The Directors present the strategic report of KCR Residential REIT plc ('KCR' or the 'Company') and its subsidiaries (together, the 'Group') for the year ended 30 June 2023. 

PRINCIPAL ACTIVITY

The Group carries on the business of acquiring, developing and managing residential property predominantly for letting to third parties on long and short leases.  At the year-end, the Group consisted of the Company, which is a public company limited by shares, and its wholly owned subsidiaries:

1.           K&C (Coleherne) Limited owns a freehold residential property in Chelsea, London containing ten studio flats;

2.           K&C (Osprey) Limited owns ten freehold apartments and the freehold of several retirement properties let on long leases to residents and provides management services in respect of these properties and to third-party landlords;

3.           KCR (Kite) Limited owns three freehold residential properties in Ladbroke Grove, London (16 flats);

4.           KCR (Southampton) Limited owns a long leasehold block of 27 two-bedroom apartments at Chapel Riverside, Southampton. The lease is a 999 lease for which the Company pays a peppercorn rent; and

5.           K&C (Newbury) Limited owns no property and is now effectively dormant.

Throughout the year the Company remained a REIT and has complied with REIT rules throughout the period and since the balance sheet date.

GROUP STRATEGY

The Directors intend to build a significant presence in the residential letting market, primarily through the acquisition of land with planning permission that will be developed into residential property and the acquisition of existing residential property. Assets are predominantly acquired with the purpose of letting to third parties.

RESULTS

The Group reports a consolidated loss of £166,136 for the year to 30 June 2023 (2022 - consolidated loss of £342,081). 

REVIEW OF BUSINESS AND FINANCIAL PERFORMANCE

The Board has reviewed whether the Annual Report, taken as a whole, presents a fair, balanced and understandable summary of the Group's position and prospects, and believes that it provides the information necessary for shareholders to assess the Group's position, performance, and strategy.

In reporting financial information, KCR presents alternative performance measures, "APMs", which are not defined or specified under the requirements of IFRS.  For example, portfolio occupancy and percentage of rent arrears.  The Company believes that these APMs, which are not considered to be a substitute for or superior to IFRS measures, provide stakeholders with additional helpful information on the performance of the business.  The Board reminds readers that these APMs are not GAAP measures, are not intended as a substitute for those measures, and that other companies may use different measures.

Revenue in this financial year increased by 23% to £1,575,482 (2022 - £1,280,770). Core portfolio revenue (relating to Rentals, Management fees and Ground Rent) was the primary contributor to revenue growth with continued strong performance from Coleherne Road and the Deanery Court property was transitioned to the Cristal Apartments WIWO operating model.  Portfolio occupancy (excluding the planned vacancy at Coleherne Road and Deanery Court during the transition phase) and rent collection remained above 95% for the whole year.   

The Cristal Apartments WIWO strategy is expected to result in lower levels of occupancy but enhanced revenue. We will be revisiting the APM in respect of occupancy given this.

The Group recorded an operating profit before separately disclosed items of £718,546 (2022 - £340,613). Increase against the prior year was due to an increased contribution from positive revaluation movements. After allowing for separately disclosed items and finance costs, the loss before taxation was £166,136 (2022 - £342,081). Separately disclosed items relating to refinancing and refurbishment works accounted for a majority of the loss before taxation in the 2023 financial year.   The Group reports the operating result both before and after separately disclosed items as the costs associated with refurbishment works is expected to vary significantly year-on-year.

Total assets at 30 June 2023 decreased to £27.2 million (2022 - £27.4 million). Investment property increased overall (£1,230,000) partially due to the acquisition of an additional apartment and capitalisation of a component of the Coleherne Road refurbishment works.   

Net assets decreased to £13.51 million (2022 - £13.68 million) and net asset value per share decreased to 32.42p (2022 - 32.82p).

Upon completion of the Torchlight transaction in the 2020 financial year, the Group entered into an option agreement to grant Torchlight an option to subscribe for a further 50,000,000 new Ordinary Shares during the option period (up to 6 August 2022). Details of the option agreement were disclosed in the Strategic Report in the 2022 financial statements.

In October 2021, Torchlight exercised 13,500,000 options (2021: 600,000) and converted into 10p shares at a price of 19.9821p per share (2021: 19.8079p per share), increasing Torchlight's interest in the Company to 23,100,000 shares, representing 55.4% of the Company's enlarged issued share capital.

On 6 August 2022 the option expired with no further exercises being made by Torchlight.

KEY PERFORMANCE INDICATORS

The Directors and management team monitor key performance indicators relevant to each of the subsidiaries to improve Group performance. Management reports to the Board if data shows significant variances against expected outcomes and proposes mitigation action as necessary.

Examples of the KPIs used to monitor aspects of performance include:

1.    At property level:

1.1.      Vacancy rate in terms of number of units available and potential rental income

Target occupancy of at least 90 per cent. achieved; and

1.2.      Outstanding rents as a percentage of rental income

Target debtor balance of less than 10 per cent. of rental revenue achieved.

Now that Deanery Court is being operated under the Cristal Apartments WIWO operating model, target vacancy rate will be reviewed in line with an expected increases in occupancy volatility.

2.    At Group level

Near term focus continues to be on reducing costs, enhancing revenue and growing the business to achieve a cash break-even position (before separately disclosed capital expenditure), to provide a stable base from which to grow. Solid progress in this respect is being made. In order to achieve this, the Group is focusing on optimising performance from the existing assets and incremental acquisitions where they make sense.

RISKS AND UNCERTAINTIES

The Board regularly reviews the risks to which the Group is exposed and ensures through its meetings and its regular reporting that these risks are minimised as far as possible.

The principal risks and uncertainties facing the Group at this stage in its development are:

·           Financing and liquidity risk

The Company has an ongoing requirement to fund its activities through the equity markets and in the future to obtain finance for property acquisition and development. Although there is no certainty that such funds will be available when needed, the Company believes it would be able to access further funding for the Directors to continue to focus on selectively growing the Group's asset base

·           Financial instruments

Details of risks associated with the Group's financial instruments are given in note 20 to the financial statements. The Directors seek to mitigate these risks in manners appropriate to the risk;

·           Valuations

The valuation of the investment property portfolio is inherently subjective as it is made on the basis of assumptions made by the valuer or the Directors, that may not prove to be accurate. The outcome of this judgment is significant to the Group in terms of its investment decisions and results. The Directors, who have long experience of property and valuation principles, seek to mitigate this risk by employing independent valuation experts to complete periodic valuations of the assets in the portfolio. Valuation assumptions are reviewed and considered by the Directors for reasonableness.

                   Directors' duty to promote the success of the Company under Section 172 Companies Act 2006

Section 172 (1) of the Companies Act 2006 requires Directors to act in the way they consider, in good faith, would be most likely to promote the success of the Company for the benefit of shareholders as a whole, and in doing so having regard to a diverse group of stakeholders.

The Directors continue to have regard to the impact of decisions made on all stakeholders and are aware of their responsibilities to promote the success of the Company, in accordance with section 172 of the Companies Act 2006.

We aim to work responsibly with our stakeholders and outline below the key Board decisions made during the 2023 financial year:

FORWARD-LOOKING STATEMENTS

This Annual Report contains certain forward-looking statements which have been made by the Directors in good faith, based on the information available at the time of the approval of the Annual Report and financial statements. By their nature, such forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that will or may occur in the future. Actual results may differ from those expressed in such statements.

OUTLOOK

Whilst the near-term focus remains on improving the operational performance of the existing assets and containing or reducing costs, the Group is continuing to investigate the purchase of residential property assets that are capable of supporting an increasing income yield. It may be necessary for the Group to raise more capital in order to achieve this objective.

ON BEHALF OF THE BOARD:

Russell Naylor
Executive Director

19 September 2023

CORPORATE GOVERNANCE STATEMENT

Compliance with the QCA code

During the year to 30 June 2023 KCR Residential REIT plc, while an AIM quoted Company, was operating with four directors and three employees. In September 2018, it adopted the QCA Code but with such a tightly controlled operational and risk environment was not able to, in all areas, fully comply with the principles. During the current year, the Directors have continued to work towards compliance and updating the website to comply as far as possible with the following QCA Code principles, noting areas where the small scope of operations limits their ability to fully comply:

Principle 1: Establish a strategy and business model which promotes long-term value for shareholders

The Company's objective is to build a substantial property portfolio predominantly in the residential sector that generates both secure income flow from rents and increasing net asset value for shareholders. The Company acquires or develops blocks of studio, one, two and three-bed apartments that are close to transport links, shopping and leisure, predominantly in London, its surrounds and the South East. These blocks are focused on attracting tenants seeking affordable rental accommodation.

The Company brings its property corporate finance expertise to the identification and execution of these acquisitions.

The Company looks to acquire properties at below market value to improve yield on cost and enhance net asset value. It aims to achieve this through acquisition strategies including:

·      using the REIT's inherent tax advantages; acquiring properties in corporate structures with embedded capital appreciation and deferred tax liabilities which are reduced to zero as the corporate becomes part of the REIT group; and

·      acquiring permitted land, funding the development process and retaining the developer's profit.

Over the medium to long term, the Company expects rental and property values to increase in line with inflation. These increases, coupled with new acquisitions, are designed to enable the Company, once it has reached sufficient scale, to pay dividends from cash flow generated by rents and to deliver net asset value increases through positive property revaluations. Active asset management of the properties may also deliver value increases. The Company, as a REIT, is required to distribute 90 per cent. of its rental profits.

It is the Company's paramount intention to conduct its activities in a professional and responsible manner for the benefit of its shareholders, its employees, and the communities in which it operates.

Further detail on the key challenges that the Board addresses are set out under Risks and Uncertainties in the Strategic Report.

Principle 2: Seek to understand and meet shareholder needs and expectations

The Company remains committed to engaging with its shareholders to ensure its strategy and performance are clearly understood. Feedback from investors is obtained through direct interaction between the Executive Director and shareholders following the Company's full and half year results and certain other ad hoc meetings between executive management and shareholders that take place during the year.

The Company seeks to communicate with its shareholders on a timely and transparent basis at all times. Announcements through RNS are as comprehensive as possible. As part of the Company's repositioning, the speed of reporting of the interim and full year results to shareholders has substantially improved.

The Chief Executive attends and presents at investor forums from time to time, as well as holding discussions with analysts, shareholders and investment managers on an ad hoc basis.

It is apparent from such interaction that shareholders have several concerns, including:

·       How do the Directors propose to expand operations without dilution to existing shareholdings?

         Since property companies are capital-intensive, the Company will raise equity over time to fund the acquisition of new properties. Torchlight Fund LP exercising its option rights as accepted and approved by shareholders was dilutive to existing shareholders. Going forward, the Board will aim to maximise the issuance price of any additional equity offerings such that issuances are accretive or, if that is not possible, they will aim to offer all shareholders the opportunity to participate in the offering on a pre-emptive basis.

·       When will the Company become profitable?

         Historically the Company has advised the Company may become profitable and cash flow positive once it has approximately £50m of investments generating satisfactory rental income. In view of the improved operational performance and cost reductions, it is now considered likely that the Company may become profitable with substantially less than £50m of income generating investments. Executive management is focused on achieving this objective as soon as possible. This is naturally dependent on the availability of suitable transactions and the ability to complete the acquisitions either via  additional equity capital or debt.

Shareholder liaison is managed though Russell Naylor Russell.Naylor@kcrreit.com.

Principle 3: Take into account wider stakeholder and social responsibilities and their implications for long-term success

The Company currently operates in the UK. It identifies the main stakeholders in the UK as being investors, tenants, and suppliers of services (accountant, nominated adviser, broker, lawyers), employees, directors, third-party property managers, banks and other debt providers and property agents introducing investment opportunities.

The Company has an important social responsibility in its role as a landlord of residential housing. We commit to delivering great service to our tenants, which includes providing safe and high-quality residential units, at market prices, managed in a professional way.

Treating all our stakeholders well, and in particular our key customers - our tenants, is key to growing a sustainable business that will have long-term success.

Principle 4: Embed effective risk management, considering both opportunities and threats, throughout the organisation

The Board is responsible for setting the risk framework within which the Company operates and ensuring that suitable risk-management controls and reporting structures are in place throughout the Group.

The Board seeks to minimise risk in the management of its operations. The Company uses third-party advisers to address specific issues that arise during operations where they bring complementary expertise and experience.

Principle 5: Maintain the board as a well-functioning, balanced team led by the chair

The Board comprises a balance of independent and non-independent Directors with collective, specific and complementary skills that enable the Company to manage and direct its affairs in a professional manner, with embedded corporate governance procedures that are fit for purpose.

Full Board meetings are generally held on a quarterly basis and all necessary documentation is provided to the Board in advance, so that they can understand the issues under review and make well-considered decisions. During the year, between full Board meetings, the Board convenes whenever necessary to consider and, if appropriate, approve the execution and completion by executive management of key matters that fall within the Board's defined remit as set out below.

The Board has audit and remuneration sub-committees that are chaired by non-executive directors.

All of the Directors devote such time to the Company's affairs as the Board considers appropriate.

On 3 November 2020 Michael Davies stepped down as Chairman and James Thornton, an independent non-executive director of KCR, became the Non-Executive Chairman of the Board. KCR believes that a reduced board of four members is appropriate for a business of its size and is in line with its efforts to reduce operating costs, assisting with its drive to profitability. As a result of these changes, the Company has only one Independent Non-Executive Director. The Company acknowledges the recommendations of the QCA Code, which it has adopted, and it is intended at the appropriate time to seek appointment of a further Independent Non-Executive Director.

Principle 6: Ensure that between them the directors have the necessary up-to-date experience, skills and capabilities

The Board maintains up-to-date skills, knowledge and experience to enable it to direct and manage the Company's operations, finances and its interface with investors, the public markets and its other stakeholders.

The Board takes great care to appoint managers and staff with the appropriate skills and experience, and is aware of the importance of encouraging diversity among its workforce.

The Board works as a team and regularly reviews its procedures and composition.

The relevant experience and skills of the current Directors are set out under About Us / The Board on the Company's website. Each Director is involved in other organisations which keep their professional skills sharpened and up to date.

Principle 7: Evaluate Board performance based on clear and relevant objectives, seeking continual improvement

The Board of KCR comprises:

*appointed Chairman on 3 November 2020

In accordance with its obligations under the QCA Code, the Board will review internally its collective performance, and the performance of its committees and Board members. At this stage of its evolution and in view of the size of the Board, the Directors do not believe that it is practical to undertake an external or a wide-ranging evaluation of the performance of Board members. The primary tasks of the Executive Director, Russell Naylor, have been and will continue to be to grow the Company's asset base and revenue through the delivery of additional assets to the portfolio. This has included developing capital and asset partnerships and finding ways to raise appropriately priced and structured debt finance to support transactions and equity capital in an uncertain equity market. He is a key point of contact for the capital markets.

In these tasks, Russell Naylor will be supported by the Non-Executive Directors advising on matters such as internal financial controls, financial management, capital planning and overseeing the preparation of financial reports to shareholders.

The primary task of the Chairman, James Thornton, is to ensure that the Board has performed its role correctly, that governance is adhered to, and that the Company works towards delivering value to shareholders in accordance with the Company's strategy. He is also a point of contact with many of the Company's shareholders and professional advisers.

Succession planning remains an important issue for the Board, and in particular the Chairman.

Principle 8: Promote a corporate culture that is based on ethical values and behaviours

The Board strives to promote a corporate culture based on sound ethical values and behaviours.

The Company has adopted a code for Directors' and employees' dealings in securities, which is appropriate for a company whose securities are traded on AIM. The code is in accordance with the requirements of the Market Abuse Regulation that came into effect in 2016.

The Board is also aware that the tone and culture it sets will greatly impact all aspects of the Company and the way that employees behave, as well as the achievement of corporate objectives. A significant part of the Company's activities is centered upon an open dialogue with shareholders, employees and other stakeholders. Therefore, the importance of sound ethical values and behaviours is crucial to the ability of the Company to successfully achieve its corporate objectives.

Principle 9: Maintain governance structures and processes that are fit for purpose and support good decision-making by the Board

The Board is committed to high standards of corporate governance. No system of internal control can completely eliminate the risk of process or individual failures. To an extent, the corporate governance structures which the Company is able to operate are limited by the size of the executive management team and the small number of Executive Directors, which is itself dictated by the current size of the Company's operations. Within this limitation necessitated by the current small size of the business, the Board is dedicated to having strong internal control systems in place to enable it to maintain the highest possible standards of governance and probity.

The Chairman, James Thornton:

· leads the Board and is primarily responsible for the effective working of the Board;

· in consultation with the Board, ensures good corporate governance and sets clear expectations with regards to Company culture, values and behaviour;

· sets the Board's agenda and ensures that all Directors are encouraged to participate fully in the activities and decision-making process of the Board;

· takes responsibility for relationships with the Company's professional advisers and major shareholders.

The Executive Director, Russell Naylor:

· is primarily responsible for developing the Company's strategy in consultation with the Board, for its implementation and for the operational management of the business;

· is primarily responsible for new projects and expansion;

· runs the Company on a day-to-day basis;

· implements the decisions of the Board;

· monitors, reviews and manages key risks;

· is the Company's primary spokesperson, communicating with external audiences, such as investors, analysts and the media;

· is primarily responsible for the systems of financial controls in operation for the Company and each of its subsidiaries;

· is primarily responsible for all financial management and financial planning matters;

· monitors, reviews and manages key risks as they relate to financial impact; and

· implements the financial and internal control decisions of the Board.

The Remuneration Committee is chaired by Richard Boon, Non-Independent Non-Executive Director, and comprises Richard Boon and James Thornton, and meets on an ad hoc basis when required.

The Audit and Risk Committee is chaired by James Thornton, Chairman and Independent Non-Executive Director, and comprises James Thornton and Richard Boon, Non-Independent Non-Executive Director. Russell Naylor is invited to attend as appropriate. It meets at least twice each financial year to consider the interim and final results. In the latter case, the auditors are present and the meeting considers and takes action on any matters raised by the auditors arising from their audit.

The chair of each of the Committees may invite executive management and Board members to attend any meeting.

Matters reserved for the Board include:

· vision and strategy;

· review of budgets, asset plans and trading results;

· approving financial statements;

· financing strategy, including debt strategy;

· business planning relating to acquisitions, divestments and major refurbishments not already agreed in the strategy and asset plans;

· capital expenditure in excess of agreed budgets;

· corporate governance and compliance;

· risk management and internal controls;

· appointments and succession plans at senior management level; and

· Directors' remuneration.

Principle 10: Communicate how the Company is governed and is performing by maintaining a dialogue with shareholders and other relevant stakeholders

The Company's website sets out the principal approach of the Company to governance. It contains all relevant documents and information for shareholders, including all RNS announcements, financial reports, shareholder circulars, and the Company's articles.

Shareholders are additionally encouraged to participate at the AGM, to ensure that there is a high level of accountability and identification with the Group's strategy and goals.

Audit & Risk Committee Report

The Audit & Risk committee is a Board committee delegated with responsibility to oversee and review financial and internal controls in accordance with its Terms of Reference. The Committee also makes recommendations to the Board on payment of dividends or otherwise. The Committee is also responsible for setting and agreeing audit fees and overseeing the process for auditor appointment.

The committee is chaired by Independent Non-Executive Chairman, James Thornton, with a quorum of a minimum of two Non-Executive Directors. There are two Non-Executive Director members; James Thornton and Richard Boon.

During the 2023 financial year the Audit & Risk Committee met to review and recommend the interim and year-end financial statements.

Remuneration Committee Report

The Remuneration Committee is a Board committee of Non-Executive Directors acting within its terms of reference to execute its responsibility for the review and approval of salary and bonuses of Board members and senior management personnel and related employment matters.

During 2023, the Remuneration Committee met to review and approve senior management salaries and bonus structure for staff.

It is the Company's policy that the remuneration of Directors should be commensurate with the services provided by them to the Company and should take account of published data on reasonable market comparable Groups, where available. Details of the Directors' remuneration are set out in the Report of the Directors.

The Directors present their report with the financial statements of the Company and the Group for the year ended 30 June 2023.

A review of the business, risks and uncertainties and future developments is included in the Chairman's Letter, the Chief Executive's Letter, the Group Strategic Report, and in note 20 to the financial statements.

DIVIDENDS

The Directors do not recommend payment of a dividend for the year (2022 - £nil).

Political donations

The Group made no political donations during the year (2022 - £nil).

DIRECTORS

The following Directors served during the year to 30 June 2023 and up to the date of approval of this Annual Report:

The beneficial interests of the Directors holding office at 30 June 2023 in the issued share capital of the Company were as follows:

The beneficial interests of the directors holding office at 19 September 2023 in the issued share capital of the Company were as follows:

SUBSTANTIAL SHAREHOLDINGS

As at 19 September 2023, the Directors had been notified that the following shareholders owned a disclosable interest of three per cent. or more in the Ordinary Shares of the Company:

DIRECTORS' REMUNERATION

The Directors received the following remuneration for their services during the year:

* The remuneration paid to Russell Naylor included fees of £48,000 charged by Naylor Partners, a business in which Russell Naylor is a Director (2022 - £48,000).

INTERNAL CONTROLS AND RISK MANAGEMENT

The Directors are responsible for the Group's system of internal control.  Although no system of internal control can provide absolute assurance against material misstatement or loss, the Group's system is designed to provide reasonable assurance that problems are identified on a timely basis and dealt with appropriately.

 

REPORT OF THE INDEPENDENT AUDITOR TO THE MEMBERS OF

KCR RESIDENTIAL REIT PLC

 

Opinion

 

We have audited the financial statements of KCR Residential REIT Plc (the 'Parent Company') and its Subsidiaries (together, the 'Group') for the year ended 30 June 2023 which comprise the Consolidated Statement of Comprehensive Income, the Consolidated and Company Statements of Financial Position, the Consolidated and Company Statements of Changes in Equity, the Consolidated and Company Statements of Cash Flows, and notes to the financial statements, including a summary of significant accounting policies. The financial reporting framework that has been applied in their preparation is applicable law and UK adopted International Accounting Standards.

In our opinion, the Group and the Parent Company financial statements:

·      give a true and fair view of the state of the Group and the Parent Company's affairs as at 30 June 2023 and of the Group's Loss for the year then ended;

·      are in accordance with UK adopted International Accounting Standards; and

·      have been prepared in accordance with the Companies Act 2006.

 

Basis for opinion

 

We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the 'Auditor's responsibilities for the audit of the financial statements' section of our report. We are independent of the Group and the Parent Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC's Ethical Standard as applied to listed entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

 

 

Conclusions relating to going concern

 

We are responsible for concluding on the appropriateness of the Directors' use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group and the Parent Company's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify the auditor's opinion. Our conclusions are based on the audit evidence obtained up to the date of our report. However, future events or conditions may cause the Group and the Parent Company to cease to continue as a going concern.

 

Our evaluation of the Directors' assessment of the Group and the Parent Company's ability to continue to adopt the going concern basis of accounting included:

 

·      Obtaining the 12-month going concern assessment performed by management, including the assumptions and sensitivities prepared by management;

·      Challenging the appropriateness of management's forecasts by:

o  checking the mathematical accuracy of the cash flow forecast;

o  assessing the key assumptions used in the going concern assessment based on our knowledge of the Group and the current economic climate; and

o  assessing whether management has taken into account the principal and emerging risks noted in the annual report.

 

 

·      We determined whether there is a material uncertainty which casts significant doubt over the ability of the Group and the Parent Company to continue as a going concern; and

·      We assessed the disclosures in the financial statements relating to going concern, to ensure they were in compliance with IAS 1.

 

In our evaluation of the Directors' conclusions, we considered the inherent risks associated with the Group and the Parent Company's business model, we assessed and challenged the reasonableness of estimates made by the Directors and the related disclosures and analysed how those risks might affect the Group and the Parent Company's financial resources or ability to continue operations over the going concern period.  

 

Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually or collectively, may cast significant doubt on the Group and the Parent Company's ability to continue as a going concern for a period of at least twelve months from when the financial statements are authorised for issue.

 

In auditing the financial statements, we have concluded that the Directors' use of the going concern basis of accounting in the preparation of the consolidated financial statements is appropriate.

 

The responsibilities of the Directors with respect to going concern are described in the 'Responsibilities of Directors' section of this report.

 

 

Our approach to the audit

 

	Overview of our audit approach
	Overall materiality:  Group: £250,000, which represents 2% of the Group's net assets. Parent Company: £164,000, which represents 2% of the Parent Company's net assets.
	Key audit matters were identified as: Valuation of Investment Property (same as previous year) Our audit approach was a risk-based substantive audit focused on the investment activities of the Group.

 

 

 

Key audit matters

 

Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters included those that had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

 

 

In the graph below, we have presented the key audit matters, significant risks and other risks relevant to the audit.

 

 

 

 

 

 

 

 

 

 

 

                     

 

 

 

Key audit matter

Significant risk

Other risk

 

 

 

Key Audit Matter

How our scope addressed the matter

Valuation of Investment Property (2023: £25.8m and 2022: £24.6) The Group holds investment properties which comprise properties owned by the Group held for rental income and capital appreciation. Investment properties are valued by the Directors with reference to independent external desktop or full valuations performed. Valuations are based on a market approach which provides an indicative value by comparing the property with other similar properties for which price information is available and the valuation technique is Income capitalisation and/or capital value on a per square foot basis. The valuation of investment properties requires significant judgement in determining the appropriate inputs to be used in the model and there is a risk that the properties are incorrectly valued.

In responding to the key audit matter, we performed the following audit procedures: o Obtained understanding of the processes, policies and methodologies, including the use of industry specific measures, and policies for valuing investment properties held and confirmed our understanding by performing test of design and implementation of relevant controls. o Assessed the independence, competence and objectivity of the Group's external valuation expert. o Obtained and inspected the independent appraisals regarding the investment properties and supporting data to assess whether the data used is appropriate and relevant and discussed these with management to evaluate whether the fair value of the investment properties is reasonably stated, challenging the assumptions made by management. o Verified valuation inputs made by the management and the Group's external valuation expert to independent sources and tested the arithmetical accuracy of the calculations. o Performed the following procedures: a) assessed and corroborated management's market related judgements and valuation inputs (i.e., gross yield, rate per square foot) by reference to comparable transactions, and independently compiled databases/indices. b) determined whether the methodologies used to value investment properties were consistent with methods usually used by market participants for similar types of properties; and c)  assessed the adequacy of the financial statement disclosures in relation to the use of estimates and judgements regarding the fair value of the investment properties. Our results Based on the procedures performed we have not identified any material issues that would suggest the valuation of investment properties is inappropriate.

 

Our application of materiality

 

We apply the concept of materiality both in planning and performing the audit, and in evaluating the effect of identified misstatements on the audit and of uncorrected misstatements, if any, on the financial statements and in forming the opinion in the auditor's report.

Materiality was determined as follows:

Materiality measure	Group	Parent Company
Materiality for financial statements as a whole	We define materiality as the magnitude of misstatement in the financial statements that, individually or in the aggregate, could reasonably be expected to influence the economic decisions of the users of these financial statements. We use materiality in determining the nature, timing and extent of our audit work.
Materiality threshold	£250,000 which is 2% of -net assets.	£164,000 which is 2% of net assets.
Significant judgements made by auditor in determining the materiality	In determining materiality, we made the following significant judgements: o  Net assets, as a benchmark, is considered the most appropriate because the investors would usually assess the performance of the Company by looking at the net asset value.   Due to the Company being listed and considering that the investors or potential investors would be sensitive to changes in the net asset value, it was deemed that 2% would be the most appropriate percentage.
Significant revision(s) of materiality threshold	There was no significant revision of our materiality threshold as the audit progressed.
Performance materiality used to drive the extent of our testing	We set performance materiality at an amount less than materiality for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole.
Performance materiality threshold	£175,000 which is 70% of financial statement materiality.	£114,800 which is 70% of financial statement materiality.
Significant judgements made by auditor in determining the performance materiality	In determining materiality, we made the following significant judgements: -       Our risk assessment, including our assessment of the Group and Parent Company's overall control environment.
Significant revision(s) of performance materiality threshold	There was no significant revision of our performance materiality threshold as the audit progressed.
Communication of misstatements to the audit committee	We determine a threshold for reporting unadjusted differences to the audit committee.
Threshold for communication	£12,500 which is 5% of financial statement materiality and misstatements below that threshold that, in our view, warrant reporting on qualitative grounds.	£8,200 which is 5% of financial statement materiality and misstatements below that threshold that, in our view, warrant reporting on qualitative grounds.

 

The graph below illustrates how performance materiality interacts with our overall materiality and the tolerance for potential uncorrected misstatements.

Overall materiality - Group	Overall materiality - Parent Company

FSM: Financial statements materiality, PM: Performance materiality, TFPUM: Tolerance for potential uncorrected misstatements

 

 

 

An overview of the scope of our audit

We performed a risk-based audit that requires an understanding of the Group and Parent Company's business and in particular matters related to:

Understanding the Group, its components, and their environments, including Group-wide controls

-     We obtained an understanding of the Group and its environment, including Group-wide controls, and assessed the risks of material misstatement at the Group level;

 

Identifying significant components

-     We evaluated the components to assess their significance and determined the planned audit response based on a measure of materiality. The measure of materiality used was based upon net assets or total assets appropriate

 

Type of work to be performed on financial information of parent and other components (including how it addressed the key audit matters)

-     We undertook substantive testing on significant transactions, balances and disclosures, the extent of which was based on various factors such as our overall assessment of the control environment, the effectiveness of controls over individual systems and the management of specific risks; and

 

-     For subjective estimates made by management on the valuation of the investment properties, we performed independent searches to confirm the appropriateness of the valuation methodology used in consideration of the comparable properties, market assumptions and other inputs used.

 

Other information

The Directors are responsible for the other information. The other information comprises the information included in the annual report, other than the financial statements and our auditor's report thereon. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon.

 

In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement of the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact.

 

We have nothing to report in this regard.

 

Opinions on other matters prescribed by the Companies Act 2006

In our opinion, based on the work undertaken in the course of the audit:

 

-     the information given in the strategic report and the directors' report for the financial year for which the financial statements are prepared is consistent with the financial statements; and

-     the strategic report and the Directors' report have been prepared in accordance with the applicable legal requirements.

Matters on which we are required to report by under the Companies Act 2006

In light of the knowledge and understanding of the Parent Company and the Group and its environment obtained in the course of the audit, we have not identified material misstatements in the strategic report or the Directors' report.

 

Matters on which we are required to report by exception

We have nothing to report in respect of the following matters in relation to which The Companies Act, 2006 requires us to report to you if, in our opinion:

 

·    adequate accounting records have not been kept; or

·    the financial statements are not in agreement with the accounting records and returns; or

·    certain disclosures of Directors' remuneration specified by law are not made; or

·    we have not obtained all the information and explanations, which to the best of our knowledge and belief, are necessary for the purposes of our audit.

 

Responsibilities of Directors

As explained more fully in the Directors' responsibilities statement set out above, the Directors are responsible for the preparation of the financial statements which give a true and fair view in accordance with UK adopted International Accounting Standards, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, the Directors are responsible for assessing the Group and Parent Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group and Parent Company or to cease operations, or have no realistic alternative but to do so.

 

Auditor's responsibilities for the audit of the financial statements

 

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion.

Reasonable assurance is a high level of assurance but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council's website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor's report.

 

 

 

 

 

 

 

 

Explanation as to what extent the audit was considered capable of detecting irregularities, including fraud

 

Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our responsibilities, outlined above, to detect material misstatements in respect of irregularities, including fraud. Owing to the inherent limitations of an audit, there is an unavoidable risk that material misstatements in the financial statements may not be detected, even though the audit is properly planned and performed in accordance with the ISAs (UK).

 

The extent to which our procedures are capable of detecting irregularities, including fraud is detailed below:

 

·      We obtained an understanding of the legal and regulatory frameworks applicable to the Group and the Parent Company in which it operates. We determined that the following laws and regulations were most significant: the Companies Act 2006, and the Real Estate Investment Trust (REIT) status section 1158 of the Corporation Tax Act 2010.

·      We understood how the Group and the Parent Company are complying with those legal and regulatory frameworks by making inquiries to management including those responsible for compliance procedures. We corroborated our inquiries through our review of Board meetings, review of compliance reports, review of correspondence with the regulator and review of key regulatory requirements. We identified areas of the above laws and regulations that could reasonably be expected to have a material effect on the financial statements from our sector experience and through discussion with management.

·      We assessed the susceptibility of the Group and the Parent Company's financial statements to material misstatement, including how fraud might occur, by evaluating management's incentives and opportunities for manipulation of the financial statements. This included the evaluation of the risk of management override of controls. We determined that the principal risks were in relation to valuation of investment properties and revenue transactions.

·      In assessing the potential risks of material misstatement, we obtained an understanding of:

-     the entity's operation, including the nature of its revenue sources and services and of its objectives and strategies to understand the classes of transactions, account balances, expected financial statement disclosures and business risks that may result in risks of material misstatement;

-     the applicable statutory provisions; and

-     the entity's control environment.

 

Our audit procedures involved:

-     identifying and assessing the design and implementation of controls management has in place to prevent and detect fraud;

-     understanding how those charged with governance considered and addressed the potential for override of controls or other inappropriate influence over the financial reporting process; and

-     identifying and testing journal entries, in particular any journal entries posted with unusual account combinations.

 

·      These audit procedures were designed to provide reasonable assurance that the consolidated financial statements were free from fraud or error. The risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error and detecting irregularities that result from fraud is inherently more difficult than detecting those that result from error, as fraud may involve collusion, deliberate concealment, forgery or intentional misrepresentations. Also, the further removed non-compliance with laws and regulations from events and transactions reflected in the consolidated financial statements, the less likely we would become aware of it.

 

·      We communicated relevant laws and regulations and potential fraud risks to all engagement team members, and remained alert to any indications of fraud or non-compliance with laws and regulations throughout the audit;

 

·      The Engagement Leader assessed the appropriateness of the collective competence and capabilities of the engagement team including consideration of the engagement teams:

-  understanding of, and practical experience with audit engagements of a similar nature and complexity through appropriate training and participation.

-  knowledge of industry in which the client operates; and

-  understanding of the legal and regulatory requirements specific to the entity including the provisions of the Companies Act 2006 and the Real Estate Investment Trust (REIT) status section 1158 of the Corporation Tax Act 2010.

 

Use of our report

This report is made solely to the Parent Company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Parent Company's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Parent Company and the Parent Company's members as a body, for our audit work, for this report, or for the opinions we have formed.

 

 

 

 

Jeremy Ellis

Senior Statutory Auditor

for and on behalf of Grant Thornton Limited

Statutory Auditor, Chartered Accountants

St Peter Port, Guernsey

 

 

19 September 2023