Caledonian Trust's (LSE:CNN) latest annual report to June 2014, published in preliminary form on Christmas Eve, is much more upbeat on the prospects for the Scottish property market, and for the realisation of value from Caledonian Trust’s portfolio in particular, than the 2013 comments.
Considering the decades of experience and the cautious nature of the directors I think these are bullish remarks from the chairman:
“….the prospects for the investment market are better than at any time since 2007….The underlying factors that brought about this year's great improvement seem likely to continue”
“Demand for investment has many components but a major one is a synthesis of perception, analysis, future expectation, momentum, confidence and "gut" feeling: possibly a variant of Keynes's "animal spirits" all contributing to "group think". During the deteriorating phase of the cycle the "group think" view that predominates is that the market will continue flat or deteriorate further, so reducing demand. When the "group think" changes.. the transformation in demand is dramatic. The value change that accompanies these reversals of "animal spirits" is very large; and such a reversal took place in the general property investment market last year.”
“The increasing supply of credit increases the demand for investment property.”
“Jones Lang Lasalle are slightly more optimistic than Savills [on house price rises], as in 2015 they forecast 4.0% growth in the UK and 3.5% in Scotland, together with a five year growth of 22.8% in the UK and 19.3% for Scotland.”
“Last year I said there would be an imminent turning point in the housing market: "... the key determinant of the long-term housing market will be a shortage of supply, resulting in high prices. For most UK markets that position has now been reached."
“Current demand will be reinforced by an increase in the long-term requirement for houses …. There will be an imbalance between the demand and supply leading to higher long-term prices. The prospects for the housing market are extremely good.”
“The Group has positioned itself to take advantage of a housing market which is improving and which I expect to continue to improve over the next few years. We have completed major investments in long planning processes and although larger schemes are still being promoted, most of the required investment has been made. Our emphasis is on the completion and realisation of development opportunities which can be marketed shortly, and within our development portfolio there are sufficient opportunities to allow several years of such sales. As these sales take place other development opportunities will then be brought forward to provide replacements for these realisations.”
“We will seek to develop our major sites as soon as those immediately available are completed. In a liquid and improving market we plan to secure all practicable developments, as there is ample opportunity to reinvest elsewhere as opportunities continue to be presented for the use of our strong development expertise to create high returns.”
“We do not depend on a further recovery in prices for the successful development of our sites as most of these sites were purchased unconditionally, i.e. without planning permission, for prices not far above their existing use value, and before the 2007 house price peak. A major component of the Group land development value lies in the grant of planning permission, and in its extent, and it is relatively independent of changes in house values. For development or trading properties no change is made to the Group's balance sheet even when improved development values have been obtained. Naturally, however, the balance sheet will reflect such enhanced value when the properties are developed or sold.”
“Unlike many other property companies, the Group has successfully negotiated the worst economic crisis for over a century. The prospects, contrary to the last seven years, are very good.”
The good times are only just getting started judging by the fact that they sold very little in the year to June 2014 (nor did they buy much), as they bide their time waiting for true lift-off.
In the final post I'll attempt an estimation of minimum balance sheet value when assets are valued at fair value rather than cost.