Financial Review

I am delighted to report another strong set of results for the year. Investment activity and asset management initiatives across the whole Estate have underpinned our performance which is discussed in the Chief Executive's overview. The purpose of this review is to develop some of the elements that contributed to the year's success and highlight areas receiving special consideration going forward.

As a long-term landowner, we have obligations to achieve year-on-year long-term growth. Over the past 10 years we have seen revenue growth of 70.5% delivering to the Treasury £1.8 billion. Despite the fall in capital values this year, we have achieved capital growth of 65.9% over the same period, and a total return that has outperformed Investment Property Databank (IPD) over the past 10 years. Our financial Key Performance Indicators (KPIs) are threefold: income performance, which is measured against targets set by the Treasury; total return, which we compare with the IPD All Property Index and our peers; and capital growth which is also measured against the IPD All Property Index and our peers.

Our performance this year has been as follows:

KPI	Target	Actual
Net income surplus	£224.2m	£226.5m
Total return	–25.5%	–15.8%
Capital growth	–29.7%	–19.3%

The Crown Estate Act 1961

It is important to understand the provisions of the Act and especially how we report our financial results. The Crown Estate Act 1961 places certain obligations and restrictions on the way we do business. In particular we are unable to borrow to finance investment and we have special accounting arrangements that are specifically aimed at maintaining a balance between income and capital, similar to a trust.

Given these arrangements, our income results are very good and we continue to deliver an increased income contribution to the Treasury.

The Crown Estate Act requires that the distinction between income and capital is maintained in the accounts. In order to achieve this and at the same time comply with International Financial Reporting Standards (IFRS) we have presented our Income and Expenditure Account in a three column format.

We have reported an income surplus of £226.5 million in the year ended 31 March 2009 compared with £213.4 million (restated) in the previous year. The effect of adopting IFRS, which combines capital and income, is that our overall income and expenditure account reports a deficit of £1.29 billion, compared with a surplus of £246 million for the previous year. The majority of this deficit relates to revaluation losses of £1.33 billion reflecting deteriorating market conditions during the year. Our capital account result does not however affect our payment to the Treasury since any capital gains or losses are not recognised within the income computation under The Crown Estate Act.

International Financial Reporting Standards (IFRS)

Last year, we decided that we would be an early adopter of IFRS ahead of other public sector organisations. The conversion has been a challenge as we had the added complication of having to comply with the requirements of The Crown Estate Act as detailed above. The adoption of IFRS should nevertheless enable a more direct comparison with our peers in the property sector.

The impact of IFRS on restated net assets for 2007/08 has been an increase of £5.7 million as a result of changes in the way income from the granting of rent-free periods has been recognised. The biggest change has been to the income and expenditure account which now shows the impact of revaluation gains and losses previously taken through the balance sheet.

As a landed estate, The Crown Estate is unusual in the property industry in the way that we are required to keep the Estate intact. As a result we receive lease premiums in exchange for granting long leases over some of our substantial listed properties. IFRS has presented a challenge in the way that these premiums have been accounted for with the result that we have had to go back many years to then spread this income over the remaining lease life. The changes to the financial statements made as a result of adopting IFRS are explained more fully in note 35.

Property valuation

The total value of the Estate, inclusive of indirect holdings, fell by 16.1% to £5.7 billion for the year ending March 2009. The outward shift in yields across the year has seen our urban commercial portfolio decline from 69% to 63% of The Crown Estate. The remaining 37% of the portfolio, made up of rural, marine and residential, has been more resilient.

The urban commercial portfolio performed broadly in line with the market, falling in value as property yields have moved out and more latterly rental values have started to fall. Overall, the equivalent yield on these properties moved out from 5.5% to 6.6% and capital growth was –27.8%. This compares with our IPD benchmark of –30.0%. Better performance has come from our central London retail holdings and our ‘bond like' long leasehold lettings with long dated reversions. The largest writedowns in value have been the Gibraltar Limited Partnership, the only property interest which carries gearing, and those properties held for development.

The value of our housing and residential holdings fell by 10.2% to £578 million as a result of net sales of £77 million; the underlying capital growth was however positive. After very strong performance last year the rural portfolio steadied, rising in value by 1.9% to £920 million. This was probably conservative as the Mason v Boscowen VAT ruling overhung the market at the valuation date, impacting negatively on reversionary rents. The position was however resolved in the subsequent Government budget. The marine portfolio has risen by 10.6% to £409 million primarily due to a growing wind farm income stream and direct investment in marinas.

Transactional activity was significantly down on last year but we have continued to trade, with activities characterised by increased investment in marine and commercial property outside London. A number of non-core sales have been made during the year, realising £209 million which was 9.5% above their 31 March 2008 valuation.

Transparency of disclosure and the pursuit of best practice is a priority for us. We continually seek to improve both the benchmarking of our performance and the independence of our portfolio valuations. From April 2009 the urban commercial portfolio is now divided into three portfolios: Regent Street; the rest of London; and diversification. In September 2008 we started valuing these portfolios on a quarterly basis and each portfolio is now submitted to IPD with its own bespoke benchmark. The three portfolios total £3.34 billion and are valued by DTZ and Jones Lang LaSalle.

Further valuation appointments have been made during the year, in order to achieve greater consistency and to separate the valuation function from the managing agent function. To this end, Jones Lang LaSalle now values our residential portfolio at Regent's Park and Kensington Palace Gardens, Knight Frank values our affordable housing and Savills values the agricultural estate. We also instigated a check valuation of the marine estate this year. Vail Williams evaluated a 7% sample of our coastal interests totalling £11.4 million and were within 1.7%.

At the start of the year we also set total return targets for the residential, rural and marine parts of the business. These are being combined into a weighted IPD benchmark report which will reflect the composition of The Crown Estate and therefore more accurately benchmark our asset performance.

Investment in partnerships

In June 2008 we formed a co-ownership agreement with Morley Fund Management for an interest in property at Crown Point Shopping Park, Leeds, in which we invested £67.7 million. In December 2008 we invested in another trust in land at Princes Street, London with CGNU Life Assurance for a consideration of £12 million. This brings our total number of investments in limited partnerships to four which in total are valued at £213.2 million with an income account contribution of £10.2 million.

Cash flow

During 2008/09 we benefited from starting the year with healthy cash reserves just as liquidity problems were beginning to affect the market. As a result we were able to take advantage of investment opportunities that were congruent with our investment strategy as well as consolidating and strengthening our holdings. Nevertheless, maintaining a strong liquidity position remains very important to us given our inability to borrow: it is vital that we have sufficient funds to enable us to take advantage of opportunities the current market may present, as well as being able to fund the development commitments on our urban central London portfolio and marine estate.

This year there has been significant investment activity, mainly on the urban commercial portfolio and on the marine estate. The overall total investment across The Crown Estate, including our investment in the 50% interest in Crown Point Shopping Park, Leeds, was £412 million and our total disinvestment was £231 million, leading to a net outflow of £181 million compared with a net inflow of £21 million in 2007/08.

Risk factors and risk management

Risk management is well established within The Crown Estate, with continuing activity to develop and embed risk management processes across the organisation to help ensure we continue to deliver healthy income and capital returns. Risks that threaten achievement of The Crown Estate's corporate and departmental objectives are identified and assessed by management on an ongoing basis (as part of daily business activities), quarterly (by way of formal risk registers) and annually (as part of the business planning process). Key risks reported by management are considered and discussed by the cross-departmental risk committee and Management Board and reported to the audit committee. The Management Board also performs an annual risk assessment to identify and assess strategic risks facing the organisation.

Principal risks and uncertainties

The risks listed here are not the only ones associated with The Crown Estate and are predominantly external. They are not set out in any particular order. Additional risks and uncertainties not presently known to management or currently deemed to be less material may also have an adverse impact on the organisation. All these risks could affect the organisation structure, its operating surplus, net assets, liquidity and/or resources.

Risk	Principal mitigations
Portfolio performance Increase/decrease in revenues and property value caused by macro-economic and market risk, including the current economic downturn, capital availability, changing demand, tenant risks and investment opportunities.	Investment strategy Investment appraisal process both of acquisitions and disposals Economic and market monitoring Portfolio performance monitoring Tenant and arrears monitoring
Developments and projects Failure of developments and projects to deliver expected benefits, cost overruns, letting risks, capital exposure and supplier/third party capability issues.	Business case evaluation process Project management processes Close management of lettings on development projects Monitoring of supplier/third party costs and performance
Operational framework Failure to remain competitive in the way we operate, management of our suppliers and key partners and their relationship with our customers and, internally, our ability to attract and retain key talent.	Ongoing review of our business model and cost base Monitoring of supplier performance Review of remuneration structure and reward strategy
Stakeholder perception Adverse impact on our reputation due to changing perceptions of key stakeholders and/or non-compliance with regulation.	Stakeholder relationship management strategy Health & Safety policy for the corporate office and property portfolio Legal and regulatory compliance model Community engagement and investment programmes Customer focus programmes
Sustainability Decline in revenues and property value as a result of failure to manage the compliance and commercial implications of climate change and environmental regulation, or failure to keep abreast of best sustainability practice.	Sustainability strategy Sustainability considered in property investment decisions

Charitable donations

The Crown Estate provided donations to a range of bodies totalling £10,425 in 2008/09 (£10,157 in 2007/08), as permitted by The Crown Estate Act 1961, section 4(2).

Supplier payment performance

The Crown Estate's payment policy is to pay all suppliers within 30 days of receipt of a correctly documented invoice, or on completion of service where a fee is recoverable from a third party, or according to contract where a shorter payment period is agreed. During the year The Crown Estate paid 62% of invoices from suppliers within this period. At the beginning of the financial year The Crown Estate implemented a new purchase ordering system. Immediately following the change the average time taken to pay suppliers was 48 days. The Crown Estate now commits to pay all suppliers within 10 days providing a valid invoice complying with standard terms of business is received. The Crown Estate observes the principles of the ‘Better Payment Practice Code'.

Our employees

Whilst these are undoubtedly testing times for our business, we have solid foundations in the skills and talents of our people our values of commercialism, integrity and stewardship, and the way we do business. We promote and reinforce our vision and values both to our employees and business partners so that they know:

they are part of a modern, but entrepreneurial business that rewards their ambition and contribution;
the business they work for always tries to do the right thing – so they can too;
they are part of a business which takes its responsibilities seriously and focuses on the long term.

Through enhanced communication channels we listen and respond to our staff and involve them in our strategic planning.

We want all our staff to be ‘good people to do business with' and support them with training and development. The Crown Estate is accredited as an ‘Investor in People' and is continually reviewing areas where further improvements can be made, reflecting the importance we place upon our people. As a result of a thorough review of our internal communications we have made a number of improvements, striving to encourage more employee involvement and engagement through two-way communication channels. These include the introduction of a new ‘Team Talk' process which encourages discussion and debate, a regular newsletter available both online and in print, organisational briefings by the Chief Executive and senior managers, formal and informal feedback processes and the intranet. Employees also receive copies of the corporate plan, annual report and sustainability report.

The final phases of our revised reward strategy will be rolled out this year. These flexible and competitive reward policies and practices will attract, retain and motivate employees and help to develop a high performance culture that supports the achievement of our business goals.

Our focus over the next three years will be to deliver the remaining elements of the programme, and to keep arrangements under continual review to ensure that they continue to remain flexible and competitive.

We continue to monitor sickness absence closely with the aim of reducing absences.

We are committed to improving the health, wellbeing and attendance of all employees and we value the contribution our employees make to our success. Therefore, it is in the best interests of The Crown Estate to ensure that employees are able to make as full a contribution as possible and that absences are minimised.

Our sickness absence rates for 2008/09 were:

	Total average number of employees during the year	Total days lost	Average percentage working days lost	% lost to long-term
General administration	212	1,118.5	2.0%	49.0%
Operating activities	213	1,986.5	3.6%	65.4%
Total	425	3,105.0	2.8%	59.5%

The Crown Estate encourages all its employees to manage their wellbeing and adopt a healthy lifestyle through a number of health and wellness initiatives. We also offer beneficial rates for health insurance, dental and optical care and provide free confidential advice and counselling services and flu vaccinations.

The Crown Estate is an equal opportunity employer and is committed to ensuring that no employee or applicant is treated less favourably on the grounds of race, religion, ethnic origin, disability or sexual orientation.

We are fortunate to have many talented people who enjoy working in the challenging and unique environment that The Crown Estate offers. To reinforce this message, our staff turnover fell below 10% in 2008/09 to 9.2% compared with 11.5% in 2007/08.

Information systems – financial systems

We continue to invest in our information systems to help us achieve our corporate objectives. Our strategy will continue to target core property management systems and the underlying business processes that support them. During the year we completed the implementation of our Agresso financial system and it is now embedded within The Crown Estate. The benefits of improved financial management are now being realised across the business. We have also made a strategic investment in Spatial Data Systems (digitising and consolidating our cartographic records and providing a marine decision support tool (MaRS^®)), and have extended our capability to support strategic planning decisions, especially in relation to our investment in renewable and low carbon energy.

During the financial year there was one non-reportable personal data incident and none in the prior year.

Insurance

The Crown Estate's insurance programme was re-tendered by our insurance brokers in advance of the April 2009 renewal. As a result of this exercise, no increases have been incurred in the rates used to calculate the premiums payable by our tenants.

The Crown Estate continues in its support for those provisions within the Commercial Lease Code that relate to the disclosure of insurance commissions. Our average commission on the insurance arranged on the property portfolio is 7.7%. The advice received from our brokers is that this is at the lower end of the commission levels retained by other major property owners.

Looking ahead

During the year we have started to take advantage of market conditions to reposition the portfolio in line with our investment strategy. Significant investments have been made, as values fell and attractively priced purchase opportunities arose, in high quality retail parks and industrial estates which have secure income streams and provide asset management opportunities. We expect this trend to continue through 2009/10, targeting the purchase of dominant shopping centres, open A1 retail parks and south east industrials. We have also made a number of disposals of properties that are not core to our strategy.

We expect yields to stabilise during 2009/10 but it will be another tough year as the recession feeds through to higher unemployment, more pressure on retailer margins and a higher level of voids across the portfolio. Rental values are now falling and we are not expecting them to start picking up until 2011/12. This is also starting to impact on the marine portfolio as turnover rents on marinas, ports and aggregate extraction come under pressure.

2009/10 will therefore be a particularly challenging year. Our view is that for a business such as The Crown Estate, with a long-term agenda and sound fundamentals in place, the coming 12 months will nonetheless reveal interesting opportunities to deliver our strategy, proactively manage our assets and improve our portfolio. To this end we will be taking forward our development programme, working up planning applications and continuing to invest time and money in renewable energy.

John Lelliott Finance Director