Chief Executive's Strategic Review
Above: Roger Bright, Chief Executive and Second Commissioner
"Last year, as I looked forward to 2006/07, I expressed confidence that our new investment strategy would enhance our financial performance and set us on an even firmer long-term footing. I am pleased that this confidence is reflected in this year's results."
Our turnover has increased by 3.9% to £262.2 million and our net revenue surplus, the profit which goes to the Exchequer for the benefit of UK taxpayers, rose by 4.9% to £200.1 million. Our total capital value at the end of the year was £7.1 billion, an increase of £1.2 billion, nearly 20%, over the previous year. Of that, the total value of our property portfolio accounted for £6.6 billion, an increase of 15.6% over the year before.
Our performance when measured against industry benchmarks has also been encouraging. Following disposals totalling £418 million and purchases of £186 million, our total return for the portfolio as a whole was 25.7%, and for the entire urban portfolio 27.4%. This compares with the IPD Quarterly Index to 31 March 2007, which reports all property total returns for the year of 15.8%. This out-performance is driven by our sector weightings, in particular our high exposure to central London offices. Strong contributions have also come from our residential and rural portfolios, and retail rents have been driven forwards on Regent Street on the back of active asset management.
We are not, though, about to rest on our laurels. Our 'balanced scorecard' of objectives, developed around our core values of commercialism, integrity and stewardship, provide a framework within which we have set ourselves challenging targets. Over the next five years we have set our sights on being recognised as exemplars of commercial performance, and providers, owners and managers of quality land and buildings, embracing high standards of corporate responsibility and customer focus.
Getting our investment strategy right is key to achieving these aims. The Crown Estate has a substantial portfolio of valuable assets and we are continually striving to drive capital value and revenue return. At the same time, many assets are historically or environmentally important, and we take very seriously our role as their long-term owner.
Over the last two to three years we have developed and refined our investment strategy, the purpose of which is to achieve a balanced high quality portfolio which will deliver sustainable long-term performance across all areas of our business – urban, rural and marine. Our management board reviews on a quarterly basis progress against the strategy and its continuing appropriateness in the light of economic and market intelligence. Once a year our main board reviews the strategy as a whole and agrees any changes which may be needed.
For our urban estate, the investment strategy identifies three distinct sectors. The first consists of our core holdings, which comprises high value, contiguous assets primarily in Regent Street and St James's in central London. Historic holdings long associated with The Crown Estate, such as Regent's Park, Carlton House Terrace, Pall Mall and Kensington Palace Gardens form the second sector. The third is a portfolio of commercial and fully tradeable properties, which provide long–term secure revenue streams for the future, giving us the room for manoeuvre we need for redevelopment, refurbishment and asset management initiatives elsewhere on the estate.
Against this background, the main thrust of our investment strategy has been to dispose of secondary stock outside our core holdings and to reduce our current substantial exposure to central London offices, balanced by investment in our core estate and in the acquisition of quality assets with good long–term revenue potential. Consequently, disposals have been primarily properties in central London, notably Bedford Square, Osnaburgh Street, Hobhouse Court and a long lease on 13-16 Carlton House Terrace, while major investments during the year included the new John Lewis distribution centre at Magna Park at Milton Keynes, The Harte & Garter hotel in Windsor and two substantial head leaseholds in Regent Street.
This year has also seen a very important initiative for The Crown Estate, in the form of participation for the first time in a limited partnership. In September, we acquired a share of the Lend Lease Retail Partnership for £39 million giving us an equity interest in the Bluewater Shopping Centre in Kent and Touchwood Court Shopping Centre in Solihull. This approach has given us access to investments of a size and scale that would not have been available to us given the constraints on borrowing imposed by The Crown Estate Act.
Towards the end of the year we also set in train the formation of a partnership with Hercules Unit Trust which combines ownership of Fort Kinnaird Retail Park outside Edinburgh with two retail parks in our ownership at Cheltenham and Leamington Spa. This allows us to participate in the performance of one of the premier retail parks in the UK, and to enjoy access to first-class management expertise in this type of asset.
"Over the next five years, we have set our sights on being recognised as exemplars of commercial performance, embracing high standards of corporate responsibility and customer focus."
These activities and initiatives are reflected in the performance of our urban portfolio, which saw its capital value grow by 17.5% and its turnover by 3.8% to £195.7 million. We are delighted that our commitment to professional asset management and the promotion of quality development was recognised by our peers in the property industry when we won the Estates Gazette 'Property Company of the Year – London' award in September. Judgement by our peers and those with whom we do business is another important indicator of performance.
Falling yields have driven performance over the past couple of years but this yield impact is clearly now on the wane, and looking forward, we expect yields to move sideways and possibly start to ease out. Future performance is therefore going to come from the fundamentals of income return and rental growth. To this end we consider that we are well placed going into next year: the heart of our portfolio is and will remain in central London, and based on regional forecasts of economic growth we are relatively confident. In particular, the current supply and demand imbalance for West End offices suggests better than average rental growth over the next couple of years. The continuing strength of this market will also provide opportunities for further disposals of more peripheral properties that are not key to our strategy.
Outside London we see opportunities for further purchases, similar to Magna Park in Milton Keynes, which have bond-like characteristics and are relatively defensive in the current market. In the short-term there may be concerns over the residential market but this is an emerging investment class and an area where we would like more exposure in the longer term, as our traditional residential base diminishes in value due to enfranchisement. Beyond this we are seeing interesting, perhaps alternative, investment propositions emerging from our marine estate, along with opportunities for investment on our rural estate. In each case transactions will need to match our hurdle rates and in so doing, satisfy our requirements as to sustainability, adaptability and accessibility.
The marine estate has also performed well this year, with total capital value increasing by 13.2% to £337 million and turnover by 3.8% to £38.3million. A range of increased activities across this diverse estate has contributed to these results, including further offshore windfarms coming on-stream, the newly–completed Langeled undersea gas pipeline and growing demand for marine-based leisure activities.
The unique nature of this estate – involving ownership of the seabed right around the UK out to the 12 mile territorial limit, and just over half the foreshore – means that we work closely not only with a range of marine-based industries but also with a number of Government departments whose responsibilities impact upon the marine environment, including DEFRA which is currently promoting proposals for a new Marine Bill, and DTI which has responsibility for energy policy. We believe we have a vital part to play in the formulation of policy in such areas, and in facilitating its implementation.
Looking ahead, the Government's targets for increasing the proportion of UK energy generated from renewable resources present further opportunities for the marine estate in which we will play an active role. Similarly, the major construction programme associated with 2012 Olympic Games presents significant opportunities for the offshore aggregate dredging industry. More broadly, our investment strategy has identified marine as presenting significant potential opportunities which we intend to proactively promote and pursue in the coming year.
The rural estate has had a challenging but successful year. Total capital value increased by 6.1% to £714 million despite net disposals, with underlying capital growth increasing by 14.4%. Turnover has increased marginally, to £22.3 million due to firmer commodity prices. Net capital receipts of £51.5 million from the sale of land at our Bingham estate in Nottinghamshire and smaller disposals at King's Lynn and Romney Marsh, were achieved. Growth in residential values, together with an uplift in development land at Whitehill, near Edinburgh, contributed to the rise in capital value. Overall, the rural estate achieved a total return for the year of 17.2%.
As we enter 2007/08, the prospects for British agriculture are looking stronger than they have for a long time against a background of rising commodity prices, global harvest volatility and competing demands for bio-fuels. Our tenants' success is also our success, and we will look for opportunities to support and invest in their businesses where it makes sound economic sense to do so.
Looking ahead, we remain committed to being a rural landowner, taking very seriously our responsibilities to our tenant farmers, to the rural landscape and to the environment. Our investment strategy for the rural estate is designed to ensure that the portfolio has good quality assets that will give a sound long-term return. We will seek to realise development opportunities where they arise but always with very careful regard to their social, economic and environmental impact and with a commitment to promoting high quality, sustainable projects. We will, where appropriate, make selective disposals and reinvest, with the aim of maintaining the overall proportion of rural estate assets within The Crown Estate portfolio.
Our Windsor estate embraces The Great Park, a national asset of considerable historic, amenity and environmental importance of which we are proud custodians. With over 2 million visitors a year, however, Windsor is far from static and we actively manage and invest in the estate. The net cost of running the estate in 2006/07 was £2 million, and we invested over £7 million in the provision of a new visitor facility for The Royal Landscape, an area of the Park which comprises The Savill Garden, Valley Garden and Virginia Water. The Savill Building – a beautiful and innovative design – was opened by His Royal Highness, The Duke of Edinburgh in June and has already won a number of prestigious architectural and design awards. Around 400,000 visitors have passed through its doors in its first year of opening.
Our holdings in Scotland comprise marine, rural and urban property, and we are keenly aware that our activities, particularly in the Highlands and Islands, can make an important contribution to the environmental, social and economic well-being of the community. We recognise and respect the changes that devolution has brought to the people of Scotland, and we are committed to working with the Scottish Executive, other public bodies and our tenants and customers to release the opportunities on our holdings for the benefit of the public and the communities where we operate. This year, we are publishing a separate comprehensive report setting out in more detail our activities in Scotland.
Corporate responsibility has always formed an important part of The Crown Estate, with integrity and stewardship firmly established as core values. We have continued to increase our focus in this area, setting clear and measurable targets in the five key areas of how we do business; our customers; our people; the environment; and the wider community. In 2006/07 we successfully met in full 58% of the targets we set ourselves for the year, and achieved over 50% completion of a further 37% of them. As our external environmental advisors acknowledge, the profile of corporate responsibility is now much higher in the organisation and continues to rise.
Our employees are, of course, vital to our success, and as an accredited 'Investor in People' we take our responsibilities in this area very seriously. The organisation has been through a significant amount of change, and it is important that people are clear about their roles and responsibilities and what is expected of them. At the same time, we need to ensure our employees have the right skills and are properly rewarded for their achievements. Our 'balanced scorecard' approach provides clarity of direction, but we need to constantly ensure that our people are engaged and motivated. We have therefore initiated a review of our internal communications and of our reward strategy, both of which will be concluded later this year.
The Crown Estate has changed and modernised significantly over the last five years. There is still much to be done, but I believe we have put in place the foundations for sustained long-term performance. In 2006/07 we have begun to see the benefits of these changes; we must ensure that the momentum continues to grow in 2007/08 and beyond.
Roger Bright
Chief Executive and
Second Commissioner