdictions.
Land Securities Annual Report 2006
98
Independent Auditors Report
to the members of Land Securities Group PLC
We have audited the Group and parent
company financial statements (the ‘financial
statements’) of Land Securities Group PLC for
the year ended 31 March 2006 which comprise
the Group Income Statement, the Group and
Parent Company Balance Sheets, the Group and
Parent Company Cash Flow Statements, the
Group and Parent Company Statement of
Change in Shareholders’ Equity and the related
notes. These financial statements have been
prepared under the accounting policies set out
therein.We have also audited the information
in the Directors’ Remuneration Report that is
described as having been audited.
Respective responsibilities of directors and auditors
The directors’ responsibilities for preparing the
Annual Report, the Directors’ Remuneration
Report and the financial statements in
accordance with applicable law and
International Financial Reporting Standards
(IFRSs) as adopted by the European Union are
set out in the Statement of Directors’
Responsibilities.
Our responsibility is to audit the financial
statements and the part of the Directors’
Remuneration Report to be audited in
accordance with relevant legal and regulatory
requirements and International Standards on
Auditing (UK and Ireland). This report, including
the opinion, has been prepared for and only for
the Company’s members as a body in
accordance with Section 235 of the Companies
Act 1985 and for no other purpose.We do not,
in giving this opinion, accept or assume
responsibility for any other purpose or to any
other person to whom this report is shown or
into whose hands it may come save where
expressly agreed by our prior consent in writing.
We report to you our opinion as to whether the
financial statements give a true and fair view
and whether the financial statements and the
part of the Directors’ Remuneration Report to
be audited have been properly prepared in
accordance with the Companies Act 1985 and
Article 4 of the IAS Regulation.We report to you
whether, in our opinion, the information given
in the Directors’ Report includes that specific
information presented in the Operating and
Financial Review that is cross-referenced from
the Business Review section of the Directors’
Report.We also report to you if, in our opinion,
the Company has not kept proper accounting
records, if we have not received all the
information and explanations we require for
our audit, or if information specified by law
regarding directors’ remuneration and other
transactions is not disclosed.
We review whether the Corporate Governance
Statement reflects the Company’s compliance
with the nine provisions of the 2003 FRC
Combined Code specified for our review by the
Listing Rules of the Financial Services Authority,
and we report if it does not.We are not required
to consider whether the Board’s statements on
internal control cover all risks and controls, or
form an opinion on the effectiveness of the
Group’s corporate governance procedures or
its risk and control procedures.
We read other information contained in the
Annual Report and consider whether it is
consistent with the audited financial
statements. The other information comprises
only the Directors’ Report, the unaudited part
of the Directors’ Remuneration Report, the
Chairman’s Statement, the Operating and
Financial Review and the Corporate Governance
Statement.We consider the implications for our
report if we become aware of any apparent
misstatements or material inconsistencies with
the financial statements. Our responsibilities do
not extend to any other information.
Basis of audit opinion
We conducted our audit in accordance with
International Standards on Auditing (UK and
Ireland) issued by the Auditing Practices Board.
An audit includes examination, on a test basis,
of evidence relevant to the amounts and
disclosures in the financial statements and the
part of the Directors’ Remuneration Report to
be audited. It also includes an assessment of the
significant estimates and judgements made by
the directors in the preparation of the financial
statements, and of whether the accounting
policies are appropriate to the Group’s and
Company’s circumstances, consistently applied
and adequately disclosed.
We planned and performed our audit so as to
obtain all the information and explanations
which we considered necessary in order to
provide us with sufficient evidence to give
reasonable assurance that the financial
statements and the part of the Directors’
Remuneration Report to be audited are free
from material misstatement, whether caused
by fraud or other irregularity or error. In forming
our opinion we also evaluated the overall
adequacy of the presentation of information in
the financial statements and the part of the
Directors’ Remuneration Report to be audited.
Opinion
In our opinion:
the Group financial statements give a true
and fair view, in accordance with IFRSs as
adopted by the European Union, of the state
of the Group’s affairs as at 31 March 2006
and of its profit and cash flows for the year
then ended
the parent company financial statements give
a true and fair view, in accordance with IFRSs
as adopted by the European Union as applied
in accordance with the provisions of the
Companies Act 1985, of the state of the
parent company’s affairs as at 31 March 2006
and cash flows for the year then ended
the financial statements and the part of the
Directors’ Remuneration Report to be audited
have been properly prepared in accordance
with the Companies Act 1985 and Article 4
of the IAS Regulation
the information given in the Directors’ Report
is consistent with the financial statements.
PricewaterhouseCoopers LLP
Chartered Accountants and Registered Auditors
London
23 May 2006
Land Securities Annual Report 2006
99
Financial Statements
Business Analysis
99 Financial statements and business
analysis contents
100 Five year summary
101 Income statement
101 Statement of recognised income
and expense
102 Balance sheets
103 Cash flow statements
104 Notes to the financial statements
137 Directors’ report
139 Introduction
140 Investment property business –
Combined portfolio
142 Investment property business –
Retail
146 Investment property business –
London Portfolio
150 Investment property business –
Combined portfolio analysis
153 Property Outsourcing –
Land Securities Trillium
158 Investor information
159 Glossary
160 Index
Ibc Contact details
i
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a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Land Securities Annual Report 2006
100
Five Year Summary
Income statement
Before exceptional items
Group revenue
Costs
Profit on disposal of fixed asset properties
Net surplus on revaluation of investment properties
Operating profit
Net finance expenses
Income from joint ventures (post-tax)
Profit before tax
Income tax expense
Profit after tax
Exceptional items
Goodwill impairment
Profit on disposal of joint venture (Telereal)
Debt restructuring costs
Total exceptional items
Tax on exceptional items
Exceptional items post tax
Profit for the financial year
Revaluation surplus/(deficit) for the year
Group
Joint ventures
Total
Revenue profit (old definition)
Less: trading properties
Less: long-term contracts
Revenue profit (new definition)
Balance sheet
Investment properties
Property outsourcing properties
Net investment in finance leases
Goodwill
Investment in joint ventures
Other fixed assets
Total non-current assets
Trading properties and long-term development contracts
Cash and cash equivalents less short-term borrowings and overdrafts
Other current assets and liabilities
Total current assets and liabilities
Provisions
Borrowings
Pension benefits
Deferred tax liabilities
Total non-current liabilities
Net assets
Net debt
Results per share
Total dividend per share#
Basic earnings per share
Diluted earnings per share
Adjusted earnings per share
Adjusted diluted earnings per share
Net assets per share
Diluted net assets per share
Adjusted net assets per share
Adjusted diluted net assets per share
2006
IFRS
£m
2005
IFRS
£m
2004
UK GAAP*
£m
2003
UK GAAP*
£m
2002
UK GAAP*
£m
1,828.7
(1,267.8)
560.9
74.5
1,579.5
2,214.9
(194.5)
2,020.4
110.3
2,130.7
(593.3)
1,537.4
(64.5)
293.0
–
228.5
(90.0)
138.5
1,675.9
1,579.5
105.5
1,685.0
434.9
(21.7)
(21.9)
391.3
11,440.5
563.2
233.9
34.3
829.5
73.6
13,175.0
255.9
(31.1)
(218.6)
6.2
(58.2)
(3,654.8)
(6.5)
(1,967.8)
(5,687.3)
7,493.9
(3,685.9)
46.70p
357.95p
356.50p
70.76p
70.47p
1597p
1590p
1920p
1912p
1,627.1
(1,134.7)
492.4
112.0
827.9
1,432.3
(189.0)
1,243.3
141.5
1,384.8
(265.8)
1,119.0
(12.7)
–
(64.6)
(77.3)
19.2
(58.1)
1,060.9
827.9
69.5
897.4
401.3
(27.9)
(11.6)
361.8
8,240.1
546.3
163.4
34.3
854.9
57.9
9,896.9
164.0
(45.8)
(101.6)
16.6
(42.0)
(2,392.3)
(10.9)
(1,418.0)
(3,863.2)
6,050.3
(2,438.1)
43.25p
227.32p
226.45p
67.13p
66.87p
1293p
1289p
1493p
1488p
1,285.8
(821.1)
464.7
52.0
–
516.7
(174.4)
342.3
17.7
360.0
(71.7)
288.3
–
–
–
–
–
–
288.3
400.7
6.2
406.9
309.2
(7.3)
–
301.9
7,880.9
769.2
–
34.3
204.2
51.0
8,939.6
85.0
(439.9)
(365.3)
(720.2)
(11.7)
(1,995.9)
–
(173.3)
(2,180.9)
6,038.5
(2,435.8)
37.10p
61.84p
61.76p
47.86p
47.80p
1294p
1293p
1333p
1331p
1,071.3
(608.9)
462.4
26.6
–
489.0
(144.9)
344.1
13.0
357.1
(90.8)
266.3
–
–
(52.0)
(52.0)
15.6
(36.4)
229.9
(56.8)
–
(56.8)
336.2
(1.8)
–
334.4
7,823.9
557.4
–
36.7
106.8
41.5
8,566.3
52.6
59.1
(287.5)
(175.8)
(5.9)
(2,648.4)
–
(173.1)
(2,827.4)
5,563.1
(2,589.3)
35.50p
46.46p
46.44p
50.89p
50.88p
1188p
1188p
1220p
1219p
977.1
(479.6)
497.5
13.4
–
510.9
(142.9)
368.0
(4.5)
363.5
(99.9)
263.6
–
–
–
–
–
–
263.6
(105.5)
46.8
(58.7)
350.1
(5.8)
–
344.3
7,800.0
428.9
–
38.9
188.8
45.3
8,501.9
36.9
45.2
(430.2)
(348.1)
(5.3)
(1,987.3)
–
(124.6)
(2,117.2)
6,036.6
(1,942.1)
34.00p
50.27p
49.54p
49.18p
48.49p
1151p
1132p
1178p
1157p
* note 35 indicates the IFRS adjustments (and their magnitude) that would be required to be made to restate the UK GAAP results for 2002, 2003 and 2004 under IFRS.
# all amounts represent the interim dividend paid and final proposed dividend.
Land Securities Annual Report 2006
Financial Statements
Income statement for the year ended 31 March 2006
Group
Income: Group and share of joint ventures
Less: share of joint ventures income
Group revenue
Costs
Profit on disposal of fixed asset properties
Net surplus on revaluation of investment properties
Goodwill impairment
Profit on disposal of joint venture (Telereal)
Operating profit
Interest expense
Interest income
Share of the profit of joint ventures (post-tax)
Distribution received from joint venture (Telereal)
Profit/(loss) before tax
Income tax (expense)/credit
Profit/(loss) for the financial year
Earnings per share
Basic earnings per share*
Diluted earnings per share*
*adjusted earnings per share is given in note 11
Before
exceptional
items
£m
1,988.2
(159.5)
1,828.7
(1,267.8)
560.9
74.5
1,579.5
–
–
2,214.9
(201.8)
7.3
2,020.4
98.6
11.7
2,130.7
(593.3)
1,537.4
Exceptional
items
£m
–
–
–
–
–
–
–
(64.5)
293.0
228.5
–
–
228.5
–
–
228.5
(90.0)
138.5
Notes
17
4
4
4
4
4, 8
4, 8
6
6
17
17
4
9
30
11
11
Before
exceptional
items
£m
1,876.2
(249.1)
1,627.1
(1,134.7)
492.4
112.0
827.9
–
–
1,432.3
(198.8)
9.8
1,243.3
76.1
65.4
1,384.8
(265.8)
1,119.0
Exceptional
items
£m
–
–
–
(14.8)
(14.8)
–
–
(12.7)
–
(27.5)
(49.8)
–
(77.3)
–
–
(77.3)
19.2
(58.1)
2006
Total
£m
1,988.2
(159.5)
1,828.7
(1,267.8)
560.9
74.5
1,579.5
(64.5)
293.0
2,443.4
(201.8)
7.3
2,248.9
98.6
11.7
2,359.2
(683.3)
1,675.9
357.95p
356.50p
Statement of recognised income and expense for the year ended 31 March 2006
Group
Profit for the financial year
Actuarial losses on defined benefit pension schemes
Deferred tax on actuarial losses on defined benefit pension schemes
Fair value movement on cash flow hedges taken to equity – Group
Deferred tax on fair value movement on cash flow hedges taken to equity – Group
– joint ventures
– joint ventures
Net losses recognised directly in equity
Total recognised income and expense
Company
The Company has no other recognised income or expense other than that recognised in the income statement.
101
2005
Total
£m
1,876.2
(249.1)
1,627.1
(1,149.5)
477.6
112.0
827.9
(12.7)
–
1,404.8
(248.6)
9.8
1,166.0
76.1
65.4
1,307.5
(246.6)
1,060.9
227.32p
226.45p
2005
£m
1,060.9
(4.9)
1.5
–
–
–
–
2006
£m
1,675.9
(5.0)
1.5
(2.2)
(2.7)
0.6
0.8
(7.0)
(3.4)
1,668.9
1,057.5
Land Securities Annual Report 2006
102
Financial statements continued
Balance sheets at 31 March 2006
Non-current assets
Investment properties
Property, plant and equipment
Property outsourcing properties
Other property, plant and equipment
Net investment in finance leases
Goodwill
Investment in subsidiary undertakings
Investment in joint ventures
Total non-current assets
Current assets
Trading properties and long-term development contracts
Trade and other receivables
Cash and cash equivalents
Total current assets
Total assets
Current liabilities
Short-term borrowings and overdrafts
Trade and other payables
Current tax liabilities
Total current liabilities
Non-current liabilities
Provisions
Borrowings
Pension benefits
Deferred tax liabilities
Total non-current liabilities
Total liabilities
Net assets
Equity
Ordinary shares
Treasury shares
Share-based payments
Share premium
Capital redemption reserve
Merger reserve
Retained earnings
Total shareholders’ equity
Notes
2006
£m
Group
2005
£m
2006
£m
Company
2005
£m
13
13
13
13
14
15
16
17
18
19
20
21
22
23
24
25
26
28, 30
30
30
30
30
30
30
11,440.5
8,240.1
563.2
73.6
12,077.3
233.9
34.3
–
829.5
13,175.0
255.9
578.9
15.6
850.4
546.3
57.9
8,844.3
163.4
34.3
–
854.9
9,896.9
164.0
513.5
5.0
682.5
–
–
–
–
–
–
5,037.1
–
5,037.1
–
142.7
5.0
147.7
–
–
–
–
–
–
5,037.1
–
5,037.1
–
325.5
0.3
325.8
14,025.4
10,579.4
5,184.8
5,362.9
(46.7)
(585.0)
(212.5)
(844.2)
(58.2)
(3,654.8)
(6.5)
(1,967.8)
(5,687.3)
(6,531.5)
7,493.9
46.9
(3.4)
6.3
43.2
30.5
–
7,370.4
7,493.9
(50.8)
(577.2)
(37.9)
(665.9)
(42.0)
(2,392.3)
(10.9)
(1,418.0)
(3,863.2)
(4,529.1)
6,050.3
46.8
(2.1)
3.3
31.4
30.5
–
5,940.4
6,050.3
(34.0)
–
(3.6)
(37.6)
–
–
–
–
–
(37.6)
–
–
–
–
–
–
–
–
–
–
5,147.2
5,362.9
46.9
–
–
43.2
30.5
373.6
4,653.0
5,147.2
46.8
–
–
31.4
30.5
373.6
4,880.6
5,362.9
The financial statements on pages 101 to 136 were approved by the Board of Directors on 23 May 2006 and were signed on its behalf by:
F W Salway
M F Greenslade
Directors
Land Securities Annual Report 2006
Cash flow statements for the year ended 31 March 2006
Group
Net cash generated from operations
Cash generated from operations
Interest paid
Interest received
Funding pension scheme deficit
Taxation (corporation tax received)
Net cash inflow from operations
Cash flows from investing activities
Investment property development expenditure
Acquisition of investment properties
Other investment property related expenditure
Capital expenditure associated with property outsourcing
Capital expenditure on properties
Disposal of fixed asset investment properties
Disposal of fixed asset operating properties
Net expenditure on properties
Net expenditure on non-property related fixed assets
Net cash outflow from capital expenditure
Receivable finance leases acquired
Receipts in respect of receivable finance leases
Net loans made to joint ventures
Distributions from joint ventures
Proceeds from disposal of joint venture (Telereal)
Acquisitions of Group undertakings (net of cash acquired)
Net cash (used in)/from investing activities
Cash flows from financing activities
Issue of shares
Purchase of own share capital
Increase/(decrease) in debt
Debt repaid on acquisition of Tops Estates
Decrease in finance leases payable
Repayment of B shares
Dividend paid to ordinary shareholders
Net cash from/(used in) financing activities
Increase/(decrease) in cash and cash equivalents at end of the year
Company
Net cash generated from operations
Cash generated from operations
Interest paid
Interest received
Taxation (corporation tax received)
Net cash inflow from operations
Cash flows from financing activities
Issue of shares
Repayment of B shares
Dividend paid to ordinary shareholders
Net cash used in financing activities
Decrease in cash and cash equivalents at end of the year
103
Financial statements continued
Notes
31
31
2006
£m
2006
£m
2005
£m
591.5
(187.7)
7.3
(4.9)
(30.3)
375.9
(1,098.5)
733.2
10.6
182.8
(5.4)
17.5
2.8
197.7
(227.0)
(29.3)
(236.6)
(1,429.2)
(78.8)
(29.7)
(1,774.3)
675.5
4.1
(1,094.7)
(26.9)
(1,121.6)
(84.8)
2.3
(72.8)
206.6
293.0
(321.2)
11.9
(1.9)
1,221.2
(257.9)
(1.2)
–
(238.9)
11.9
–
(238.9)
(215.3)
(309.8)
(40.6)
(122.5)
(688.2)
335.1
355.3
2.2
(19.3)
(17.1)
(92.6)
2.3
(88.8)
245.8
–
(5.4)
15.7
(2.1)
(322.2)
–
(1.0)
(8.4)
(175.5)
15.7
(8.4)
(175.5)
2005
£m
523.4
(313.5)
18.3
(15.2)
3.6
216.6
44.2
(493.5)
(232.7)
165.0
(17.9)
8.4
7.8
163.3
(168.2)
(4.9)
Land Securities Annual Report 2006
104
Notes to the financial statements
for the year ended 31 March 2006
1. Basis of preparation
These financial statements have been prepared in
accordance with International Financial Reporting
Standards (‘IFRS’) and International Financial Reporting
Interpretations Committee (‘IFRIC’) interpretations and
with those parts of the Companies Act 1985 applicable
to companies reporting under IFRS. The financial
statements have also been prepared in accordance with
IFRS as adopted by the European Union (‘EU’) and
therefore comply with Article 4 of the EU IAS Regulation.
The financial statements have been prepared under the
historical cost convention as modified by the revaluation
of land and buildings, available for sale investments,
financial assets and liabilities held for trading. A summary
of the more important group accounting policies is set
out in note 2 below.
The preparation of financial statements in conformity
with generally accepted accounting principles requires
the use of estimates and assumptions that affect the
reported amounts of assets and liabilities at the date
of the financial statements and the reported amounts
of revenues and expenses during the reporting period.
Although these estimates are based on management’s
best knowledge of the amount, event or actions, actual
results ultimately may differ from those estimates.
The disclosures required by IFRS 1 ‘First time adoption of
International Financial Reporting Standards’ concerning
the transition from UK GAAP to IFRS are given in note 35.
2. Significant accounting policies
(a) Basis of consolidation
The consolidated financial statements of the Group
include the financial statements of Land Securities Group
PLC (‘the Company’) and its subsidiaries up to 31 March
2006. Subsidiaries are those entities controlled by the
Company. Control exists when the Company has the
power, directly or indirectly, to govern the financial and
operating policies of an entity so as to obtain benefits
from its activities. The financial statements of
subsidiaries are included in the consolidated financial
statements from the date that control commences until
the date control ceases.
Joint ventures are those entities over whose activities the
Group has joint control, established by contractual
agreement. Interests in joint ventures are accounted for
using the equity method of accounting as permitted by
IAS 31 ‘Interests in joint ventures’ and following the
procedures for this method set out in IAS 28
‘Investments in associates’. The equity method requires
the Group’s share of the joint venture’s profit or loss for
the period to be presented separately in the income
statement and the Group’s share of the joint venture’s
net assets to be presented separately in the balance
sheet. Joint ventures (Telereal) with net liabilities are
carried at zero value in the balance sheet where there is
no commitment to fund the deficit and any distributions
received are included in the consolidated profit for the year.
Intra-group balances and any unrealised gains and losses
arising from intra-group transactions are eliminated in
preparing the consolidated financial statements.
Unrealised gains arising from transactions with joint
ventures are eliminated to the extent of the Group’s
interest in the joint venture concerned. Unrealised losses
are eliminated in the same way, but only to the extent
that there is no evidence of impairment.
The difference between the fair value of an investment
property at the reporting date and its carrying amount
prior to re-measurement is included in the income
statement as a valuation gain or loss.When the Group
begins to redevelop an existing investment property for
continued future use as an investment property, the
property remains an investment property and is
accounted for as such.
(b) Acquisitions and business combinations
Where properties are acquired through corporate
acquisitions and there are no significant assets or
liabilities other than property, the acquisition is treated
as an asset acquisition. In all other cases the acquisition
is accounted for as a business combination, in which
case, the assets and liabilities of a subsidiary or joint
venture are measured at their estimated fair value at
the date of acquisition.
(c) Segment reporting
A business segment is a group of assets and operations
engaged in providing products or services that are
subject to risks and returns that are different from those
of other business segments. The Group is organised into
business segments.
Unallocated expenses are costs incurred centrally which
are neither directly attributable nor reasonably
allocatable to individual segments. Unallocated assets
are cash and cash equivalents. Unallocated liabilities
include short-term borrowings and overdrafts, and
certain non-current liabilities (borrowings, pension
deficit and deferred tax liabilities).
(d) Investment properties
Investment properties are those properties, either owned
by the Group or where the Group is a lessee under a
finance lease, that are held either to earn rental income
or for capital appreciation or both. In addition, properties
held under operating leases are accounted for as
investment properties when the rest of the definition
of an investment property is met. In such cases, the
operating leases concerned are accounted for as if they
were finance leases.
Investment properties are measured initially at cost,
including related transaction costs. After initial
recognition at cost, investment properties are carried at
their fair values based on a professional valuation made
as of each reporting date. Properties are treated as
acquired at the point when the Group assumes the
significant risks and returns of ownership and as disposed
when these are transferred to the buyer. Investment
property is measured on initial recognition at cost,
including related transaction costs. Additions to
investment properties consist of costs of a capital nature
and, in the case of investment properties under
development, capitalised interest. Certain internal staff
and associated costs directly attributable to the
management of major schemes during the construction
phase are also capitalised.
When the Group begins to redevelop an existing
investment property with a view to sale, the property is
transferred to trading properties and held as a current
asset. The property is re-measured to fair value as at the
date of the transfer with any gain or loss being taken to
profit or loss. The re-measured amount becomes the
deemed cost at which the property is then carried in
trading properties.
Property that is being constructed or developed for
future use as an investment property, but which has not
previously been classified as such, is classified as
investment property under development within
property, plant and equipment. This is recognised initially
at cost but is subsequently re-measured to fair value at
each reporting date. Any gain or loss on re-measurement
is taken direct to equity unless any loss in the period
exceeds any net cumulative gain previously recognised in
equity. In the latter case, the amount by which the loss in
the period exceeds the net cumulative gain previously
recognised is taken to profit or loss. On completion, the
property is transferred to investment property with any
final difference on re-measurement accounted for in
accordance with the foregoing policy.
Gross borrowing costs associated with direct expenditure
on properties under development or undergoing major
refurbishment are capitalised. The interest capitalised is
calculated using the Group’s weighted average cost of
borrowings after adjusting for borrowings associated
with specific developments.Where borrowings are
associated with specific developments, the amount
capitalised is the gross interest incurred on those
borrowings less any investment income arising on their
temporary investment. Interest is capitalised as from the
commencement of the development work until the date
of practical completion. The capitalisation of finance
costs is suspended if there are prolonged periods when
development activity is interrupted. Interest is also
capitalised on the purchase cost of a site or property
acquired specifically for redevelopment in the short term
but only where activities necessary to prepare the asset
for redevelopment are in progress.
(e) Property, plant and equipment
Operating properties
These are properties owned and managed by Land
Securities Trillium, the Group’s property outsourcing
business, and which do not satisfy the definition of an
investment property. Operating properties are stated
at cost less accumulated depreciation. Depreciation is
charged to the income statement on a straight-line basis
Land Securities Annual Report 2006
Notes to the financial statements continued
105
2. Significant accounting policies continued
over the estimated useful lives of the properties
concerned.
The estimated useful lives are as follows:
Freehold land
Freehold buildings
Leasehold properties
– Not depreciated
– Up to 50 years
–
Shorter of the unexpired
lease term and 50 years
Other property, plant and equipment
This category comprises computers, motor vehicles,
furniture, fixtures and fittings and improvements to
Group offices. These assets are stated at cost less
accumulated depreciation and are depreciated on a
straight-line basis over their estimated useful lives of
between two and five years.
The residual values and useful lives of all property, plant
and equipment are reviewed, and adjusted if appropriate,
at least at each financial year end.
(f) Goodwill
At the date of the Group’s transition to IFRS, 1 April
2004, the goodwill in the Group balance sheet
represented that arising on the acquisition of Trillium
less amortisation to that date. In accordance with IFRS 1
‘First-time adoption of IFRS’, this amount has been
adopted as the carrying amount of the goodwill for IFRS
accounting purposes and the goodwill was reviewed for
impairment at 31 March 2004 and at each subsequent
year end. In accordance with IFRS 3 ‘Business
combinations’, the goodwill is not amortised but is
reviewed for impairment at each reporting date. The
Group’s policy on impairment is set out in (t) below.
(g) Investment in subsidiary undertakings
Investments in subsidiaries are stated at cost less any
provision for permanent impairment in value.
(h) Trading properties and long-term development
contracts
Trading properties are those properties held for sale and
are shown at the lower of cost and net realisable value.
Revenue on long-term development contracts is
recognised according to the stage reached in the contract
by reference to the value of work completed using the
percentage of completion method. An appropriate
estimate of the profit attributable to work completed is
recognised once the outcome of the contract can be
estimated reliably. The gross amount due from customers
for contract work is shown as a receivable. The gross
amount due comprises costs incurred plus recognised
profits less the sum of recognised losses and progress
billings.Where the sum of recognised losses and progress
billings exceeds costs incurred plus recognised profits,
the amount is shown as a liability.
(i) Trade and finance lease receivables
Trade and finance lease receivables are recognised
initially at fair value. A provision for impairment is
established where there is objective evidence that
the Group will not be able to collect all amounts due
according to the original terms of the receivables
concerned.
(j) Cash and cash equivalents
Cash and cash equivalents comprises cash balances,
deposits held at call with banks and other short-term
highly liquid investments with original maturities of
three months or less. Bank overdrafts that are repayable
on demand and form an integral part of the Group’s cash
management are deducted from cash and cash
equivalents for the purpose of the statement of cash flows.
(k) Trade and other payables
Trade and other payables are stated at cost.
(l) Provisions
A provision is recognised in the balance sheet when the
Group has a constructive or legal obligation as a result
of a past event and it is probable that an outflow of
economic benefits will be required to settle the obligation.
If the effect is material, provisions are determined by
discounting the expected future cash flows at a pre-tax
rate that reflects current market assessments of the time
value of money and, where appropriate, the risks specific
to the liability.
A provision for onerous contracts is recognised when
the expected benefits to be derived by the Group from a
contract are lower than the unavoidable cost of meeting
its obligations under the contract.
Provision is made for dilapidations that will crystallise
in the future where, on the basis of the present condition
of the property, an obligation exists at the reporting date
and can be reliably measured. The estimate is revised
over the remaining period of the lease to reflect changes
in the condition of the building or other changes in
circumstances. The estimate of the obligation takes
account of relevant external advice.
(m) Borrowings
Borrowings other than bank overdrafts are recognised
initially at fair value less attributable transaction costs.
Subsequent to initial recognition, borrowings are stated
at amortised cost with any difference between the
amount initially recognised and redemption value being
recognised in the income statement over the period of
the borrowings, using the effective interest method.
Where existing borrowings are exchanged for new
borrowings and the terms of the existing and new
borrowings are not substantially different (as defined
by IAS 39), the new borrowings are recognised initially
at the carrying amount of the existing borrowings. The
difference between the amount initially recognised and
the redemption value of the new borrowings is
recognised in the income statement over the period of
the new borrowings, using the effective interest method.
(n) Pension benefits
The Group accounts for pensions under IAS 19 ‘Employee
Benefits’. In respect of defined benefit pension schemes,
obligations are measured at discounted present value
while scheme assets are measured at their fair value
except annuities, which are valued to match the liability
or benefit value. The operating and financing costs of
such plans are recognised separately in the income
statement. Service costs are spread using the projected
unit method. Financing costs are recognised in the
periods in which they arise and are included in interest
expense. Actuarial gains and losses arising from either
experience differing from previous actuarial assumptions
or changes to those assumptions are recognised
immediately in the statement of recognised income
and expense.
Contributions to defined contribution schemes are
expensed as incurred.
(o) Share capital
Ordinary shares are classed as equity. External costs
directly attributable to the issue of new shares are shown
in equity as a deduction, net of tax, from the proceeds.
The consideration paid, including any directly
attributable incremental costs, by any Group entity to
acquire the Company’s equity share capital (treasury
shares), is deducted from equity until the shares are
cancelled, reissued or disposed of. Where treasury shares
are sold or reissued, the net consideration received is
included in equity.
(p) Share-based payments
The cost of granting share options and other share-based
remuneration to employees and directors is recognised
through the income statement.These are equity-settled
and therefore the cost is measured at the grant date.The
Group has used the Black-Scholes option valuation model
to establish the relevant costs.The resulting values are
amortised through the income statement over the vesting
period of the options and other grants.The charge is
reversed if it appears probable that applicable performance
criteria will not be met although the performance criteria
are not market related.
(q) Revenue
Revenue comprises rental income, service charges and
other recoveries from tenants of the Group’s investment
and trading properties, property services income earned
by its property outsourcing business, proceeds of sales of
its trading properties and income arising on long-term
contracts. Rental income includes the income from
managed operations such as car parks, food courts,
serviced offices and flats. Service charges and other
recoveries include income in relation to services charges
and directly recoverable expenditure together with any
chargeable management fees. Property services income
Land Securities Annual Report 2006
106
Notes to the financial statements continued
2. Significant accounting policies continued
represents unitary charges and the recovery of other
direct property or contract expenditure reimbursable
by customers.Where revenue is obtained from the
rendering of services, it is recognised by reference to the
stage of completion of the relevant transactions at the
reporting date. The Group discloses its joint venture
revenue on a gross basis as this is considered to be
a more meaningful presentation.
Rental income from investment property leased out
under an operating lease is recognised in the income
statement on a straight-line basis over the term of
the lease. Lease incentives granted are recognised as an
integral part of the net consideration for the use of the
property and are therefore also recognised on the same,
straight-line basis.
When property is let out under a finance lease, the Group
recognises a receivable at an amount equal to the net
investment in the lease at inception of the lease. Rentals
received are accounted for as repayments of principal
and finance income as appropriate. Minimum lease
payments receivable on finance leases are apportioned
between finance income and reduction of the
outstanding receivable. Finance income is allocated to
each period during the lease term so as to produce a
constant periodic rate of interest on the remaining net
investment in the finance lease. Contingent rents, being
those lease payments that are not fixed at the inception
of a lease, for example turnover rents are recorded as
income in the periods in which they are earned.
Where revenue is obtained by the sale of assets, it is
recognised when the significant risks and returns have
been transferred to the buyer. In the case of sales of
properties, this is generally on unconditional exchange
except where payment or completion is expected to
occur significantly after exchange. For conditional
exchanges, sales are recognised as the conditions are
satisfied. Sales of investment and other fixed asset
properties, which are not included in revenue, are
recognised on the same basis.
(r) Expenses
Property and contract expenditure, including bid costs
incurred prior to the exchange of a contract, is expensed
as incurred with the exception of expenditure on long-
term development contracts (see (h) above).
Rental payments made under an operating lease are
recognised in the income statement on a straight-line
basis over the term of the lease. Lease incentives
received are recognised as an integral part of the net
consideration for the use of the property and also
recognised on a straight-line basis.
Minimum lease payments payable on finance leases and
operating leases accounted for as finance leases under
IAS 40 are apportioned between finance expense and
reduction of the outstanding liability. Finance expense
Land Securities Annual Report 2006
is allocated to each period during the lease term so as
to produce a constant periodic rate of interest on the
remaining liability. Contingent rents (as defined in (q)
above) are charged as expense in the periods in which
they are incurred.
(s) Exceptional items
Items which are sufficiently material by either their size
or nature to require separate disclosure are disclosed as
exceptional items within the relevant consolidated
income statement category. Items that management
consider fall into this category are presented separately
in the consolidated income statement in the column
headed ‘Exceptional items’. Events that may give rise to
exceptional items include gains or losses on the disposal
of joint ventures or other investments, impairment of
assets including goodwill arising as a result of recognising
deferred tax on a business combination and financial
restructurings.
(t) Impairment
The carrying amounts of the Group’s non-financial
assets, other than investment property (see (f) above),
are reviewed at each reporting date to determine
whether there is any indication of impairment. If any
such indication exists, the asset’s recoverable amount is
estimated (see below). An impairment loss is recognised
in profit or loss whenever the carrying amount of an
asset exceeds its recoverable amount. For the purposes of
assessing impairment, assets are grouped together at the
lowest levels for which there are separately identifiable
cash flows.
Where a derivative is designated as a hedge of the
variability of a highly probable forecasted transaction, i.e.
an interest payment, the element of the gain or loss on
the derivative that is an effective hedge is recognised
directly in equity.When the hedge of a forecasted
transaction subsequently results in the recognition of a
financial asset or a financial liability, the associated gains
or losses that were recognised directly in equity are
reclassified into profit or loss in the same period or
periods during which the asset acquired or liability
assumed affects profit or loss, i.e. when interest income
or expense is recognised. The gain or loss on any
ineffective element of any hedge is recognised in the
income statement immediately.
(v) Income tax
Income tax on the profit for the year comprises current
and deferred tax. Current tax is the tax payable on the
taxable income for the year and any adjustment in
respect of previous years. Deferred tax is provided in full
using the balance sheet liability method on temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the
amounts used for taxation purposes.
In particular, deferred tax is provided on the full
difference between the original cost of investment
properties and their carrying amounts at the reporting
date without taking into account deductions and
allowances which would only apply if the properties
concerned were to be sold, except where such properties
are classified as held for disposal.
The recoverable amount of an asset is the greater of its
net selling price and its value in use. The value in use is
determined as the net present value of the future cash
flows expected to be derived from the asset, discounted
using a pre-tax discount rate that reflects current market
assessments of the time value of money and the risks
specific to the asset.
An impairment loss is reversed if there has been a change
in the estimates used to determine the recoverable
amount. An impairment loss is reversed only to the
extent that the asset’s carrying amount after the reversal
does not exceed the amount that would have been
determined, net of applicable depreciation, if no
impairment loss had been recognised.
No provision is made for temporary differences (i) arising
on the initial recognition of assets or liabilities that affect
neither accounting nor taxable profit and (ii) relating to
investments in subsidiaries to the extent that they will
not reverse in the foreseeable future.
(w) Leases
A Group company is the lessee
i) Operating lease – leases in which substantially all risks
and rewards of ownership are retained by another party,
the lessor, are classified as operating leases. Payments,
including prepayments, made under operating leases (net
of any incentives received from the lessor) are charged to
the income statement on a straight-line basis over the
period of the lease.
(u) Derivative financial instruments (‘derivatives’)
The Group uses interest rate swap derivatives to help
manage its interest rate risk. In accordance with its
treasury policy, the Group does not hold or issue
derivatives for trading purposes.
Derivatives are recognised at fair value. The gain or
loss on re-measurement to fair value is recognised
immediately in profit or loss unless the derivatives
qualify for hedge accounting, in which case recognition
depends on the nature of the item being hedged.
ii) Finance lease – leases of assets where the Group has
substantially all the risks and rewards of ownership are
classified as finance leases. Finance leases are capitalised
at the lease’s commencement at the lower of the fair
value of the property and the present value of the
minimum lease payments. Each lease payment is
allocated between the liability and finance charges so
as to achieve a constant rate on the finance balance
outstanding. The corresponding rental obligations, net of
finance charges, are included in current and non-current
borrowings. The finance charges are charged to the
income statement over the lease period so as to produce
(e) Trade receivables
The Group is required to judge when there is sufficient
objective evidence to require the impairment of
individual trade receivables. It does this on the basis of
the age of the relevant receivables and external evidence
of the credit status of the debtor entity.
(f) Exceptional items
Exceptional items are defined as those items which are
sufficiently material by either their size or nature as to
require separate disclosure. Deciding which items meet
this definition requires the Group to exercise its
judgement.
(g) Investment property valuation
The Group uses the valuation performed by its
independent valuers as the fair value of its investment
properties. The valuation is based upon assumptions
including future rental income, anticipated maintenance
costs and the appropriate discount rate. The valuers also
make reference to market evidence of transaction prices
for similar properties.
(h) Unagreed rent reviews
Where the rent review date has passed, and the revised
annual rent has not yet been agreed, rent is accrued from
the date of the rent review based upon an estimation of
the revised annual rent. The estimate is derived from
knowledge of market rents for comparable properties.
2. Significant accounting policies continued
a constant periodic rate of interest on the remaining
balance of the liability for each period. The investment
properties acquired under finance leases are
subsequently carried at their fair value.
A Group company is the lessor
i) Operating lease – properties leased out to tenants
under operating leases are included in investment
properties in the balance sheet.
ii) Finance lease – when assets are leased out under a
finance lease, the present value of the minimum lease
payments is recognised as a receivable. The difference
between the gross receivable and the present value of
the receivable is recognised as unearned finance income.
Lease income is recognised over the term of the lease
using the net investment method before tax, which
reflects a constant periodic rate of return.Where only
the buildings element of a property lease is classified
as a finance lease, the land element is shown within
operating leases.
(x) Dividends
Dividend distributions to the Company’s shareholders
are recognised as a liability in the Group’s financial
statements in the period in which the dividends are
approved by the Company’s shareholders.
3. Significant judgements, key assumptions
and estimates
(a) Goodwill
Goodwill arising from the difference between how
deferred tax is calculated for accounting purposes and
the value ascribed to it in negotiations has been judged
not to be an asset and is accordingly impaired on
completion of the relevant acquisition.
(b) Distinction between operating properties and
investment properties
A property is classified as an operating property rather
than an investment property where the degree of
ancillary services supplied is judged to be significant in
the context of the arrangements between the landlord
and tenant.
(c) Finance lease calculations
In apportioning rentals on finance lease properties, the
Group is required to estimate the split of the fair values
of the properties concerned between land and buildings.
The inception of many of the Group’s leases took place
many years ago so that reliable estimates are very
difficult to obtain. Accordingly, the Group has had to
apply its judgement in estimating the split at inception
of certain finance lease properties.
(d) Trading properties
Trading properties are carried at the lower of cost and
net realisable value. The latter is assessed by the Group
having regard to suitable external advice and knowledge
of recent comparable transactions.
Notes to the financial statements continued
107
Land Securities Annual Report 2006
108
Notes to the financial statements continued
4. Segmental information
Group
Income statements
Rental income
Service charge income
Property services income
Trading property sale proceeds
Long-term development
contract income
Finance lease interest
Revenue
Rents payable
Other direct property or
contract expenditure
Indirect property or
contract expenditure
Long-term development
contract expenditure
Bid costs
Cost of sales of trading properties
Depreciation
London
Portfolio
£m
Other
Investment
Portfolio
£m
Property
Outsourcing
£m
278.5
40.0
–
93.8
95.7
6.0
514.0
(4.1)
4.3
0.2
–
5.9
78.4
–
88.8
–
–
–
924.8
–
–
2.5
Retail
£m
255.9
38.3
–
–
–
4.4
298.6
(12.0)
2006
Total
£m
538.7
78.5
924.8
99.7
174.1
12.9
London
Portfolio
£m
Other
Investment
Portfolio
£m
Property
Outsourcing
£m
252.1
34.2
–
1.0
64.4
6.4
358.1
(3.8)
15.8
1.3
–
21.3
126.8
–
165.2
–
–
–
763.6
100.2
–
–
Retail
£m
204.0
33.9
–
–
–
2.1
240.0
(9.7)
927.3
(183.9)
1,828.7
(200.0)
863.8
(183.6)
1,627.1
(197.1)
2005
Total
£m
471.9
69.4
763.6
122.5
191.2
8.5
(59.7)
(47.9)
(0.9)
(610.1)
(718.6)
(41.6)
(46.1)
(3.8)
(446.5)
(538.0)
(32.7)
(28.7)
(4.8)
(8.8)
(75.0)
(22.7)
(22.0)
(1.7)
(8.1)
(54.5)
–
–
–
(1.0)
193.2
(74.7)
–
(78.0)
(4.1)
276.5
Profit on disposal of fixed
asset properties
40.1
33.2
Net surplus on revaluation of
investment properties
Goodwill impairment
Profit on disposal of
636.9
(64.5)
935.5
–
joint venture (Telereal)
–
–
Segment result
805.7
1,245.2
Credit arising from change in pension scheme benefits
Unallocated expenses
Exceptional costs
Operating profit
Net financing costs – ordinary
– exceptional
Share of the profit of joint ventures (post-tax)
Distribution received from joint venture (Telereal)
Profit before tax
(77.5)
–
(4.2)
(0.1)
1.3
0.2
5.2
–
–
6.7
–
(7.4)
–
(20.5)
96.6
1.0
1.9
–
293.0
392.5
(152.2)
(7.4)
(82.2)
(25.7)
567.6
74.5
1,579.5
(64.5)
293.0
2,450.1
8.3
(15.0)
–
2,443.4
(194.5)
–
2,248.9
98.6
11.7
2,359.2
–
–
–
(1.9)
164.1
14.1
397.4
(12.7)
–
562.9
(53.2)
–
(0.8)
(4.5)
227.7
29.8
412.1
–
–
669.6
(126.4)
–
(15.1)
(0.2)
18.0
37.6
18.4
–
–
74.0
–
(2.6)
(96.3)
(29.0)
97.7
(179.6)
(2.6)
(112.2)
(35.6)
507.5
30.5
112.0
–
–
–
827.9
(12.7)
–
128.2
1,434.7
–
(15.1)
(14.8)
1,404.8
(189.0)
(49.8)
1,166.0
76.1
65.4
1,307.5
Included within rents payable is finance lease interest payable of £1.8m (2005: £2.0m) and £2.8m (2005: £2.4m) respectively for Retail and London Portfolio.
The share of the profit of joint ventures (post-tax) of £98.6m (2005: £76.1m) is attributable to Retail.
The distribution received from the joint venture (Telereal) of £11.7m (2005: £65.4m) is attributable to Property Outsourcing.
Land Securities Annual Report 2006
Notes to the financial statements continued
109
London
Portfolio
£m
4,418.3
–
4.3
108.9
–
Other
Investment
Portfolio
£m
Property
Outsourcing
£m
143.5
–
0.5
–
–
–
546.3
48.3
14.8
34.3
2005
Total
£m
8,240.1
546.3
57.9
163.4
34.3
4. Segmental information continued
Group
Balance sheets
Investment properties
Operating properties
Other property, plant and
equipment
Net investment in finance leases
Goodwill
Investment in equity accounted
joint ventures
Trading properties and long-term
development contracts
Trade and other receivables
Segment assets
Unallocated assets
Total assets
Trade and other payables
Non-current payables
Segment liabilities
Unallocated liabilities
Total liabilities
Other segment items
Capital expenditure
London
Portfolio
£m
Other
Investment
Portfolio
£m
Property
Outsourcing
£m
Retail
£m
2006
Total
£m
Retail
£m
5,514.6
–
5,856.5
–
–
563.2
11,440.5
563.2
3,678.3
–
73.6
233.9
34.3
4.8
39.7
–
69.4
–
4.7
–
–
104.3
9.7
229.3
–
41.2
7.3
73.8
–
768.5
–
158.7
6.5
107.1
–
150.5
207.5
6,522.9
6,328.1
55.1
53.0
34.3
19.8
1.1
202.7
929.2
(153.4)
–
(153.4)
(135.0)
–
(135.0)
(31.5)
–
(31.5)
(235.6)
(58.2)
(293.8)
829.5
841.9
–
13.0
–
854.9
255.9
578.6
–
181.4
125.3
53.8
14,009.5
4,746.1
4,710.6
15.9
14,025.4
(555.5)
(58.2)
(613.7)
(5,917.8)
(6,531.5)
(135.4)
–
(135.4)
(143.3)
–
(143.3)
36.9
11.2
205.1
(19.6)
–
(19.6)
1.8
267.1
912.6
(256.9)
(42.0)
(298.9)
164.0
513.5
10,574.4
5.0
10,579.4
(555.2)
(42.0)
(597.2)
(3,931.9)
(4,529.1)
121.3
207.8
0.6
45.5
375.2
89.7
160.2
5.8
33.7
289.4
All the Group’s operations are in the UK and are organised into four main business segments against which the Group reports its primary segment information. These are Retail, London
Portfolio, Other Investment Portfolio and Property Outsourcing.
Company
The Company’s business is to invest in its subsidiaries, and therefore it operates in a single segment.
5. Employee costs
Group
The average number of employees during the year, excluding directors, and the corresponding aggregate employee costs were:
Indirect property or contract and administration
Direct property or contract services:
Full time
Part time
Employee costs
Salaries
Social Security
Other pension
Share-based payments
Directors
Aggregate emoluments excluding pensions
Company contributions to pension schemes
2006
No.
499
1,258
85
1,842
2005
No.
453
1,218
63
1,734
2006
£m
44.9
52.0
1.5
98.4
74.3
13.6
8.2
2.3
98.4
4.2
0.8
5.0
2005
£m
38.7
48.2
1.1
88.0
67.2
8.0
11.6
1.2
88.0
3.7
0.4
4.1
With the exception of the directors, who are employed by Land Securities Group PLC, all employees are employed by subsidiaries of the Group.
Five directors (2005: five) have retirement benefits accruing under money purchase pension schemes. Retirement benefits accrue to one director (2005: one) under the Group’s
defined benefit pension scheme. Information on directors’ emoluments, share options and interests in the Company’s shares is given in the Remuneration Report on pages 90 to 96.
Land Securities Annual Report 2006
110
Notes to the financial statements continued
6. Net finance costs
Interest expense
Bond and debenture debt
Bank borrowings
Other interest payable
Loans from joint ventures
Fair value losses on interest rate swaps
Amortisation of bond exchange de-recognition (note 24)
Bond exchange de-recognition adjustment written off on redemption of bonds (note 24)
Expected return on pension scheme assets
Interest on pension scheme liabilities
Net financing income/(expense) on pension scheme
B share dividends
Interest capitalised in relation to properties under development
Total interest and similar charges payable – ordinary
Cost of purchase and redemption of bonds and debenture debt
Total interest and similar charges payable – exceptional
Interest income
Short-term deposits
Other interest receivable
Interest receivable from joint ventures
Total interest receivable
Net finance costs
Included within rents payable (note 4) is finance lease interest payable of £4.6m (2005: £4.4m).
7. Profit before taxation
The following items have been charged or (credited) in arriving at profit before taxation:
Employee costs (note 5)
Depreciation of property, plant and equipment (note 13):
Investment properties
Operating properties
Other property, plant and equipment
Impairment of goodwill (note 15)
Profit on disposal of fixed asset properties
Profit on disposal of joint venture (Telereal)
Bad debts written off and provision for doubtful debts
Services provided by the Group’s auditor
During the year the Group obtained the following services from the Group’s auditor at costs as detailed below:
Audit services
Statutory audit (Company: 2006: £0.1m; 2005: £0.1m)
Further assurance services
Tax services
Compliance services
Advisory services
Land Securities Annual Report 2006
2006
£m
(143.1)
(56.8)
(1.3)
–
(2.2)
(26.6)
(1.5)
7.3
(7.2)
0.1
–
(231.4)
29.6
(201.8)
–
–
1.0
1.7
4.6
7.3
Group
2005
£m
(149.9)
(55.5)
(0.9)
(0.3)
(0.8)
(11.2)
–
6.4
(6.7)
(0.3)
(0.1)
(219.0)
20.2
(198.8)
(49.8)
(49.8)
7.1
2.7
–
9.8
(194.5)
(238.8)
2006
£m
Company
2005
£m
–
–
(5.4)
–
–
–
–
–
–
–
–
(5.4)
–
(5.4)
–
–
–
17.5
–
17.5
12.1
2006
£m
98.4
2.9
11.6
11.2
64.5
(74.5)
(293.0)
13.1
0.8
0.5
0.2
0.3
1.8
–
–
(17.8)
–
–
–
–
–
–
–
(0.1)
(17.9)
–
(17.9)
–
–
0.2
8.2
–
8.4
(9.5)
2005
£m
88.0
2.6
20.6
12.4
12.7
(112.0)
–
5.3
0.6
0.4
0.2
–
1.2
Notes to the financial statements continued
111
2006
£m
(293.0)
64.5
–
–
2005
£m
–
12.7
14.8
49.8
8. Exceptional items
Profit on disposal of joint venture (Telereal)
Goodwill impairment
Debt restructuring – charged to costs
– charged to interest
On 30 September 2005 the Group sold its interest in the Telereal joint venture for £293.0m (net of costs), resulting in an exceptional profit of £293.0m, as the book value of the
joint venture was £nil. The tax charge arising on the disposal was £90.0m. Where goodwill arises as a result of recognising deferred tax on a business combination, the goodwill is
written off immediately to the income statement. The goodwill impaired arose on the acquisition of Tops Estates PLC on 10 June 2005 and on the assets acquired from Slough
Estates PLC on 15 December 2004. On 3 November 2004, the Group completed a debt exchange whereby a predominately secured funding strategy was established. The costs
of this debt restructuring have been treated as exceptional.
9.
Income tax expense
Current tax
Corporation tax charge/(credit) for the year
Adjustment in respect of prior years
Corporation tax in respect of property disposals
Total current tax charge/(credit)
Deferred tax
Origination and reversal of timing differences
Released in respect of property disposals
On valuation surplus
Total deferred tax charge
Total income tax charge in the income statement
The tax for the year is lower than the standard rate of corporation tax in the UK (30%). The differences are explained below:
Profit on activities before taxation
Profit on activities multiplied by rate of corporation tax in the UK of 30%
Effects of:
Deferred tax released in respect of property disposals
Corporation tax on disposal of fixed assets
Goodwill impairment
Joint venture accounting adjustments
Prior year corporation tax adjustments
Prior year deferred tax adjustments
Non-allowable expenses and non-taxable items
Total income tax expense in the income statement (as above)
2006
£m
181.6
(14.7)
38.0
204.9
34.6
(30.1)
473.9
478.4
683.3
Group
2005
£m
(66.8)
(26.0)
46.7
(46.1)
149.4
(105.0)
248.3
292.7
246.6
2,359.2
707.8
1,307.5
392.2
(34.7)
23.0
19.4
(26.5)
(14.7)
0.8
8.2
683.3
(105.0)
13.6
3.8
(37.7)
(26.0)
(3.4)
9.1
246.6
2006
£m
3.6
(2.8)
–
0.8
–
–
–
–
0.8
12.1
3.6
–
–
–
–
(2.8)
–
–
0.8
Company
2005
£m
–
–
–
–
–
–
–
–
–
1,890.5
567.1
–
–
–
–
–
–
(567.1)
–
The calculation of the Group’s tax charge necessarily involves a degree of estimation and judgement in respect of certain items whose tax treatment cannot be finally deter-
mined until a formal resolution has been reached with the relevant tax authorities. In such cases the Group has reserved on the basis that these provisions will be required. If all
such issues are resolved in the Group’s favour, provisions of up to £225.0m could be released in the future.
10. Dividends
Ordinary dividends paid
Final dividend for the year ended 31 March 2005 (32.85p per share)
Final dividend for the year ended 31 March 2004 (27.20p per share)
Interim dividend for the year ended 31 March 2006 (18.15p per share)
Interim dividend for the year ended 31 March 2005 (10.40p per share)
2006
£m
153.8
–
85.1
–
238.9
Group
2005
£m
–
126.9
–
48.6
175.5
2006
£m
153.8
–
85.1
–
238.9
Company
2005
£m
–
126.9
–
48.6
175.5
The Board has proposed a final dividend of 28.55p per share (final dividend for the year ended 31 March 2005: 32.85p) which will result in a further distribution of £134.0m.
It will be paid on 24 July 2006 to shareholders who are on the register of members on 23 June 2006.
Land Securities Annual Report 2006
112
Notes to the financial statements continued
11. Earnings per share
Earnings
Profit for the financial year
Revaluation surpluses net of deferred taxation – Group
– joint ventures
Fixed asset property disposals after current and deferred tax
Goodwill impairment
Deferred tax arising from capital allowances on investment properties
Mark-to-market adjustment on interest rate swaps (net of deferred tax)
Eliminate effect of bond exchange de-recognition (net of deferred tax)
Deferred tax arising from capitalised interest on investment properties
Exceptional costs of debt restructuring
Credit arising from change in pension scheme benefits (net of deferred tax)
Profit on disposal of joint venture (net of taxation)
Adjustment to restate the Group’s share of Telereal’s earnings from a distribution to an equity basis
Adjusted earnings
Weighted average number of ordinary shares
Weighted average number of ordinary shares
Effect of own shares
Weighted average number of ordinary shares after adjusting for own shares
Effect of dilutive share options
Weighted average number of ordinary shares adjusted for dilutive instruments
Earnings per share
Basic earnings per share
Diluted earnings per share
Adjusted earnings per share
Adjusted diluted earnings per share
2006
£m
1,675.9
(1,105.6)
(73.8)
(66.5)
64.5
12.2
1.5
19.7
7.2
–
(5.8)
(203.0)
5.0
331.3
No. m
468.5
(0.3)
468.2
1.9
470.1
pence
357.95
356.50
70.76
70.47
2005
£m
1,060.9
(579.6)
(48.7)
(178.4)
12.7
9.3
1.9
7.8
5.2
45.4
–
–
(23.2)
313.3
No. m
466.9
(0.2)
466.7
1.8
468.5
pence
227.32
226.45
67.13
66.87
Management have chosen to disclose adjusted earnings per share in order to provide a better indication of the Group’s underlying business performance. Accordingly, it excludes
the effect of all exceptional items, the one-off benefit from the pension scheme changes and other items of a capital nature (excluding trading properties and long-term contract
profits) as indicated above. In addition, the deferred tax arising on capital allowances in respect of investment properties has been eliminated as experience has shown that these
allowances are not in practice repayable. Deferred tax on capitalised interest is also added back as this is effectively a permanent timing difference.
12. Net assets per share
Shareholders’ equity
Net assets attributable to equity shareholders
Deferred tax arising on revaluation surpluses – Group
– joint ventures
– acquired
Cumulative mark-to-market adjustment on interest rate swaps (net of deferred tax) – Group
– joint ventures
Deferred tax arising from capital allowances on investment properties
Deferred tax arising from capitalised interest on investment properties
Reverse bond exchange de-recognition adjustment (net of deferred tax)
Adjusted net assets attributable to equity shareholders
2006
£m
7,493.9
1,580.9
75.5
83.3
5.4
3.2
116.8
28.2
(375.3)
9,011.9
2005
£m
6,050.3
1,117.9
43.8
19.0
2.3
1.3
112.7
32.3
(395.0)
6,984.6
Land Securities Annual Report 2006
Notes to the financial statements continued
113
2006
No. m
469.3
2.1
471.4
pence
1597
1590
1920
1912
2005
No. m
467.8
1.7
469.5
pence
1293
1289
1493
1488
12. Net assets per share continued
Number of ordinary shares
Number of ordinary shares
Effect of dilutive share options
Number of ordinary shares adjusted for dilutive instruments
Net assets per share
Net assets per share
Diluted net assets per share
Adjusted net assets per share
Adjusted diluted net assets per share
Adjusted net assets per share excludes the deferred tax arising on revaluation surpluses, mark-to-market adjustments on financial instruments used for hedging purposes and the
bond exchange de-recognition adjustment as management consider that this better represents the expected future cash flows of the Group. In addition, the deferred tax arising
on capital allowances in respect of investment properties is excluded as experience has shown that these allowances do not in practice crystallise. Deferred tax on capitalised
interest is also added back as this is effectively a permanent timing difference. The adjusted net assets per share does not take into account management’s estimate of the tax
on property disposals as referred to in note 26.
13. Non-current assets
Net book value at 1 April 2004
Properties transferred from portfolio management into the development
Property investment
Investment properties
Property
Outsourcing
Portfolio Development
programme
£m
management
£m
Operating and
investment
properties
£m
Total
£m
Other
Other
property,
plant and
equipment
£m
Total
£m
6,763.1
731.1
7,494.2
769.2
51.0
8,314.4
programme during the year (at 1 April 2004 valuation)
(151.0)
151.0
–
–
–
–
Developments completed, let and transferred from the development
programme into portfolio management during the year
Property acquisitions
Acquisitions through business combinations
Capital expenditure
Transfer from finance leases
Capitalised interest
Disposals
Transfer to trading properties
Surrender premiums received
Properties contributed to the Metro Shopping Fund LP and the Bristol Alliance
Depreciation
Surplus on revaluation
Net book value at 31 March 2005
Properties transferred from portfolio management into the development
485.4
311.9
197.0
40.6
29.1
–
(558.6)
(30.0)
(20.7)
(175.9)
(2.6)
6,888.3
596.2
7,484.5
(485.4)
–
–
205.4
–
17.5
(95.7)
–
–
–
–
523.9
231.7
755.6
–
311.9
197.0
246.0
29.1
17.5
(654.3)
(30.0)
(20.7)
(175.9)
(2.6)
7,412.2
827.9
8,240.1
–
103.6
–
18.9
–
–
(324.8)
–
–
–
(20.6)
546.3
–
546.3
–
–
–
24.5
–
–
(5.2)
–
–
–
(12.4)
57.9
–
57.9
–
415.5
197.0
289.4
29.1
17.5
(984.3)
(30.0)
(20.7)
(175.9)
(35.6)
8,016.4
827.9
8,844.3
programme during the year (at 1 April 2005 valuation)
(102.4)
102.4
–
–
–
–
Developments completed, let and transferred from the development
programme into portfolio management during the year
Property acquisitions
Acquisitions through business combinations
Capital expenditure
Capitalised interest
Disposals
Transfer to trading properties
Surrender premiums received
Depreciation
Surplus on revaluation
Net book value at 31 March 2006
271.6
1,414.1
592.6
78.8
–
(641.8)
(84.7)
(14.0)
(2.9)
8,995.8
1,215.4
(271.6)
24.7
–
239.3
24.5
(7.8)
–
–
–
867.1
362.2
–
1,438.8
592.6
318.1
24.5
(649.6)
(84.7)
(14.0)
(2.9)
9,862.9
1,577.6
10,211.2
1,229.3
11,440.5
–
–
–
29.7
–
(3.1)
–
–
(11.6)
561.3
1.9
563.2
–
–
–
27.4
–
(0.5)
–
–
(11.2)
73.6
–
73.6
–
1,438.8
592.6
375.2
24.5
(653.2)
(84.7)
(14.0)
(25.7)
10,497.8
1,579.5
12,077.3
Land Securities Annual Report 2006
114
Notes to the financial statements continued
13. Non-current assets continued
The following table reconciles the net book value of the investment properties to the market value. The components of the reconciliation are included within their relevant balance
sheet headings.
Net book value at 31 March 2005
Plus: amount included in prepayments in respect of lease incentives
Less: head leases capitalised (note 27)
Plus: properties treated as finance leases
Market value at 31 March 2005 – Group
– plus: share of joint ventures (note 17)
Market value at 31 March 2005 – Group and share of joint ventures
Net book value at 31 March 2006
Plus: amount included in prepayments in respect of lease incentives
Less: head leases capitalised (note 27)
Plus: properties treated as finance leases
Market value at 31 March 2006 – Group
Market value at 31 March 2006 – Group and share of joint ventures
– plus: share of joint ventures (note 17)
Investment properties
Portfolio Development
programme
£m
management
£m
7,484.5
59.1
(58.2)
138.9
7,624.3
755.6
3.7
(11.7)
–
747.6
10,211.2
1,229.3
76.8
(66.1)
171.7
4.6
(8.5)
–
10,393.6
1,225.4
Total
£m
8,240.1
62.8
(69.9)
138.9
8,371.9
993.9
9,365.8
11,440.5
81.4
(74.6)
171.7
11,619.0
1,273.9
12,892.9
Included in investment properties are leasehold properties with a net book value of £1,419.8m (2005: £1,283.2m).
In accordance with IFRS1 ‘First time adoption of International Reporting Standards’ and IAS 17 ‘Leases’, the Group has reviewed the classification of all leases at the opening balance
sheet date of 1 April 2004. In reviewing leases of land and buildings in accordance with IAS 17 the land and buildings elements of the lease need to be considered separately. On this
basis, leases on 43 properties entered into between 1923 and 2003 were reclassified as finance leases in these accounts.This resulted in an increase in fixed assets of £77.2m and a
finance lease creditor of the same amount at first time adoption on 1 April 2004.At 31 March 2006 leases on 34 properties entered into between 1936 and 2005 were classified as
finance leases.The corresponding increase in fixed assets and finance lease creditor was £74.6m (2005: £69.6m). Operating lease expense has reduced by £5.8m (2005: £5.4m).
The fair value of the Group’s investment properties at 31 March 2006 has been arrived at on the basis of a valuation carried out at that date by Knight Frank LLP, independent
valuers. The valuation, which conforms to International Valuation Standards, was arrived at by reference to market evidence of transaction prices for similar properties. Included
within the property outsourcing operating and investment properties are investment properties with a market value of £27.1m (2005: £24.4m). Fixed asset properties include
capitalised interest of £115.8m (2005: £120.9m). The average rate of capitalisation is 5.5% (2005: 6.8%). The historical cost of investment properties is £6,265.5m (2005:
£4,594.7m). The current value of investment properties in respect of proposed developments is £383.8m (2005: £189.2m). Developments are transferred out of the development
programme when physically complete and 95% let. Schemes completed during the year were Bexhill Retail Park; Whitefriars, Canterbury; Eastbourne Terrace, W2; and
Summerland Gate, Exeter. The property rental income earned by the Group from its investment properties amounted to £537.2m (2005: £471.2m).
Capital commitments
Development contracts
14. Net investment in finance leases
Non-current
Finance leases – gross receivables
Unearned finance income
Unguaranteed residual value
Current
Finance leases – gross receivables
Unearned finance income
Total net investment in finance leases
Land Securities Annual Report 2006
2006
£m
689.8
2005
£m
522.5
2006
£m
595.6
(391.1)
29.4
233.9
14.8
(10.6)
4.2
238.1
2005
£m
372.1
(241.9)
33.2
163.4
11.2
(8.7)
2.5
165.9
Notes to the financial statements continued
115
14. Net investment in finance leases continued
Gross receivables from finance leases:
Not later than one year
Later than one year but not more than five
More than five years
Unearned future finance income
Unguaranteed residual value
Net investment in finance leases
2006
£m
14.8
72.5
523.1
610.4
(401.7)
29.4
238.1
The Group has leased out a number of investment properties under finance leases ranging between 15 and 100 years in duration. These are accounted for as finance lease
receivables rather than investment properties. The fair value of the Group’s finance lease receivables approximates to the carrying amount.
15. Goodwill
At beginning of year
Arising on acquisitions during the year (note 32)
Impaired during the year
At end of year
Represented by:
Gross goodwill recognised
Total accumulated impairment losses
2006
£m
34.3
64.5
(64.5)
34.3
119.2
(84.9)
34.3
2005
£m
11.2
81.8
290.3
383.3
(250.6)
33.2
165.9
2005
£m
34.3
12.7
(12.7)
34.3
54.7
(20.4)
34.3
The goodwill carried in the Group balance sheet relates entirely to the Group’s property outsourcing business, Land Securities Trillium, which is a cash-generating unit as defined
in IAS 36 ‘Impairment of Assets’. This goodwill is tested annually for impairment or more frequently if there are indications that the goodwill might be impaired. Impairment is
tested by comparing the carrying amount of the business’ assets and liabilities with its recoverable amount, being its value in use. The latter is calculated by reference to the cash
flow projections prepared annually by the business for its major contracts and covering the entire term of the contracts concerned but without assuming any renewals. The main
assumptions underlying the forecasts are the relative inflation rates applying to costs and revenues and the amount of expenditure required for the business to fulfil its service
level commitments. The cash flows are discounted at a rate reflecting market assessments of the time value of money and the risks specific to the business. The discount rate
used for the 2006 test was 8.5%.
During the year, the Group acquired 100% of Tops Estates PLC. The fair value exercise gave rise to goodwill of £64.5m. Similarly, during the prior year the Group acquired a retail
property portfolio from Slough Estates plc. The fair value exercise gave rise to goodwill of £12.7m. The goodwill arises primarily from the difference between how deferred tax is
calculated for accounting purposes and the value ascribed to it in negotiations. The former is based on the difference between the values of the assets and liabilities concerned
for accounts purposes and those applying for taxation. The latter is based on tax payments likely to be made. In the Group’s opinion, the carrying amount of this goodwill cannot
be justified by reference to future cash flows and it has accordingly been impaired.
16. Investment in Group undertakings
Company
At beginning of year
Additions
At end of year
2006
£m
5,037.1
–
5,037.1
2005
£m
4,092.7
944.4
5,037.1
Certain subsidiaries and joint ventures have non-coterminous year ends. In these circumstances management accounts prepared at 31 March 2006 are used for the purposes of
the Group consolidation. The directors consider that to give full particulars of all subsidiary undertakings would lead to a statement of excessive length. The principal Group
undertakings, all of which are wholly owned, either directly by the Company or through a fellow subsidiary undertaking, and its joint ventures, which are 50% owned (with the
exception of the Bullring Limited Partnership which is 33% owned), are:
Wholly owned Group undertakings
Group operations
Land Securities Properties Limited
Property Outsourcing
Land Securities Trillium Limited
Investment property business
Land Securities Intermediate Limited
Land Securities Property Holdings Limited
Ravenseft Properties Limited
The City of London Real Property Company Limited
Ravenside Investments Limited
Joint ventures
Scottish Retail Property Limited Partnership
Metro Shopping Fund LP
Buchanan Galleries Limited Partnership
Bullring Limited Partnership
All principal Group undertakings are incorporated in England and Wales. A full list of subsidiary undertakings at 31 March 2006 will be annexed to the Company’s next annual return.
Land Securities Annual Report 2006
116
Notes to the financial statements continued
17. Investment in joint ventures
Year ended 31/03/06 and at 31/03/06
Summary financial
information of Group’s
share of joint ventures
Scottish
Retail
Property
Limited
Partnership
£m
Metro
Shopping
Fund LP
£m
Buchanan
Galleries
Limited
Partnership
£m
Martineau
Galleries
Limited
Partnership
£m
Bullring
Limited
Partnership
£m
Parc Tawe
£m
Bristol
Alliance
£m
Other*
£m
Telereal
£m
Income statement
Rental income
Service charges income
Property services income
Trading property sale proceeds
Revenue
Rents payable
Other direct property expenditure
Indirect property expenditure
Cost of sales of trading properties
Depreciation
Profit on disposal of fixed
asset properties
Net surplus/(deficit) on revaluation
of investment properties
Operating profit
Net finance costs
Profit before tax
Income tax (expense)/credit
Profit after tax
Adjustment due to net liabilities
Share of profits of joint
ventures after tax
Distribution received from
Telereal
20.8
4.8
–
–
25.6
–
(8.8)
(1.0)
–
–
15.8
–
20.7
36.5
(10.8)
25.7
(6.5)
19.2
–
11.8
2.3
–
–
14.1
–
(3.2)
(0.6)
–
–
10.3
–
23.2
33.5
(9.4)
24.1
(7.8)
16.3
–
9.1
1.5
–
–
10.6
–
(2.5)
(0.1)
–
–
8.0
–
14.4
22.4
(4.3)
18.1
(4.3)
13.8
–
19.2
16.3
13.8
Balance sheet
Investment properties**
Operating properties
Current assets
Current liabilities
Non-current liabilities
Deferred tax
Adjustment due to net liabilities
Net assets
Capital commitments
Market value of investment
345.3
–
12.0
357.3
(17.7)
(221.2)
(13.2)
(252.1)
–
105.2
–
275.9
–
7.8
283.7
(8.5)
(184.0)
(10.2)
(202.7)
–
81.0
–
173.9
–
6.6
180.5
(4.2)
–
(3.3)
(7.5)
–
173.0
–
properties**
339.2
274.1
177.5
Net investment
At 1 April 2005
Properties contributed
Cash contributed
Cost of acquisition
Share of post-tax results
Adjustment to restate the Group’s
293.6
–
–
–
19.2
share of Telereal’s earnings from an
equity to a distribution basis
Distributions
Fair value movement on cash
flow hedges taken to equity
Loan advances
Loan repayments
At 31 March 2006
–
(185.9)
(1.8)
–
(19.9)
105.2
39.6
–
24.7
–
16.3
–
(1.5)
(0.1)
2.0
–
81.0
163.5
–
–
–
13.8
–
(4.3)
–
–
–
0.5
–
–
–
0.5
–
(0.1)
–
–
–
0.4
–
0.1
0.5
–
0.5
–
0.5
–
0.5
21.4
–
3.9
25.3
(0.4)
–
–
(0.4)
–
24.9
–
21.4
–
–
24.8
–
0.5
–
(0.4)
–
–
–
1.3
0.4
–
–
1.7
(0.1)
(1.2)
–
–
–
0.4
–
(0.3)
0.1
0.1
0.2
0.1
0.3
–
0.3
22.8
–
2.0
24.8
(0.4)
–
(1.3)
(1.7)
–
23.1
–
14.6
2.1
–
–
16.7
–
(4.0)
(0.3)
–
–
12.4
(0.2)
31.3
43.5
0.1
43.6
(9.7)
33.9
–
3.5
–
–
–
3.5
–
(0.5)
(0.3)
–
–
2.7
–
15.7
18.4
0.3
18.7
(4.7)
14.0
–
33.9
14.0
297.2
–
10.6
307.8
(4.9)
–
(43.6)
(48.5)
–
259.3
–
120.7
–
16.3
137.0
(9.2)
(2.4)
(6.9)
(18.5)
–
118.5
153.2
23.8
303.0
123.7
23.5
–
–
–
0.3
–
(1.5)
–
0.8
–
23.1
238.2
–
–
–
33.9
–
–
–
–
(12.8)
259.3
82.0
–
–
–
14.0
–
–
–
27.5
(5.0)
118.5
0.5
–
–
–
0.5
–
–
–
–
–
0.5
0.1
0.4
1.0
(0.3)
0.7
(0.1)
0.6
–
0.6
11.2
–
39.0
50.2
(5.6)
–
(0.1)
(5.7)
–
44.5
–
11.2
14.5
6.4
0.8
26.5
0.6
–
(1.3)
–
–
(3.0)
44.5
–
–
80.8
5.5
86.3
(17.1)
–
(7.6)
(1.3)
(7.1)
53.2
0.9
–
54.1
(32.9)
21.2
(4.5)
16.7
(16.7)
–
11.7
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
16.7
(5.0)
(11.7)
–
–
–
–
Total
£m
62.1
11.1
80.8
5.5
159.5
(17.2)
(20.3)
(9.9)
(1.3)
(7.1)
103.7
0.8
105.5
210.0
(57.2)
152.8
(37.5)
115.3
(16.7)
98.6
11.7
1,268.4
–
98.2
1,366.6
(50.9)
(407.6)
(78.6)
(537.1)
–
829.5
153.2
1,273.9
854.9
6.4
50.3
26.5
115.3
(5.0)
(206.6)
(1.9)
30.3
(40.7)
829.5
173.0
24.9
**Other principally includes the Martineau Limited Partnership, the Ebbsfleet Limited Partnership, the A2 Limited Partnership and the Mill Group.
**The difference between the book value and the market value is the amount included in prepayments in respect of lease incentives, head leases capitalised and properties treated as finance leases.
Land Securities Annual Report 2006
Notes to the financial statements continued
117
17. Investment in joint ventures continued
Year ended 31/03/05 and at 31/03/05
Summary financial
information of Group’s
share of joint ventures
Scottish
Retail
Property
Limited
Partnership
£m
Metro
Shopping
Fund LP
£m
Buchanan
Galleries
Limited
Partnership
£m
Martineau
Galleries
Limited
Partnership
£m
Bullring
Limited
Partnership
£m
Parc Tawe
£m
Bristol
Alliance
£m
Other*
£m
Telereal
£m
Income statement
Rental income
Service charges income
Property services income
Trading property sale proceeds
Revenue
Rents payable
Other direct property expenditure
Indirect property expenditure
Cost of sales of trading properties
Depreciation
Profit on disposal of fixed
asset properties
Net surplus/(deficit) on revaluation
of investment properties
Operating profit/(loss)
Net finance costs
Profit/(loss) before tax
Income tax (expense)/credit
Profit/(loss) after tax
Adjustment due to net liabilities
Share of profits/(losses) of
joint ventures after tax
Distribution received from
Telereal
16.3
5.6
–
–
21.9
(0.2)
(6.4)
(1.1)
–
–
14.2
–
19.7
33.9
(0.3)
33.6
(10.1)
23.5
–
23.5
Balance sheet
Investment properties**
Operating properties
Current assets
Current liabilities
Non-current liabilities
Deferred tax
Adjustment due to net liabilities
Net assets
Capital commitments
Market value of investment
311.1
–
10.9
322.0
(12.2)
(8.4)
(7.8)
(28.4)
–
293.6
0.2
7.2
1.3
–
–
8.5
–
(1.7)
(0.6)
–
–
6.2
–
12.8
19.0
(6.7)
12.3
(3.6)
8.7
–
8.7
151.7
–
4.4
156.1
(4.8)
(108.4)
(3.3)
(116.5)
–
39.6
–
2.4
0.6
–
–
3.0
–
(0.7)
–
–
–
2.3
–
(3.2)
(0.9)
–
(0.9)
0.3
(0.6)
–
(0.6)
159.3
–
7.7
167.0
(4.5)
–
1.0
(3.5)
–
163.5
–
properties**
302.7
149.8
162.8
Net investment
At 1 April 2004
Properties contributed
Cash contributed
Cost of acquisition
Share of post-tax results
Adjustment to restate the Group’s
250.2
–
31.7
–
23.5
share of Telereal’s earnings from an
equity to a distribution basis
Distributions
Loan advances
Loan repayments
–
–
–
(11.8)
At 31 March 2005
293.6
–
92.1
87.1
–
8.7
–
(146.3)
86.2
(88.2)
39.6
–
–
–
166.5
(0.6)
–
(2.4)
–
–
163.5
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1.6
0.6
–
–
2.2
(0.1)
(0.9)
–
–
–
1.2
–
0.9
2.1
–
2.1
(0.3)
1.8
–
1.8
22.6
–
2.5
25.1
(0.2)
–
(1.4)
(1.6)
–
23.5
–
12.8
5.5
–
–
18.3
–
(6.1)
(0.2)
–
–
12.0
–
31.9
43.9
0.1
44.0
(9.6)
34.4
–
34.4
264.8
–
11.0
275.8
(3.7)
–
(33.9)
(37.6)
–
238.2
3.4
23.7
271.0
21.7
–
–
–
1.8
–
–
–
–
23.5
209.9
–
–
–
34.4
–
–
5.8
(11.9)
238.2
3.1
–
–
–
3.1
–
(0.1)
–
–
–
3.0
–
7.4
10.4
–
10.4
(2.2)
8.2
–
8.2
81.2
–
8.0
89.2
(5.0)
–
(2.2)
(7.2)
–
82.0
0.7
83.9
–
85.6
–
–
8.2
–
(1.7)
14.9
(25.0)
82.0
0.9
0.2
–
–
1.1
(0.3)
–
–
–
–
0.8
(1.8)
–
(1.0)
0.1
(0.9)
1.0
0.1
–
0.1
13.0
–
2.7
15.7
(1.2)
–
–
(1.2)
–
14.5
–
–
44.4
–
–
–
0.1
–
(30.0)
–
–
14.5
Total
£m
44.3
13.8
165.3
25.7
249.1
(36.5)
(15.9)
(17.6)
(8.1)
(13.8)
157.2
–
–
165.3
25.7
191.0
(35.9)
–
(15.7)
(8.1)
(13.8)
117.5
12.3
10.5
–
129.8
(66.4)
63.4
(21.2)
42.2
(42.2)
–
65.4
–
1,015.4
50.5
1,065.9
(50.6)
(1,086.4)
–
(1,137.0)
71.1
–
–
–
–
–
–
–
42.2
23.2
(65.4)
–
–
–
69.5
237.2
(73.2)
164.0
(45.7)
118.3
(42.2)
76.1
65.4
1,003.7
1,015.4
97.7
2,116.8
(82.2)
(1,203.2)
(47.6)
(1,333.0)
71.1
854.9
4.3
993.9
526.2
177.7
118.8
166.5
118.3
23.2
(245.8)
106.9
(136.9)
854.9
**Other includes the Martineau Limited Partnership and the Ebbsfleet Limited Partnership.
**The difference between the book value and the market value is the amount included in prepayments in respect of lease incentives, head leases capitalised and properties treated as finance leases.
Land Securities Annual Report 2006
118
Notes to the financial statements continued
18. Trading properties and long-term development contracts
Trading properties
Amount recoverable under long-term development contracts less payments on account
The amounts for contracts in progress at the balance sheet date are as follows:
Contract revenue recognised as revenue in the year
Contract costs incurred and recognised profits (less recognised losses) to date
Advances received
Plus: gross amount due to customers for contract work (included in accruals and deferred income)
Gross amount due from customers for contract work
19. Trade and other receivables
Trade receivables – property investment
– property outsourcing
Property sales receivables
Other receivables
Prepayments and accrued income
Finance leases receivable within one year (note 14)
Loans to Group undertakings
Trade receivables are net of provisions for doubtful debts of £12.6m (2005: £6.5m).
20. Cash and cash equivalents
Cash at bank and in hand
Short-term deposits
2006
£m
27.1
107.4
145.2
61.4
233.6
4.2
–
578.9
2006
£m
5.1
10.5
15.6
Group
2005
£m
18.4
186.8
77.0
49.2
179.6
2.5
–
513.5
Group
2005
£m
5.0
–
5.0
The effective interest rate on short-term deposits was 4.6% (2005: 4.2%) and the deposits have an average maturity of 2 days (2005: 6 days).
21. Short-term borrowings and overdrafts
Borrowings falling due within one year (note 24)
Overdrafts
Bond exchange de-recognition adjustment falling due within one year (note 24)
Amounts payable under finance leases falling due within one year (notes 24 and 27)
Where the Group operates a notional cash pooling arrangement the cash and overdraft balances are netted off.
2006
£m
59.2
–
(15.6)
3.1
46.7
Group
2005
£m
76.3
–
(26.5)
1.0
50.8
2006
£m
163.5
92.4
255.9
174.1
414.0
(339.0)
75.0
17.4
92.4
2006
£m
–
–
–
–
–
–
142.7
142.7
2006
£m
5.0
–
5.0
2006
£m
–
34.0
–
–
34.0
2005
£m
108.9
55.1
164.0
191.2
262.9
(214.8)
48.1
7.0
55.1
Company
2005
£m
–
–
–
–
–
–
325.5
325.5
Company
2005
£m
0.3
–
0.3
Company
2005
£m
–
–
–
–
–
Land Securities Annual Report 2006
22. Trade and other payables
Trade payables
Capital payables
Other payables
Accruals and deferred income
Notes to the financial statements continued
119
2006
£m
42.9
85.2
28.2
428.7
585.0
2005
£m
42.7
82.5
34.7
417.3
577.2
Capital payables represent amounts due under contracts to purchase properties, which were unconditionally exchanged at the year end, and for work completed on investment
properties but not paid for at the financial year end. Deferred income principally relates to rents received in advance.
23. Provisions
At 1 April 2004
Charged to income statement for year
Utilised in year
At 31 March 2005
Charged to income statement for year
Utilised in year
At 31 March 2006
24. Borrowings
Unsecured
Amounts payable under finance leases (note 27)
Acquisition loan notes 2015
Money market borrowings
Secured
5.016 per cent Notes due 2007
4.625 per cent Notes due 2013
5.292 per cent Notes due 2015
4.875 per cent Notes due 2019
5.425 per cent Notes due 2022
5.391 per cent Notes due 2026
5.391 per cent Notes due 2027
5.376 per cent Notes due 2029
5.396 per cent Notes due 2032
Bank facility due 2010
Syndicated bank debt
DWP term loan
Bond exchange de-recognition adjustment
Fair value of interest rate swaps – qualifying hedges
– non-qualifying hedges
Total borrowings
Less: borrowings falling due within one year (note 21)
Plus: bond exchange de-recognition falling due within one year (note 21)
Less: amounts payable under finance leases falling due within one year (notes 21 and 27)
Falling due after one year
Dilapidations
£m
11.7
12.0
(1.0)
22.7
1.9
(1.5)
23.1
Barclays
surplus
leases
£m
–
–
–
–
25.0
(5.2)
19.8
Nominal value
2005
£m
2006
£m
Unamortised discount
and issue costs
2005
£m
2006
£m
74.6
122.8
43.6
241.0
181.7
300.0
391.5
400.0
255.3
210.7
611.3
317.9
322.9
15.5
750.0
260.0
4,016.8
4,257.8
(527.6)
4.3
3.4
3,737.9
(62.3)
14.8
(3.1)
3,687.3
69.9
–
73.0
142.9
181.7
–
393.3
–
257.3
210.7
613.9
318.0
323.4
–
320.0
268.1
2,886.4
3,029.3
(554.9)
2.1
1.2
2,477.7
(79.0)
25.7
(1.0)
2,423.4
–
–
–
–
(0.1)
(0.5)
(0.9)
(4.6)
(1.0)
(1.0)
(3.1)
(1.7)
(2.0)
(0.1)
(1.6)
(11.2)
(27.8)
(27.8)
(8.6)
–
–
(36.4)
3.1
0.8
–
(32.5)
–
–
–
–
(0.1)
–
(0.9)
–
(1.0)
(1.1)
(3.2)
(1.9)
(2.1)
–
(2.0)
(12.9)
(25.2)
(25.2)
(9.4)
–
–
(34.6)
2.7
0.8
–
(31.1)
Other
£m
7.9
14.7
(3.3)
19.3
8.9
(12.9)
15.3
2006
£m
74.6
122.8
43.6
241.0
181.6
299.5
390.6
395.4
254.3
209.7
608.2
316.2
320.9
15.4
748.4
248.8
3,989.0
4,230.0
(536.2)
4.3
3.4
3,701.5
(59.2)
15.6
(3.1)
3,654.8
Total
£m
19.6
26.7
(4.3)
42.0
35.8
(19.6)
58.2
Book value
2005
£m
69.9
–
73.0
142.9
181.6
–
392.4
–
256.3
209.6
610.7
316.1
321.3
–
318.0
255.2
2,861.2
3,004.1
(564.3)
2.1
1.2
2,443.1
(76.3)
26.5
(1.0)
2,392.3
Land Securities Annual Report 2006
120
Notes to the financial statements continued
24. Borrowings continued
All borrowings are denominated in Sterling.
On 3 November 2004 a debt refinancing was completed resulting in the Group exchanging all of its outstanding bond and debenture debt for new Notes. The new Notes do not
meet the IAS 39 requirement to be substantially different from the debt that it replaced. Consequently the book value of the new Notes is reduced to the book value of the
original debt (‘the bond exchange de-recognition adjustment’). The adjustment will be amortised to zero over the life of the new Notes.
The Notes and the committed bank facilities are secured on a fixed and floating pool of assets (“the Security Group”). This grants the Group’s investors security over a pool of
investment properties valued at £9.4bn at 31 March 2006 (2005: £7.4bn). The secured debt structure has a tiered covenant regime which gives the Group substantial operational
flexibility when the loan to value and interest rate cover in the Security Group are less than 65% and more than 1.45 times respectively. If these limits are exceeded, operational
restrictions increase significantly and could act as an incentive to reduce gearing.
The acquisition loan notes were issued by Retail Property Holdings Trust Limited, a subsidiary of the Group, as partial consideration for the purchase of Tops Estates PLC and the
LxB portfolio. The notes are unsecured, however, they have the benefit of a commercial bank guarantee. Interest is calculated with reference to six month LIBOR.
The DWP term loan is a syndicated term loan due to expire in December 2017 and is secured on the freehold and long leasehold properties acquired from the Department of
Work and Pensions. The carrying amount of the properties concerned was £388.1m at 31 March 2006 (2005: £389.4m).
The Group had interest rate swaps outstanding with a notional principal of £615.0m (2005: £250.0m) which do not qualify for hedge accounting and which terminate over the
period 2007 to 2011. The contracts have fixed interest payments at an average rate of 4.9% and have floating interest receipts at LIBOR. In addition, there were interest rate
swaps outstanding with a notional principal of £243.2m (2005: £245.9m) which qualify for hedge accounting and which terminate over the period 2009 to 2017. The contracts
have fixed interest payments at an average rate of 5.1% and have floating interest receipts at LIBOR.
The fair value of interest rate swaps is based on the market price of comparable instruments at the balance sheet date. The fair values of short-term deposits, loans and
overdrafts are assumed to approximate to their book values, as are the values of longer-term, floating rate bank loans. The Group’s Notes are listed on the Irish Stock Exchange
and their fair values are based on their respective market prices.
The maturity profiles of the Group’s borrowings and the expiry periods of its
undrawn committed borrowing facilities are:
One year or less, or on demand
More than one year but no more than two years
More than two years but no more than five years
More than five years
The fair value of the Group’s borrowings are:
Book value
Fair value
Excess of fair value over book value
2006
£m
Borrowings
2005
£m
Undrawn committed
facilities
2005
£m
2006
£m
46.7
185.7
780.8
2,688.3
3,701.5
50.8
–
505.9
1,886.4
2,443.1
–
–
1,252.0
–
1,252.0
–
–
1,680.0
–
1,680.0
2006
£m
2005
£m
3,701.5
4,426.0
(724.5)
2,443.1
3,074.1
(631.0)
Of the excess of fair value over book value £536.2m (2005: £564.3m) is the bond exchange de-recognition adjustment.
Financial risk management
Financial risk factors
The Group’s operations and debt financing expose it to a variety of financial risks that include the effects of changes in debt market prices, credit risks, liquidity and interest rates.
Interest rate risk
The Group uses interest rate swaps and similar instruments (forward rate agreements, forward starting swaps, etc) to manage its interest rate exposure.With property and interest
rate cycles typically of four to seven years duration, the Group’s target is to have a minimum of 80% of anticipated debt at fixed rates of interest and 20% floating over this
timeframe. Due to a combination of factors, principally the high level of certainty required under IAS 39 ‘Financial Instruments: Recognition and Measurement’, hedging instruments
used in this context do not qualify for hedge accounting.
Land Securities Annual Report 2006
Notes to the financial statements continued
121
Credit risk
The Group’s principal financial assets are bank balances and cash, trade and other receivables, finance lease receivables and short-term investments. The Group’s credit risk is
primarily attributable to its trade and finance lease receivables. The amounts presented in the balance sheet are net of allowances for doubtful receivables. An allowance for
impairment is made where there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables concerned. The
credit risk on liquid funds and derivative financial instruments is limited due to the Group’s policy of monitoring counterparty exposures. The Group has no significant concentration
of credit risk, with exposure spread over a large number of counterparties.
Liquidity risk
The Group actively maintains a mixture of long-term and short-term committed facilities that are designed to ensure that the Group has sufficient available funds for operations
and planned future investments.
Accounting for derivative financial instruments and hedging activities
Derivatives are initially accounted for and measured at fair value on the date a derivative contract is entered into and subsequently measured at fair value. The gain or loss on
remeasurement is taken to the income statement except where the derivative is a designated cash flow hedging instrument.
In order for a derivative to qualify for hedge accounting, the Group is required to document in advance the relationship between the item being hedged and the hedging
instrument. The Group is also required to document and demonstrate an assessment of the relationship between the hedged item and the hedging instrument which shows that
the hedge will be effective on an ongoing basis. The effectiveness testing is re-performed at each year end to ensure that the hedge remains highly effective.
Gains or losses on cash flow hedges that are regarded as highly effective are recognised in equity. Where the forecasted transaction results in a financial asset or liability only,
gains or losses previously recognised in equity are reclassified to profit or loss in the same period as the asset or liability affects profit or loss. Where the forecasted transaction
results in a non-financial asset or liability, gains or losses previously recognised in equity are included in the cost of the related asset or liability. If the forecasted transaction or
commitment results in future income or expenditure, gains or losses deferred in equity are transferred to the income statement in the same period as the underlying income or
expenditure. Ineffective portions of the gain or loss on the hedging instrument are recognised in profit or loss as they arise.
For the portion of hedges deemed ineffective or transactions that do not qualify for hedge accounting, any change in assets or liabilities is recognised immediately in the income
statement. Where a hedge no longer meets the effectiveness criteria, any gains or losses deferred in equity are only transferred to the income statement when the forecasted or
committed transaction is recognised in the income statement. However, where cash flow hedge accounting has been applied for a forecasted or committed transaction that is
no longer expected to occur, then the cumulative gain or loss recorded in equity is transferred to the income statement. When a hedging instrument expires or is sold, any
cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecasted hedged transaction itself is ultimately recognised in the
income statement.
25. Pension benefits
Defined benefit schemes
Land Securities Scheme
The Pension & Assurance Scheme of the Land Securities Group of Companies (‘the Scheme’) is the most significant defined benefit pension scheme of the Group. The Scheme is
a wholly funded scheme, and the assets of the Scheme are held in a self-administered trust fund which is separate from the Group’s assets.
Contributions to the Scheme are determined by a qualified independent actuary on the basis of triennial valuations using the projected unit method. As the Scheme is closed to
new members, the current service cost will be expected to increase as a percentage of salary, under the projected unit method, as members approach retirement.
Contributory money purchase scheme
A contributory money purchase scheme was introduced on 1 January 1999 for all new administrative and senior property based employees, subject to eligibility, together with a
separate similar scheme, effective 1 April 1998, for other property based employees. A further separate similar scheme, previously set up by Trillium, is also in operation for Land
Securities Trillium employees.
Pension costs for defined contribution schemes are as follows:
Defined contribution schemes
2006
£m
1.7
2005
£m
0.9
All death-in-service and benefits for incapacity arising during employment are wholly insured. No post retirement benefits other than pensions are made available to employees
of the Group.
Land Securities Annual Report 2006
122
Notes to the financial statements continued
25. Pension benefits continued
A full actuarial valuation of the Land Securities Scheme was undertaken on 1 July 2005 by the independent actuaries, Hymans Robertson Consultants & Actuaries. This valuation,
and the latest formal valuation of the Trillium Plan, were updated to 31 March 2006. The major assumptions used in this valuation, were (in nominal terms):
Rate of increase in pensionable salaries
Rate of increase in pensions in payment
Discount rate
Inflation
Expected return on plan assets
2006
%
3.25#
3.00
4.90
3.00
5.90
2005
%
4.25*
3.00
5.40
3.00
5.90
#plus an allowance of 1.25% per annum for promotional salary increases in respect of employee members of the Trillium Plan
* plus an allowance of 1% per annum for promotional salary increases in respect of employee members of the Land Securities Scheme
The expected return on plan assets is based on expectations for bonds and equities. At the year end, the expected return on bonds is based on market yields of long dated bonds
at that date. The estimated expected return on equities includes an additional equity risk premium.
The mortality assumptions used in this valuation were:
Life expectancy at age 60 for current pensioners – Men
– Women
Life expectancy at age 60 for future pensioners (current age 40) – Men
– Women
2006
years
26.6
29.5
27.8
30.6
2005
years
23.2
26.2
26.5
29.4
The fair value of the assets in the Schemes (including annuities purchased to provide certain pensions in payment) and the expected rate of return (net of investment management
expenses) were:
Equities
Bonds and insurance contracts
Other
Fair value of schemes assets
Present value of schemes liabilities
Deficit in the schemes
Related deferred tax asset
Net pension liability
The major categories of plan assets as a percentage of total plan assets are as follows:
Equities
Bonds and insurance contracts
Other
2006
%
7.50
4.60
4.50
2005
%
7.50
5.00
4.75
2004
%
7.50
5.00
4.00
2006
£m
64.1
82.9
3.0
150.0
(156.5)
(6.5)
2.0
(4.5)
2005
£m
48.7
62.3
14.7
125.7
(136.6)
(10.9)
3.3
(7.6)
2006
%
43
55
2
2004
£m
42.9
58.8
2.9
104.6
(121.8)
(17.2)
5.2
(12.0)
2005
%
39
50
11
The plan assets do not include any directly owned financial instruments issued by Land Securities Group PLC. Indirectly owned financial instruments had a fair value of less
than £0.2m.
Land Securities Annual Report 2006
Notes to the financial statements continued
123
2006
£m
3.9
–
(8.3)
(4.4)
(7.3)
7.2
(0.1)
2005
£m
3.7
0.2
–
3.9
(6.4)
6.7
0.3
25. Pension benefits continued
Analysis of the amounts (credited)/charged to the income statement
Analysis of the amount (credited)/charged to operating profit
Current service cost
Losses on curtailments and settlements
Past service cost
(Credit)/charge to operating profit
Analysis of amount (credited)/charged to interest expense
Expected return on plan assets
Interest on schemes liabilities
Net (return)/charge
During the year, the Group introduced amendments to the main scheme, which were adopted by the Trustees for active members who had given their consent. As a result, active
members will have their accrued entitlement at 31 March 2006 linked to inflation, with future benefits according to annual earnings. The effect of this has been a reduction of
£8.3m in the Group’s pension liability associated with funding future anticipated salary increases.
Changes in the present value of the defined benefit obligation
At beginning of year
Current service cost
Past service cost
Interest cost
Actuarial losses
Benefits paid
Losses on curtailments
Contributions by plan participants
At end of year
Changes in the fair value of plan assets
At beginning of year
Expected return on plan assets
Employer contributions
Actuarial gains
Benefits paid
Contributions by plan participants
At end of year
Analysis of the movement in the balance sheet deficit
At beginning of year
(Credit)/charge to operating profit
Expected return on plan assets
Interest on schemes liabilities
Employer contributions
Actuarial losses
At end of year
2006
£m
136.6
3.9
(8.3)
7.2
20.5
(3.6)
–
0.2
156.5
2006
£m
125.7
7.3
4.9
15.5
(3.6)
0.2
150.0
2006
£m
10.9
(4.4)
(7.3)
7.2
(4.9)
5.0
6.5
2005
£m
121.8
3.7
–
6.7
8.0
(4.0)
0.2
0.2
136.6
2005
£m
104.6
6.4
15.4
3.1
(4.0)
0.2
125.7
2005
£m
17.2
3.9
(6.4)
6.7
(15.4)
4.9
10.9
Land Securities Annual Report 2006
124
Notes to the financial statements continued
25. Pension benefits continued
Analysis of the amounts recognised in the statement of recognised income and expense
Analysis of gains and losses
Actual return less expected return on schemes assets
Experience gains and losses arising on schemes liabilities
Actuarial losses
Actuarial gains and losses are recognised immediately through the statement of recognised income and expense.
History of experience gains and losses
Experience adjustments arising on schemes assets
Amount
Percentage of schemes assets
Experience adjustments arising on schemes liabilities
Amount
Percentage of the present value of funded obligations
Present value of schemes liabilities
Fair value of schemes assets
Deficit
2006
£m
15.5
(20.5)
(5.0)
2005
£m
3.1
(7.8)
(4.7)
2005
£m
2004
£m
2003
£m
3.1
2.5%
7.8
5.7%
13.7
13.1%
(16.3)
–21.3%
0.2
0.1%
(121.8)
104.6
(17.2)
2.7
2.8%
(95.0)
76.4
(18.6)
2006
£m
15.5
10.3%
20.5
13.1%
(156.5)
150.0
(6.5)
(136.6)
125.7
(10.9)
The contributions expected to be paid in respect of the defined benefit schemes during the financial year ending 31 March 2007 amount to £5.0m. The Company did not operate
any defined contribution schemes or defined benefit schemes during the financial year ended 31 March 2006 or in the previous financial year.
Accelerated
tax depreciation
£m
Capitalised
interest
£m
Revaluation
surplus
£m
(136.2)
(11.9)
15.4
3.5
(6.4)
(135.6)
(20.4)
17.8
(9.7)
(30.1)
(5.2)
5.8
0.6
–
(28.9)
(8.9)
11.3
–
(953.5)
(248.3)
83.9
–
(19.0)
(1,136.9)
(473.9)
10.9
(64.3)
Other
£m
(4.3)
(154.3)
(0.1)
–
–
(158.7)
8.1
(4.6)
0.5
Total
£m
(1,124.1)
(419.7)
105.0
4.1
(25.4)
(1,460.1)
(495.1)
35.4
(73.5)
(147.9)
(26.5)
(1,664.2)
(154.7)
(1,993.3)
Tax losses
£m
–
37.8
–
37.8
(20.3)
(5.3)
–
12.2
Hedges
£m
13.4
(12.4)
–
1.0
0.7
–
0.6
2.3
Pension
deficit
£m
5.2
(3.4)
1.5
3.3
(2.8)
–
1.5
2.0
Other
£m
–
–
–
–
9.0
–
–
9.0
Total
£m
18.6
22.0
1.5
42.1
(13.4)
(5.3)
2.1
25.5
26. Deferred taxation
Deferred tax liabilities
At 1 April 2004
Net charge to income statement for year
Released in respect of property disposals during the year
Disposal of a company
Deferred tax on acquisition of a company
At 1 April 2005
Net charge to income statement for year
Released in respect of property disposals during the year
Deferred tax on acquisition of a company
At 31 March 2006
Deferred tax assets
At 1 April 2004
Net charge to income statement for year
Charged to equity
At 1 April 2005
Net charge to income statement for year
Released in respect of property disposals during the year
Charged to equity
At 31 March 2006
Land Securities Annual Report 2006
Notes to the financial statements continued
125
26. Deferred taxation continued
Deferred tax is provided as follows:
Excess of capital allowances over depreciation – investment properties
– operating properties
Capitalised interest – investment properties
– operating properties
Revaluation surpluses – own
– acquired
Tax losses
Other temporary timing differences
Total deferred tax
Tax on capital gains that would become payable by the Group if it were to dispose of all of its investment
properties at the amount stated in the balance sheet
Potential reduction in tax on contingent capital gains if properties were sold within their owning companies
Tax on contingent capital gains assuming no further mitigation
2006
£m
116.8
31.1
23.9
2.6
1,580.9
83.3
(12.2)
141.4
1,967.8
991.2
(28.3)
962.9
2005
£m
112.7
22.9
28.0
0.9
1,117.9
19.0
(37.8)
154.4
1,418.0
586.5
(90.4)
496.1
It has not been possible to determine the amounts that will crystallise within one year as required by IFRS as it is not possible to determine which properties, if any, will be sold
in the next financial year.
It is the current intention of the Group to hold investment assets for the long-term and the deferred tax provision has been calculated on this basis.
27. Obligations under finance leases
The minimum lease payments under finance leases fall due as follows:
Not later than one year
Later than one year but not more than five
More than five years
Future finance charges on finance leases
Present value of finance lease liabilities (notes 13 and 24)
The present value of finance lease liabilities is as follows:
Not later than one year (notes 21 and 24)
Later than one year but not more than five
More than five years
The fair value of the Group’s lease obligations, using a discounting rate of 5.5%, is £85.2m (2005: £75.6m).
28. Called up share capital
Ordinary shares of 10p each
Non-equity B shares of £1.02 each
Redeemable preference shares of £1 each
Movements in the share capital of the Company were
At beginning of year
Issued on the exercise of options under:
1993 Savings Related Share Option Schemes
1984 Executive Share Option Scheme
2000 Executive Share Option Scheme
2002 Executive Share Option Scheme
At end of year
The number of ordinary shares that would be issued if all options were exercised at 31 March 2006 is 4,217,859 (2005: 5,440,682).
2006
£m
7.2
27.7
438.4
473.3
(398.7)
74.6
3.1
5.6
65.9
74.6
2005
£m
5.1
19.1
436.7
460.9
(391.0)
69.9
1.0
2.9
66.0
69.9
2006
No. m
600.0
38.9
0.1
Authorised
2005
No. m
600.0
38.9
0.1
Allotted and fully paid
2005
£m
2006
£m
46.9
–
–
46.9
46.8
–
–
46.8
Number of shares
2005
2006
467,803,066
465,924,545
174,715
–
1,176,464
129,537
114,522
35,500
1,686,498
42,001
469,283,782
467,803,066
Land Securities Annual Report 2006
126
Notes to the financial statements continued
29. Share-based payments
The Group’s share-based payments are all equity-settled and comprise the Savings Related Share Option Schemes (Sharesave), various Executive Share Option Schemes (ESOS),
Performance and Deferred Bonus share schemes related to the annual bonus scheme, and the Long-Term Incentive Plan. In accordance with IFRS 2 ‘Share-based Payment’ the fair
value of equity-settled share-based payments to employees is determined at the date of grant and is expensed on a straight-line basis over the vesting period based on the
Group’s estimate of shares or options that will eventually vest. Fair value is calculated using a Black-Scholes pricing model.
Savings Related Share Option Schemes
Under the 2003 Savings Related Share Option Scheme all staff who have been with the Group for a continuous period of not less than six months are eligible to make regular
monthly contributions into a Sharesave scheme operated by Lloyds TSB Bank Plc. On completion of the three, five or seven year contract period ordinary shares in Land Securities
Group PLC may be purchased at a price based upon the current market price at date of invitation less 20% discount. Options are satisfied by the issue of new shares. Options are
normally forfeited if the employee leaves the scheme before the options vest or lapse if options are not exercised within six months of the bonus date. In certain circumstances
leavers may exercise their options early based upon current savings. Alternatively, they may continue saving to receive the tax-free bonus at the end of the contract or withdraw
their cash immediately. Fair value calculations assume a lapse rate, based upon historic values, of approximately 20% for employees leaving the Group before vesting.
Details of the share options outstanding during the year are as follows:
At beginning of year
Granted
Exercised
Forfeited
Lapsed
At end of year
Exercisable at end of year
Weighted average remaining contractual life (years)
Number of options
2005
2006
797,944
171,233
(174,715)
(24,923)
(21,722)
747,817
14,406
773,326
170,119
(114,522)
(22,933)
(8,046)
797,944
25,580
Weighted average
exercise price
2005
pence
2006
pence
725
1146
652
742
855
834
724
Years
2.22
667
957
686
690
728
725
688
Years
2.39
The options outstanding under the scheme are exercisable at prices between 628p and 1146p after three, five or seven years from the date of grant. 428,143 of the options
outstanding are exercisable at prices between 628p and 713p during the period 2004 to 2010. Of the remaining options, 153,482 are exercisable at 957p, and 166,192 at 1146p
during the periods 2007 to 2011 and 2008 to 2012 respectively. The weighted average share price at the date of exercise during the year was 1468p (2005: 1234p). During the
year, options were granted on 30 September 2005 (2005: 1 October 2004). The estimated fair value of the options granted on that date was £0.6m (2005: £0.5m).
During the year, the Group recognised total expenses of £0.2m (2005: £0.1m) relating to Savings Related Share Option.
1984 Executive Share Option Scheme
The contract period for the 1984 Executive Share Option Scheme expired during 2005. The scheme was not subject to performance conditions. The weighted average share price
at the date of exercise for share options exercised during 2005 was 1163p. No expense was recognised by the Group during the year, or during the corresponding year as the
grants preceded the date relevant for IFRS 2 ‘Share-based Payment’.
Details of the share options outstanding during the year are as follows:
At beginning of year
Exercised
At end of year
Exercisable at end of year
Weighted average remaining contractual life (years)
Number of options
2005
2006
–
–
–
–
35,500
(35,500)
–
–
Weighted average
exercise price
2005
pence
2006
pence
–
–
–
–
Years
–
619
619
–
–
Years
–
2000 Executive Share Option Scheme
No new grants to directors and senior management of the Group have been made under this scheme since 19 July 2002. These options have fully vested as the growth in the
Group’s normalised adjusted diluted earnings per share exceeded the growth in the Retail Prices Index by 2.5% per annum over the vesting period. Options are satisfied by the
issue of new shares. Options are forfeited, in most circumstances, when an employee leaves the Group before vesting or lapse if they are not exercised within 10 years of the
date of grant.
Land Securities Annual Report 2006
Notes to the financial statements continued
127
Number of options
2005
2006
1,513,564
(1,176,464)
(24,500)
312,600
312,600
3,458,062
(1,686,498)
(258,000)
1,513,564
478,564
Weighted average
exercise price
2005
pence
2006
pence
827
824
849
836
836
Years
5.73
838
850
818
827
860
Years
6.94
29. Share-based payments continued
Details of the share options outstanding during the year are as follows:
At beginning of year
Exercised
Forfeited
At end of year
Exercisable at end of year
Weighted average remaining contractual life (years)
The options outstanding under the scheme are exercisable at prices between 812p and 869p up to 2012. The weighted average share price at the date of exercise for share
options exercised during the year was 1516p (2005: 1222p).
No expense was recognised by the Group during the year, or during the corresponding year as the grants preceded the date relevant for IFRS 2 ‘Share-based Payment’.
2002 Executive Share Option Scheme
The final grants to directors and senior management of the Group under this scheme were made on 12 July 2004. Vesting is subject to growth in the Group’s normalised
adjusted diluted earnings per share exceeding the growth in the Retail Prices Index by 2.5% per annum over the three year vesting period. For options granted in the year ended
31 March 2004 there are a maximum of two re-tests for performance criteria in years 4 and 5. For options granted in the year ended 31 March 2005 there is no re-testing of
performance criteria. Options are satisfied by the issue of new shares.
Options are normally forfeited if the employee leaves the scheme before the options vest or lapse if options are not exercised within 10 years of the date of grant. Fair value
calculations assume a lapse rate, based upon historic values, of between 2% and 5% per annum for employees leaving the Group before vesting.
Details of the share options outstanding during the year are as follows:
At beginning of year
Granted
Exercised
Forfeited
At end of year
Exercisable at end of year
Weighted average remaining contractual life (years)
Number of options
2005
2006
3,129,174
–
(129,537)
(181,063)
1,764,867
1,547,853
(42,001)
(141,545)
2,818,574
3,129,174
26,200
–
Weighted average
exercise price
2005
pence
2006
pence
965
–
852
978
970
–
Years
7.76
786
1159
788
900
965
–
Years
8.74
26,200, 1,409,359 and 1,383,015 of the options outstanding under the 2002 Executive Share Option Scheme are exercisable at 756p, 788p and 1159p respectively up to 2014,
provided the associated performance conditions are met. The weighted average share price at the date of exercise for share options exercised during the year was 1653p (2005:
1182p). In 2005, options were granted on 12 July 2004. The estimated fair value of the options granted on that date is £2.6m.
During the year, the Group recognised an expense of £0.8m (2005: £1.2m) relating to 2002 Executive Share Option Scheme.
Land Securities Annual Report 2006
128
Notes to the financial statements continued
29. Share-based payments continued
2005 Executive Share Option Scheme
The 2005 Executive Share Option Scheme is open to executives and management staff not eligible to participate in the Land Securities 2005 Long-Term Incentive Plan for senior
executives. Options are granted in the ordinary shares of Land Securities Group PLC at the middle market price on the three dealing days immediately preceding the date of
grant. The 3 year vesting period is not subject to performance conditions. Options are satisfied by the transfer of shares.
Options are normally forfeited if the employee leaves the scheme before the options vest or lapse if options are not exercised within 10 years of the date of grant. Fair value
calculations assume a lapse rate, based upon historic values, of 2% per annum for employees leaving the Group before vesting.
Details of the share options outstanding during the year are as follows:
At beginning of year
Granted
Exercised
Lapsed
At end of year
Exercisable at end of year
Weighted average remaining contractual life (years)
Number of options
2005
2006
Weighted average
exercise price
2005
pence
2006
pence
–
350,737
(898)
(10,971)
338,868
–
–
–
–
–
–
–
–
1421
1421
1421
1421
–
Years
9.33
–
–
–
–
–
–
Years
–
The options outstanding under the scheme are exercisable at 1421p up to 2015. The weighted average share price at the date of exercise for share options exercised during the
year was 1696p. During the year, options were granted on 29 July 2005. The estimated fair value of the options granted on that date is £0.7m.
During the year, the Group recognised an expense of £0.1m (2005: £nil) relating to the 2005 Executive Share Option Scheme.
Performance Shares
Under the performance share plan approved by shareholders in 2002, senior executives of the Group receive up to two shares for each deferred share received under the separate
management bonus scheme depending on the extent to which performance criteria are satisfied. Half of these performance shares are dependent on the real increase in the
Group’s normalised adjusted diluted earnings per share over three financial years. The other half of the performance shares are subject to the Group’s total property return
equalling or exceeding the Investment Property Databank All Fund Universe Index over a three year rolling period. The final grant under the scheme was made in July 2005.
Awards under the plan are satisfied by transfer of existing shares. Fair value calculations have been adjusted for participants who have left the Group but no adjustment has been
made for future anticipated lapses.
Details of the rights over shares outstanding during the year are as follows:
At beginning of year
Granted
Exercised
Forfeited
Lapsed
At end of year
Exercisable at end of year
Weighted average remaining contractual life (years)
The performance shares outstanding under the scheme are to be issued at £nil consideration provided that performance conditions are met.
Number of shares
2005
2006
311,834
171,940
(31,528)
(9,072)
(31,528)
411,646
–
Years
1.45
185,078
126,756
–
–
–
311,834
–
Years
1.65
Land Securities Annual Report 2006
Notes to the financial statements continued
129
29. Share-based payments continued
The mid-market share price at the date of exercise for performance shares exercised during the year was 1416p. During the year, shares were granted on 4 July 2005 (2005:
12 July 2004). The estimated fair value of the shares granted on that date is £1.1m (2005: £1.5m).
During the year, the Group recognised an expense of £1.0m (2005: £0.7m) relating to Performance Shares.
Deferred Bonus Shares
Under the Executive Directors’ and senior management bonus plan participants are eligible for awards in cash and deferred shares. The underlying performance criteria are
earnings per share and increase in net asset value over the previous year. In previous years Executive Directors have had the opportunity to earn a bonus of up to 20% of salary
in cash and 20% of salary in shares for meeting rigorous targets and up to a maximum of 40% of salary in cash and 40% of salary in shares for superior results. Following a
review of the reward structure by the Remuneration Committee, Executive Directors are in future eligible for awards of up to 100% of salary, 25% of which must be taken in
deferred shares. Other management grades must now take their entire bonus in cash. Awards under the plan are satisfied by transfers of existing shares.
The shares are deferred for three years and normally forfeited if the executive leaves employment during the period. Fair value has been adjusted for participants who have left
the Group, but no adjustment has been made for future anticipated lapses.
Details of the rights over shares outstanding during the year are as follows:
At beginning of year
Granted
Capitalisation of dividends
Exercised
Forfeited
At end of year
Exercisable at end of year
Weighted average remaining contractual life (years)
Number of shares
2005
2006
195,095
103,246
6,551
(8,895)
(25,370)
270,627
–
Years
1.36
147,848
82,801
2,809
(33,368)
(4,995)
195,095
–
Years
1.83
The deferred shares outstanding under the scheme are to be to be issued at nil consideration subject to vesting conditions being met.
The mid-market share price at the date of exercise for shares exercised during the year was 1483p (2005: 1396p). During the year, rights were granted over deferred shares on
4 July 2005 (2005: 12 July 2004). The estimated fair value of the rights over shares granted on that date is £1.3m (2005: £1.2m).
During the year, the Group recognised an expense of £0.7m (2005: £0.5m) relating to Deferred Bonus Shares.
2005 Long-Term Incentive Plan
The new Long-Term Incentive Plan (‘LTIP’) for Executive Directors and senior executives authorises the Remuneration Committee to make grants of LTIP shares with a face value
of up to 100% of salary for Executive Directors and up to 75% of salary for senior executives. In addition, an award of matching shares can be made, linked to co-investment in
shares by participants. The employee’s investment can be made through deferral of an annual bonus award and/or through optional pledging of shares purchased in the market.
The maximum level of matching is shares with a face value of 50% of salary for Executive Directors and 25% of salary for senior executives. Performance conditions are similarly
structured to those applying to the Performance Share Plan except that the EPS targets are increased and the IPD index measure is more closely targeted to the Group’s asset
classes. Awards may be satisfied by the issue of new shares and/or transfer of treasury shares and/or transfer of shares other than treasury shares.
Fair value calculations include the assumption that LTIP and matching shares will be awarded at 50% of the maximum possible under the scheme and have been adjusted for
participants who have left the scheme but no adjustment has been made for future anticipated lapses.
Details of the rights over shares outstanding during the year are as follows:
At beginning of year
Granted
Forfeited
At end of year
Exercisable at end of year
Weighted average remaining contractual life (years)
The shares outstanding under the scheme are to be issued at £nil consideration provided performance conditions are met.
Number of shares
2005
2006
–
359,870
(8,445)
351,425
–
Years
2.35
–
–
–
–
–
Years
–
Land Securities Annual Report 2006
130
Notes to the financial statements continued
29. Share-based payments continued
No shares vested during the year. Rights to receive 320,525 performance shares were granted on 29 July 2005, and 22,679 on 30 September 2005. Rights to receive 16,666
matching shares were granted on 30 September 2005. The estimated fair value of the rights over the shares granted on those dates is £4.4m.
During the year, the Group recognised an expense of £0.8m (2005: £nil) relating to the 2005 Long-Term Incentive Plan.
Fair values are calculated using the Black-Scholes option pricing model. Inputs into this model for each scheme are as follows:
Range of share prices at grant date
846p to 1433p
756p to 1159p
1421p
787p to 1405p
787p to 1392p
1421p to 1478p
1993 Savings
Related Share
Option Schemes
2002 Executive
Share Option
Scheme
2005 Executive
Share Option
Scheme
Performance
Share Plan
Deferred
Bonus Shares
2005 Long-Term
Incentive Plan
Range of exercise prices
Expected volatility
Expected life
Risk free rate
Expected dividend yield
677p to 1146p
756p to 1159p
19%
19%
1421p
19%
nil
19%
nil
19%
nil
19%
3 to 7 years
3 to 5 years
3 to 5 years
3 years
3 to 5 years
3 to 5 years
4.17% to 4.84% 3.60% to 5.10% 4.17% to 4.22% 3.60% to 5.03% 4.08% to 5.03% 4.17% to 4.22%
3.81% to 4.37% 4.11% to 4.34%
3.81% 3.81% to 4.34% 3.81% to 4.34%
3.81%
Expected volatility was determined by calculating the historic volatility of the Group’s share price over the previous 10 years. The expected life used in the model has been
determined, based upon management’s best estimate, for the effects of non-transferability, exercise restrictions, and behavioural considerations. Risk free rate is the yield, at the
date of the grant of an option, on a gilt-edged stock with a redemption date equal to the anticipated exercise of that option.
30. Total shareholders’ equity
Group
At 1 April 2004
Repayment of B shares
Exercise of options
Fair value of share-based payments
Treasury shares acquired
Actuarial losses on defined benefit pension schemes
Dividend paid (note 10)
Profit for the financial year
At 31 March 2005
Exercise of options
Fair value movement on cash flow hedges – Group
– joint ventures
Fair value of share-based payments
Treasury shares acquired
Cost of shares awarded to employees
Actuarial losses on defined benefit pension schemes
Dividend paid (note 10)
Profit for the financial year
At 31 March 2006
Ordinary
shares
£m
Treasury
shares
£m
Share-based
payments
£m
Share
premium
£m
Capital
redemption
reserve
£m
46.6
–
0.2
–
–
–
–
–
46.8
0.1
–
–
–
–
–
–
–
–
46.9
–
–
–
–
(2.1)
–
–
–
(2.1)
–
–
–
–
(1.9)
0.6
–
–
–
(3.4)
0.8
–
–
2.5
–
–
–
–
3.3
–
–
–
3.6
–
(0.6)
–
–
–
6.3
15.9
–
15.5
–
–
–
–
–
31.4
11.8
–
–
–
–
–
–
–
–
43.2
22.1
8.4
–
–
–
–
–
–
30.5
–
–
–
–
–
–
–
–
–
30.5
Retained
earnings*
£m
5,066.8
(8.4)
–
–
–
(3.4)
(175.5)
1,060.9
5,940.4
–
(1.6)
(1.9)
–
–
–
(3.5)
(238.9)
1,675.9
7,370.4
Total
£m
5,152.2
–
15.7
2.5
(2.1)
(3.4)
(175.5)
1,060.9
6,050.3
11.9
(1.6)
(1.9)
3.6
(1.9)
–
(3.5)
(238.9)
1,675.9
7,493.9
*Included within retained earnings is £3.5m (2005: £nil; 2004: £nil) of losses in respect of cash flow hedges.
Land Securities Annual Report 2006
Notes to the financial statements continued
131
30. Total shareholders’ equity continued
Treasury shares represent the cost of shares purchased in Land Securities Group PLC by the Employee Share Ownership Plan (‘ESOP’) which is operated by the Group in respect
of its commitment to the Deferred Bonus scheme (note 29). The number of shares held by the ESOP at 31 March 2006 was 292,703 (2005: 194,139).
Company
At 1 April 2004
Repayment of B shares
Exercise of options
Dividend paid (note 10)
Profit for the financial year
At 31 March 2005
Exercise of options
Dividend paid (note 10)
Profit for the financial year
At 31 March 2006
*Available for distribution
Ordinary
shares
£m
Share
premium
£m
Capital
redemption
reserve
£m
46.6
–
0.2
–
–
46.8
0.1
–
–
46.9
15.9
–
15.5
–
–
31.4
11.8
–
–
43.2
22.1
8.4
–
–
–
30.5
–
–
–
30.5
Merger
reserve
£m
373.6
–
–
–
–
373.6
–
–
–
373.6
Retained
earnings*
£m
3,174.0
(8.4)
–
(175.5)
1,890.5
4,880.6
–
(238.9)
11.3
4,653.0
Total
£m
3,632.2
–
15.7
(175.5)
1,890.5
5,362.9
11.9
(238.9)
11.3
5,147.2
Land Securities Group PLC has not presented its own profit and loss account, as permitted by Section 230 (1)(b) Companies Act 1985. The retained profit for the year of the
Company, dealt within its financial statements, was £11.3m (2005: £1,890.5m). The merger reserve arose on 6 September 2002 when the Company acquired 100% of the issued
share capital of Land Securities PLC. The merger reserve represents the excess of the cost of acquisition over the nominal value of the shares issued by the Company to acquire
Land Securities PLC. The merger reserve does not represent a realised or distributable profit.
31. Cash flow from operating activities
Reconciliation of operating profit to net cash inflow from operating activities:
Cash generated from operations
Profit for the financial year
Income tax expense
Profit before tax
Distribution received from joint venture (Telereal)
Share of the profits of joint ventures (post-tax)
Interest income
Interest expense
Operating profit
Adjustments for:
Depreciation
Profit on disposal of fixed asset properties
Profit on disposal of joint venture
Net surplus on revaluation of investment properties
Goodwill impairment
Pension scheme (credit)/charge
Changes in working capital:
Decrease in trading properties and long-term development contracts
Decrease/(increase) in receivables
(Decrease)/increase in payables
Net cash generated from operations
2006
£m
1,675.9
683.3
2,359.2
(11.7)
(98.6)
2,248.9
(7.3)
201.8
2,443.4
25.7
(74.5)
(293.0)
(1,579.5)
64.5
(4.4)
(2.1)
23.0
(11.6)
591.5
Group
2005
£m
1,060.9
246.6
1,307.5
(65.4)
(76.1)
1,166.0
(18.3)
248.6
1,396.3
35.7
(112.0)
–
(827.9)
12.7
3.7
(31.2)
(49.1)
95.2
523.4
2006
£m
11.3
0.8
12.1
–
–
12.1
(17.5)
5.4
–
–
–
–
–
–
–
Company
2005
£m
1,890.5
–
1,890.5
–
–
1,890.5
(8.4)
17.9
1,900.0
–
–
–
–
–
–
–
182.8
–
182.8
–
(1,735.0)
–
165.0
Land Securities Annual Report 2006
132
Notes to the financial statements continued
32. Acquisition of Tops Estates PLC
The Group acquired 100% of the voting rights of Tops Estates PLC on 10 June 2005 for a consideration of £334.1m, including costs. This has been accounted for as a business
combination.
Fair value of assets acquired
Investment properties
Debtors
Cash and cash equivalents
Current liabilities
Non-current liabilities
Deferred taxation
Net assets acquired
Fair value of consideration
Cash
Costs
Goodwill (note 15)
Book value
at acquisition
£m
Fair value
adjustments
£m
Fair value
acquired
£m
573.0
21.9
12.9
(19.4)
(230.6)
(9.2)
348.6
19.6
(7.0)
–
–
(27.3)
(64.3)
(79.0)
592.6
14.9
12.9
(19.4)
(257.9)
(73.5)
269.6
325.3
8.8
334.1
(64.5)
269.6
Set out below are the results of Tops Estates PLC from the date of acquisition (10 June 2005) to 31 March 2006 and for the period from 1 April 2005 to the date of acquisition:
Results for
Tops Estates
PLC from
Results for Results for the
the Group Group for the
10 June 2005 to excluding Tops
31 March 2006
£m
Estates PLC 31 March 2006
£m
year ended 1 April 2005 to
9 June 2005
£m
£m
Results for
Tops Estates
Results for the
Group as if
Tops Estates
PLC from PLC had been
acquired on
1 April 2005
£m
Revenue
Profit before tax
Taxation expense
Profit after tax
27.6
11.2
(3.3)
7.9
1,801.1
2,348.0
(680.0)
1,668.0
1,828.7
2,359.2
(683.3)
1,675.9
7.5
5.4
(0.4)
5.0
1,836.2
2,364.6
(683.7)
1,680.9
There were no recognised gains or losses in the year other than the profit attributable to shareholders.
Land Securities Annual Report 2006
Notes to the financial statements continued
133
33. Related party transactions
During the year ended 31 March 2005 the Group had a 50% interest in the Telereal partnerships and joint ventures (‘Telereal’). The Group, principally through Land Securities
Trillium Telecom Services Limited, provided staff to Telereal to deliver services to BT, for which it received £16.1m. The interests in the Telereal partnerships and joint ventures
were sold on 30 September 2005.
The Group has a 50% interest in the Metro Shopping Fund LP. During the year ended 31 March 2005 the Group made sales of investment properties to the Partnership for
consideration of £91.8m.
The Group has a 50% interest in the Bristol Alliance. During the year ended 31 March 2005 the Group made net sales of investment properties to the Partnership for net
consideration of £10.8m.
The Group receives fees in respect of accounting and asset management services and development services from its joint ventures. These fees are calculated on an arms length
basis.
The Group receives interest income from the Buchanan Galleries Limited Partnership.
Remuneration of key management personnel
The remuneration of the directors, who are the key management personnel of the Group, is set out below in aggregate for each of the applicable categories specified in IAS 24
‘Related Party Disclosures’. Further information about the remuneration of individual directors is provided in the audited part of the Remuneration Report on pages 90 to 96.
Short-term employee benefits
Post-employment benefits
Share-based payments
2006
£m
3.9
0.8
0.7
5.4
2005
£m
3.5
0.4
0.6
4.5
Land Securities Annual Report 2006
134
Notes to the financial statements continued
34. Operating lease arrangements
The Group earns non-rental income by leasing its investment and operating properties to tenants under non-cancellable operating leases.
At the balance sheet date, the Group had contracted with tenants to receive the following future minimum lease payments:
Not later than one year
Later than one year but not more than five
More than five years
The total of contingent rents recognised as income during the year was £7.4m (2005: £6.7m).
2006
£m
496.7
1,927.3
3,724.5
6,148.5
2005
£m
592.7
1,956.1
3,836.8
6,385.6
35. Reconciliation of UK GAAP to IFRS
The Group’s transition date for the adoption of IFRS is 1 April 2004. This transition date has been selected in accordance with IFRS 1 ‘First-time adoption of International
Financial Reporting Standards’. The Group has also adopted IAS 32 ‘Financial Instruments: Disclosure and Presentation’ and IAS 39 ‘Financial Instruments: Recognition and
Measurement’ from 1 April 2004.
The principal differences for the Group between reporting under IFRS as compared to UK GAAP as at 31 March 2005 are:
(i) Recognising revaluation surpluses and deficits in the income statement
(ii) Providing in full for deferred tax on revaluations and charging movements on this provision through the income statement
(iii) Restating the financial effects of the November 2004 debt refinancing
(iv) Showing the Group’s share of the profit after tax and net assets of all its joint ventures and joint arrangements as single lines in the income statement and balance sheet
respectively
(v) Ceasing to amortise goodwill but instead testing for impairment
(vi) No longer recognising dividends payable to shareholders prior to their approval by the Annual General Meeting in the case of the final dividend and by the Board in the case
of the interim dividend
The application of IFRS has also changed the presentation of the cash flow statement which now shows cash flows derived from three types of activities – operating, investing
and financing. In addition, under IFRS, the cash flow statement includes all cash flows in respect of cash and cash equivalents. This is a broader definition of cash than under UK
GAAP.
As a general rule, the Group is required to establish its IFRS accounting policies for the year ended 31 March 2006 and apply these retrospectively to determine its opening IFRS
balance sheet at the transition date of 1 April 2004 and the comparative information for the year ended 31 March 2005. However, advantage has been taken of certain
exemptions afforded by IFRS 1 ‘First-time adoption of International Financial Reporting Standards’ as follows:
Business combinations prior to 1 April 2004
The Group has applied IFRS 2 ‘Share-based Payment’ retrospectively only to awards made after 7 November 2002 that had not vested at 1 January 2005
Presentation of a five year history of experience gains and losses as required by IAS 19 ‘Employee Benefits’. A four year history has been presented
Land Securities Annual Report 2006
Notes to the financial statements continued
135
35. Reconciliation of UK GAAP to IFRS continued
In preparing the IFRS accounts, the Group has adjusted amounts reported previously in the financial statements prepared in accordance with UK GAAP. An explanation of how
the transition has affected the Group’s financial performance and position is set out in the following tables and accompanying narrative.
Group
Reconciliation of equity
Equity shareholders’ funds under UK GAAP*
IFRS adjustments
Deferred tax on revaluations – Group
– joint ventures
– on acquisitions
Dividend**
Finance leases – Group
– joint ventures
Pension benefit (net of deferred tax)**
Tenant lease incentives
Fair value of interest rate swaps – Group (net of deferred tax)
– joint ventures (net of deferred tax)
Non-amortisation of goodwill (Land Securities Trillium)
Share-based payments
Write off negative goodwill arising
Adjustment to restate the Group’s share of Telereal’s earnings from an equity to a distribution basis – investment
– taxation
Bond exchange de-recognition (net of deferred tax)
Other
Equity shareholders’ funds under IFRS
Company
Reconciliation of equity
Equity shareholders’ funds under UK GAAP *
IFRS adjustments
Dividend
Equity shareholders’ funds under IFRS
Notes
2006
£m
2005
£m
2004
£m
8,750.2
6,636.6
6,030.1
(i)
(i)
(i)
(ii)
(iv)
(iv)
(iii)
(v)
(vi)
(vi)
(vii)
(viii)
(ix)
(ix)
(x)
Notes
(1,580.9)
(75.5)
(83.3)
134.0
4.3
(0.2)
(13.6)
(23.0)
(5.4)
(3.2)
4.8
4.1
6.3
–
–
375.3
–
7,493.9
2006
£m
(1,117.9)
(43.8)
(19.0)
153.7
8.5
(0.3)
(17.7)
(16.5)
(2.3)
(1.3)
2.4
3.0
6.3
71.1
(10.6)
395.0
3.1
6,050.3
2005
£m
(953.5)
(24.0)
–
126.8
(9.2)
(0.2)
(16.2)
(13.6)
(31.1)
–
–
1.4
–
47.9
(10.6)
–
4.4
5,152.2
2004
£m
5,013.2
5,209.2
3,505.4
(ii)
134.0
5,147.2
153.7
5,362.9
126.8
3,632.2
* UK GAAP referred to in these reconciliations is that existing as at 31 March 2005.
**Adjustment to UK GAAP as at 31 March 2005, most of which would no longer be required under UK GAAP following the adoption of FRS 17 ‘Retirement benefits’ and FRS 21
‘Events after the balance sheet date’.
Notes
(i) Deferred tax is required to be provided in full on all differences between carrying values for accounts purposes and those for taxation. In particular, deferred tax is now provided on revaluation surpluses.
(ii) Dividends are now only provided when finally approved, either by the Annual General Meeting in the case of final dividends or by the Board for interim dividends.
(iii) The actuarial deficit in the Group’s defined benefit pension schemes is now recognised as a liability in the consolidated balance sheet.
(iv) Tenant leases which transfer substantially all of the risks and rewards of ownership to the tenant are treated as finance leases. The property is de-recognised from the balance sheet and a receivable
recognised in its place.
(v) The cost of tenant lease incentives, such as rent free periods, are now amortised over the term of the leases concerned rather than over the period to the first review to market rents.
(vi) The fair value of all derivatives such as interest rate swaps is now recognised in the Group balance sheet at each reporting date.
(vii) Goodwill arising on acquisition is no longer amortised but kept on the balance sheet and reviewed regularly for impairment.
(viii) The cost of share based payments is now recognised through the income statement.
(ix) Joint ventures cease to be consolidated once their net assets become negative. This is the case with Telereal during the year under review.
(x) The bond exchange which took place in November 2004 qualified as an extinguishment of the existing debt and an issue of new debt under UK GAAP. Under IFRS, this is not the case and the
existing debt is reinstated with the difference in redemption amounts being amortised over the life of the new debt.
Land Securities Annual Report 2006
136
Notes to the financial statements continued
35. Reconciliation of UK GAAP to IFRS continued
Group
Reconciliation of profit
Profit/(loss) attributable to ordinary shareholders under UK GAAP*
IFRS adjustments
Revaluation surplus on investment properties – Group
– joint ventures
Deferred tax on revaluations – Group
– joint ventures
Taxation on revaluation surpluses realised on disposal of investment properties
Finance leases – Group
– joint ventures
Pension benefit (net of deferred tax)**
Tenant lease incentives
Fair value of non-qualifying interest rate swaps (net of deferred tax)
Non-amortisation of goodwill (Land Securities Trillium)
Share-based payments
Goodwill impairment on the acquisition of businesses
Adjustment to restate the Group’s share of Telereal’s earnings from an equity to a distribution basis
B share dividends
Bond exchange de-recognition – originating adjustment (net of deferred tax)
Profit attributable to ordinary shareholders under IFRS
– adjustment in year (net of deferred tax)
Company
Reconciliation of profit
Profit attributable to ordinary shareholders under UK GAAP*
IFRS adjustments
B share dividends
Profit attributable to ordinary shareholders under IFRS
Notes
(xi)
(xi)
(xii)
(xii)
(xiii)
(iv)
(iv)
(iii)
(v)
(vi)
(vii)
(viii)
(ix)
Notes
2006
£m
658.5
1,579.5
105.5
(463.0)
(31.7)
(43.3)
9.1
0.1
7.6
(0.1)
(1.5)
2.4
(2.5)
(64.5)
(60.5)
–
–
(19.7)
1,675.9
2006
£m
11.3
–
11.3
2005
£m
(35.8)
827.9
69.5
(164.4)
(19.8)
(40.3)
(9.4)
(0.1)
1.9
(3.0)
27.5
2.4
(0.9)
(12.7)
23.2
(0.1)
402.8
(7.8)
1,060.9
2005
£m
1,890.6
(0.1)
1,890.5
*UK GAAP referred to in these reconciliations is that existing as at 31 March 2005.
**Adjustment to UK GAAP as at 31 March 2005, most of which would no longer be required under UK GAAP following the adoption of FRS 17 ‘Retirement benefits’ and FRS 21
‘Events after the balance sheet date’.
(xi) The surpluses and deficits arising on the periodic revaluation of the investment property portfolio are now taken through the income statement.
(xii) Deferred tax is provided in full on the revaluation surpluses and deficits and taken through the income statement.
(xiii) Deferred tax provided on revaluation surpluses does not become payable on disposal of the properties concerned and so has to be written back through the income statement.
Land Securities Annual Report 2006
Directors’ Report
The directors submit their report with the
audited financial statements for the year to
31 March 2006. A review of the Group’s
business and results for the year is contained in
the Chairman’s statement and the Operating
and Financial Review (‘OFR’), which should be
read in conjunction with this report.
1. Business of the Group
Land Securities Group PLC is the Group holding
company, and during the year the principal
activity of its operating subsidiaries continued
to be the business of property development and
portfolio management of offices, shops, retail
warehouses, food superstores and leisure
throughout the UK together with property
outsourcing. The Group consists of three main
business units, Retail, London Portfolio and
Property Outsourcing.
2. Business review, results for the year and
dividends
The information that fulfils the requirements of
the business review can be found in the OFR on
pages 24 to 77, which are incorporated in this
report by reference.
The results are set out in the income statement
on page 101.
An interim dividend of 18.15p per share was
paid on 9 January 2006 and the directors now
recommend the payment of a final dividend of
28.55p per share making a total of 46.70p per
share for the year ended 31 March 2006, an
increase of 8.0% over that for the previous year.
Subject to authorisation at the Annual General
Meeting to be held on 19 July 2006, the final
dividend will be paid on 24 July 2006 to
shareholders registered at the close of business
on 23 June 2006. It is expected that the shares
will be quoted ex-dividend from 21 June 2006.
3.Valuation and net assets
(i) Valuation
Knight Frank LLP valued the Group’s investment
properties at £11,619.0m as at 31 March 2006.
(ii) Net assets
The investment portfolio valuation has been
included in the financial statements for the year
ended 31 March 2006 and the net assets of the
Group at that date amounted to £7,493.9m.
4. Directors
The directors who held office during the year
were:
Peter G Birch CBE 1, 4
Francis Salway 4
Martin Greenslade (appointed 01/09/05)
Mark Collins
Ian Ellis
Mike Hussey
Richard Akers (appointed 17/05/05)
David Rough 1, 2, 3, 4
Sir Winfried Bischoff 1, 2, 3
Stuart Rose 1, 2, 3
Bo Lerenius CBE 1, 2, 3
Alison Carnwath 1, 2, 3
Andrew Macfarlane (resigned 05/08/05)
1 Non-executive
2 Member of the Audit Committee
3 Member of the Remuneration Committee
4 Member of the Nominations Committee
Biographical details of the directors appear on
pages 78 and 79. Since Martin Greenslade was
appointed as a director after the last Annual
General Meeting, he will retire from the Board,
and, being eligible, offers himself for re-election.
He has a service agreement which is terminable
on one year’s notice from either the Company
or the director.
Peter Birch, David Rough, Sir Winfried Bischoff
and Ian Ellis will retire from the Board by
rotation and, being eligible, offer themselves
for re-election. Peter Birch, David Rough and
Sir Winfried Bischoff do not have a service
agreement with the Company; Ian Ellis has
a service contract which is terminable on
one year’s notice from either the Company
or the director.
137
Particulars of the interests of each director
in the shares of the Company, and of their
holdings of options over ordinary shares and
other long-term incentive arrangements, are
shown in the Remuneration Report.
Apart from share options, no contract subsisted
during or at the end of the financial year in
which a director of the Company is or was
materially interested and which is or was
significant in relation to the Group’s business.
5. Share capital
The Company was authorised at the Annual
General Meeting held on 12 July 2005 to
repurchase in the market ordinary shares
representing up to approximately 10% of the
issued share capital at that time with such
authority to expire at the 2006 Annual General
Meeting. No shares were repurchased in the
year to 31 March 2006. A resolution to renew
this authority in respect of up to approximately
10% of the issued share capital will be proposed
at the 2006 Annual General Meeting.
6. Substantial shareholders
At 19 May 2006 the following interests in
issued share capital had been notified to the
Company under Part VI of the Companies
Act 1985.
Barclays plc
M&G Investments
Legal & General
Investment Management
Number of shares
28,199,037
18,933,720
15,329,367
Merrill Lynch Investment Managers
15,129,595
%
6.01
4.03
3.27
3.22
Land Securities Annual Report 2006
138
Directors’ report continued
7. Employees
Details of the Group’s policies on employment
and on employee development are given on
pages 34 and 80. The Group is committed to
achieving a high standard of health and safety
and continually reviews its policies and
practices to ensure that those standards are
maintained. Further details are given on
page 83.
8. Donations
During the year ended 31 March 2006
charitable donations amounted to £559,000.
This amount included £50,000 paid to
charitable trusts investigating sites of
considerable archaeological importance.
There were no contributions of a political
nature during the year.
9. Environment
We report on our environmental activities on
page 84. The Group’s environmental policy is
published on the Company’s website
www.landsecurities.com
10. Corporate responsibility
We report on corporate responsibility including
employees, health, safety and the environment
both in this Annual Report and our recently
published 2006 Corporate Responsibility Report.
11. Payment policy
The Group is a registered supporter of the CBI’s
Better Payment Practice Code to which it
subscribes when dealing with all of its suppliers.
The code requires a clear and consistent policy
that payments are made in accordance with
contract or as required by law; that payment
terms are agreed at the outset of a transaction
and adhered to; that no amendments to
payment terms are made without the prior
agreement of suppliers and that there is a
system which deals quickly with complaints and
disputes to ensure that suppliers are advised
accordingly without delay when invoices or
parts thereof are contested.
The effect of the Group’s payment policy is that
its trade creditors at the financial year end
represented 11 days’ purchases.
12. Directors’ indemnities
On 5 May 2006 the Company agreed in writing
to indemnify each of the directors against any
liability incurred by the director in respect of
acts or omissions arising in the course of their
office. The indemnity only applies to the extent
permitted by law. A copy of the deed of
indemnity is available for inspection at
the registered office and at the Annual
General Meeting.
13.Treasury operations and financial instruments
The Group’s policy in relation to financial risk
management and use of financial instruments
is set out in notes 2(u) and 24 to the financial
statements.
14.Auditors and disclosure of information to
auditors
So far as the directors are aware, there is no
relevant audit information of which the auditors
are unaware and each director has taken all
reasonable steps to make himself or herself
aware of any relevant audit information and
to establish that the auditors are aware of
that information.
A resolution to reappoint
PricewaterhouseCoopers LLP as auditors to
the Company will be proposed at the Annual
General Meeting.
15.Annual General Meeting
Accompanying this report is the Notice of the
Annual General Meeting which sets out the
resolutions for the meeting. These are explained
in a letter from the Chairman which
accompanies the Notice.
By order of the Board
P M Dudgeon
Secretary
23 May 2006
Land Securities Annual Report 2006
139
Business Analysis
In this section we provide more detailed information about
our major investment properties and facts and figures about the
development programme and property outsourcing contracts
to help you understand more about our business activities.
Introduction
Land Securities owns 220 investment properties across the UK and is delivering an extensive
development programme as well as managing the property portfolios for six major occupiers, so we
have tried to bring all of this activity to life in the following pages.
The images, key facts, occupier data, graphs and maps will hopefully give you a feel for what is
important in our business and what we are doing that is different to others in the property industry.
We have split the portfolio into market sectors to assist with analysis and presented the information
in different formats, by region for example, to make detailed analysis easier. Land Securities sees itself
as an industry leader and has provided examples of property activity which demonstrates how we
are achieving this position.
The detailed list of major property holdings is no longer included in this section but you will find it
on our website www.landsecurities.com
Portfolio valuation
The value of the property interests in the combined portfolio, including a pro-rata share of our
property joint ventures totalled £12,892.9m at 31 March 2006 (31 March 2005: £9,365.8m).
Detailed breakdowns by sector, including comprehensive analyses of the Group’s valuation, rental
income and yield profiles follow in the investment portfolio analysis. The aggregate of the Market
Values of those properties held by the Group, excluding joint ventures, as at 31 March 2006 was
£11,619.0m (31 March 2005: £8,371.9m).
The valuation of the freehold and leasehold properties at 31 March 2006 was undertaken by
Knight Frank LLP as External Valuer. The valuations were in accordance with the Royal Institution of
Chartered Surveyors Appraisal and Valuation Standards and the International Valuation Standards.
The valuation of each property was on the basis of Market Value, subject to the assumptions that
investment properties would be sold subject to any existing leases and that properties held for
development would be sold with vacant possession in existing condition. The Valuer’s opinion of
Market Value was primarily derived using comparable recent market transactions on arm’s
length terms.
Retail
This business unit includes our shopping
centres, retail warehouses, shops outside
London, shops held through the Metro
Shopping Fund LP, regional offices and
sundry other regional properties.
London Portfolio
This business unit includes all London offices
and retail, but excludes those assets held in
the Metro Shopping Fund LP
Combined portfolio valuation
£12.9bn
5.9
6.9
Retail
London Portfolio
Other
Land Securities Annual Report 2006
140140
Investment property business – combined portfolio
Top twelve properties
Cardinal Place, SW1
A trio of office buildings has
created a new focal point for
Victoria with shopping and
cafés, art gallery and
improved public spaces.
Completed in January 2006.
White Rose Centre, Leeds
An award winning 60,390m2
shopping centre on the edge
of Leeds.White Rose is
anchored by a Debenhams
department store.
Bullring, Birmingham
Opened in 2003, the
110,000m2 shopping centre
transformed retail in
Birmingham’s city centre
(one-third ownership).
50 Queen Anne’s Gate, SW1
This iconic 30,140m2 building
is undergoing a major
refurbishment and will be
occupied by the Department
for Constitutional Affairs
when completed in 2007.
Combined portfolio value by location
Shopping
centres
Retail
and shops warehouses
%
%
Offices
%
Other
%
Central, inner and
outer London
South East and
Eastern
Midlands
Wales and South
West
North, North West,
Yorkshire and
Humberside
Scotland and
Northern Ireland
Total
12.5
5.8
3.7
4.5
8.7
5.7
40.9
0.6
5.5
2.5
1.4
6.0
37.3
0.1
0.1
0.1
0.3
1.9
17.9
0.1
38.0
1.0
1.3
0.1
0.1
0.6
0.1
3.2
St David’s Centre, Cardiff
The principal covered
shopping centre in Cardiff
provides 39,735m2 of
floorspace. The centre will
benefit from the 103,620m2
St David’s 2 mixed-use
development planned for
completion in 2009.
Total Retail
Almondvale shopping centre
and designer outlet mall,
(50% ownership), Livingston
Forming the heart of the retail
offer in Livingston these two
adjacent properties total
75,000m2 of retail space.
Principal tenants include JJB
Sports, New Look, Gap and
Marks & Spencer.
£6.9bn
Total London Portfolio
£5.9bn
7.8%
1
1
Land Securities Annual Report 2006
% figures calculated by reference to the combined portfolio
value of £12.9bn
% Portfolio by value and number of property
holdings at 31 March 2006
15.6%
4
6.4%
12.7%
6.1%
51.4%*
* Retail and London Portfolio
combined
£m
0 – 9.99
10 – 24.99
25 – 49.99
50 – 99.99
100 – 149.99
150 – 199.99
Over 200
Total
Value
%
No. of
properties
2.0
3.6
15.0
17.2
20.2
12.4
29.6
64
27
51
33
22
9
14
100.0
220
Notes:
Includes Land Securities’ share of joint venture properties.
Average rents – excluding properties in the
development programme and voids
Retail
Shopping centres and shops
Retail warehouses (including
supermarkets)
Offices
Central and inner London
Rest of UK
Average rent
£/m2
Average ERV
£/m2
n/a
177
333
149
n/a
208
324
163
Notes:
Average rent and estimated rental value have not been provided where it is
considered that the figures would be potentially misleading (ie where there is
a combination of analysis of rents on an overall and Zone A basis in the retail
sector; or where there is a combination of uses; or small sample sizes).
This is not a like-for-like analysis with the previous year. It excludes
properties in the development programme and voids.
Gunwharf Quays,
Portsmouth
This 41,290m2 mixed-use
waterfront destination
includes an outlet centre of
87 shops, cinema, Bowlplex,
comedy club, night club,
hotel, 22 restaurants, fitness
club and marina.
Retail World,Team Valley,
Gateshead
The retail park was acquired
in 1996 and comprises
26 units totalling 35,240m2.
Following a major
refurbishment we have
introduced key retailers such
as Next, Boots and Borders.
Devonshire House,W1
14,190m2 of air-conditioned
offices on Piccadilly with nine
showrooms and shops at
ground floor. Occupiers
include Alliance Capital and
Boston Consulting.
The Bridges, Sunderland
Extended in 2000, the
shopping centre now offers
over 100 retailers and is
anchored by Debenhams.
It receives over 26 million
shopper visits each year.
Major occupiers
Dresdner Kleinwort Wasserstein
141141
Business analysis continued
Whitefriars Quarter,
Canterbury
Whitefriars Quarter includes
our award winning retail-led
scheme which opened in
2005. This has regenerated
the city centre with new
fashion retailers, restaurants,
public spaces and residential
apartments.
Top 12 occupiers
1 Central Government
2 J Sainsbury plc
3 Dixons Group
4 Allen & Overy
5 Dresdner Kleinwort Wasserstein
6 Arcadia Group
7 The Boots Company PLC
8 Argos and Homebase
9 Metropolitan Police Authority
10 Marks & Spencer Group PLC
11 Lloyds TSB Group plc
12 Virgin Group
Total
Eland House, SW1
A key property within the
Victoria portfolio, the
23,170m2 office building is
occupied by the Government.
Current gross rent roll %
9.4
2.1
2.1
2.0
1.8
1.6
1.5
1.3
1.1
1.1
1.1
1.0
26.1
Like-for-like reversionary potential at
31 March 2006
Reversionary potential
(ignoring additional
income from the
letting of voids)
Gross reversions
Over-rented
Net reversionary potential
31/03/06
31/03/05
% of rent roll % of rent roll
10.9
4.4
6.5
11.0
5.5
5.5
Notes:
The reversion is calculated with reference to the gross secure rent roll after
the expiry of rent free periods on those properties which fall under the
like-for-like definition as set out in the notes to combined portfolio analysis
on page 150.
Of the over-rented income 78.3% is subject to a lease expiry or break
clause in the next five years.
Land Securities Annual Report 2006
Land Securities Annual Report 2006
142
Investment property business – Retail
Top twelve properties
White Rose Centre, Leeds
This prime shopping centre
includes a Debenhams
department store, 12 large
space users, over 70 shops
and a food court.
Bullring, Birmingham
This award-winning shopping
centre is anchored by
Selfridges and Debenhams
and offers over 130 shops and
restaurants (one-third
ownership).
.
St David’s Centre, Cardiff
St David’s occupies the prime
retail position in Cardiff city
centre. The centre is anchored
by Debenhams and provides
over 70 shops including Bhs,
Mothercare and Miss
Selfridge.
Almondvale shopping
centre and designer outlet
mall (50% ownership),
Livingston
This destination acts as a
major attraction for the
whole of the central belt of
Scotland. Planning has been
received for Phase III of
development.
Gunwharf Quays,
Portsmouth
In 2003, Land Securities
acquired 100% ownership of
this unique designer outlet
centre.The waterfront location
makes this a leading south-east
shopping and leisure
destination.
Team Valley, Gateshead
Acquired in 1996 and
refurbished in 2003 this
leading retail park comprises
26 units totalling 35,240m2.
Key retailers include TKMaxx
and Arcadia.
Retail portfolio value
£6.9bn
0.8
2.3
3.8
Shopping centres
Retail parks
Other
Top 12 properties
£bn
2.8
4.1
Top 12
Other
Retail accommodation
m2
1.9 million
Total retail occupiers
1,600
Retail occupiers
Land Securities Annual Report 2006
143
Business analysis continued
The Bridges, Sunderland
This shopping centre includes
Debenhams as its anchor
department store together
with Tesco, Peacocks,
Mark One, Boots, H&M, Next,
TK Maxx, New Look and
Superdrug.
Whitefriars Quarter,
Canterbury
Together with our award-
winning Whitefriars scheme,
the Clocktower and Marlowe
Arcade form the retail heart
of Canterbury.
Lakeside Retail Park,
Thurrock
Currently undergoing
refurbishment, the leading
retail park in Essex offers
33,890m2 of retail space
including Blacks, Mothercare,
Argos and Habitat.
East Kilbride
Part of the Scottish Retail
Property Limited Partnership
(50% ownership), East Kilbride
combines four malls to create
the biggest shopping centre in
Scotland offering over 230
shops and a Debenhams
department store.
Buchanan Galleries,
Glasgow
Prime positioned shopping
centre comprising John Lewis
department store, 4 major
stores, over 75 shops and a
food court (50% ownership).
The Fort,Westwood Cross,
Thanet
Acquired in 2005, the new
fashion park offers 31,413m2
of retail space including
Marks & Spencer,
Debenhams, Next and a
further 38 shops and health
and fitness facilities.
Top retail properties over £50m by location
13
22
25
21
26
24
23
1
1
2
3
4
2
1
1
5
3
6
5
9
4
6
4
7
8
7
11
10
8
19
20
18
17
13
15
9
14
10
12
11
12
16
Notes
1 Part of Scottish Retail Property
Limited Partnership
2 Part of Buchanan Partnership
3 Part of Birmingham Alliance
4 Part of St David’s 2 Partnership
5 Part of Metro Shopping Fund LP
Shopping centres
Scotland
Aberdeen
1. Bon Accord Centre1 *
St Nicholas Centre1
East Kilbride
2. East Kilbride Shopping Centre1*
Livingston
3. Almondvale Centre *
Glasgow
4. Buchanan Galleries2 *
North, north-west,Yorkshire
and Humberside
Newcastle
5. The Gate
Sunderland
6. The Bridges *
Leeds
7. White Rose Shopping Centre *
8. Leeds Plaza & Albion St *
Liverpool
9. St Johns Centre &
Williamson Sq, Clayton Sq *
Midlands
Corby
10. Corby Town Centre
Birmingham
11. Bullring3 *
Retail warehouses
Scotland
Dundee
1. Kingsway Retail Park *
Livingston
2. Almondvale West *
Almondvale Retail Park
Almondvale South
North, north-west,Yorkshire
and Humberside
Gateshead
3. Retail World, Team Valley
Retail Park *
Liverpool
4. Aintree Retail Park *
Manchester
5. White City Retail Park
£100m and above *
£50m–£100m
In the development pipeline
South and south-east
Canterbury
12. Whitefriars Quarter *
Welwyn Garden City
13. Howard Centre
Maidstone
14. Fremlin Walk *
Hatfield
15. The Galleria *
Portsmouth
16. Gunwharf Quays *
Wales and south-west
Exeter
17. Princesshay *
Bristol
18. Broadmead
Cardiff
19. St David’s 24
20. St David’s Centre*
London
21. Stratford Centre, Stratford
22. N1, Islington5
23. Lewisham Centre *
24. Southside,Wandsworth5
25. Notting Hill Gate,W115
26. W12 Centre,
Shepherds Bush
Midlands
Chester
6. Chester Retail Park
Greyhound Retail Park
Derby
7. The Meteor Centre
Northampton
8. Nene Valley Retail Park
South and south-east
West Thurrock
9. Lakeside Retail Park *
Thanet
10. The Fort,Westwood Cross *
Bexhill-on-Sea
11. Ravenside Retail
and Leisure Park *
Bracknell
12. The Peel Centre
London
13. Ravenside Retail Park,
Edmonton
Land Securities Annual Report 2006
144
Investment property business – Retail
Development
timeline
| 2007
Princesshay, Exeter
44,560m2 – Opening 2007
This mixed-use development is
planned around a series of
pedestrian streets and public
spaces and will provide a
vibrant new retail and leisure
destination for the south west.
Feature property
Princesshay, Exeter
Situated in the heart of historic Exeter,
Princesshay, a mixed-use retail development,
will create 60 new shops, cafés and restaurants
as well as 120 apartments. Using innovative
design, the architecture, finish and landscaping
will reflect the beauty of the Cathedral, the
surrounding countryside and the dramatic
Devon coastline.
The regeneration of the city centre, led by the
Princesshay scheme, will re-affirm Exeter as the
regional capital and is one of the most long-
awaited and significant developments in the
South West this decade.
Architects for the scheme are Panter Hudspith,
Wilkinson Eyre and Chapman Taylor while the
public realm has been designed by Livingston Eyre.
The scheme will be anchored by a Debenhams
2010 department store and has already
attracted a wide range of retailers including
Next, Zara, Quicksilver and Top Shop/Top Man.
We are also targeting independent retailers to
ensure a vibrant retail mix.
Exeter’s primary catchment population totals
345,000 with a total catchment population of
642,000 with an estimated total comparison
goods spend of over £1bn(1).
(1) Source The Retail Group – Retail Strategy Study June 2004
Major retail joint ventures
Birmingham Alliance
Land Securities, Hammerson plc and Henderson Global Investors
Ltd formed a partnership which has regenerated 40 acres in
Birmingham city centre. The first phase was Martineau Place
(sold in 2004), the Bullring followed in 2003 and the third and
final phase will be Martineau Galleries, a mixed-use
development linking the city with the East side.
Bristol Alliance
In Bristol, Land Securities and Hammerson plc have formed a
partnership to invest £400 million to regenerate the city and
provide a new urban centre with retail, leisure facilities,
residential apartments, offices and public spaces. The
development is set to propel the south west’s capital city
into a top ten retail position.
Land Securities Annual Report 2006
Willow Place, Corby
16,260m2 – Opening 2007
Willow Place reflects the
aspirations of Corby, a town
rapidly expanding and set to
double its population by
2021. The scheme will provide
modern retail units for quality
multiple retailers, and is the
first step in the rejuvenation
of the town centre.
Christ’s Lane, Cambridge
7,150m2 – Opening 2007
This retail and residential
scheme is located within the
city centre conservation area
and will re-establish the
historic street, Christ’s Lane,
to create a new retail
thoroughfare in the city.
Key facts
Anchored by Debenhams
60 new shops
120 city centre apartments
Restaurants and cafés
New public spaces
The Buchanan Partnership
Through the swap with Slough Estates in 2004 we entered a
partnership with Henderson Global Investors for the ownership
of Buchanan Galleries. The shopping centre is located in
Glasgow’s prime retail area and we are currently assessing
the property’s further development potential.
The Metro Shopping Fund LP
Land Securities and Delancey created The Metro Shopping Fund LP
to combine a selection of central London retail assets to enable
more effective management. The portfolio includes properties in
Victoria, Notting Hill, lslington and Clapham and the recent
purchase of Southside Shopping Centre, Wandsworth.
| 2008
Broadmead, Bristol
50% ownership
139,350m2 – Opening 2008
This mixed-use development
will create a new retail core
and leisure facilities in a
regenerated historic quarter,
bringing activity to the city
centre day and night.
Phase III, Livingston
37,670m2 – Opening 2008
Plans have been approved for
the next phase of expansion
of Livingston town centre,
providing new shops and
apartments alongside new
public spaces including a
winter garden.
145
Business analysis continued
| 2009
St David’s 2, Cardiff
50% ownership
103,620m2 – Opening 2009
This mixed-use development
set within new public spaces,
arcades and treelined
boulevards, will help establish
Cardiff as one of the top retail
destinations in Europe.
Development pipeline
Retail
Shopping centres and shops
Whitefriars, Canterbury
Summerland Gate, Exeter
Description
Size
m2
Planning
Letting
%
Estimated/actual
completion date
Cost
£m
Retail/residential
37,160m2/3,260
Retail and leisure/residential
5,380m2/1,390
Broadmead, Bristol
The Bristol Alliance – a limited partnership with Hammerson plc
Christ’s Lane (formerly Bradwell’s Court), Cambridge
Retail
Leisure
Offices
Residential
Retail/leisure
Residential
83,610
9,000
28,000
18,740
5,800
1,350
Princesshay, Exeter
Retail/residential
37,360/7,200
St David’s Cardiff – St David’s Partnership
– a partnership with Capital Shopping Centres
Willow Place, Corby
Retail/leisure
Residential
Retail
85,000
18,620
16,260
Almondvale Centre Phase III, Livingston
Retail/leisure
32,000/5,670
Retail warehouses
Bexhill Retail Park, extension
Kingsway Retail Park, Dundee, Phase II
Maskew Avenue, Peterborough
Commerce Centre, Poole (part)
Friary Retail Park, Plymouth
Thanet Leisure, Thanet
Almondvale South, Livingston, Phase IIb
Retail warehouses
Retail warehouses
Retail warehouses
Retail warehouses
Retail warehouses
Retail warehouses
Retail warehouses
2,720
8,650
13,380
6,040
7,200
8,970
4,180
99
100
26
76
48
2
13
100
64
91
54
32
July 2005
Apr 2005
Sept 2008
113
14
200
Dec 2007
26
Sept 2007
150
2009
2007
2008
June 2005
May 2004
Sept 2007
Sept 2006
Dec 2007
Apr 2007
2007
11
15
32
22
8
22
PR
PR
RG
PR
Key
Developments let and transferred or sold
Developments approved and in progress
Developments completed
Proposed developments
Planning status
PR
AS
RG
Planning received
Application submitted
Resolution to grant
PI
OPR
Planning inquiry
Outline planning received
Major retail joint ventures continued
Retail park developments
Scottish Retail Property Limited Partnership
A joint venture was created with British Land to combine our
retail assets in Aberdeen and East Kilbride. This provided benefits
of scale and the ability to maximise the long-term value of the
centres through development and other property activity.
Thanet Leisure, Thanet
We have acquired an 8.5 acre site adjacent to Westwood Cross
fashion park, Thanet, which has planning consent for a leisure
and entertainment scheme including a hotel, multi-screen
cinema, casino, bingo, restaurants and car spaces.
The St David’s 2 Partnership
As substantial landowners in Cardiff city centre, Land Securities
and Capital Shopping Centres created the St David’s Partnership
to deliver a new heart for the Welsh capital. St David’s 2 will
breathe new life and vibrancy into Cardiff and consolidate it as a
major national and international capital city.
Maskew Avenue, Peterborough
We shall shortly be building three new superstores on Maskew
Avenue, next to the existing Boulevard Retail Park, to house
retailers B&Q and Matalan. Their relocation from Peterborough’s
South Bank will free up land in Peterborough’s town centre to
help facilitate their ambitious regeneration programme.
Land Securities Annual Report 2006
146
Investment property business – London Portfolio
Top twelve properties
Cardinal Place, SW1
The 60,550m2 scheme
provides modern office
accommodation and ground
floor retail, anchored by
Marks & Spencer. New
retailers to Victoria include
Molton Brown, Hobbs
and Zara.
50 Queen Anne’s Gate, SW1
Formerly occupied by the
Home Office, a major
refurbishment will be
completed in 2007.
Devonshire House,W1
After many years of
ownership this property is
now being marketed for sale.
Eland House, SW1
Forming part of our Victoria
holdings this building has
benefited from the Cardinal
Place redevelopment.
Portland House, SW1
Refurbished in 2002, the
29,120m2 office building is
located in the heart of the
Victoria portfolio. It is multi-
let to occupiers such as
American Express and the
Government.
Portman House,W1
A 12,810m2 office building
located adjacent to Oxford
Street incorporating 3,540m2
of prime retail space.
London Portfolio value
£5.9bn
1.1
4.8
London offices
London retail
Top 12 properties
£bn
3.2
2.7
Top 12
Other
Total accommodation
940,000m2
Total London occupiers
650
Dresdner Kleinwort Wasserstein
London occupiers
international plc
Land Securities Annual Report 2006
147
Business analysis continued
Empress State Building,
SW6
Following a major
refurbishment in 2003, as
part of the Landflex portfolio,
the 43,330m2 building is let
to the Metropolitan Police
and incorporates 2,040m2
of retail and leisure space.
New Street Square, EC4
Contemporary office buildings
arranged around a new public
square will replace a series of
post war office blocks.
One-third of the office
accommodation has been pre-
let to Deloitte. Ground floor
retail and restaurant space will
complete the scheme.
Ashdown House, SW1
The 21,000m2 office and
retail property holds a
prominent position in Victoria
and is fully let to the
Government (DEFRA HQ).
The ground floor retail
includes various tenants
including Dixons and Boots.
Kingsgate House, SW1
The 18,640m2 office building
on Victoria Street is let to the
Secretary of State and has 18
shops at ground level.
Piccadilly Circus,W1
Iconic illuminated advertising
in the heart of the West End.
The site includes 1,460m2 of
offices and 3,690m2 of ground
floor retail, restaurants and a
public house.
One New Change, EC4
The current building opposite
St Paul’s is occupied by Allen
& Overy until 2006, following
which the site will be
redeveloped to create new
office and retail
accommodation and unique
public spaces.
Top London properties over £50m by location
EC2
1. Moorgate Hall
2. One Wood Street
EC3
3. 13/23 Fenchurch Street
EC4
4. New Street Square *
5. One New Change *
6. Regis House
7. 50 Ludgate Hill
and 26 Old Bailey *
8. Cannon Street House
and Martin House
9. Fleetbank House
10. Hill House *
11. Times Square *
12. IPC Tower, Shoe Lane
NW1
13. Greater London House *
SW1
14. Haymarket House
15. New Scotland Yard *
16. 50 Queen Anne’s Gate *
17. Portland House *
18. Eland House *
19. Kingsgate House *
20. Cardinal Place *
21. Westminster City Hall
22. Clive House
23. Ashdown House
*
SE1
24. Bankside 2 & 3
25. Red Lion Court
SW6
26. Empress State *L
WC1
27. 1 Theobald’s Court
28. Holborn Gate,
330 High Holborn
WC2
29. 40 Strand *
W1
30. 455/475 and 475/497
Oxford Street and
Park House *
31. Portman House *
32. Devonshire House *
33. Piccadilly Circus *
34. 12/24 Oxford Street and
2/5 Tottenham Court Road
35. Oxford House 70/80
Oxford Street
W2
36. 40 Eastbourne Terrace
L
E14
37. 6/7 and 8/9
Harbour Exchange
EC2
1
EC3
3
WC1
EC1
W1
31
30
35
33
32
SW1
28
WC2
29
27
34
14
16
15
21
23
19
20
22
18
17
W2
36
SW6
4
12
9
10
2
7
5
11
8
EC4
6
24
25
SE1
13
37
26
* £100m and above
£50-100m
In the development pipeline
L Landflex building
Land Securities Annual Report 2006
148
Investment property business – London Portfolio
Development timeline
| 2007
Bankside 123, SE1
This major mixed-use scheme
will create a focal point for
the area’s expanding business
community, providing office
and retail accommodation
in three stunning buildings.
Building 1 has been completed
and sold to IPC Media.
One Wood Street, EC2
The delivery of this high
quality office space and
much needed modern retail
accommodation is the first
step in the transformation of
the Cheapside area. Global
law firm, Eversheds, has pre-
let the office accommodation.
50 Queen Anne’s Gate, SW1
This iconic building is
undergoing a major
refurbishment, both
externally and internally,
to create high specification
offices for occupation by
the Department for
Constitutional Affairs in 2007.
Feature property
Cardinal Place – case study
Cardinal Place, located on Victoria Street, SW1
has literally transformed the heart of Victoria.
New office accommodation has been created
in three modern buildings, one with a distinctive
curving glass entry, to replace a series of
outdated 1960s offices. New ground floor retail,
anchored by Marks & Spencer and including
fashion brands such as Zara and Hobbs, has
provided much needed high street retail, while
the café and restaurants have given the residents
and people working in the area a much needed
place to meet, eat and socialise.
Designed by EPR Architects Limited, the
60,550m2 contemporary scheme has opened
up new views of Westminster Cathedral and
provided new pedestrian passages connecting
Victoria Street with Bressenden Place. In
addition to the new public piazza and walkways,
an art gallery is centred within the scheme,
drawing tourists, locals and office workers to
view the regularly changing exhibitions.
Completed in January 2006, it is estimated
that the 51,130m2 office accommodation will
house up to 4,000 people when fully let and
that the 9,420m2 retail space has created 400
new retail jobs.
Key facts
51,130m2 of offices in 3 buildings
14 shops anchored by Marks & Spencer
9,420m2 of retail floorspace
7 restaurants and cafés
Art gallery
New public spaces
Landflex is an integrated accommodation package which provides occupiers with lease flexibility, service guarantee and price certainty.
7 Soho Square, W1
The first property in the Landflex portfolio is located within
a vibrant and creative business community in the heart of
London’s West End. The 3,760m2 property offers flexible space
in one of London’s best known squares and is home to
Expedia.co.uk and Ryder HKS.
Empress State, SW6
Located in Earl’s Court, SW6, the Metropolitan Police Authority
occupies the property under a single building property
outsourcing Landflex solution.
Land Securities Annual Report 2006
40 Eastbourne Terrace, W2
The recently refurbished building now with striking glass
and terracotta finishes is centrally located in Paddington.
The 7,690m2 property is let to CB&I and is fully serviced under
the Landflex solution.
140 Aldersgate Street, EC1
The most recent addition to the portfolio, the Sidell Gibson
designed building is Landflex’s first exposure to the City of
London market. Occupiers include Vibrant Media and
Flightbookers.
149
Business analysis continued
| 2008
| 2010
| 2010
New Street Square, EC4
Replacing a jumble of post
war office blocks, four
contemporary buildings
will create workspaces and
a striking public square
surrounded by retail and
restaurant space, furthering
the regeneration of Mid-town.
Park House,W1
On Oxford Street, close to
Marble Arch, we are looking to
redevelop the whole block to
provide a mix of offices, prime
retail and residential apartments.
One New Change, EC4
Adjacent to St Paul’s
Cathedral, the Jean Nouvel
designed One New Change
development represents a
rare opportunity for
comprehensive redevelop-
ment in the heart of the City
and to create new amenities
and seven day retail trading.
Development pipeline
London portfolio
Central and Inner London properties
40 Eastbourne Terrace, W2
Cardinal Place, SW1
Bankside 2&3, SE1
1 Wood Street, EC2
New Street Square, EC4
50 Queen Anne’s Gate, SW1
Dashwood House, EC2
One New Change, EC4
Park House, W1
Description
Offices
Offices/retail
Offices
Retail/leisure
Offices/retail
Offices
Retail/leisure
Offices
Offices
Retail
Offices/retail
Offices/retail
Residential
Size
m2
Planning
Letting
%
Estimated/actual
completion date
Cost
£m
7,690
51,130/9,420
35,550
3,170
15,020/1,500
62,340
2,980
30,140
13,870
590
30,790/20,550
15,550/8,470
5,950
100%
34/98%
100%(*)
35%
Dec 2005
Jan 2006
Aug 2007
Sep 2007
Mar 2008
12
256
121
102
312
100%
Dec 2007
126
AS
RG
AS
2009
2010
2010
The letting was achieved after 31 March 2006.
Notes:
(*)
Cost (£m) refers to the estimated capital expenditure required to develop the scheme from the start of the financial year in which the property is added to our Development Programme. Finance charges are excluded from cost. Floor areas
shown above represent the full scheme whereas the cost represents our share of costs. Letting % is measured by ERV and shows letting status at 31 March 2006. Trading Property development schemes and the Kent Thameside project are
excluded from the development pipeline.
Key
Developments let and transferred or sold
Developments approved and in progress
Developments completed
Proposed developments
Planning status
PR
AS
Planning received
Application submitted
Resolution to grant
RG
PI
Planning inquiry
OPR Outline planning received
London clusters – areas of London on which we are focusing our investment and development activities:
South Bank
The pace of development here on the South Bank has been
astonishing, with new art galleries and theatres and high-tech
office space. We realise that many major companies are
choosing to locate themselves here to benefit from the
regenerated surroundings with easy access to the City, and we
are providing more opportunities with our major mixed-use
scheme, Bankside 123, adjacent to Tate Modern.
Victoria
Politics, art, churches, iconic squares, parks and royalty all reside
in SW1 and our properties and their occupiers reflect this
exciting mix. The creation of Cardinal Place has given the area a
focus, and further plans for development around Bressenden
Place will continue the regeneration of the area.
Mid-town
Traditionally the home to journalism and law, the area between
Holborn and the City is undergoing a major transformation
driven by the New Street Square development on New Fetter
Lane. This major scheme will replace an assortment of post-war
office blocks with contemporary office buildings and create a
new urban square with retail, cafés, and public spaces.
Oxford Street
As the world renowned shopping heart of London, Oxford Street
offers some of the best retail in the UK. Our portfolio in the area
includes modern retail accommodation, offices, the Park House
development at the west end and longer-term development
opportunities at the east end of the street.
Land Securities Annual Report 2006
150
Investment property business
Combined portfolio analysis
The like-for-like portfolio(2)
Open Market Value(7)
Valuation Surplus(1)
Gross Rental Income(1)
Annual net rent(8)
Annual net estimated
rental value(9)
31/03/06
£m
31/03/05
£m
Surp/(def)
£m
Surp/(def)
%
12 mths to
31/03/06
£m
12 mths to
31/03/05
£m
31/03/06
£m
31/03/05
£m
31/03/06
£m
31/03/05
£m
267.9
110.6
19.7
398.2
203.7
25.8
229.5
627.7
247.3
91.9
40.8
8.8
388.8
5.8
394.6
24.7
1.047.0
95.7
1,142.7
236.6
–
317.6
1,696.9
(13.8)
1,683.1
405.5
153.9
27.5
586.9
227.7
56.7
284.4
871.3
453.3
135.9
121.4
73.8
784.4
8.7
793.1
32.5
1,696.9
(13.8)
1,683.1
1,577.5
105.6
1,683.1
2,128.8
865.6
206.3
3,200.7
1,308.7
185.4
1,494.1
4,694.8
1,696.5
737.2
225.5
51.2
2,710.4
52.3
2,762.7
240.6
7,698.1
565.3
8,263.4
3,337.6
–
1,291.9
12,892.9
3,816.5
1,101.5
357.5
5,275.5
1,904.9
409.8
2,314.7
7,590.2
2,416.4
1,059.7
654.8
675.6
4,806.5
88.0
4,894.5
408.2
12,892.9
1,816.4
752.4
179.9
2,748.7
1,094.6
160.0
1,254.6
4,003.3
1,436.1
647.1
185.2
41.7
2,310.1
45.5
2,355.6
219.3
6,578.2
437.6
7,015.8
970.4
627.5
752.1
9,365.8
2,553.8
860.1
445.6
3,859.5
1,256.2
225.5
1,481.7
5,341.2
1,737.2
1,085.5
352.1
423.0
3,597.8
53.4
3,651.2
373.4
9,365.8
11,619.0
1,273.9
12,892.9
8,371.9
993.9
9,365.8
Shopping centres and shops
Shopping centres
Central London shops
Other in-town shops
Retail warehouses
Retail parks
Other
Total retail
London offices
West End
City
Mid-town
Inner London
Total London offices
Rest of UK
Total offices
Other
Like-for-like portfolio(2)
Completed developments(3)
Total
Acquisitions(4)
Sales and restructured interests(5)
Total development programme(6)
Combined portfolio
Properties treated as
finance leases
Combined portfolio
Total portfolio analysis
Shopping centres and shops
Shopping centres
Central London shops
Other in-town shops
Retail warehouses
Retail parks
Other
Total retail
London offices
West End
City
Mid-town
Inner London
Total London offices
Rest of UK
Total offices
Other
Combined portfolio
Properties treated as
finance leases
Combined portfolio
Represented by:
Investment portfolio
Share of joint ventures
Combined portfolio
Land Securities Annual Report 2006
14.5
14.7
10.6
14.3
18.6
16.2
18.3
15.5
17.2
14.3
22.6
20.8
16.9
12.8
16.8
11.5
15.9
21.4
16.2
7.6
–
32.9
15.3
n/a
15.3
12.0
16.3
8.4
12.6
13.7
16.1
14.1
13.0
23.3
14.8
22.9
12.6
19.7
11.1
19.6
8.7
15.3
n/a
15.3
16.0
9.1
15.3
129.9
41.8
10.8
182.5
51.7
10.0
61.7
244.2
92.5
58.1
13.4
3.3
167.3
1.7
169.0
11.4
424.6
26.1
450.7
123.0
20.8
19.5
614.0
122.5
44.7
11.1
178.3
47.3
9.3
56.6
234.9
93.2
62.6
12.8
3.7
172.3
1.7
174.0
9.5
418.4
12.5
430.9
22.5
56.9
16.8
527.1
(13.2)
600.8
(10.9)
516.2
194.5
58.9
20.7
274.1
69.1
18.5
87.6
361.7
102.8
88.7
13.5
30.2
235.2
1.7
236.9
15.4
614.0
(13.2)
600.8
538.7
62.1
600.8
139.5
46.3
30.8
216.6
55.2
15.3
70.5
287.1
97.7
82.2
15.8
16.1
211.8
3.7
215.5
24.5
527.1
(10.9)
516.2
471.9
44.3
516.2
115.4
41.7
9.2
166.3
53.3
8.6
61.9
228.2
90.4
58.0
13.2
3.2
164.8
3.7
168.5
11.4
408.1
15.4
423.5
164.2
–
10.4
598.1
194.4
51.3
17.0
262.7
75.4
17.6
93.0
355.7
101.3
80.8
13.4
23.2
218.7
6.4
225.1
17.3
598.1
112.2
43.5
9.7
165.4
50.4
8.6
59.0
224.4
87.1
57.2
13.3
3.7
161.3
4.0
165.3
13.9
403.6
10.7
414.3
57.4
22.1
9.0
502.8
145.1
46.3
24.4
215.8
58.5
11.4
69.9
285.7
87.0
77.1
13.0
17.6
194.7
4.1
198.8
18.3
502.8
130.9
46.8
12.2
189.9
64.6
9.9
74.5
264.4
101.9
53.7
12.8
4.9
173.3
4.7
178.0
13.1
455.5
32.0
487.5
196.0
–
144.7
828.2
256.0
58.9
23.1
338.0
95.7
23.9
119.6
457.6
160.9
84.3
42.7
49.8
337.7
7.9
345.6
25.0
828.2
123.6
46.4
11.7
181.7
60.5
9.5
70.0
251.7
93.0
53.4
12.1
4.8
163.3
5.1
168.4
13.2
433.3
33.2
466.5
61.1
41.2
99.0
667.8
179.6
56.6
28.3
264.5
70.7
13.6
84.3
348.8
125.5
97.4
41.3
29.3
293.5
5.4
298.9
20.1
667.8
533.6
64.5
598.1
445.1
57.7
502.8
739.0
89.2
828.2
604.3
63.5
667.8
151
Business analysis continued
The like-for-like portfolio(2)
Gross income yield(10)
31/03/05
%
31/03/06
%
Equivalent yield(11)
31/03/06
%
31/03/05
£m
Annual gross estimated
rental value(12)
31/03/06
£m
31/03/05
£m
Voids (by ERV)(13)
31/03/06
%
31/03/05
%
Lease length as
at 31/03/06(14)
Median
years(i)
Mean
years(ii)
Shopping centres and shops
Shopping centres
Central London shops
Other in-town shops
Retail warehouses
Retail parks
Other
Total retail
London offices
West End
City
Mid-town
Inner London
Total London offices
Rest of UK
Total offices
Other
Like-for-like portfolio(2)
Completed developments(3)
Total
Acquisitions(4)
Sales and restructured interests(5)
Total development programme(6)
Combined portfolio
Total portfolio analysis
Shopping centres and shops
Shopping centres
Central London shops
Other in-town shops
Retail warehouses
Retail parks
Other
Total retail
London offices
West End
City
Mid-town
Inner London
Total London offices
Rest of UK
Total offices
Other
Combined portfolio
Represented by:
Investment portfolio
Share of joint ventures
Combined portfolio
5.4
4.8
4.5
5.2
4.1
4.6
4.1
4.9
5.3
7.9
5.9
6.3
6.1
7.1
6.1
4.7
5.3
2.7
5.1
4.9
n/a
0.8
4.6
5.1
4.7
4.8
5.0
4.0
4.3
4.0
4.7
4.2
7.6
2.0
3.4
4.6
7.3
4.6
4.2
4.6
4.6
5.1
4.6
6.2
5.8
5.4
6.0
4.6
5.4
4.7
5.6
6.1
8.8
7.2
8.9
7.0
8.8
7.0
6.3
6.1
2.4
5.9
5.9
3.5
1.2
5.4
5.7
5.4
5.5
5.6
4.7
5.1
4.7
5.3
5.0
7.1
3.7
4.2
5.4
7.7
5.4
4.9
5.4
5.3
5.8
5.4
5.3
5.1
5.1
5.2
4.7
5.0
4.7
5.1
5.5
5.9
5.4
6.2
5.6
7.7
5.6
6.1
5.3
5.3
5.3
5.4
n/a
5.3
5.3
5.3
5.1
5.2
5.3
4.8
4.9
4.8
5.1
5.5
5.6
5.4
5.8
5.5
7.4
5.6
5.9
5.3
5.3
5.2
5.3
5.9
5.8
5.7
5.9
5.3
5.6
5.3
5.7
6.3
6.5
6.1
6.8
6.4
8.8
6.4
6.5
6.0
6.0
6.0
6.0
5.9
5.5
6.0
5.9
5.8
5.8
5.9
5.4
5.6
5.4
5.7
6.3
6.2
6.0
6.4
6.2
8.6
6.3
6.4
6.0
6.0
5.8
6.0
139.5
48.0
13.7
201.2
64.6
9.9
74.5
275.7
103.3
54.5
13.2
4.9
175.9
4.8
180.7
13.3
469.7
33.0
502.7
197.7
n/a
n/a
n/a
131.0
47.6
13.4
192.0
60.5
9.5
70.0
262.0
94.5
54.0
12.1
4.8
165.4
5.1
170.5
13.3
445.8
33.2
479.0
61.3
n/a
n/a
n/a
3.0
3.1
6.6
3.3
2.9
0.0
2.6
3.1
3.0
8.8
0.0
2.0
4.5
20.8
5.0
2.3
3.8
1.5
3.6
5.1
n/a
n/a
n/a
2.4
0.4
0.7
1.8
2.0
0.0
1.7
1.8
7.0
5.6
0.0
0.0
5.8
9.8
5.9
2.3
3.4
9.9
3.8
1.1
n/a
n/a
n/a
8.5
6.0
7.5
7.5
13.3
14.5
13.3
9.0
5.5
0.5
3.3
0.5
3.3
2.8
3.3
6.3
5.8
13.0
6.0
8.8
n/a
n/a
n/a
7.1
7.7
13.0
7.7
13.0
12.7
12.9
9.1
8.0
1.8
4.8
0.7
5.4
6.9
5.5
13.2
7.7
13.9
7.9
10.7
n/a
n/a
n/a
Notes
1 The valuation surplus and rental income values are
stated after adjusting for the effect of SIC 15 under
IFRS, but before restating for finance leases.
8 Annual net rent is annual rents in payment at
31 March 2006 after deduction of ground rents.
It excludes the value of voids and current rent free periods.
2 The like-for-like portfolio includes all properties
which have been in the portfolio since 1 April 2004
but excluding those which were acquired, sold or
included in the development programme at any
time during that period. Capital expenditure on
refurbishments, acquisition of headleases and
similar capital expenditure has been allocated to
the like-for-like portfolio in preparing this table.
Changes in valuation from period-to-period reflect
this capital expenditure as well as the disclosed
valuation surpluses.
3 Completed developments represent those
properties previously included in the development
programme, which have been completed, let and
removed from the development programme in
the period since 1 April 2004.
4 Includes all properties acquired in the period since
1 April 2004, other than those included in the
development programme.
5 Includes all properties sold (other than directly out
of the development programme), or where the
ownership interest has been restructured, in the
period since 1 April 2004.
6 Ongoing developments are properties in the
development programme. They exclude completed
developments as defined in note (3) above.
7 The open market value figures include the Group
share of the various joint ventures and exclude
properties owned by Land Securities Trillium and Telereal.
9 Annual net estimated rental value includes vacant
space, rent frees and future estimated rental values
for properties in the development programme and
is calculated after deducting expected ground rents.
10 The gross income yield represents the annual net
rent expressed as a percentage of the market value
ignoring costs of purchase or sale.
11 The net nominal equivalent yield has been
calculated on the gross outlays for a purchase of the
property (including purchase costs) and assuming
that rent is received annually in arrears.
12 Annual gross estimated rental value is calculated in
the same way as net estimated rental value before
the deduction of ground rents.
13 Voids represent all unlet space in the properties,
including voids where refurbishment work is being
carried out and voids in respect of pre-development
properties. Voids are calculated based on their gross
estimated rental value as defined in (12) above.
14 The definition for the figures in each column is:
(i) Median is the number of years until half of
income is subject to lease expiry/break clauses.
(ii) Mean is rent-weighted average remaining term
on leases subject to lease expiry/break clauses.
Land Securities Annual Report 2006
152
Investment property business
Combined portfolio reconciliation
Investment statement – gross rental income reconciliation
Combined portfolio
Central London shops (excluding Metro Shopping Fund LP)
Inner London offices in Metro Shopping Fund LP
Rest of UK offices
Allocation of other
Less: finance lease adjustment
Total rental income
Open market value reconciliation
Combined portfolio
Central London shops (excl. Metro Shopping Fund LP)
Inner London offices in Metro Shopping Fund LP
Rest of UK offices
Allocation of other
Combined portfolio
Rental value reconciliation
Combined portfolio
Central London shops (excl. Metro Shopping Fund LP)
Inner London offices in Metro Shopping Fund LP
Rest of UK offices
Allocation of other
Combined portfolio
Development pipeline financial summary
Other
London Investment
Portfolio
£m
Portfolio
£m
Year
ended
31/03/06
£m
Retail
£m
London
Portfolio
£m
Other
Investment
Portfolio
£m
Year
ended
31/03/05
£m
235.2
47.0
–
0.1
4.3
286.6
(8.1)
278.5
15.4
–
–
0.1
(11.2)
4.3
–
4.3
612.3
–
–
1.7
–
614.0
(13.2)
600.8
287.1
(45.2)
0.5
3.3
4.3
250.0
(2.6)
247.4
211.8
45.2
(0.5)
–
4.7
261.2
(8.3)
252.9
24.5
–
–
0.4
(9.0)
15.9
–
15.9
523.4
–
–
3.7
–
527.1
(10.9)
516.2
Retail
£m
361.7
(47.0)
–
1.5
6.9
323.1
(5.1)
318.0
7,590.2
(1,053.7)
18.3
87.4
235.6
6,877.8
4,806.5
1,053.7
(18.3)
–
90.5
5,932.4
408.2
–
–
0.6
(326.1)
82.7
12,804.9
–
–
88.0
–
12,892.9
5,341.2
(820.8)
12.5
53.4
164.1
4,750.4
3,597.8
820.8
(12.5)
–
80.7
4,486.8
373.4
–
–
–
(244.8)
128.6
9,312.4
–
–
53.4
–
9,365.8
457.6
(56.0)
0.9
4.9
13.3
420.7
337.7
56.0
(0.9)
2.9
6.5
402.2
25.0
–
–
0.1
(19.8)
5.3
820.3
–
–
7.9
–
828.2
348.8
(53.7)
1.0
5.3
8.9
310.3
293.5
53.7
(1.0)
–
6.8
353.0
20.1
–
–
0.1
(15.7)
4.5
662.4
–
–
5.4
–
667.8
Cumulative movements on the development programme to 31/03/06
Total scheme details
Capital
Disposals
SIC15 rent
Market value expenditure Capitalised Revaluation
surplus
and other
to date(1) adjustments
£m
at start
of scheme
£m
incurred
to date
£m
interest
to date
£m
£m
Market
value at
Estimated
total
capital
31/03/06 expenditure(4)
£m
£m
Estimated
total
capitalised
interest
£m
Estimated
total
cost less
proceeds(2)
£m
Valuation
surplus for
Net 12 months
to
income/
ERV(3) 31/03/06(1)
£m
£m
Development programme
let, transferred or sold
Shopping centres and shops
Retail warehouses
London Portfolio
Development programme completed,
approved or in progress
Shopping centres and shops
Retail warehouses
London Portfolio
Proposed developments
Shopping centres and shops
Retail warehouses
London Portfolio
27
–
14
41
83
66
188
337
126
11
12
149
91
42
439
572
11
–
–
11
5
1
35
41
45
3
28
76
20
18
299
337
(7)
1
–
(6)
–
–
5
5
Movement on proposed developments for the year to 31/03/06
11
5
321
337
16
–
1
17
–
–
–
–
–
1
29
30
–
–
–
–
202
15
54
271
199
127
966
1,292
27
6
351
384
127
11
12
150
376
100
917
1,393
415
4
554
973
11
–
–
11
31
3
67
101
34
–
58
92
154
11
26
191
451
169
1,172
1,792
446
10
883
1,339
11
1
3
15
32
11
101
144
31
1
61
93
22
3
24
49
23
8
285
316
–
1
29
30
Notes:
(1)
(2)
Includes profit realised on the disposal of property.
Includes the property at the market valuation at the start of the financial year in which the property was added to the Development Programme together with estimated capitalised interest. For Proposed Development properties,
the market value of the property at 31 March 2006 is included in the estimated total cost. Estimated total cost is stated net of residential proceeds for Shopping Centres and shops of £11m, £39m and £30m for developments
transferred or sold, completed or in progress and proposed developments respectively. The London Portfolio proposed developments are stated net of residential proceeds of £80m. Allowances for rent free periods are excluded from
cost.
(3) Net headline annual rental payable on let units plus net ERV at 31 March 2006 on unlet units.
(4)
For those schemes transferred or sold, completed or in progress the cost for each scheme is shown on the preceding pages. The costs of the Proposed Development properties are not shown on a scheme by scheme basis as the
schemes have not yet been finalised and could still be subject to material change. For Proposed Development properties the estimated total capital expenditure represents the outstanding costs required to complete the scheme as
at 31 March 2006.
Land Securities Annual Report 2006
Property Outsourcing - Land Securities Trillium
153
Business analysis continued
Barclays
Barclays transferred 50,100m2
of property to Land Securities
Trillium and is free from
property responsibility and
risks on that portfolio.
BBC
After five years, and the sale
of Media Village White City,
the BBC and Land Securities
Trillium property partnership
will end in July 2006 when
the facilities management
services of the contract will
handover to new providers.
DVLA
Land Securities Trillium is
undertaking a £30m
refurbishment of DVLA’s
headquarters and provides
full services to the DVLA’s
94,133m2 estate supporting
new work practices.
DWP
Our 20 year partnership with
DWP has delivered an
improved, integrated service
and major cost savings to the
department.
Norwich Union
We are investing £90m in the
refurbishment of Norwich
Union‘s headquarters and
provide full maintenance and
repair services to 115,000m2
of its accommodation.
Telereal
Following the sale of our
Telereal stake, we retain
leasehold risk on 50
properties and provide
Telereal with IT and Helpdesk
services.
Clients
Customer service centre
Land Securities Trillium’s award winning
Customer Service Centre is at the heart of the
business. It is a fully resilient function managed
across two sites 24 hours a day, seven days
a week, 365 days a year. It currently manages
seven contracts resulting in 600,000 customer
contacts per year. Service levels are met
consistently while customer satisfaction
remains very high.
Total income
£927.3m
Total accommodation
under management
m2
3.3 million
Customer service contacts
per annum
600,000
Land Securities Annual Report 2006
154
Property Outsourcing – Land Securities Trillium
DVLA refurbishment,
Swansea
We have enabled DVLA
to implement cultural,
operational and organisational
change across the Agency by
delivering cost effective
upgrades to modernise its
headquarters and implement
new working practices.
Norwich Union
Headquarters
The new atrium for Norwich
Union, designed and delivered
by Land Securities Trillium,
offers new facilities and a
vibrant working environment
for Norwich Union staff.
Job Centre Plus
We continue to support
transformation in the way
that DWP serves the public
through delivery of Job
Centre Plus.
Feature contract
DWP
In 1998, DWP transferred the ownership and
management of its estate to us for 20 years.
The original portfolio included 650 buildings
covering a floor area of over 1.6 million m2.
Known as PRIME, the agreement included the
purchase of all the freehold premises,
responsibility for rental costs, dilapidation
liabilities on leased buildings and the cost of
maintaining the buildings as well as the provision
of building-related facilities management
services. All surplus space was transferred to us
for disposal.We paid £250m for the freehold
portfolio and received annual revenue of £250m,
for full services across the freehold and leasehold
portfolios.
Unlike a conventional sale and leaseback
arrangement, the contract provides the
flexibility to vacate buildings as necessary to
match DWP’s changing business requirements.
The contract also offers life cycle risk transfer.
In 2003, the contract was expanded to
include an additional 1,100 properties covering
900,000m2. We paid a further £100m for
the freehold properties.
New business opportunities
Mill Group joint venture
Investors in the Community Group Ltd (‘IIC’) is a joint venture
between Land Securities Trillium and Mill Group which aims to
achieve a leading position in the Building Schools for the Future
(‘BSF’) and community Public Private Partnership markets
through investment in new socially responsible projects.
IIC is short-listed for Leeds BSF.
Land Securities Annual Report 2006
Key facts
Overall customer satisfaction – 90%
Portfolio of 1,639 properties covering
2.5 million m2
Accommodating 115,000 staff
Metrix
Metrix is a 50:50 joint venture between Land Securities Trillium
and QinetiQ to bid for the Defence Training Review (‘DTR’), the
largest PFI contract ever with a £13bn training and
accommodation package covering over 600,000m2. DTR aims
to modernise the delivery of professional and trade training
throughout the armed forces, including provision of new and
refurbished accommodation and full range estates services.
155
Business analysis continued
DWP, Hinchley Wood
Residential consent for part
of DWP’s Hinchley Wood site
shows value generated by
innovative thinking for both
Land Securities Trillium and
our customer.
Barclays leasehold property
We have achieved 100%
sub-letting of all five floors at
8 Angel Court since taking
on the lease in 2005.
Telereal leasehold property
Telephone House, Brighton
one of the 50 Telereal
properties where rent review
risk has been transferred to us.
Regional breakdown by contract (000m2) and number of employees
Average length of contract
798m2
28
106m2
4
1,918m2
289
1,522m2
35
3,739m2
734
15.2 years
Number of people by occupation
as at 31/03/06
Asset management
Call centre
Capital projects
Quality assurance
Facilities management
HR/finance/business development
Total
Note:
These figures exclude all Telereal staff
Total
42
95
214
36
585
118
1,090
Service partner agreements at 31/03/06
Service partner
Service element
Estimate of
proportion
of service
providers’
turnover
<5%
<5%
<5%
Catering
Building maintenance
Security
Building maintenance
20-25%
Cleaning
Furniture
Cleaning
Facilities Management
Cleaning
Security
Security
<5%
15-20%
<5%
<5%
<5%
<5%
20-25%
Compass
Dalkia
Group 4
GS Hall
ISS
Amaryllis/MiB
MITIE
Norland
OCS
Securitas
Wilson James
Average contract length of above service partners: 11 years
Average contract time remaining of above service partners: 7 years
Average annual contract value of above service partners: £18m
Land Securities Annual Report 2006
DWP
BBC
Norwich
Union
DVLA
Barclays
Telereal II
Other
Total
Telereal
(50%)
Contract
20 yrs
5 yrs
25 yrs
20 yrs
20 yrs
4.5 yrs
Mar 2018
Jun 2006
Jun 2029
Mar 2025
Dec 2024
Mar 2010
£m
67.5
–
–
13.3
5.5
–
86.3
(17.1)
–
–
–
(1.3)
(7.6)
–
(7.1)
53.2
0.9
–
–
54.1
–
–
–
–
–
£m
–
1.4
–
–
–
–
£m
642.0
13.1
222.7
47.0
–
2.5
1.4
927.3
£m
13.7
1.0
0.3
–
–
2.4
17.4
(3.4)
(2.7)
(3.2)
(0.3)
–
(1.9)
–
(0.9)
5.0
–
–
–
5.0
(2.9)
–
–
–
43.7
Norwich
Union
000m2
107.0
5.2
2.8
115.0
40.0
75.0
115.0
8.7
£m
8.2
–
3.8
0.7
–
0.1
12.8
(1.7)
(3.8)
(0.5)
(3.6)
–
(2.1)
–
(0.1)
1.0
–
–
–
1.0
–
–
–
–
–
DVLA
000m2
13.3
–
–
13.3
–
13.3
13.3
81.4
£m
0.5
1.7
–
–
–
–
2.2
–
–
–
–
–
0.3
–
–
2.5
–
1.9
–
4.4
–
–
–
27.1
–
£m
–
–
–
21.1
–
–
21.1
–
–
–
–
–
(14.2)
–
–
6.9
–
–
–
6.9
–
–
–
–
–
(0.7)
(1.2)
–
–
–
(8.6)
(7.4)
(0.5)
(17.0)
–
–
293.0
276.0
–
(0.2)
19.8
–
–
Barclays
000m2
Telereal II
000m2
Other
000m2
11.4
14.8
23.9
50.1
11.3
38.8
50.1
–
–
–
–
–
–
–
–
150.0
–
–
–
–
–
–
–
–
–
(52.6)
(0.5)
(17.3)
–
(32.5)
–
–
0.5
–
–
–
0.5
–
–
–
–
–
BBC
000m2
–
–
–
–
–
–
–
364.2
(183.9)
(229.3)
(26.1)
(215.7)
–
(147.8)
(7.4)
(20.5)
96.6
1.0
1.9
293.0
392.5
(17.5)
(1.4)
19.8
27.1
536.2
Total
000m2
2,347.9
86.4
190.2
2,624.5
912.8
1,711.7
2,624.5
697.4
156
Property outsourcing – Land Securities Trillium
Contract analysis
Year ended 31/03/06
Contract length
Term(1)
Expiry date
Income
Unitary charge
Third party (sublet) income
Capital projects
Other revenue
Proceeds of sales of trading properties
Finance lease income
Gross property income
Costs
Rent payable
Service partners (maintenance, facilities etc)
Life cycle maintenance costs
Capital projects
Cost of sales of trading properties
Other costs, including overheads
Bid costs
Depreciation
Contract level operating profit
Profit on sale of fixed assets
£m
553.0
9.0
198.0
9.0
–
–
£m
66.6
–
20.6
16.2
–
–
769.0
103.4
(178.1)
(169.0)
(21.9)
(194.5)
–
(88.8)
–
(19.0)
97.7
1.0
Net surplus on revaluation of investment property
Profit on disposal of investment in
joint venture (Telereal)
Segment profit
Capital expenditures
Life cycle maintenance costs capitalised
Estates capitalised
Book value of assets at 31 March 2006
Investment in joint venture
Investment properties
Operating properties
(1) For Barclays contract, this is the sale and leaseback term.
–
–
98.7
(14.6)
(1.2)
–
–
492.4
Contract analysis
Floorspace
Client occupied
Third party (sublet)
Vacant
Total
Freeholds/ valuable leaseholds
Leaseholds
Total
Estate managed but not transferred
DWP
000m2
2,216.2
66.4
163.5
2,446.1
861.5
1,584.6
2,446.1
93.1
Land Securities Annual Report 2006
Vacation allowance and portfolio activity – DWP
000m2
Client occupied*
Third party (sublet)
Vacant
Total
Freeholds/valuable leaseholds
Leaseholds
Total
Estate managed but not transferred
Vacation allowance used to date
Available allowance
Future allowance
*Includes core vacations
Vacation allowance and portfolio activity – Barclays
000m2
Client occupied
Third party (sublet)
Vacant
Total
Freeholds/valuable leaseholds
Leaseholds
Total
Estate managed but not transferred
Note: The ‘Disposals’ column includes – lease surrenders, lease expiries and disposals.
Regional breakdown by contract at 31/03/06
000m2
London, South East and West England
Northern England
Scotland
Midlands and Wales
Total
DWP
856
890
298
495
2,539
157
Business analysis continued
31/03/05
Acquisitions
Vacations
Lettings
Disposals
31/03/06
2,331.5
65.2
79.2
2,475.9
866.4
1,609.5
2,475.9
100.5
120.2
322.9
278.2
19.4
–
–
19.4
1.3
18.1
19.4
–
–
–
–
(134.7)
(5.6)
140.3
–
–
–
–
(7.4)
–
–
–
–
6.8
(6.8)
–
–
–
–
–
–
–
–
–
–
(49.2)
(49.2)
(6.2)
(43.0)
(49.2)
–
–
–
–
2, 216.2
66.4
163.5
2,446.1
861.5
1,584.6
2,446.1
93.1
234.1
289.1
198.2
31/03/05
Acquisitions
Vacations
Lettings
Disposals
31/03/06
11.3
10.2
10.0
31.5
11.3
20.2
31.5
–
BBC
340
–
24
–
364
0.1
0.2
18.3
18.6
–
18.6
18.6
–
NU
63
32
29
–
124
–
–
–
–
–
–
–
–
–
4.4
(4.4)
–
–
–
–
–
–
–
–
–
–
–
–
–
DVLA
Barclays
Telereal
10
6
2
77
95
39
–
–
11
50
150
–
–
–
11.4
14.8
23.9
50.1
11.3
38.8
50.1
–
Total
1,458
928
353
583
150
3,322
Land Securities Annual Report 2006
158
Investor Information
The report and financial statements, share price
information, company presentations, primary
financial statements as excel downloads, the
financial calendar, corporate governance,
contact details and other debt and equity
investor information on the Group are available
through the internet on
www.landsecurities.com/investorrelations.
Registrar
All general enquiries concerning holdings of
ordinary shares in Land Securities Group PLC,
should be addressed to:
Lloyds TSB Registrars, The Causeway,Worthing,
West Sussex BN99 6DA.
Telephone: 0870 600 3972
Textphone: 0870 600 3950
Website: www.shareview.co.uk
An online share management service is
available, enabling shareholders to access
details of their Land Securities shareholdings
electronically. Shareholders wishing to view
this information, together with additional
information such as indicative share prices
and information on recent dividends, should
visit the online shareholder centre at
www.landsecurities.com/investorrelations or
www.shareview.co.uk.
E-communication
UK shareholders may elect to receive
communications electronically. Shareholders
who opt to receive electronic communications
can also submit their proxy votes electronically.
To register for this service, shareholders should
visit the online shareholder centre at
www.landsecurities.com/investorrelations or
www.shareview.co.uk.
Payment of dividends
Shareholders whose dividends are not currently
paid to mandated accounts may wish to
consider having their dividends paid directly
into their bank or building society account.
This has a number of advantages, including the
crediting of cleared funds into the nominated
account on the dividend payment date. If
shareholders would like their future dividends
to be paid in this way, they should complete a
mandate instruction available from the
Land Securities Annual Report 2006
registrars. Under this arrangement tax vouchers
are sent to the shareholder’s registered address.
Dividend reinvestment plan (DRIP)
The Company offers shareholders the option to
participate in a DRIP. This enables shareholders
to reinvest their cash dividends in Land
Securities Group PLC shares.
For further details, contact:
The Share Dividend Team, Lloyds TSB Registrars,
The Causeway,Worthing,West Sussex BN99 6DA
Telephone: 0870 241 3018
International dialling: +44 121 415 7049.
For participants in the plan, key dates can be
found in the online financial calendar at
www.landsecurities.com/investorrelations.
Low cost share dealing facilities
Shareview provides both existing and
prospective UK shareholders with simple, low
cost ways of buying and selling Land Securities
Group PLC ordinary shares by telephone,
internet or post.
For telephone dealing, call 0870 850 0852
between 8.30am and 4.30pm Monday to Friday.
For internet dealing, log on to
www.shareview.co.uk/dealing
For postal dealing, call 0870 242 4244 for full
details and a form.
Existing shareholders will need to provide the
account/shareholder reference number, shown
on the share certificate.
Sharegift
Shareholders with a small number of shares,
the value of which makes it uneconomic to sell
them, may wish to consider donating them
to the charity ShareGift, (registered charity
1052686) which specialises in using such
holdings for charitable benefit. A ShareGift
Donation form can be obtained from Lloyds TSB
Registrars, The Causeway,Worthing,West
Sussex BN99 6DA.
Further information about ShareGift is available
at www.sharegift.org or by writing to:
ShareGift, 46 Grosvenor Street, London W1K 3HN
Telephone: 020 7828 1151.
Corporate Individual Savings Accounts (ISAs)
The Company has arranged for a Corporate ISA
to be managed by Lloyds TSB Registrars, who
can be contacted at:
The Causeway,Worthing,West Sussex BN99 6UY.
Telephone: 0870 242 4244.
Capital gains tax
For the purpose of capital gains tax, the price
of the Company’s ordinary shares at 31 March
1982, adjusted for the capitalisation issue in
November 1983, was 205p.
The appropriate values to be used as base costs
in respect of shares in Land Securities Group
PLC issued under the Scheme of Arrangement
in September 2002 are:
Ordinary shares – 769p
B shares – 101p
so that the new ordinary shares and the B
shares received in respect of the old ordinary
shares in Land Securities PLC will attract
86.99% and 13.01% respectively of the base
cost in those old ordinary shares.
Unclaimed Assets Register
The Company participates in the Unclaimed
Assets Register, which provides a search facility
for financial assets which may have been
forgotten. For further information, contact:
The Unclaimed Assets Register, Bain House,
16 Connaught Place, London W2 2ES.
Telephone: 0870 241 1713
Website: www.uar.co.uk
Share price information
The latest information on Land Securities Group
PLC share price is available on our website
www.landsecurities.com.
Registered office
5 Strand, London WC2N 5AF
Registered in England and Wales
No. 4369054
Offices
5 Strand, London WC2N 5AF
and at
140 London Wall, London EC2Y 5DN
1 City Walk, Leeds S11 9DX
120 Bath Street, Glasgow G2 2EN
159
Glossary
Adjusted earnings per share (‘EPS’)
Earnings per share based on revenue profit plus profits on trading
properties and long-term development contracts.
Adjusted net asset value (‘NAV’) per share
NAV per share adjusted to add back deferred tax associated with
investment properties and capitalised interest, the adjustment
arising from the de-recognition of the bond exchange, together
with cumulative mark-to-market adjustment arising on interest
swaps and similar instruments used for hedging purposes.
Average unexpired lease term
Excludes short-term lettings such as car parks and advertising
hoardings, residential leases and long ground leases.
Balanced scorecard
An approach to strategic management developed in the early
1990s by Drs. Robert Kaplan and David Norton to translate an
organisation’s vision into a set of performance indicators
distributed among four perspectives: Financial, Customer, Internal
Business Processes, and Learning and Growth.
Book value
The amount at which assets and liabilities are reported in the
financial statements.
CABE
Commission for Architecture and the Built Environment (‘CABE’).
Combined portfolio
The combined portfolio is our wholly-owned investment
portfolio combined with our share of the value of properties held
in joint ventures. Unless stated these are the pro-forma numbers
we use when discussing the investment property business.
Development pipeline
The Group’s development programme together with any
proposed schemes that are not yet included in the development
programme but which are more likely to proceed than not.
Development programme
The Group’s development programme comprises projects which
are completed but less than 95% let; developments on site;
committed developments (being projects which are approved and
the building contract let); and authorised developments (those
projects approved by the Board for which the building contract
has not yet been let). For reporting purposes we retain properties
in the programme until they are 95% let.
Development surplus
Excess of latest valuation over the total development cost (‘TDC’).
Diluted figures
Reported amount adjusted to include the effects of potential
shares issuable under employee share schemes.
Earnings per share (‘EPS’)
Profit after taxation attributable to ordinary shareholders divided
by the weighted average number of ordinary shares in issue
during the year.
Equivalent yield
The internal rate of return from an investment property, based on
the gross outlays for the purchase of a property (including
purchase costs), reflecting reversions to current market rent, and
such items as voids and expenditures but disregarding potential
changes in market rents and reflecting the actual cash flow rents.
Estimated rental value (‘ERV’)
The estimated market rental value of lettable space as
determined biannually by the Company’s valuers. This will
normally be different to the rent being paid.
Exceptional item
An item of income or expense that is deemed to be sufficiently
material to require separate disclosure.
Finance lease
A lease that transfers substantially all the risks and rewards of
ownership from the lessor to the lessee.
Flexible accommodation allowance
Allowance agreed between a property outsourcing client and
Land Securities Trillium, to vacate a given amount of floor space
or to expand over the life of the contract.
Gearing (net)
Total borrowings, including bank overdrafts, less short-term
deposits, corporate bonds and cash, at book value, plus non-equity
shareholders’ funds as a percentage of equity shareholders’ funds.
Gross income yield
The annual net rent on investment properties expressed as a
percentage of the valuation ignoring costs of purchase or sale.
Head lease
A lease under which the Group holds an investment property.
Initial yield
Annualised net rents on investment properties expressed as a
percentage of the valuation.
Interest rate swap
A financial instrument where two parties agree to exchange an
interest rate obligation for a predetermined amount of time.These
are used by the Group to convert floating rate debt to fixed rates.
Rental value growth
Increase in the current rental value, as determined by the
Company’s valuers, over the 12 month period on a like-for-like
basis.
Investment portfolio
The investment portfolio comprises our wholly-owned investment
properties together with the properties held for development but
excludes Land Securities Trillium properties.
Resolution to grant planning consent
The formal resolution by a local planning authority to grant
planning permission, usually conditional upon the completion of
a section 106 or other legal agreement.
Joint venture
An entity in which the Group holds an interest on a long-term
basis and is jointly controlled by the Group and one or more
venturers under a contractual arrangement whereby decisions on
financial and operating policies essential to the operation,
performance and financial position of the venture require each
venturer’s consent.
LIBOR
The London Interbank Offered Rate, the interest rate charged by
one bank to another for lending money.
Like-for-like portfolio
Properties that have been in the investment or combined portfolio
for the whole of the current and previous financial year.
London Portfolio
This business includes all London offices and London retail, but
excludes those assets held in the Metro Shopping Fund LP.
Mark-to-market adjustment
An accounting adjustment to change the book value of an asset
or liability to its market value.
Net asset value (‘NAV’) per share
Total equity divided by the number of ordinary shares in issue at
the period end.
Open A1 planning consent
Planning permission for the retail sale of any goods.
Open market value
Open market value is an opinion of the best price at which the
sale of an interest in the property would complete
unconditionally for cash consideration on the date of valuation
(as determined by the Group’s external valuers). In accordance
with usual practice, the Group’s external valuers report valuations
net, after the deduction of the prospective purchaser’s costs,
including stamp duty, agent and legal fees.
Operating properties
Properties acquired and managed by Land Securities Trillium as
part of its property outsourcing contracts with third parties and
which do not meet the accounting definition of investment
property.
Other investment portfolio
This comprises all other investment properties not included in
Retail or London Portfolio.
Outline planning consent
This gives consent in principle for a development, and covers
matters such as use and building mass. Full details of the
development scheme must be provided in an application for full
planning consent, including detailed design, external appearance
and landscaping before a project can proceed. An outline
planning permission will lapse if full planning permission is not
granted within three years.
Over-rented
Space that is let at a rent above its ERV.
Retail
This business includes our shopping centres, shops, retail
warehouse properties and assets held in retail joint ventures but
not London retail.
Retail park
A scheme of three or more retail warehouse units aggregating
over 4,650m2 with shared parking.
Return on average capital employed
Group profit before interest, plus joint venture profit before tax,
divided by the average capital employed (defined as
shareholder’s funds plus net debt).
Return on average equity
Group profit before tax plus joint venture tax divided by the
average equity shareholder’s funds.
Revenue profit
Profit before tax, excluding profits on the sale of fixed asset and
trading properties, profits on long-term development contracts,
revaluation surpluses, mark-to-market adjustments on interest
rate swaps and similar instruments used for hedging purposes,
the adjustment to interest payable resulting from the
amortisation of the bond exchange de-recognition and any
exceptional items.
Reversionary or under-rented
Space where the passing rent is below the ERV.
Reversionary yield
The anticipated yield to which the initial yield will rise once the
rent reaches the ERV.
Section 106 agreement
An agreement, under the Town and Country Planning Act 1990,
between a local planning authority and a developer negotiated in
the context of granting planning permission. It provides a means
of ensuring that developers contribute towards infrastructure and
services that the local authority believes to be necessary to
facilitate the proposed development. Contributions may either be
in cash or in kind.
Total business return
Dividend per share, plus the increase in adjusted diluted net asset
value per share, divided by the adjusted diluted net asset value
per share at the beginning of the period.
Total development cost (‘TDC’)
All capital expenditure on a project including the opening book
value of the property on commencement of development,
together with all finance costs less residential proceeds.
Total property return
Valuation surplus, profit/(loss) on property sales and net rental
income in respect of investment properties expressed as a
percentage of opening book value of the investment property
portfolio.
Total shareholder return
The growth in value of a shareholding over a specified period,
assuming that dividends are reinvested to purchase additional
units of the stock.
Passing rent
The annual rental income receivable which may be more or less
than the ERV (see over-rented and reversionary).
Trading properties
Properties held for trading purposes and shown as current assets
in the balance sheet.
Public Private Partnership (‘PPP’)
A partnership that brings together, for mutual benefit, a public
body and a private company in a long-term joint venture for the
purpose of delivering public projects or services.
Pre-let
A lease signed with an occupier prior to completion of a
development.
Private Finance Initiative (‘PFI’)
A particular form of PPP, that is a government or public authority
initiative to acquire private financing for public sector
infrastructure.
Real Estate Investment Trust (‘REIT’)
In the context of the draft legislation for the introduction of REITs
in the UK, a REIT must be a publicly quoted company with at
least three quarters of its profits derived from a qualifying
property rental business. Income and capital gains from the
property rental business will be exempt from tax but the REIT will
be required to distribute a significant proportion of those profits
to shareholders. Corporation tax will be payable on
non-qualifying activities in the normal way.
Turnover rent
Rental income which is related to an occupier’s turnover.
Unitary charge
The basic payment received by Land Securities Trillium under a
property outsourcing contract.
Voids
The area in a property or portfolio, excluding developments,
which is currently available for letting.
Weighted average cost of capital (‘WACC’)
Weighted average of cost of debt and notional cost of equity,
used as a benchmark to assess investment returns.
Yield shift
A movement (negative or positive) in the equivalent yield of a
property asset.
Zone A
A means of analysing and comparing the rental value of retail
space by dividing it into zones parallel with the main frontage.
The most valuable zone, Zone A, is at the front of the unit. Each
successive zone is valued at half the rate of the zone in front of it.
Land Securities Annual Report 2006
160
Index
A
Accounts explained
B
Benchmarking
Total shareholder return
Investment Property Databank
Weighted average cost of capital (‘WACC’)
Board, The
Board of Directors
Business analysis
Portfolio valuation
Investment property business –
combined portfolio
Investment property business – Retail
Investment property business –
London Portfolio
Investment property business –
combined portfolio analysis
Property outsourcing
Business model
Owning property
Developing property
Property outsourcing
Business Planning
Business plan
Balanced scorecard
Our performance
C
Chairman’s Statement
Contact details
Contents
Core purpose and strategy
Corporate Governance
Introduction
Role of the Board
Board balance and independence
Director induction and training
Board appraisal
Nominations Committee
Remuneration Committee
Investor relations
Annual General Meeting
Audit committee
External auditors
Valuers
Financial reporting
Going concern
Internal control
Corporate Responsibility
Stakeholder engagement
Social, ethics and environmental risks
Employees
Community
Performance highlights
Future outlook – key challenges
Health and safety
Key performance indicator
Health and safety training
Accident reporting
Risk assessments and audits
Construction skills certification scheme
Environment
Environmental management systems
Asbestos
Energy and waste management
CO2 emissions
Waste management
Biodiversity
Climate change
Customers
D
Developing property
Sustainable development
Development risk management
Director’s report
Directors responsibilities
Land Securities Annual Report 2006
19
38 – 47
38
38
39
39
39
40
40
40
40
41
41
41
42
42
42
42
43
43
101 – 136
101
101
102
103
100
159
98
160
44 – 47
44
45
45
46
46
47
158
36
58 – 67
60
61
61
62
62
62
62
64
64
66
66
66
25
25
26
26
19
F
Financial highlights
Financial Review
Headline results
Profit before tax
Revenue profit
Earnings per share
Dividend
Net assets
Cash flow and net debt
Financing strategy and financial structure
Gearing
Funding structure
Expected debt maturities
Hedging
Future funding
Taxation
Pension schemes
Key financial risks
Investor relations
Legal proceedings
Financial Statements
Income statement
Statement of recognised income and expense
Balance sheets
Cash flow statements
Five Year Summary
G
Glossary
I
Independent Auditors Report
Index
Investment Property Business
Performance
Contribution to performance
Key drivers of valuation change
Investment
Development
Property management
Investor information
K
Key performance indicators
L
London Portfolio
Achievements
London economy
London office markets
London retail
Strategy
Performance
Contribution to performance
Redeploy capital to maximise future
growth prospects
Enhance returns through development activities
Create strong relationships with occupiers
Landflex
Customer service
M
Markets
Regulatory
Competitive landscape
Business
N
New business
Notes to the financial statements
O
Operating and Financial Review
Owning property
Outlook
20
20
20
21
21
78 – 79
139 – 157
139
140 – 141
142 – 145
146 – 149
150 – 152
153 – 157
28
28
29
32
36
36
36
36
20 – 23
161
IFC, 17, 99
24
85 – 88
85
85
85
86
86
86
86
86
86
86
87
87
87
87
87
80 – 84
80
80
80
82
82
82
83
83
83
83
83
84
84
84
84
84
84
84
84
84
33
29
30
30
137 – 138
97
P
People
Communication and engagement
Reward and recognition
Performance highlights
Performance overview
Property investment risk management
Property outsourcing
Achievements
Markets
Contract features
Strategy
Performance
Contribution to performance
Accessing new opportunities
Northern Ireland Civil Service Workplace 2010
Building Schools for the Future
Defence Training Review
Growing our business
Leading innovation
Corporate Real Estate Group
Customer service
Service delivery
Health, safety and environment
Environment
Property outsourcing risk management
R
Remuneration Report
Introduction and compliance
The Committee
Remuneration policy and philosophy
2005/06 Directors’ remuneration
Base salary
Annual bonuses
Long-term incentives
LTIP performance shares
LTIP matching shares
EPS Target
TPR
Share options
Shareholding guidelines
Pensions
“A day” changes
Non-Executive Directors
Service agreements
Directors’ interest in shares
Information regarding senior managers
Performance graph
Retail
Retail achievements
Retail market
UK retail property market
Strategy
Performance
Contribution to performance
Investment in dominant retail assets
Regeneration and renewal of the portfolio
Customer service and property management
Customers satisfaction surveys
Environment management
Risk Management
S
Strategic direction
U
Understanding IFRS
Urban Community Development
34
34
34
21
18
29
32, 68 – 75
70
71
71
72
72
72
74
74
74
74
74
75
75
75
75
75
75
32
90 – 96
90
90
90
90
91
91
91
91
91
91
92
92
94
94
94
95
95
95
96
96
48 – 57
50
51
51
52
52
52
52
54
55
56
56
89
22
37
76 – 77
76
76
21
33
104 – 136
Kent Thameside
Stansted
V
Values
24 – 77
28
22
Contact details
If you have any comments in respect
to this year’s Annual Report please write to:
Investor Relations Department
Land Securities Group PLC
5 Strand, London WC2N 5AF
T: +44(0)20 7413 9000
E: investor.relations@landsecurities.com
www.landsecurities.com
If you have any other comments or
queries on any aspect of our business,
please do not hesitate to contact us as
above and we will pass your enquiry
on to the relevant individual.
We couldn’t let our Chairman and
Executive Directors get away without
trying to draw a bicycle – here’s how
they did.
Design by SAS and BOB Design
Illustrations by Laura Carlin
Location photography by James Harris
Board photography by George Brooks
Printed by St Ives Westerham Press,
environmentally accredited
printers ISO 14001.
This report is printed on paper that meets
international environmental standards, contains
total chlorine free virgin pulp, obtained from
sustainably managed forests.
Land Securities Group PLC
Copyright and trade mark notices
All rights reserved.
©Copyright 2006 Land Securities Group PLC.
Land Securities, LandSecurities (stylised), the
“LS” block logo, Making Property Work, and
Landflex are trade marks of Land Securities
Group PLC.
All other trade marks and registered trade
marks are the property of their respective
owners.
Peter Birch
Chairman
Francis Salway
Group Chief
Executive
Mark Collins
Chief Operating
Officer
Martin Greenslade
Group Finance
Director
Mike Hussey
Managing Director –
London Portfolio
Richard Akers
Managing Director –
Retail
Ian Ellis
Chief Executive –
Land Securities
Trillium
Land Securities Group PLC
5 Strand, London WC2N 5AF
T: +44 (0)20 7413 9000
E: investor.relations@landsecurities.com
www.landsecurities.com