Financial statements
- Independent auditors' report
- Consolidated income statement
- Consolidated statement of comprehensive income
- Consolidated statement of changes in shareholders' equity
- Consolidated balance sheet
- Consolidated cash flow statement
- Notes to the financial statements
- Independent auditors' report
- Company balance sheet
- Notes to the Company financial statements
Notes to the financial statements
for the year ended 31 October 2011
10. Investment properties, investment properties under construction and interests in leasehold properties
| Investment property £'000 |
Interests in leasehold properties £'000 |
Investment property under construction £'000 |
Total investment properties £'000 |
|
As at 1 November 2010 |
686,178 | 69,130 | 18,360 | 773,668 |
Additions |
16,847 | — | 18,654 | 35,501 |
Reclassifications |
19,994 | (1,220) | (19,994) | (1,220) |
Impairments |
(2,230) | — | — | (2,230) |
Revaluations |
(8,708) | — | (1,961) | (10,669) |
Depreciation |
— | (5,518) | — | (5,518) |
Exchange movements |
1,483 | 142 | — | 1,625 |
As at 31 October 2011 |
713,564 | 62,534 | 15,059 | 791,157 |
The reclassification of £1,220,000 from interests in leasehold properties relates to the acquisition of the freehold of a leasehold property.
| Investment property £'000 |
Interests in leasehold properties £'000 |
Investment property under construction £'000 |
Total investment properties £'000 |
|
As at 1 November 2009 |
646,778 | 71,954 | 12,641 | 731,373 |
Additions |
8,668 | 9,433 | 16,948 | 35,049 | Reclassifications |
10,480 | (3,492) | (10,480) | (3,492) |
Revaluations |
24,816 | — | (709) | 24,107 |
Depreciation |
— | (5,635) | — | (5,635) |
Disposals |
(795) | (2,700) | (40) | (3,535) |
Exchange movements |
(3,769) | (430) | — | (4,199) |
As at 31 October 2010 |
686,178 | 69,130 | 18,360 | 773,668 |
The interest in leasehold properties at 1 November 2009 was adjusted by £2.9 million to reflect the present value of minimum lease payments of contractual rents. A corresponding reduction was recorded in the finance lease obligations with no impact on net assets. The remaining £0.6 million of the reclassification related to the acquisition of the freehold of a leasehold property.
(Losses)/gains on investment properties comprise:
| 2011 £'000 |
2010 £'000 |
|
Revaluations |
(10,669) | 24,107 |
Impairments |
(2,230) | — |
Depreciation |
(5,518) | (5,635) |
| (18,417) | 18,472 |
| Deemed cost £'000 |
Valuation £'000 |
Revaluation on deemed cost £'000 |
|
Freehold stores |
|||
As at 1 November 2010 |
297,034 | 541,181 | 244,147 |
Movement in year |
35,861 | 34,538 | (1,323) |
As at 31 October 2011 |
332,895 | 575,719 | 242,824 |
Leasehold stores |
|||
As at 1 November 2010 |
72,760 | 144,997 | 72,237 |
Movement in year |
2,194 | (7,152) | (9,346) |
As at 31 October 2011 |
74,954 | 137,845 | 62,891 |
All stores |
|||
As at 1 November 2010 |
369,794 | 686,178 | 316,384 |
Movement in year |
38,055 | 27,386 | (10,669) |
As at 31 October 2011 |
407,849 | 713,564 | 305,715 |
The valuation of £713.6 million excluded £0.8 million in respect of owner occupied property. Rental income earned from investment properties for the years ended 31 October 2011 and 31 October 2010 was £77.73 million and £76.72 million, respectively.
The freehold and leasehold investment properties have been valued as at 31 October 2011 by external valuers, Cushman & Wakefield LLP ("C&W"). The valuation has been carried out in accordance with the RICS Valuation Standards – Global and UK, 7th Edition published by The Royal Institution of Chartered Surveyors ("the Red Book"). The valuation of each of the investment properties has been prepared on the basis of market value as a fully equipped operational entity, having regard to trading potential. Two non-trading properties were valued on the basis of Market Value. The valuation has been provided for accounts purposes and, as such, is a Regulated Purpose Valuation as defined in the Red Book. In compliance with the disclosure requirements of the Red Book, C&W has confirmed that:
- the members of the RICS who have been the signatories to the valuations provided to the Group for the same purposes as this valuation have been so since October 2006;
- C&W does not provide other significant professional or agency services to the Group;
- in relation to the preceding financial year of C&W, the proportion of total fees payable by the Group to the total fee income of the firm is less than 5%; and
- C&W has continually been carrying out biannual valuations for accounts purposes on behalf of the Group since October 2006.
Market uncertainty
C&W's valuation report comments on valuation uncertainty resulting from the recent global banking crisis coupled with the economic downturn and, more recently, sovereign debt concerns in Europe. The factors have resulted in a low number of transactions in the market for self-storage property.
C&W notes that although there were a number of self-storage transactions in 2007, the only significant transactions since 2007 are:
- the sale of a 51% share in Shurgard Europe which was announced in January 2008 and completed on 31 March 2008;
- the sale of the former Keepsafe portfolio by Macquarie to Alligator Self Storage which was completed in January 2010; and
- the purchase by Shurgard Europe of the 80% interests held by its joint venture partner (Arcapita) in its two European joint venture vehicles, First Shurgard and Second Shurgard. The price paid was €172 million and the transaction was announced in March 2011. The two joint ventures owned 72 self-storage properties.
Two further smaller transactions have taken place in 2011 at West Molesey in Surrey and Cambridge.
Due to the lack of comparable market information in the self-storage sector, C&W has had to exercise more than the usual degree of judgement in arriving at its opinion of value.
It has been held that valuers may properly conclude within a range of values. This range is likely to be greater in an illiquid market where inherent uncertainty exists and a greater degree of judgement must therefore be applied.
Valuation method and assumptions
The valuation of the operational self-storage facilities has been prepared having regard to trading potential. Cash flow projections have been prepared for all of the properties reflecting estimated absorption, revenue growth and expense inflation. A discounted cash flow method of valuation based on these cash flow projections has been used by C&W to arrive at its opinion of market value for these properties.
C&W has adopted different approaches for the valuation of the leasehold and freehold assets as follows:
Freehold and long leasehold (UK and France)
The valuation is based on a discounted cash flow of the net operating income over a ten year period and notional sale of the asset at the end of the tenth year.
Assumptions
- Net operating income is based on projected revenue received less projected operating costs together with a central administration charge of 6% of the estimated annual revenue subject to a cap and collar. The initial net operating income is calculated by estimating the net operating income in the first twelve months following the valuation date.
- The net operating income in future years is calculated assuming straight line absorption from day one actual occupancy to an estimated stabilised/mature occupancy level. In the valuation the assumed stabilised occupancy level for the trading stores (both freeholds and all leaseholds) open at 31 October 2011 averages 78.72% (31 October 2010: 79.46%). The projected revenues and costs have been adjusted for estimated cost inflation and revenue growth. The average time assumed for stores to trade at their maturity levels is 31.61 months (31 October 2010: 37.61 months).
- The capitalisation rates applied to existing and future net cash flows have been estimated by reference to underlying yields for industrial and retail warehouse property, yields for other trading property types such as student housing and hotels, bank base rates, ten year money rates, inflation and the available evidence of transactions in the sector. The valuation included in the accounts assumes rental growth in future periods. If an assumption of no rental growth is applied to the external valuation, the net initial yield pre-administration expenses for the 106 mature stores is 7.48% (31 October 2010: 7.27%) rising to a stabilised net yield pre-administration expenses of 9.81% (31 October 2010: 10.08%).
- The future net cash flow projections (including revenue growth and cost inflation) have been discounted at a rate that reflects the risk associated with each asset. The weighted average annual discount rate adopted (for both freeholds and leaseholds) is 12.14% (31 October 2010: 12.21%).
- Purchasers costs of 5.8% (UK) and 6.2% (France) (see below) have been assumed initially and sales plus purchaser's costs totalling 7.8% (UK) and 8.2% (France) are assumed on the notional sales in the tenth year in relation to freehold and long leasehold stores.
Short leaseholds (UK)
The same methodology has been used as for freeholds, except that no sale of the assets in the tenth year is assumed but the discounted cash flow is extended to the expiry of the lease. The average unexpired term of the Group's UK short-term leasehold properties is 12.50 years (31 October 2010: 12.62 years). The average unexpired term excludes the French commercial leases.
Short leaseholds (France)
In relation to the French commercial leases, C&W has valued the cash flow projections in perpetuity due to the security of tenure arrangements in that market and the potential compensation arrangements in the event of the landlord wishing to take possession. The valuation treatment is therefore the same as for the freehold properties. The capitalisation rates on these stores reflect the risk of the landlord terminating the lease arrangements.
Investment properties under construction (UK and France)
C&W has valued the stores in development, adopting the same methodology as set out above but on the basis of the cash flow projection expected for the store at opening and allowing for the outstanding costs to take each store from its current state to completion and full fit out. C&W has allowed for carry costs and construction contingency, as appropriate.
Prudent lotting
C&W has assessed the value of each property individually. However, with regard to the stores which have low or negative short-term cash flow, C&W has prepared its valuation on the assumption that were these properties to be brought to the market then they would be lotted or grouped for sale with other more mature assets of a similar type owned by the Group in such a manner as would most likely be adopted in the case of an actual sale of the interests valued. This lotting assumption has been made in order to alleviate the issue of low or negative short-term cash flow. C&W has not assumed that the entire portfolio of properties owned by the Group would be sold as a single lot and the value for the whole portfolio in the context of a sale as a single lot may differ significantly from the aggregate of the individual values for each property in the portfolio, reflecting prudent lotting as described above.
Valuation assumption for purchaser's costs
The Group's investment property assets have been valued for the purposes of the financial statements after deducting notional purchaser's costs of 5.8% (UK) and 6.2% (France) of gross value, as if they were sold directly as property assets. The valuation is an asset valuation which is entirely linked to the operating performance of the business. They would have to be sold with the benefit of operational contracts, employment contracts and customer contracts, which would be very difficult to achieve except in a corporate structure.
This approach follows the logic of the valuation methodology in that the valuation is based in a capitalisation of the net operating income after allowing a deduction for operational cost and an allowance for central administration costs. Sale in a corporate structure would result in a reduction in the assumed Stamp Duty Land Tax but an increase in other transaction costs reflecting additional due diligence resulting in a reduced notional purchaser's cost of 2.75% of gross value. All the significant sized transactions that have been concluded in the UK in recent years were completed in a corporate structure. The Group therefore instructed C&W to carry out a Red Book valuation on the above basis.
