hermes property unit trust

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Hermes Property Unit Trust

Annual Report and Financial Statements 2016

Contents

Introduction

Key Features and Statement of Principles 1

Financial Highlights 2

Chairman’s Report 3

Trust Manager’s Report

Strategic Overview 4

Trust Manager’s Report 7

Direct Property Portfolio 14

Governance

Responsibilities and Governance 19

Appointments Committee and Trust Management Team 20

Advisors 21

Financial Statements

Audited Financial Statements 22

Valuers’ Report to the Trust Manager 31

Independent Auditors’ Report to the Unit Holders 32

Independent Auditors’ Disclaimer Letter 33

Investor Information

Information about the Trust 34

Notice of Annual General Meeting 35

Distribution Analysis 36

Unit Holder Information 37

Alternative Investment Fund Managers Directive – Remuneration Disclosure 38

Further Information 39

Front cover: Citygate Court, Manchester

Annual Report and Financial Statements 2016 1

INTRO

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The Trust is an unauthorised, tax exempt open-ended property unit trust and an Alternative Investment Fund (“AIF”) as defined in the UK Alternative Investment Fund Managers Regulations 2013 (SI 2013/1773). It was created in 1967 in the UK to enable Unit Holders to participate mutually in a professionally managed scheme investing in real property without prejudicing their tax exempt status whilst also freeing them from the burden of management.

The objective of the Trust is to achieve investment returns consistent with a diversified and actively managed UK property portfolio.

Key FeaturesThe Trust is a balanced property unit trust which owns a diversified portfolio of real estate investments on behalf of underlying Unit Holders. Its key features are as follows:

■■ Performance objective – To outperform the benchmark by 50 basis points per annum on a three year rolling basis.

■■ Investment philosophy – A core/satellite approach to portfolio construction. This reflects a core portfolio of property investments expected broadly to match property market returns, but with prospects for enhanced returns through exposure to higher risk/return investments in the satellite component.

■■ Fees – To ensure alignment between the Trust Manager and returns to Unit Holders, the Trust Manager receives a base fee which is augmented with a performance fee for outperformance against the Trust’s benchmark. Fees payable to the Trust Manager are capped.

■■ The Appointments Committee is wholly independent of the Trust Manager and is responsible for the appointment, removal and remuneration of both the Trust Manager, the Trustee and the independent Auditors, each subject to ratification by Unit Holders and the independent valuers.

■■ The Trust Manager is the legal operator of the Trust.

Statement of PrinciplesHermes Property Unit Trust operates under the following core principles:

■■ The Trust observes high standards of integrity and fair dealing at all times, in accordance with the obligations set out in the Trust Deed for the benefit of Unit Holders.

■■ The Trust maintains an open dialogue with Unit Holders. As part of this it provides Unit Holders with timely information enabling them to make informed decisions about the Trust.

■■ The Trust seeks to enhance the capital and income potential of its assets in a manner consistent with its risk objectives and investment policy.

■■ The Trust will manage its assets taking into consideration the relevant environmental and socioeconomic risks and opportunities which contribute to the potential of an investment to deliver long term investment performance for Unit Holders.

■■ The Trust actively engages with its occupiers to develop long term relationships in order to maximise portfolio value for its Unit Holders.

■■ The Trust complies with The Association of Real Estate Funds’ Code of Practice and with relevant codes or standards in force that apply to the Trust.

■■ The Trust is committed on a sound commercial basis to embedding the principles of responsible property investment in all of its real estate investment and asset management practices.

Further information about the Trust including its Strategy and Objectives and Constraints is available in the General Information Memorandum at www.hermes-investment.com/hput/en-gb/publications.aspx.

Further information on the Appointments Committee and Trust Manager is set out on page 20.

Key Features and Statement of Principles

2 Hermes Property Unit Trust

Financial Highlights Year to 25 March 2016

Unit holder performance – total returns for the period (% p.a.) As at 25 March 2016

Source: AREF/IPD UK Quarterly Property Funds Indices.

0%

5%

10%

15%

20%

1.2

11.0

13.3

9.0

1.8

13.1

15.3

11.4

5.6

IPD UK Other Balanced Property Fund IndexHPUT

Ten YearsFive YearsThree YearsOne YearOne Quarter

3.1

Over a 1, 3, 5 and 10 year period the Trust is in the top quartile of its benchmarkUnit holders’ funds £1,327 million (2015: £1,120 million)

Total return to unit holders 13.1% (2015: 19.1%)

Net asset value per unit £5.97 (2015: £5.49)

Distribution per unit 24.4 pence (2015: 20.8 pence)

Performance for the year 2.1% ahead of benchmark*

*Relative performance calculated on a geometric basis.


INTRO

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PerformanceAt the end of another successful year, I am delighted to report that the Trust has continued to deliver good absolute and relative returns to unit holders. The Trust produced a top quartile total return of 13.1% for the year to 25 March 2016, as compared with 11.0% for its benchmark. The Trust is the top performing fund over five and ten year periods for its benchmark. I am also pleased to report that the Trust received a performance award for its three year return to the end of December 2015: the MSCI/IPF Property Investment Award for the best three year return for Balanced Funds in the Property Fund Index based on IPD’s analysis of property portfolio performance. The Trust came top out of 25 funds.

The distribution per unit for the year ended 25 March 2016 has increased by 3.6 pence per unit to 24.4 pence per unit as compared with the previous year. This is largely as a result of the Trust’s successful asset management activities, which are detailed in the Trust Manager’s report.

Property PortfolioThe Trust has continued to grow through the acquisition of an additional ten properties during the year for £162.2 million. Two disposals for £36.9 million have also taken place. Details of these are included in the Trust Manager’s Report.

As I noted above, successful asset management activities have been a strong contributor to the Trust's excellent returns this year. The void rate has increased during the year, rising from 6.5% to 8.4%, as a consequence of acquisitions and planned asset management activities to enhance future returns. The void rate is expected to reduce in the coming months with the conclusion of a number of important lettings.

Just prior to the year end, the government announced an increase in Stamp Duty Land Tax from a maximum of 4% to 5% on commercial property costing over £250,000. Property valuers reflected the increased burden of this tax on transactions in their valuations across the industry in March 2016 and so the impact of this is reflected is reflected in the Trust’s unit price

and performance. The other consequence of this increase in tax has been the necessary adjustment to the bid-offer spread with the Offer price now attracting a premium to net asset value of 6.3%.

Investors and financing arrangementsA unit holder Waiting List has been in operation for the period and with the creation of £111.5 million of new units during the year the Waiting List is now almost fully drawn. A new debt facility is currently being negotiated to ensure the Trust retains the flexibility to take advantage of investment opportunities as they arise. This is expected to be finalised in the coming months and an update will be provided in the quarterly factsheet.

Appointments CommitteeAn important part of my role as Chairman is to ensure the stability and continuity of the Committee. Paul Clark and Sue Clayton were appointed by unit holders at last year’s AGM. I have put myself forward for re-election at this AGM and intend that this would be my final term on the Committee, having served for more than nine years.

Trust ManagerEmily Mousley is stepping away from her role for the Trust Manager and Kirsty Wilman has taken her responsibilities from April 2016. On behalf of the Committee I would like to thank Emily for her valuable contribution to the Trust over the last ten years.

OutlookA combination of a long period of strong performance from UK real estate combined with the forthcoming referendum on the UK’s relationship with the European Union has resulted in reduced investment activity within the wider UK commercial property market. The result of the referendum will be known in late June and this situation is being closely monitored. The Trust has a diversified and high quality property portfolio and I believe it is well placed for the future.

Simon Melliss Chairman

26 May 2016

Chairman’s Report

The Trust continued to deliver good absolute and relative returns to unit holders – it is the top performing fund in its peer group over the five and ten year periods

Simon MellissChairman, Appointments Committee

Unit holder performance – total returns for the period (% p.a.) Years ending 25 March 2012 to 25 March 2016

Source: AREF/IPD UK Quarterly Property Fund Indices.

0%

5%

10%

15%

20%

20162015201420132012

7.6

5.43.8

0.3

13.912.2

19.1

16.9

13.1

IPD UK Other Balanced Property Fund IndexHPUT

11.0


Trust Manager’s Report – Strategic Overview

1. Performance 2. Portfolio Activity

Aim

Activity

Outlook

Risks & Opportunities

The Trust aims to outperform the benchmark by at least 50 basis points but with an emphasis on long term sustainable returns.

The Trust Manager continues to focus on asset management to maximise the long term value of assets; including change of use, extension and refurbishments and regearing of leases to maximise income from existing tenants. Acquisitions and disposals are carefully planned to maximise opportunities and to minimise risk.

During the year the Trust has delivered total returns of 13.1% compared to a benchmark return of 11.0% which has placed the Trust as the top performing fund in its peer group over a five and ten year period. This has been driven by an income return of 3.9% and capital return of 8.8%. The distribution per unit has increased from 20.8 pence per unit for the year ended 25 March 2015 to 24.4 pence per unit in this financial year. The Trust has grown in this period by £207 million driven by subscriptions for new units of £111 million and strong capital growth with a continued emphasis on maintaining returns for existing investors through prudent acquisitions.

During the year the Trust has been a net investor, with 10 new properties acquired. There have been significant levels of asset management activity with a number of tactical voids created leading to an increase in the void rate albeit this is expected to reduce in the coming months. This has enabled a number of refurbishments to take place and new leases at higher rental values therefore agreed, at 31 Great George Street, Christopher Place and Boundary House.

Greater investor caution has been seen due to the increase in Stamp Duty Land Tax and uncertainty arising from the upcoming EU referendum. Capital growth has already slowed and transaction volumes are decreasing.

Pressure on pricing in the investment market will lead to a continuing emphasis on asset management activities to create value. Since 25 March 2016, transaction volumes in UK commercial real estate have reduced markedly. With the waiting list almost fully drawn the Trust is open to further subscriptions, but a more modest pace of investment is expected in the coming 12 months.

The portfolio has been positioned to withstand some of the uncertainties with potential growth from asset management activities rather than reliance on market movements. The Waiting List has been almost fully drawn so the debt facility, which is being put in place by the Trust Manager, will allow ongoing flexibility in the timing of transactions.

Driving performance through asset management has been the Manager’s focus for some time now. The portfolio has various opportunities and all assets are acquired with a view to their asset management potential. The Trust’s void rate, whilst higher than last year end, is tactical and expected to decrease once refurbishments and relettings have been successfully achieved. One of the key opportunities is the redevelopment of existing assets to improve income and capital returns. The Trust Manager continues to identify ways of exploiting these opportunities without taking on undue risk.

Chris MathewFund Director


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Trust Manager’s Report – Strategic Overview continued

3. Portfolio Attributes 4. Responsible Property Investment

The Trust Manager aims to position the portfolio to continue to deliver strong long term performance for unit holders whilst maintaining a low risk profile.

The Trust Manager integrates responsible property investment into its investment and asset management processes.

Activity during the year has been focussed on positioning the portfolio for the future. The Manager has crystallised profits from planning permissions without exposing the Trust to development risk. Acquisitions and disposals during the period have led to a geographical exposure of 77% in London and the South East compared to 53% in the benchmark, reflecting the expected stronger potential for sustainable economic growth in these areas compared to the rest of the UK.

The Trust Manager has been recognised as a leading organisation in the management of the environmental and social performance of its client’s portfolios by the Global Real Estate Sustainability Benchmark (GRESB) Foundation. HPUT received a Green Star in September 2015 for its performance in GRESB, ranking 4th among 19 in its peer group of UK diversified funds. The Trust Manager has taken a proactive approach in obtaining Energy Performance Certificates for its properties to be able to manage the risks presented.

The Trust’s portfolio is considered to be well positioned for the future given where the concentration of growth and opportunity is expected. A number of asset management activities are expected to improve the income yield and void rate over the next year as tactical voids decrease through lettings or property disposals.

RPI has an ever increasing importance amongst investors and legislation continues to demand more from the landlord. The new legislation on Minimum Energy Performance Standards (MEPS) means that as of 2018 commercial property below a minimum Energy Performance Certificate (EPC) level will not be allowed to be let as is, requiring either a refurbishment or a sale.

The Trust has continued to position itself to control risk and take advantage of opportunities for growth. As a result, the Trust has higher geographical weightings to the South East as economic growth and performance is expected to continue to be stronger here. The Trust has a well diversified portfolio and tenant base with good covenants to secure the future income profile.

The Trust has mitigation strategies in place for all properties categorised as F or G rated to ensure that the Trust is able to continue leasing them. Mitigation strategies are also being developed for assets that are E rated. The Trust Manager is continuing to assess the developing regulations and ensuring compliance with these.


Polar Park, HeathrowIn December the Trust purchased this fully let 10 acre industrial estate, which comprises three units, for £31.0 million, reflecting an initial yield of 5.5% and a capital value of £143 per sq.ft. The estate is well located and currently benefits from a low average passing rent of £8.35 per sq.ft. with an average estimated rental value of £10.25 per sq.ft.


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I am pleased to present the Trust Manager’s Report for the 12 months to 25 March 2016. During this period the Trust continued to outperform its benchmark, recording a unit holder return of 13.1% compared with the benchmark IPD Other Balanced Property Fund Index of 11.0%. The return was primarily driven by growth in the Trust’s unit price which increased by 8.8% over the year, with the balance of the return coming from quarterly income distributions at 3.9%.

It has been a busy 12 months for the team: the Trust has increased in size to £1.327 billion through a combination of capital growth and the creation of new units. Given the demand for new units from prospective investors a waiting list has been in operation to provide for the orderly drawdown of funds so enabling the Manager to make prudent purchases without being a forced buyer in competitive market conditions.

During the financial year, there have been a number of important activities which are noted below with further detail on each provided later in this report.

■■ Subscriptions – over the last 12 months to 25 March 2016, £111.5 million of new units have been created with both new and existing unit holders making investments.

■■ Transactional activity – reflecting the strong demand for units, the Trust was a net investor during the 12 month reporting period, making ten purchases totalling £162.2 million and two disposals (one of which was a part sale) representing £36.9 million. The Trust Manager is currently considering a number of investments and the pipeline of potential transactions remains strong, although as is noted later in this report, investment activity in the wider market is somewhat subdued.

■■ Asset Management – there have been a number of good asset management outcomes for the Trust over the past 12 months which have focused on increasing rental income

by letting void units, extending leases and increasing rents at rent reviews. There have also been a number of planning consents obtained which will allow the Trust Manager to increase the long-term capital value of assets, in the portfolio. The void rate in the property portfolio has increased over the period and stood at 8.4% of estimated rental value (ERV) as at 25 March 2016. Through the purchase of investments with void units and also through strategic asset management interventions in order to add value to the overall portfolio.

■■ Co-investment – as at 25 March 2016, the Trust held one joint venture which represented 2.1% of the total portfolio value. The Trust held no indirect investments at the end of the reporting period.

■■ Responsible Property Investment – in September 2015, the Trust was awarded a Green Star in the Global Real Estate Sustainability Benchmark in recognition of the Trust’s ongoing emphasis on sustainability. The Trust was ranked fourth out of 19 funds in its peer group.

Portfolio Value and DebtThe Trust’s total investment portfolio now includes 92 direct holdings with a net asset value of £1.291 billion and two deferred receipts from asset sales with a total value of £25.4 million as at 25 March 2016. Over the past 12 months, the total portfolio value has increased by £207 million. The Trust held one joint venture which represented 2.1% of the total portfolio value as at 25 March 2016. The Trust Manager continues to have a strategic preference towards directly held investments and held no indirect investments at the end of the reporting period.

On 25 March 2016, the Trust was almost fully invested, holding cash for investment of £12.7 million, representing 1.0% of the Trust’s portfolio which is lower than the benchmark level of 3.1%.

Trust Manager’s Report

The Trust continued to outperform its benchmark and recorded a total return to unit holders of 13.1%

Note: Valuations exclude adjustments for tenant incentives of £3.7 million as shown in note 9 on page 27.

HPUT Valuation SummaryAs at 25 March 2016

Directly Held Properties Valuation

(£m)

Net Income

(£m)

Initial Yield

(%)

ERV

(£m)

Reversionary Yield

(%)

Unit Shops 54.0 2.8 4.9 3.5 6.2

Supermarkets 63.2 3.3 5.0 3.3 5.0

Shopping Centres 36.4 2.2 5.6 2.5 6.5

Retail Warehouses 158.0 10.1 6.0 9.5 5.7

Offices 534.0 20.1 3.6 29.4 5.2

Industrials 288.4 16.1 5.3 19.9 6.5

Leisure/Other 157.2 7.5 4.5 8.5 5.1

Sub Total 1291.2 62.1 4.5 76.6 5.6


The Trust held no debt as at 25 March 2016 and no debt was drawn during the course of the financial year. In order to provide flexibility in the timing of acquisitions and disposals a new debt facility for the Trust of up to £75.0 million is being reviewed and is likely to be implemented in the coming months.

HPUT Performance Attribution We have estimated the principal drivers and detractors from performance within the Trust’s investment portfolio over the 12 month period covered in this report. In the chart below we illustrate the relative performance of each sub-sector – this analysis is relative to the Trust’s property portfolio return.

At sub-sector level, the Industrial assets within the portfolio delivered the strongest contribution towards the Trust’s annual performance followed by West End Offices and Rest of UK Offices. At property level, the investments which had a particularly beneficial impact on the overall portfolio return include the South East office Hythe House and the Greater London industrial investment Charlton Gate which have both seen notable increases in capital value growth over the 12 month reporting period.

The largest detractors from portfolio performance came from both the Retail Warehouses and the ‘Other’ sub-sectors partly as a result of purchase costs. At property level, the assets which have reduced the Trust’s portfolio return the most over the 12 month period include Maybird Shopping Park in Stratford-upon-Avon where there are a number of lease renewals in negotiation and Jury’s Inn Hotel in Liverpool due to the costs of acquisition during the period.

Sector WeightingsThe Trust’s portfolio weightings versus the benchmark are shown on page 11 and when comparing the structure of the Trust against the benchmark it is worth noting a few key points.

The first point to note is that the Trust continues to have an overweight position to central London offices, representing 21.8% of the Trust’s portfolio compared with 14.0% in the benchmark. The Trust Manager

remains comfortable with this overweight exposure: the assets are well located and many benefit from the opportunity to change use to residential: they are not assets that are valued at very high capital values per sq.ft., as would be typical of the very prime assets held by many institutional and international investors.

The Trust continues to have a deliberate underweight exposure to the retail sub-sectors which include Unit Shops, Shopping Centres and Retail Warehouses, a strategic decision which reduces the Trust’s exposure to the structural shifts seen within the retail sector. Particularly the impact of the internet on the type and size of modern occupier requirements.

Although the Trust has increased its exposure to the industrial sector from 17.3% to 21.7% over the 12 months to 25 March 2016 it remains underweight against the benchmark exposure of 23.2%. The Trust continues to have a higher weighting than the benchmark towards the South East industrial sub-sector (18.4% for the portfolio against 13.9% for the benchmark) which has good medium-term prospects. The Trust has an underweight exposure against the benchmark in the regional industrial sub-sector where the occupier market remains challenging.

TransactionsOver the last 12 months, the Trust has continued to acquire properties with good asset management potential and complete on a number of strategic sales in order to deliver strong returns for investors. During the course of the year, purchases amounted to £162.2 million and disposals totalled £36.9 million, which included the sale of two buildings at Plantation Wharf, Battersea with a deferred receipt of £15 million due upon completion of the business plan.

PurchasesDuring the last financial year ten acquisitions have completed, of which the key ones are noted below (purchase prices are net of fees):

■■ Eagle Park, Warrington – during February 2016, the Trust purchased this industrial investment for £10.65 million reflecting an initial yield of 6.5%. This industrial park comprises 8 modern

The Trust’s total investment portfolio now includes 92 direct holdings with a net asset value of £1,291 million

Trust Manager’s Report – continued

Attribution of HPUT sub-sector returns relative to Trust portfolio performanceYear to 25 March 2016 (%)

Source: Hermes Real Estate Investment Management.Attribution data is relative to the Trust’s property return and is not relative to the benchmark.

Retail Warehouses

OtherSupermarketsUnit Shops

Shopping Centres

City Offices

Rest of UK Offices

West End Offices

Industrial-1.0%

-0.8%

-0.6%

-0.4%

-0.2%

0.0%

0.2%

0.4%

0.6%

0.8%

0.67 0.640.50

0.38

-0.20 -0.21-0.29

-0.50

-0.98


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units which are fully let and benefits from being located in an area with a low supply of competing modern industrial space which provides strong prospects for rental growth in the short to medium-term.

■■ Park Avenue Industrial Estate, Luton – the Trust purchased the freehold in this multi-let industrial estate during February 2016 for £9.10 million reflecting an initial yield of 7.1%. This asset comprises 28 light industrial/warehouse and distribution units and will benefit from the opening of a new junction on to the M1, so improving connectivity and suitability for industrial occupiers.

■■ Erdington Industrial Park, Birmingham – in February 2016, the Trust acquired this well located multi-let industrial investment for £15.07 million reflecting an initial yield of 5.7%. This industrial park is located directly opposite Jaguar Land Rover’s Castle Bromwich production plant and has good asset management potential with an average unexpired lease term of 1.7 years.

■■ Polar Park, Bath Road, Heathrow – during December 2015, the Trust purchased this fully let 10 acre industrial estate comprising three units for £31.0 million reflecting an initial yield of 5.5% and a capital value of £143 per sq.ft. The estate is very well located and currently benefits from a low average passing rent of £8.35 per sq.ft. with an average estimated rental value of £10.25 per sq.ft.

■■ Fairway Trading Estate, Hounslow – the Trust acquired the freehold in this fully let industrial estate comprising 6 units for £15.95 million during December 2015 reflecting an initial yield of 5.4% and £159 per sq.ft. capital value. This 5.4 acre estate is located to the south east of Heathrow airport and has an average passing rent of £9.00 per sq.ft. which is comparatively low against the average estimated rental value of £10.50 per sq.ft.

■■ B&Q, Stratford upon Avon, Maybird Shopping Park – this strategic retail warehouse investment was purchased during September 2015 for £9.5 million and is situated adjacent to HPUT’s well located existing holding – Maybird Shopping Park. The investment reflected an income yield of 5.5% and provides opportunities for further asset management.

■■ Round Foundry & Marshalls Mill, Holbeck Urban Village, Leeds – this mixed-use investment was purchased for £31.5 million during August 2015 and is situated on the south side of Leeds City centre. It comprises: 92% office use, 5% A3 use, and 3% residential, covering a total area of 5.65 acres and provides 155,811 sq.ft. of accommodation with 301 car parking spaces. This purchase reflected an initial yield of 7.8% (rising to 8.2% upon completion of the lettings of three vacant units currently under offer) and a capital value of £200 per sq.ft.

■■ Yarnfield Park, Training and Conference Centre, Yarnfield – the Trust purchased this well located training and conference centre for £9.45 million in June 2015. This investment occupies a 20 acre site divided into two key elements (conference centre and sports centre) and benefits from a new ten year lease guaranteed by Compass Group Holdings Plc with annual uplifts of 2.5% from year three. The site also offers good medium to long-term residential development potential (subject to planning) with Barratt and Bovis Homes developing adjoining land.

■■ Jury’s Inn Hotel, Keel Wharf, Liverpool – a purpose built hotel purchased at £28.96 million reflecting an initial yield of 5.9%. The property benefits from a guaranteed 35 year indexed lease to Jury’s Doyle Hotel Management (UK) Limited with an uncapped compounded annual RPI increase reviewed every five years with an unexpired lease term of 28 years.

The Trust continues to acquire assets with good asset management potential and completed on a number of strategic sales in order to deliver strong returns for investors


HPUT capital growth by sub-sector (excludes purchases and sales) Year to 25 March 2016

Note: Data excludes assets purchased or sold during the year.Source: Hermes Real Estate Investment Management.

-5% 0% 5% 10% 15% 20%

Retail Warehouses

Supermarkets

Shopping Centres

Unit Shops

Other

Industrial

West End Offices

Rest of UK Offices

City Offices

All Property 10.2

15.3

17.3

2.7

-0.6

3.7

7.8

2.4

15.1

14.5


Asset Management Activity

Christopher Place Shopping Centre, St Albans

The Trust acquired 19-21 French Row in 2013 with a view to improving the main entrance to the shopping centre. Terms were agreed with Tiger Retail during Q3 2015 to lease a reconfigured store. This has improved rental income and footfall in the main shopping area.

27 Soho Square, London

Planning consent was obtained in April 2015 for a potential change of use to 15 residential units within the envelope of the existing office building, as well as the creation of two A1/A2/A3 units at ground and lower ground floor. The property is fully let as offices and a banking hall and these uses are expected to continue in the medium-term.

Citygate Court, Manchester

The Trust has undertaken a comprehensive 12 month internal and external refurbishment program of this 46,000 sq.ft. office investment in central Manchester. The refurbishment completed in early 2016 and the 40,000 sq.ft. of refurbished space is currently being marketed to prospective occupiers.

31 Great George Street, Bristol

The refurbishment of five office floors comprising 49,792 sq.ft. began in October 2015 and is due to complete in September 2016. An agreement for lease has been completed with JLL for the 4th and 5th floors subject to completion of the refurbishment works for a term of 15 years at a rent of £27 per sq.ft. and a 20 month rent free period. The sixth floor was let to JM Finn in October 2015, leaving just three floors to let in the building.


Disposals There were two disposals during the 12 months which are described below:

■■ Allport, Hayes Road, Southall – during December 2015, the Trust sold the freehold of this single let industrial asset situated north east of Heathrow Airport. This disposal reflected a net initial yield of 4.9% (£208 per sq.ft. capital value) and a 2.1% premium above the end-November 2015 valuation of £21.45 million. The sale achieves a premium price from an asset with limited reversionary and asset management potential over the next five years given the 10+ year unexpired term.

■■ Plantation Wharf, Battersea – the Trust sold the long underlease on each of the two riverside office buildings, known as Ivory House and Calico House, to a residential developer for £15 million. The buildings form a relatively small but important part of the Trust's wider commercial holdings in Plantation Wharf and both properties provide the opportunity to create 34 residential units through permitted development. The purchase price benefits from a coupon equivalent to 10% per annum. The purchase price and coupon have both been deferred.

Asset ManagementOver the past 12 months, there have been a number of good outcomes from asset management activity which have helped to drive returns for the Trust. Asset management includes all activities connected with maintaining and improving the rental income from a property investment, but also the refurbishment, extension and repositioning of assets especially through achieving planning consent. The most significant of these are set out below:

■■ 31 Great George Street, Bristol – the refurbishment of five office floors comprising 49,792 sq.ft. began in October 2015 and is due to complete in September 2016. An agreement for lease has been completed with JLL for the 4th and 5th floors subject to completion of the refurbishment works for a term of 15 years at a rent of £27 per sq.ft. and a 20 month rent

free period. The sixth floor was let to JM Finn in October 2015 who were a sub-tenant of the previous occupier of the property – PWC, leaving just 3 floors to let in the building.

■■ Christopher Place Shopping Centre, St Albans – there have been a number of recent asset management activities at this property including the letting of Unit 3B to Kanuka Tea Ltd at £50,000 per annum on a ten year lease with a five year break. A rent review of Unit 22 (Neal’s Yard) increasing the rent from £49,500 to £63,200 per annum. An Agreement for Lease to Busaba Eathai with the tenant undertaking works and the lease starting in May 2016 at £65,000 per annum. The Trust acquired 19-21 French Row in 2013 with a view to improving the main entrance to the shopping centre. Terms were agreed with Tiger Retail during Q3 2015 to lease a reconfigured store. This has improved rental income and footfall in the main shopping area.

■■ Citygate Court, Manchester – the Trust has undertaken a comprehensive 12 month internal and external refurbishment program of this 46,000 sq.ft. office investment in central Manchester. The refurbishment completed in early 2016 and the 40,000 sq.ft. of refurbished office space is currently being marketed to prospective occupiers.

■■ Summit Centre, Heathrow – planning consent was obtained in December 2015 to reconfigure units 3/4 with the insertion of new loading doors and the construction of a new dedicated service yard. This will significantly improve the flexibility of the industrial units and was a condition of an Agreement for Lease which was agreed at end-2014. Units 3/4 comprise 55,000 sq.ft. and this letting will provide additional income of £540,000 per annum for the Trust.

■■ Boundary House, London, EC1 – following completion of the refurbishment works over the first floor totalling 5,025 sq.ft., a 10 year lease was completed with Innisfree Group Ltd at £55 per sq.ft. in return for 12 months rent free, helping contribute towards doubling the rental income since the start of works in 2014.


0%

5%

10%

15%

20%

25%

10.8

3.9

15.8

4.1

8.8

2.7

11.9

7.2

14.6

9.9

5.8

13.3

23.2

10.1

3.1

13.3

5.1

21.7

13.7

1.0

IPD UK other Balanced Property Fund IndexHPUT

CashLeisure/OtherIndustrialRest of UKOffices

South EastOffices

West EndOffices

City OfficesRetailWarehouses

ShoppingCentres

Unit Shops/Supermarkets

Sector weighting (%) – gross value basisAs at 25 March 2016

Source: IPD UK Quarterly Property Fund Indices.

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Over the past 12 months, there have been a number of good outcomes from asset management activity which helped to drive returns for the Trust


■■ Sainsbury’s, Beaconsfield – the outstanding rent review from December 2012 was settled at arbitration in September 2015 and awarded the Trust an increase in rent of £380,000 per annum.

■■ 27 Soho Square, London, W1 – planning consent was obtained in April 2015 for a potential change of use to 15 residential units within the envelope of the existing office building, as well as the creation of two A1/A2/A3 units at ground and lower ground floor. The property is fully let as offices and a banking hall and these uses are expected to continue in the medium-term.

Income and VoidsAt 25 March 2016 the net initial yield on the Trust’s direct portfolio was 4.5% and the reversionary yield was 5.6%. The net initial yield will increase in 2016 through a combination of fixed increases at rent reviews and through lettings where agreements for lease are in place with tenants, but are subject to works to buildings being satisfactorily concluded.

The void rate has increased during the course of the year and at 25 March 2016 this stood at 8.4% of ERV, with three properties accounting for approximately half this amount as follows.

■■ Citygate, Manchester – as set out on page 11 has been a focus for asset management activity. The 40,000 sq.ft. of offices have an established rental value of £970,000 per annum. 1.3% of the Trust's ERV.

■■ Carlson Court, Putney – planning consent was obtained for a change of use of this 47,000 sq.ft. office building to residential as reported last year and this was under offer to sell to a residential developer. A feasibility exercise is being undertaken to establish if a more valuable consent for a larger office development would be permitted on this site given the recent reduction in the supply of office accommodation. The ERV of the existing office building accounts for 0.8% of the Trust’s total ERV.

■■ Summit Centre, Heathrow – as per page 11, the planning consent obtained, facilitated a letting to Travis Perkins in units 3 and 4. These works are underway and are expected to complete in June 2016. The new lease to Travis Perkins will secure a rent of £540,000 per annum, 0.8% of the Trust’s ERV. Units 1, 5 & 6 on the estate are vacant and similar refurbishment works will be taking place in the coming months to facilitate lettings.

The chart below illustrates the Trust’s lease expiry profile and shows that as at 25 March 2016, the Trust had an average unexpired lease term of 8.7 years (adopting IPD assumptions) compared to the benchmark which was marginally lower at 8.1 years. The Trust continues to have a marginally higher exposure to lease expiries in the next five years with 46.4% of the Trust’s income due to expire compared to the benchmark of 41.7%. However a significant proportion of this relates to those investments where there is a higher alternative value for change of use.

OutlookCapital growth in both the Trust’s portfolio and in the wider UK property market slowed markedly in the final quarter of the Trust’s financial year. With capital values having increased month-on-month for 35 months in the IPD Monthly Index, expectations for 2016 were more modest, but the impact of the increase in Stamp Duty Land Tax on commercial property transactions in March 2016 combined with greater investor caution due to the referendum on the UK’s relationship with the EU in June, have contributed to a sharp reduction in investment transactions. The occupier markets have not been impacted in the same way.

Capital growth in both the Trust's Portfolio and in the wider UK property market slowed markedly

Source: IPD.

0% 10% 20% 30% 40% 50%Hermes Property Unit Trust

Average

20+ years

15-20 years

10-15 years

5-10 years

0-5 years 46.4

29.8

6.8

1.4

15.6

8.7


Income security – lease expiry profileAs at 25 March 2016 (%)



The Trust’s portfolio has been strategically positioned to control risk and enable opportunities for growth

The Trust’s portfolio has been strategically positioned both to control risk and enable opportunities for growth in the following ways:

■■ Geographical weightings – the Trust has a strategic higher exposure to assets in London and the South East of England where economic growth and property performance is expected to be stronger than the rest of the UK in the medium-term. The Trust currently has 77% of assets by capital value located in London and the South East compared with 53% in the Trust’s benchmark. The Manager is nevertheless reviewing assets across the UK to seek out the best investment opportunities.

■■ Income profile – the Trust’s income is secured against a well diversified portfolio of properties which are generally let to good tenant covenants on relatively long lease terms. As at 25 March 2016, the Trust had a slightly higher distribution yield at 3.8% than the benchmark average at 3.7%, and a higher average unexpired lease term of 8.7 years. The void rate for the Trust was 8.4%. Although this is expected to reduce with letting of void units in the coming months.

■■ Core / satellite approach – the Trust has a good balance of risk and return within its portfolio. In particular, the exposure to opportunistic strategies is less than the medium term target. This is the result of the Manager's prudence in its acquisitions over the past 24 months.

■■ Gearing and cash – the Trust has no gearing and has cash holdings which are lower than that of the benchmark.

■■ Asset specific projects – the Trust’s portfolio holds a good balance of investments which have the opportunity to be redeveloped in order to add value in the future.

Hermes Alternative Investment Management Limited

26 May 2016

Core/Satellite approach to deliver optimum risk/return

Core Strategies – 65% 69% 0-0.5%

March 16 TargetGAV Outperformance

Strategy & Medium Term Target Weighting

Income returns tounderpindistribution yield

Added Value – 25% 26% +1%Exploit valueenhancingopportunities

Opportunistic Strategies – 10% 4% +2%

Higher riskHigher returnNon-core sectorsSpecialist assets

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Direct Property PortfolioThe Trust has a portfolio bias to London and the South East with almost 80% of investment held in these regions. This is expected to be beneficial for the future performance of the Trust. A full list of properties and locations can be found in the Property Listing on pages 16-18.

Percentage of portfolio value by region

10.7%

22.9%

2.9%

54.1%

8.7% 0.7%

■ Industrials

■ OfficesShopping Centres

■ Unit Shops/Supermarkets

■ Retail Warehouses

■ Leisure/Other

North 8.7%

Industrials 2.2%

Offices 4.2%

Shopping Centres –

Unit Shops/Supermarkets –

Retail Warehouses _

Leisure/Other 2.3%

Central London 22.9%Industrials –

Offices 22.5%



Retail Warehouses –

Leisure/Other 0.4%

North East 0.7%

Industrials –

Offices –



Retail Warehouses 0.7%

Leisure/Other –

South East (excl. London) 54.1%

Industrials 19.0%

Offices 13.7%

Shopping Centres 2.8%

Unit Shops/Supermarkets 7.3%


Leisure/Other 8.4%

West 10.7%

Industrials 1.2%

Offices –




Leisure/Other 0.8%

South West 2.9%

Industrials –

Offices 1.0%



Retail Warehouses –

Leisure/Other 0.3%


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■ Industrials




■ Leisure/Other

Direct Property Portfolio – continuedDistribution of the Trust's property holdings in the London area. This highlights 62 of the Trust's 92 assets which represent 60% of total property portfolio by value.

M25

■ Industrials




■ Leisure/Other


£30 million & over

Sector Property Principal Tenants

Office 27 Soho Square, London W1Freehold property comprising 30,418 sq.ft. of office accommodation

Barclays BankJohn Ayling & Associates Ltd Palantir Technologies

8/10 Great George Street, London, SW1Freehold multi-let West End office building comprising 54,494 sq.ft.

Secretary of State for Communities and Local GovernmentFinmeccania (UK) LtdLiberal Democrats (Trustees) LtdHamilton Lane (UK) Ltd

Broken Wharf House, London, EC4Multi-let office investment located on the north bank of the Thames

United WineriesChambers Travel

2 Cavendish Square, London, W1Leasehold office building behind a period façade, comprising 30,000 sq.ft. over eight floors

Orion Capital ManagersMuse Developments LtdCoach Stores Ltd

Hythe House, HammersmithFreehold, multi-let modern office building over 56,280 sq.ft. located in Hammersmith

Computational Dynamics Ltd All Nippon Airways Co Ltd

Camden Works, London, NW1Freehold, high yielding multi-let office

Max Fordham LLP Triyoga (UK) Ltd

Boundary House, Charterhouse Street, London, EC1Freehold office property in Clerkenwell. The property comprises 32,336 sq.ft. over basement, ground and six upper floors, used as office space on upper floors and retail units on the ground floor including Gaucho Grill

Stone King LLP Gioma (UK) LimitedInrix Media Ltd

Round Foundry & Marshall’s Mill, LeedsMixed use freehold property comprising 155,811 sq.ft.

Elmwood Design LtdDentsu Aegis London LtdSimplicity Marketing Ltd

Retail Maybird Shopping Park, Stratford-upon-Avon Freehold retail warehouse park of 128,000 sq.ft. of open A1 consent and 65,000 sq.ft. of ground floor retail warehouse

MatalanAsdaBootsM&S Simply FoodB&Q

Sainsbury’s, BeaconsfieldFoodstore with a 30 year lease to Sainsbury’s

Sainsbury’s

Christopher Place, St Albans85,000 sq.ft. freehold shopping centre situated in an affluent part of the South East

AskCarluccio’sFitness FirstHobbs

Industrial Polar Park, HeathrowLeasehold multi-let industrial estate

Circle Express LtdNeg Earth Lights LtdAir Menzies International Ltd

Other Jurys Inn Hotel, LiverpoolLeasehold hotel property let on a long lease

Jury’s Hotel Management (UK) Ltd

£10 – £30 million


Office Regency House, London, W1Freehold office building located in a prominent position close to Regent Street

Russells SolicitorsA3D2 Limited

Plantation Wharf, London, SW11Mixed-use leasehold office building located on a prime riverside site in Battersea

Omarco Research LtdCrystal InteractivePanworld Foods Ltd

Blackhorse Tower, CockfostersA mid-1960s office complex of 117,500 sq.ft. on 2.37 acres, situated next to Cockfosters underground station

Blackhorse LtdNHS Property Services Ltd

1 Sekforde Street, London, EC125,000 sq.ft. freehold office building which is currently occupied as serviced offices, situated in Clerkenwell. Purchased in August 2011

Future Cities Catapault Ltd

Carlson Court, PutneyFreehold multi-let office investment in an established Greater London location

Property Portfolio – continued


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£10 – £30 million – continued


Office – continued Eastgate House, London, W1Long leasehold multi-let office building

EleQtra LtdMode Information LtdSP Fashion Ltd

Skandia Point, Southampton67,000 sq.ft. freehold office building

Skandia Life

31 Great George Street, BristolWell configured office building located in Clifton

JM Finn & Co Ltd

The Anchorage, Bridge Street, ReadingA prominent five storey detached freehold office building in Reading town centre, totalling 29,000 sq.ft.

Mobile Iron International IncWillis Ltd

Citygate Court, ManchesterFreehold 47,000 sq.ft. city centre office investment. Occupied as offices with ground floor banking hall, purchased in September 2011

Barclays Bank

Retail Sainsbury’s, CheltenhamFoodstore with a 30 year lease to Sainsbury’s

Sainsbury’s

51-53 Church Street, CavershamFood anchored retail asset in the South East let off low rents. Opportunities for extension and repositioning

WaitroseIceland Frozen FoodsWY and SF Ltd/Costa Ltd

The Broadway, WimbledonFreehold, constructed in 2000, retail terrace of six units over ground, first and second floors together with a public house to the rear. Approximate area 49,600 sq.ft.

DSG InternationalHMVSlug and LettuceMaplin Electronics Ltd

Homelands, ChelmsfordFreehold retail warehouse scheme of 105,000 sq.ft. Jointly owned in a limited partnership with BT Pension Scheme

B&Q

St Albans Retail Park I, St AlbansFreehold retail warehouse scheme of 62,560 sq.ft., let to a variety of tenants jointly owned in a limited partnership with BT Pension Scheme

MatalanHalfordsCarpetright plcPets at Home

Industrial Horndon Industrial Park, West HorndonMulti-let 26 acre industrial park offering quick access to central London

Franco Vago (UK) LtdRoomes Stores LtdBJS Storage & Distribution

1/15 Thomas Road, London, E14Multi-let Greater London industrial estate with good short to medium-term rental prospects

April Wing LtdThe BSS GroupHowden Joinery Properties Limited

Charlton Gate, LondonStandard industrial property with planning potential for trade counter use. Currently fully let with two separate tenants

Net-a-PorterSpaces Personal Storage

Reading MetropolitanProperty occupying a five acre site situated immediately to the north of Reading station

Network Rail

Mitcham Road, CroydonA modern industrial estate of approximately 88,000 sq.ft. comprising five units

B&G Heating and PlumbingSelco Trade Centres

Elstree Distribution Park, BorehamwoodFreehold distribution warehouse park close to M25 motorway, units range in size from 15,000 – 72,000 sq.ft.

Home Delivery Network LtdGailarde Ltd

Peterwood Park, Beddington Farm Road, CroydonA modern freehold industrial estate of five units, ranging in size from 9,000 – 23,000 sq.ft.

Day Lewis Medical LtdVodafoneLong Tall Sally

Summit Centre, HeathrowPrime Heathrow industrial estate located on Bath Road (A4) which connects Central London to the M25 motorway and the M4 Motorway leading to Maidenhead and Reading

Medequip Assistive Technology Ltd

LGC Complex, FordhamFreehold industrial and office estate located to the south of Fordham in an area which has established itself as an industrial and distribution hub

LGC Bioresearch Ltd

Erdington Industrial Park, BirminghamFreehold multi-let industrial estate

Jaguar Land Rover LtdSchmoltz and Bickenbach (UK) LtdBirmingham City Council

Fairway Trading Estate, HeathrowFreehold multi-let industrial estate

Fara Enterprises LimitedTrad Scaffolding Co. Limited




Industrial Guinness Road Trading Estate, ManchesterSubstantial multi-let industrial estate comprising 22 units, totalling 235,000 sq.ft. providing a good range of small to medium size units

Redhall Jex LtdTri-Star Packaging Supplies LtdKBF Enterprises Ltd

Other Premier Inn, GreenwichFreehold hotel property let on a long lease and situated close to Greenwich rail and DLR stations

Premier Inn

Block E, Greenwich High RoadA recently completed development of serviced apartments, a gym and vacant retail unit with a total floor area of 53,570 sq.ft.

Pure GymStayCity

Madelayne Court, ChelmsfordFreehold single-let purpose built care home which benefits from good access to local amenities

Runwood Homes Ltd

Yarnfield Park, Training and Conference Centre, YarnfieldFreehold training and conference centre occupying a 20 acre site

Compass Contract Services (UK) Ltd


Office Park View House, Victoria Road South, ChelmsfordFreehold office investment located in an established South East location

Royal & Sun Alliance

18/20 St John Street, London, EC1Freehold office building which adjoins another HPUT holding – Boundary House

ASM (Thayer) Ltd7 Things MediaSheppard Architects LLP

Wellington Gate, Church Road, Tunbridge WellsRefurbished freehold office accommodation over seven floors, totalling 28,000 sq.ft.

Buss Murton LLPCoutts and CoHobson Prior International Ltd

Elliot House, ManchesterFreehold office and restaurant building situated directly opposite the Spinningfields business district

Bruntwood 2000 Fourth Properties Gusto Restaurants Ltd

Retail St Albans Retail Park II, St AlbansFreehold retail warehouse scheme of 60,141 sq.ft. let to Homebase. Jointly owned in a limited partnership with BT Pension Scheme

Homebase

North End Road, CroydonTwo freehold unit shops, approximately 13,000 sq.ft.

Vision ExpressTUI

135 & 137 High Street, BromleyTwo freehold shop units forming part of a retail terrace in a prime pitch on the pedestrianised high street

Footasylum LtdC and J Clark

5/9 & 10 Church Street, CardiffFour freehold retail units with ancillary accommodation above plus a basement club on a pedestrianised street

Pearl RestaurantsKitchens Ltd

19 & 21 French Row, St Albans Freehold retail unit in close proximity to Christopher Place Shopping Centre

Hurricane Way, Clifton Moor, YorkFreehold retail warehouse constructed in 1992 with garden centre totalling approximately 51,900 sq.ft.

B&Q

12 Brighton Road, RedhillThree freehold retail warehouses constructed in 1993 totalling 32,000 sq.ft.

Pet CityLookers SouthernHalfords

Industrial Centrus Industrial Estate, HertfordFreehold multi-let industrial estate which includes a range of modern industrial units in Hertford’s well established central business location

FT SolutionsPower Valves InternationalAA & AR Goodman

Westgate Industrial Estate, BedfontTwo refurbished industrial units, close to Heathrow airport, comprising over 40,000 sq.ft.

Bridgestone Aircraft Tyre

Belleknowes Industrial Estate, InverkeithingFreehold multi-let industrial estate of approximately 140,000 sq.ft.

Iron MountainNational Oilwell VarcoNetwork Rail

Park Avenue Industrial Estate, LutonFreehold multi-let industrial estate

Carpet Accessory Trims LtdKentas of London LtdFourth Generation Ltd

Eagle Park, WarringtonFreehold multi-let industrial estate

Toyota Material Handling UK LtdPrimeline Logistics LtdRetail Associates Ltd

Other Enterprise Inns Portfolio 116 public houses in London and the South East

Enterprise Inns

Enterprise Inns Portfolio 217 public houses located in affluent areas of London, the South East and the South West of England

Enterprise Inns

£10 – £30 million – continued

Under £10 million



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Responsibilities and Governance

Appointments CommitteeThe Appointments Committee is appointed to act on behalf of Unit Holders – it is responsible for the appointment and removal of the Trust Manager, the Trustee, the independent auditors, and the independent valuer, each subject to ratification by Unit Holders, and the remuneration of both the Trust Manager and Trustee. The Appointments Committee is also required by the Trust Deed to approve the financial statements of the Trust at the end of each annual accounting period – such financial statements are considered by the Unit Holders annually at the Trust’s Annual General Meeting. The Appointments Committee has taken all reasonable steps to ensure compliance with its responsibilities.

New members of the Appointments Committee are appointed by Unit Holders at the Trust’s Annual General Meeting; at least one third of the members are considered for re-election each year. Phillip Rose retired from the Appointments Committee in July 2015. The Appointments Committee met four times during the period.

The Appointments Committee is supported by the following two Committees:

The Audit Committee – duties include the review of external audit arrangements, external audit reports and review of the auditors' statements on effectiveness of systems for internal control and risk management. It is also responsible for the review of interim and annual financial statements before submission for approval by the Appointments Committee. The Audit Committee met twice during the financial period to review the financial statements.

The Audit Committee’s principal responsibilities include:

■■ monitoring and reviewing the auditors’ independence, objectivity and effectiveness of the audit process, and considering the appointment of the auditors;

■■ discussing and agreeing the scope of the audit and reviewing the auditors’ response to changes in the regulatory requirements;

■■ reviewing the interim and annual financial statements prior to submission to the Appointments Committee including advice on whether they are fair, balanced and understandable;

■■ discussing issues and management recommendations that arise with the external auditors;

■■ agreeing any non-audit services; and

■■ considering major findings from any controls reports produced by external or internal auditors.

During this financial year, the Audit Committee discussed and considered:

■■ the scope of the audit and the risks identified by the auditors during the planning stage;

■■ the re-appointment of the external auditors;

■■ the significant risks to the financial statements and the audit response to these concluding that this response is appropriate and that no errors or issues have been identified arising from these; and

■■ the output from the Audit & Assurance Faculty (AAF) report produced by external auditors, Deloitte LLP.

As a result of this activity the Audit Committee were able to conclude that the interim and annual financial statements were fair, balanced and understandable.

In accordance with best practice, the Audit Committee reviews the audit quality and independence on an annual basis. The Audit Committee will commence a full audit tender process during this financial year for the year ended 25 March 2018. The Committee intends to propose the reappointment of PricewaterhouseCoopers LLP to unit holders for the year ended 25 March 2017, while the tender process is ongoing and a decision made. Further communication on this will follow in due course.

The Audit Committee consists of David Nicol (Chairman), Sue Clayton and Caroline Burton.

The Nominations Committee considers the appointment of new members and consists of Simon Melliss (Chairman), David Nicol and Caroline Burton.

Trust ManagerThe Trust Manager is required to manage and administer the Trust in accordance with the Trust Deed and has responsibility for all portfolio and risk management matters. It is responsible for the approval of amounts to be distributed and for the issuance of financial statements subject to approval by the Appointments Committee.

In June 2013, the Trust Manager formed the HPUT Committee through which it considers certain matters on behalf of Unit Holders including investment constraints. It comprises only the members of the Appointments Committee and met four times during the period.

The HPUT Committee is supported by the Asset Plan Committee. The Asset Plan Committee’s duties include the detailed review of the investment process and of the strategic property plans for each individual asset within the Trust’s portfolio. Its membership consists of Paul Clark (Chairman) and Sue Clayton. The Asset Plan Committee met twice formally and informally on various occasions during the period.

TrusteeThe role of the Trustee includes:

■■ ensuring that the Trust is managed by the Trust Manager in accordance with the Trust Deed and that proper accounting records have been maintained;

■■ safeguarding the property of the Trust and the rights attaching thereto by way of segregation and identification of assets; and

■■ taking all reasonable steps to ensure the investment and borrowing powers are complied with.

GovernanceThe Appointments Committee and the Trust Manager are committed to a high standard of corporate governance in the operation of the Trust.

Regulation and LegislationThe Trust Manager is responsible for dealing with its regulator, the Financial Conduct Authority, in an open and co-operative manner. The Trust Manager will inform the regulator promptly of anything concerning the Trust which might reasonably be expected to be disclosed.

The Trust Manager is also responsible for ensuring that all applicable legislation and regulations including but not limited to the Bribery Act 2010 are complied with by the Trust. It is required to maintain adequate procedures that ensure compliance with such legislation and it monitors that such procedures are adhered to.

Conflicts of InterestThe Appointments Committee and the Trust Manager will seek to avoid any conflict of interest arising. Should a conflict arise, they have a duty to ensure fair treatment of all Unit Holders.


Appointments Committee

Simon Melliss BA, FCA – Chairman (Appointed 4 February 2004)Simon retired from his role as Group Finance Director of Hammerson plc in July 2011 after twenty years with the company. He is a non-executive director of Whitbread plc and a member of Council and Treasurer at University College London.

Paul Clark BA (Hons), MPhil (Appointed 3 December 2014)Paul is Chief Investment Officer at the Crown Estate, previously Director of Investment and Asset Management since 2007, prior to that he ran the Church Commissioners global real estate investment portfolio. He is also a non-executive Director of Ronson Capital Partners and sits on various industry bodies including the Policy Committee of The British Property Federation.

David Nicol BA (Hons) CA (Appointed 16 July 2012)David is a Chartered Accountant and worked for Morgan Stanley from 1984 until 2010 taking various senior operational roles. He was chair of Morgan Stanley Pension Trustee Limited and non-executive chair of the audit committee of Morgan Stanley International until the end of 2011. He is currently Chief Executive of Brewin Dolphin plc and a member of the Council of ICAS.

Sue Clayton BSc FRICS (Appointed 9 December 2014)Sue is an Executive Director at CBRE, the global property advisers, where she has specialised in UK investment markets for over 25 years. Sue is a Non-Executive Director of Helical Bar Plc where she chairs the Valuation Committee and sits on the Audit and Remuneration Committees. She is a Trustee of the Reading Real Estate Foundation and chairs its Development Committee.

Caroline Burton MA (Appointed 4 March 2005)Formerly Executive Director of Investments, Guardian Royal Exchange plc, Caroline is currently an investment advisor to a number of local authority pension funds and holds non-executive positions at LV= and TR Property Investment Trust.

Trust Management TeamChris MathewChris has been Fund Director of the Trust since July 2006 having previously been the Trust’s Investment Manager. Chris qualified as a chartered surveyor in 1995 and prior to joining Hermes in July 2002 was an associate partner in the valuation consulting team of Drivers Jonas. Before joining Drivers Jonas, Chris worked at King Sturge and the Investment Property Databank.

Kirsty WilmanKirsty is Director of Finance and Operations in Hermes Real Estate having joined the team in 2010. She is responsible for the financial reporting, controls environment and operations for all Real Estate client mandates including the Trust. Prior to joining Hermes Real Estate, Kirsty was at Ernst and Young in Audit and Assurance working with Real Estate and Entrepreneurial clients. She qualified as a Chartered Accountant in 2005.

Mark MillerMark joined Hermes in June 2014 in the newly created role of Head of UK and MENA Institutional with responsibility for Hermes’ institutional businesses in those regions. Mark also oversees consultant relationships and client relations globally. Mark has experience in institutional business with firms such as Fidelity International, Blackstone and Legal & General Investment Management. Mark joined Hermes from Amundi Asset Management where he was Head of UK Institutional.

Appointments Committee FeesThe Appointments Committee is remunerated in respect of each accounting period an amount that will not exceed 0.05% of the gross asset value of the Trust. The Chairman is paid £40,000 per annum and other members of the Appointments Committee are each paid £27,500 per annum. The members of the Appointments Committee are paid out of the assets of the Trust and receive no additional remuneration for their appointment on the HPUT Committee.


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Advisors

Trustee and DepositaryHSBC Bank plc 8 Canada Square London E14 5HQ Registered in England no.14259

Trustee enquiries should be made to:

HSBC Bank plc Fund Services Trustee & Depositary Services 8 Canada Square London E14 5HQ

Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.

Real Estate Investment Manager Hermes Real Estate Investment Management Limited Lloyds Chambers 1 Portsoken Street London E1 8HZ

Trust ManagerHermes Alternative Investment Management Limited Lloyds Chambers 1 Portsoken Street London E1 8HZ

Authorised and regulated by the Financial Conduct Authority. The Trust Manager delegates certain property activities to Hermes Real Estate Investment Management Limited (the Real Estate Investment Manager).

Independent ValuersKnight Frank LLP 55 Baker Street London W1U 8AN

BankerThe Royal Bank of Scotland plc Financial Institutions Corporate Service Team Aldgate Union 10 Whitechapel High Street London E1 8DX

Trust Legal AdvisorsBerwin Leighton Paisner LLP Adelaide House London Bridge London EC4R 9HA

Independent AuditorsPricewaterhouseCoopers LLP 7 More London Riverside London SE1 2RT

Managing Agents Jones Lang LaSalle 40 Bank Street Canary Wharf London E14 5EG

Workman & Partners Rivergate House 70 Redcliff Street Bristol BS1 6AL


Audited Financial StatementsFor the year ended 25 March 2016

Consolidated Statement of Total Return Note 2016 2015£000 £000

Net gain on investments 2 100,638 137,602

Rental income receivable 60,420 49,150

Service Charge Income 7,382 3,703

Ground rent (212) (215)

Property expenses 3 (22,899) (17,518)

Net property income 44,691 35,120

Management expenses 4 (1,944) (1,663)

Net operating income before interest, finance costs and taxation 42,747 33,457

Share of results of investment in joint venture 1,875 1,706

Interest receivable 5 2,222 1,110

Finance costs – interest payable 6 (1) (291)

Net income before tax 46,843 35,982

Taxation 7 – (2,072)

Net income after taxation 46,843 33,910

Total return for the period before distribution 147,481 171,512

Finance costs – distributions to unit holders 6,8 (51,786) (38,852)

Change in unit holders' funds attributable to unit holders 95,695 132,660


FINA

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These financial statements were approved by the Appointments Committee on 26 May 2016 and signed on its behalf by:

Simon Melliss

David Nicol

Audited Financial Statements – continuedFor the year ended 25 March 2016

Consolidated Balance Sheet Note 2016 2015£000 £000

Fixed assets

Property investments 9 1,259,231 1,007,018

Investment in joint venture 10 28,486 27,427

Total fixed assets 1,287,717 1,034,445

Current assets

Debtors 11 46,986 30,760

Cash and deposits 40,758 94,073

Total current assets 87,744 124,833

Current liabilities

Creditors 12 (34,248) (29,718)

Amounts payable to unit holders (14,519) (10,019)

Total current liabilities (48,767) (39,737)

Net current assets attributable to unit holders 38,977 85,096

Net assets 1,326,694 1,119,541

Represented by:

Capital of unit holders

Units in issue 13 796,190 684,732

Less: Capital expenses (31,424) (26,481)

764,766 658,251

Net realised profits on sales of property 275,751 260,282

Unrealised profit 286,177 201,008

Unit holders' funds 1,326,694 1,119,541

Capital employed 1,326,694 1,119,541


Consolidated Cash Flow Statement Note 2016 2015£000 £000

Net cash inflow from operating activities 15 41,503 41,524

Taxation

Income tax paid (1,115) (5,879)

Capital expenditure

Property acquisitions and capital additions (188,490) (79,188)

Capital expenses (5,659) (3,922)

Disposal of properties 33,693 24,040

(160,456) (59,070)

Returns on investments and servicing of finance

Interest and finance costs paid (1) (291)

Interest received 1,391 1,071

Dividends received from joint venture 1,191 1,312

Distributions paid (47,286) (36,967)

(44,705) (34,875)

Financing

New units issued 111,458 86,314

Units redeemed – (89)

111,458 86,225

(Decrease)/increase in cash (53,315) 27,925

Reconciliation of net cash flow to movement in net funds

(Decrease)/increase in available cash during the year (53,315) 27,925

(Decrease)/increase in net funds during the year (53,315) 27,925

Opening cash and deposits attributable to unit holders 94,073 66,148

Closing cash and deposits attributable to unit holders 40,758 94,073

Audited Financial Statements – continuedFor the year ended 25 March 2016


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1. Accounting policies

Basis of AccountingThe financial statements have been prepared on a going concern basis in accordance with the historical cost convention as modified by the revaluation of investments and in accordance with applicable UK generally accepted principles and the Trust Deed.

Statement of ComplianceThe financial statements have been prepared in compliance with United Kingdom Accounting Standards, including Financial Reporting Standard 102, ‘‘The Financial Reporting Standard applicable in the United Kingdom and the Republic of Ireland’’ (‘‘FRS 102’’).

Basis of ConsolidationThe Trust holds certain property investments through joint ventures. Such investments are accounted for using the equity method. These investments are carried at fair value. The fair value is determined using the net asset value of the underlying investment. Investments held through subsidiary undertakings are fully consolidated in the financial statements.

Statement of Total ReturnsThe Trust has no recognised gains and losses other than those included in the results above and therefore no separate statement of total gains and losses has been presented.

Valuation of InvestmentsThe freehold and leasehold investment properties were valued independently by the Trust’s independent valuers, Knight Frank LLP, as at 25 March 2016, on the basis of Market Value in accordance with RICS Appraisal and Valuation Standards. Knight Frank LLP value the investment properties on a monthly basis.

Income and ExpenditureRental income, interest and expenditure are accounted for on an accruals basis. Rental income is recognised on a straight-line basis over the term of the lease even if payments are not made as such.

Incentives paid to enter into an operating lease are debited to the profit and loss account, to reduce the rental income, on a straight-line basis over the period of the lease. The Trust has taken advantage of the exemption in respect of lease incentives on leases in existence on the date of transition to FRS 102 (26 March 2014) and continues to debit such lease incentives to rental income over the period to the first review date on which the rent is adjusted to market rates. Lease incentives are recorded within debtors and a corresponding reduction is made to property valuations.

Valuation fees and performance fees payable to the Real Estate Investment Manager are treated as capital expenses. They are reported within property expenses in the Consolidated Statement of Total Return but are not taken in account in determining the Trust's distributable income, instead being taken to the capital expenses reserve. The effect of this treatment is to increase income distributions and reduce the Trust's Net Assets by the value of such expenses each year. Transaction costs are capitalised and reported as part of the net gain or loss on investments in the Consolidated Statement of Total Return.

Income from other investments is accounted for on an accruals basis. The fees of the manager are charged to income. Expenses include irrecoverable VAT where applicable.

Other than the interest receivable and finance costs – interest payable balances, there are no items of income, expense, gain or loss arising from the Trust's financial instruments. .

DistributionsIt is the policy of the Trust to distribute all income net of expenses to the unit holders on a quarterly basis. In accordance with FRS25 (Financial Instruments: Presentation), distributions have been classified as finance costs.

Purchases and SalesProperty purchases are accounted for on exchange of unconditional contracts. Sales are accounted for on completion.

DepreciationNo depreciation is charged on freehold or leasehold investment properties.

Cash and DepositsCash and deposits includes cash at bank, cash in hand and overnight deposits.

Bank borrowingsInterest bearing bank loans are recorded at proceeds received, net of direct issue costs. Finance charges, including direct issue costs, are recognised on an accruals basis. Issue costs are amortised over the period to the date of expiry of the facility agreement.

Significant Accounting EstimatesThe Trust's key source of estimation relates to the valuation of the property portfolio where external valuations are obtained from the Trust's independent valuers as outlined in their report on page 31. Estimates are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. There is no assurance that the estimates will reflect the actual sales price even where a sale occurs shortly after the valuation date.

Notes to the Financial StatementsFor the year ended 25 March 2016


3. Property expenses Note 2016 2015£000 £000

Trust ManagerBase fee 14 3,732 3,123 Performance fee 14 4,627 4,686

Service charge expenses 11,511 6,307 Other expenses 2,713 3,146 Valuation fees 316 256

22,899 17,518

Performance fees and valuation fees are treated as capital items and added back to income for distribution purposes. Trust Manager base fees represent the portion of base fees payable to the Trust Manager for the management of the portfolio and are calculated at 0.30% per annum of the net asset value.

4. Management expenses Note 2016 2015£000 £000

Appointments Committee fees 171 170 Trustee fees 150 126 Trust Manager base fees 14 1,244 1,041 Professional fees 293 242 Audit fees 86 84

1,944 1,663

Trust Manager base fees represent the portion of base fees payable to the Trust Manager for the management of the Trust and are calculated as 0.10% per annum of the net asset value.

The Trustee is entitled to receive a fee based on the Trust’s net asset value, which is calculated and paid quarterly in arrears. The Trustee’s fee entitlement is 0.030% per annum on the first £100 million, 0.015% per annum on the next £200 million and 0.010% per annum of the Trust’s net asset value over £300 million. The terms of this fee arrangement are subject to review on an annual basis by the Appointments Committee.

5. Interest receivable 2016 2015£000 £000

Interest on deferred consideration 1,995 845 Interest on cash and deposits 209 264 Other interest receivable 18 1

2,222 1,110

Notes to the Financial Statements – continuedFor the year ended 25 March 2016

2. Net gain on investments 2016 2015£000 £000

Proceeds from sales of investments 36,893 20,410 Historical cost of investments sold (21,424) (17,153)Profit realised on investments sold 15,469 3,257 Revaluation (gain)/ loss recognised in prior years (12,743) 582

Gain for the year on investments sold 2,726 3,839

Net unrealised gain on revaluation of property investments 97,903 132,858

Net unrealised gain on revaluation of investment in joint venture 9 905

Net gain on investments 100,638 137,602

6. Finance costs 2016 2015£000 £000

Finance costs – interest payableInterest payable 1 291

Finance costs – distributions to unit holdersInterim distributions– June quarter 10,090 7,805 – September quarter 13,590 10,480 – December quarter 13,587 10,548 Final distribution payable 14,519 10,019

51,786 38,852


7. Taxation 2016 2015£000 £000

Factors affecting tax charge

Net income and gains on investment before taxation 147,481 173,584

Income tax at standard rate of 20% 29,496 34,717 Exemption from tax on capital gains (20,128) (27,520)Permanent differences of disallowable expenses (9,368) (5,125)

Income tax charge – 2,072

9. Property Investments The movement in property investments during the year is set out below.

Freehold Leasehold Lease Incentives

Property Investments

£000 £000 £000 £000ValuationAt 25 March 2015 918,075 89,400 (457) 1,007,018 Additions at cost 121,767 66,710 – 188,477 Proceeds from disposals (21,893) (15,000) – (36,893)Profit on disposals 904 1,822 – 2,726 Revaluation gain 92,282 8,793 (3,172) 97,903 Valuation at 25 March 2016 1,111,135 151,725 (3,629) 1,259,231

Historical cost at 25 March 2016 868,808 104,709 – 973,517

8. Reconciliation of distribution to net income 2016 2015£000 £000

Net income after taxation for the period 46,843 33,910 Expenses transferred to capital 4,943 4,942

Distributions 51,786 38,852

On 26 August 2014, the Trust was approved as an exempt Unauthorised Unit Trust by HMRC, so it is not required to withhold tax from unit holders on distributions. The last tax deduction relates to the distribution paid on 15 July 2014.


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12. Creditors 2016 2015

Amounts falling due within one year £000 £000

Deferred income 13,857 11,893 Income tax payable – 753 VAT 2,370 1,249 Accruals 11,687 11,652 Other creditors 6,334 4,171

34,248 29,718

Deferred consideration relates to the sale of Ivory House and Calico House, Plantation Wharf and One Brunel Way, Slough, which completed in July 2015 and February 2015 respectively. The remaining proceeds for the former are due to be received during 2016 and interest is received at 10.0% p.a., and the latter are due to be received by 24 February 2020 and interest is received at 5.0% p.a.

10. Principal subsidiary and joint venture

Share of Entity

Country of registration

Subsidiary Capital Hill Limited Partnership 100% UK

Joint VentureTower Hill Retail Limited Partnership 50% UK


11. Debtors2016 2015£000 £000

Rental income 5,274 4,276 Prepayments and accrued income– due within one year 1,022 370 – due after more than one year 2,776 254 Other debtors 12,564 3,710 Deferred consideration 25,350 22,150

46,986 30,760

Property valuations reconcile to the independent valuers’ report as follows:2016 2015£000 £000

Directly held properties valued by Knight Frank LLP 1,262,860 1,007,475 Lease incentives (3,629) (457)

Total property investments 1,259,231 1,007,018

The Trust's investment properties at 25 March 2016 were valued by Knight Frank LLP, qualified valuers, on a market basis at £1,262,860. The valuations were carried out in accordance with the RICS Valuation – Professional Standards (January 2014), Global and UK Edition issued by the Royal Institution of Chartered Surveyors (the "Red Book"). Knight Frank LLP have recent experience in the location and class of the investment property being valued.


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13. Units in issueNumber of

units 000

Value£000

At 25 March 2015 204,309 684,732 Issued in the year 18,231 111,458 Redeemed in the year – –

At 25 March 2016 222,540 796,190

14. Related party disclosures

During the year there were transactions with the following related parties: The fees payable to Hermes Investment Management Limited, the Trust Manager, for the period, including irrecoverable VAT, were:

Note 2016£000

2015£000

Trust Manager base fee – property expenses 3 3,732 3,123 Trust Manager base fee – management expenses 4 1,244 1,041

4,976 4,164

Trust Manager performance fee 3 4,627 4,686

The Trust Manager is entitled to receive a base fee of 0.10% per annum of the quarterly net asset value of the Trust, subject to a minimum fee of £400,000 per annum in relation to its duties as Trust Manager other than in respect of Real Estate Related Services. This fee is included in management expenses in note 4.

The Trust Manager is also entitled to receive a fee of 0.30% per annum of the quarterly net asset value of the Trust, subject to a minimum fee of £900,000 per annum in respect of Real Estate Related Services. In addition, the Trust Manager may receive performance related fees for Real Estate Related Services if the performance of the Trust exceeds the average weighted total return of the agreed benchmark, being the average return on the IPD UK Other Balanced Property Fund Index Weighted Average Returns, on a three year rolling average basis. The amount of the fee is calculated as 17.5% of the out-performance generated. Fees for Real Estate Related Services are capped at 0.70% of the net asset value of the Trust at the end of the calendar year and are included in note 3.

The Trust Manager delegates Real Estate Related Services to Hermes Real Estate Investment Management Limited.

2016£000

2015£000

The amounts outstanding at the end of the year were:Trust Manager base fee – property expenses 996 820 Trust Manager base fee – management expenses 332 274

1,328 1,094

Trust Manager performance fee 5,378 5,436

BT Pension SchemeThe BT Pension Scheme wholly owns Hermes Fund Managers Limited, the holding company of both Hermes Real Estate Investment Management Limited and Hermes Alternative Investment Management Limited. The BT Pension Scheme held 698,669 units (0.31%) in the Trust at 25 March 2016.

The BT Pension Scheme co-invests with the Trust in the Tower Hill Retail Limited Partnership.




15. Reconciliation of net income to net cash inflow

2016 2015£000 £000

Net income before taxation 46,843 35,982 Interest payable 1 291 Interest receivable (2,222) (1,110)Share of results of investment in joint venture (1,875) (1,706)Expenses transferred to capital 4,943 4,942 (Increase)/decrease in debtors (12,561) 751 Increase in creditors 6,374 2,374

Net cash inflow from operating activities 41,503 41,524

16. Commitments

2016 2015£000 £000

Committed property investment activity 13,023 4,704

Relates to capital commitments in respect of approved capital expenditure on properties within the Trust’s portfolio.

17. Future Minimum Operating Lease Rentals

2016 2015The Trust had the following future minimum lease rental Income receivable under non-cancellable operating leases for each of the following periods:

£000 £000

Not later than one year 39,858 38,893 Later than one year and not later than five years 125,476 118,593 Later than five years 172,467 168,290

337,801 325,776

18. Explanation of transition to FRS 102

This is the first year that the Trust has presented its financial statements under Financial Reporting Standard 102 (FRS102) issued by the Financial Reporting Council. The last financial statements under previous UK GAAP were for the year ended 25 March 2015; however the date of transition to FRS 102 was 26 March 2014. As a consequence of adopting FRS 102, two accounting policies were changed to comply with that standard:

■■ Lease incentives on operating leases are recognised on straight line basis over the term of the lease for all leases entered into on or after 26 March 2014. Lease incentives relating to operating leases entered into prior to this date are recognised on a straight-line basis over the term of the lease (or until the first rent review or break option, if sooner). This adjustment was not material and has therefore been included in the current Consolidated Statement of Total Return. There has been no impact on capital employed for the year ended 25 March 2015.

■■ The investment in joint venture is accounted for using the equity method. Previously this was proportionally consolidated. This change had no impact on the total return for the year ended 25 March 2015 or the capital employed at this date.


Valuers’ Report to the Trust Manager

In accordance with our appointment dated 13 May 2011, we have prepared the following short Valuation Report. We are instructed as Independent Valuers to provide the Trust Manager with our opinion of the Market Value of all freehold, heritable and leasehold properties, held by Hermes Property Unit Trust, for financial reporting purposes.

We are of the opinion that the aggregate of the Market Values of the freehold and leasehold properties as at 25 March 2016 was £1,291,160,000 (One Billion, Two Hundred and Ninety One Million, One Hundred and Sixty Thousand Pounds).

We confirm that the valuation has been undertaken by us as qualified valuers in accordance with the RICS Valuation – Professional Standards global January 2014, including the International Valuation Standards and RICS Professional Standards UK January 2014 (revised April 2015), issued by the Royal Institution of Chartered Surveyors (the “Red Book”). The properties have been valued individually on the basis of Market Value as defined in the Red Book as:

“The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.”

As agreed with Hermes Real Estate Investment Management Limited, our valuations are based on information provided by them, upon which we have relied and which has not been verified by us. Our assumptions (as defined in the RICS Red Book) relating to this information are set out below.

The valuer’s opinion of Market Value was primarily derived using recent comparable market transactions on arm’s length terms, where available, and appropriate valuation techniques (the Investment Method).

We have assumed there to be good and marketable titles to the properties. The properties have been valued individually, not as part of a portfolio. We have made oral enquiries of the appropriate planning authorities and have taken into account, insofar as we are aware, unusual outgoings, planning proposals and onerous restrictions or local authority intentions which affect the properties. No allowance has been made in our valuation for expenses of realisation or for taxation which may arise in the event of development or disposals and our valuations are expressed exclusive of any VAT that may become chargeable. Our valuations reflect usual deductions in respect of purchaser’s costs and, in particular, full liability for UK Stamp Duty as applicable at the valuation date.

We have been provided with copies of headleases and leases in some instances. In respect of recent purchases we have been provided with copies of the Trust’s solicitors’ reports on title. The portfolio is valued by us on a monthly basis for unit pricing purposes and the properties are re-inspected on a regular basis.

Our valuations are based on measurements which have been provided by Hermes Real Estate Management Ltd and which were carried out in accordance with the RICS Code of Measuring Practice. In some cases the areas are provided following rent review or letting.

We have not carried out structural surveys on the portfolio and are unable to report that the properties are free of any structural fault, rot, infestation or defect of any other nature, including inherent weakness due to the use in construction of materials now suspect. No tests were carried out on any of the technical services.

We have assumed, except where we have been informed to the contrary, there to be no adverse ground or soil conditions or environmental contamination which would affect the present or future use of the properties and that the load bearing qualities of the site of each property are sufficient to support the buildings constructed or to be constructed thereon.

Save as otherwise disclosed, it has been assumed for the purpose of valuation that the relevant interests in the properties are free of mortgage, charge or other debt security and no deduction has been made for such charge or debt.

Our valuations assume that the properties would, in all respects, be insurable against all usual risks including terrorism, flooding and rising water table at normal, commercially acceptable premiums.

Those properties previously held within the Tower Hill Retail Limited Partnership are now reported at 50% interest directly within HPUT.

We set out below the respective total valuations for the directly held properties and Tower Hill Retail Limited Partnership properties, allocated by tenure.

Directly Held Properties:-

Freehold£

Leasehold£

Total £

Hermes Property Unit Trust Held as Investments: £1,111,135,000 £151,725,000 £1,262,860,000

Tower Hill Retail Limited Partnership Held as Investments: £28,300,000 - £28,300,000

Total: £1,139,435,000 £151,725,000 £1,291,160,000

The valuer, on behalf of Knight Frank LLP, with the responsibility for this report is Hazel E Morris, MRICS, RICS Registered Valuer. Parts of the valuation have been undertaken by additional valuers as listed on our file. We confirm that the valuer and additional valuers collectively meet the requirements of RICS Valuation – Professional Standards VPS 3 having sufficient current knowledge of the particular market and the skills and understanding to undertake the valuation competently.

We confirm that Knight Frank LLP meets the requirements of the Trust in the role of Independent Valuer having been appointed in 1996. The signatory of this report has been responsible for this instruction since June 2014. We further confirm that in relation to Knight Frank LLP’s preceding financial year the proportion of the total fees paid by the Trust to the total fee income of Knight Frank LLP was less than 5%. We recognise and support the RICS rules of conduct and have procedures for identifying conflicts of interest.

In accordance with our standard practice, we must state that this Valuation Report is for the use only of the party to whom it is addressed and no responsibility is accepted to any third party for the whole or any part of its contents.

If our opinion of value is disclosed to persons other than the addressees of this Report, the basis of valuation should be stated. Neither the whole nor any part of this Valuation Report nor any reference thereto may be included in any published document, circular or statement nor published in any way whatsoever whether in hard copy or electronically (including on any web-site) without our prior written approval of the form and context in which it may appear.

Yours faithfully

Hazel E Morris MRICS RICS Registered Valuer For and on behalf of Knight Frank LLP

26 May 2016

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Hermes Property Unit Trust32

Independent Auditors’ Report to the Unit Holders

Report on the financial statements Our opinionIn our opinion the financial statements, defined below:

■■ give a true and fair view of the financial position of the Trust As at 25 March 2016 and of the net revenue and the net gains of the scheme property of the Trust for the year then ended; and

■■ have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice and the Trust Deed.

This opinion is to be read in the context of what we say in the remainder of this report.

What we have audited The financial statements, which are prepared by Hermes Property Unit Trust, comprise:

■■ the Consolidated Balance Sheet As at 25 March 2016;

■■ the Consolidated Statement of Total Return for the year then ended;

■■ the Consolidated Cash Flow Statement for the year then ended; and

■■ the notes to the financial statements, which include a summary of significant accounting policies and other explanatory information.

The financial reporting framework that has been applied in the preparation of the financial statements is United Kingdom Accounting Standards, comprising FRS 102 “The Financial Reporting Standard applicable in the UK and Republic of Ireland”, and applicable law (United Kingdom Generally Accepted Accounting Practice).

In applying the financial reporting framework, the Trust Manager has made a number of subjective judgements, for example in respect of significant accounting estimates. In making such estimates, they have made assumptions and considered future events.

What an audit of financial statements involvesWe conducted our audit in accordance with International Standards on Auditing (UK and Ireland) (“ISAs (UK & Ireland)”). An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of:

■■ whether the accounting policies are appropriate to the Trust’s circumstances and have been consistently applied and adequately disclosed;

■■ the reasonableness of significant accounting estimates made by the Trust Manager; and

■■ the overall presentation of the financial statements.

In addition, we read all the financial and non-financial information in the Annual Report and Financial Statements to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.

Responsibilities for the financial statements and the audit Our responsibilities and those of the Trust Manager and the Appointments CommitteeAs explained more fully in the Responsibilities and Governance Statement set out on page 19, the Trust Manager is responsible for the preparation of the financial statements and the Appointments Committee is responsible for being satisfied that they give a true and fair view.

Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and ISAs (UK & Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.

This report, including the opinion, has been prepared for and only for the Unit Holders of the Trust as a body in accordance with the Trust Deed and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

PricewaterhouseCoopers LLPChartered Accountants London

26 May 2016


Independent Auditors’ Disclaimer Letter

Dear Sirs

Request for access to our audit report dated 26 May 2016You have asked us to agree to you providing to potential customers (the “recipient”) a copy of our report dated on 26 May 2016 (the “Report”) prepared in connection with the audit of your financial statements for the year ended 25 March 2016.

To ensure that the recipient has a clear understanding of the terms under which the Report is being provided to them, a copy of this letter should be attached to the Report.

We confirm that we give our consent to you doing so on the clear understanding that the Report was addressed to you and was prepared on your instructions as set out in our agreement dated 29 January 2016 and therefore the Report will not address or reflect the interests or circumstances of the recipient or any other third party. Furthermore, we accept no duty or responsibility and deny any liability to the recipient and to any other third party, whether or not the Report influences the decision or action of the recipient or any other party.

If our Report is given to the recipient, it should be made clear that receipt of the Report should not be a substitute for enquiries the recipient should undertake for its own purposes and any independent advice it should obtain. You should also point out to the recipient that it will be bound by a duty of confidentiality to PricewaterhouseCoopers LLP, as well as to you, [and that in respect of any Personal Data in the Report, they are required to comply with the Data Protection Act 1998]. Consequently, the Report, and information obtained from it, must not be made available or copied, in whole or in part to any other person without our prior written permission which we may, at our discretion, grant, withhold or grant subject to conditions (including conditions as to legal responsibility or absence thereof).

Where disclosure of the Report or information contained in the Report is required by law or regulation, the recipient should i) ensure that a copy

of this letter is disclosed with such information so that the other party receiving the information is on written notice of the terms on which the recipient itself had access to it; and ii) where legally permissible inform us promptly of the specific requirement to disclose and before making any disclosure.

Notwithstanding our consent to the release of the Report to the recipient, the Report remains addressed to you and it is a matter for you to decide whether the release of the Report is appropriate in the circumstances.

In consideration for PricewaterhouseCoopers LLP consenting to you providing the Report to the recipient, you agree that you will not hold PricewaterhouseCoopers LLP responsible for the consequences of us doing so; accordingly PricewaterhouseCoopers LLP, its members, partners, staff and agents shall have no liability to you, whether in contract or in tort (including without limitation negligence or breach of statutory duty) or in any way whatsoever, for any loss, damage, cost or expense suffered by you as a result of the provision of the Report to the recipient. Without conferring any greater rights than you would otherwise have at law, we accept that this does not exclude any liability we may have for death or personal injury or for the consequences of our own fraud.

This letter shall be governed and construed in accordance with the laws of England. The Courts of England and Wales will have exclusive jurisdiction to settle any claim, dispute or difference which may arise out of or in connection with this letter.

Yours faithfully

PricewaterhouseCoopers LLP

PRIVATE AND CONFIDENTIAL

The Appointments Committee Hermes Property Unit Trust Lloyds Chambers 1 Portsoken Street London E1 8HZ

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PricewaterhouseCoopers LLP, 7 More London Riverside, London, SE1 2RT T: +44 (0) 20 7583 5000, F: +44 (0) 20 7212 7500, www.pwc.co.uk

PricewaterhouseCoopers LLP is a limited liability partnership registered in England with registered number OC303525. The registered office of PricewaterhouseCoopers LLP is 1 Embankment Place, London WC2N 6RH. PricewaterhouseCoopers LLP is authorised and regulated by the Financial Conduct Authority for designated investment business.


Information about the Trust

Investment Strategy and Objectives The investments of the Trust consist primarily of freehold and leasehold land and buildings. It is the policy of the Trust Manager to spread these investments over a wide range of properties, so as to maintain a balanced investment portfolio with capital growth potential and beneficial yield. Properties may also be acquired, developed or otherwise dealt with jointly alongside other investors, particularly where these provide Unit Holders with exposure to property assets of a type or size that would not be appropriate for the Trust’s portfolio if they were to be held directly.

The Trust Manager follows policies and practices designed to enhance property returns whilst minimising risk. These are summarised as follows:

■■ The portfolio of properties held by the Trust will be diversified between sectors dependent upon the potential returns from each sector. The Trust may also invest in non-core sectors of the property market which display beneficial performance characteristics.

■■ The Trust may invest alongside other investors in pooled investments where these provide exposure to assets of a size, type or location that are expected to provide enhanced returns. The amount of exposure to jointly held assets is carefully controlled in accordance with the Trust’s investment restrictions.

■■ Properties will be acquired where the characteristics of the investment itself indicate outperformance through a combination of above average rental growth prospects and advantageous movements in capitalisation yield.

■■ Properties acquired will mainly be let to tenants of a good financial covenant where risk of default is considered to be low, although this will be balanced with acquisition of investments which offer the potential of future value enhancement as a result of active management.

■■ There will be a continuing programme of upgrading existing properties to improve rental growth prospects and capital values wherever appropriate by refurbishment, redevelopment or lease restructuring.

■■ Before developments are undertaken, either directly or in association with third parties, a careful review of the risk to reward ratio of the potential development will take place to ensure an acceptable balance for that project and for the Trust as a whole, and that development will be compliant with the Trust’s investment restrictions.

■■ The Trust can enter into derivatives transactions which reference property or property return indices. The Trust cannot extend its derivatives exposure beyond 15% of the value of the Trust’s Net Assets. Derivatives transactions would be used to hedge or increase the Trust’s exposure to property when it could be better achieved by the use of derivatives than by conventional investment transactions. The Trust can also enter into ancillary derivatives transactions such as interest rate swaps.

Investment ConstraintsThe Trust Manager may invest in property and property related investments, the latter to include shares, units, bonds or debentures or other interests in any company or collective investment scheme whose principal business is property investment or development. The Trust Manager may also enter into derivative transactions where such investments derive their value from property or are based on a property return index. The aggregate of any such derivative transactions entered into must not exceed 15% of the value of the Trust’s Deposited Property in accordance with the terms of the Trust Deed.

The Trust Manager sets constraints on the proportions that may be invested in indirect vehicles, developments and joint vehicles. These are monitored regularly by the HPUT Committee, and the Real Estate Investment Manager must comply with these constraints in the investment management of the Trust but subject to HPUT Committee discretion. A summary of the investment constraints is set out below:

■■ Co-investment – not more than 10% of gross asset value to be held in investments alongside other investors.

■■ Debt – no more than 30% of gross asset value. There are also constraints on the level of gearing set out in the Trust Deed.

■■ Development – exposure to be no more than 10% of gross asset value.

■■ Cash – usually no more than 10% of gross asset value, or subject to a waiting list for new investors to be implemented from time-to-time.

■■ Maximum relative property size – 10% of gross asset value.

■■ Approval is required for any purchase of leasehold interests with an unexpired term of less than 50 years, non-standard sectors and for the purchase of listed or indirect investments.

■■ The aggregate value of any derivative transactions entered into must not exceed 15% of gross asset value. Any derivative transactions will be approved by the HPUT Committee.

MembershipThe Trust Deed restricts the holding of Units to Exempt Funds. An “Exempt Fund” is defined in the Trust Deed to mean any person (including a body of persons or body corporate), trust, fund or unincorporated association that is wholly exempt (otherwise than by reason of residence) from capital gains tax or corporation tax on capital gains in the United Kingdom or which may hold Units in the Trust without prejudicing the total exemption of the Trust from tax on capital gains under Section 100(2) of the Taxation of Chargeable Gains Act 1992 including, as the context may require, any person or persons in whom the assets comprised in any such trust, fund or unincorporated association are from time to time vested or the persons having the conduct or administration thereof.

Further information about the Trust including its Units Dealings is available in the General Information Memorandum at www.hermes-investment.com/uki/capabilities/real-estate/hermes-property-unit-trust/


Notice is hereby given that the Annual General Meeting of the unit holders of Hermes Property Unit Trust will be held at Lloyds Chambers, 1 Portsoken Street, London E1 8HZ on Friday 1 July 2016 at 10:30am for the following purposes:

1. To receive the Reports of the Trust Manager and Auditors and Statement of Accounts for the year ended 25 March 2016.

2. To elect members of the Appointments Committee:

2.1 Simon Melliss retires, and being eligible, offers himself for re-election.

2.2 David Nicol retires, and being eligible, offers himself for re-election.

3. To re-appoint PricewaterhouseCoopers LLP as auditors of the Trust, to hold office until the conclusion of the next annual general meeting at which Financial Statements are laid before the unit holders and that their remuneration be fixed by the Appointments Committee.

A unit holder entitled to attend and vote at the Meeting may appoint a proxy to attend and vote in his place and a unit holder, being a Corporation, may authorise any person to be its representative at the Meeting.

A proxy card is enclosed. As the quorum required for the passing of the Resolutions, without adjournment, is holders present in person or by proxy representing not less than one tenth of all the units for the time being in issue, you are particularly asked to complete and return the proxy card. This will not preclude you from attending and voting at the Meeting if you so wish.

To be effective, forms of proxy must be deposited at the office of the Trust Manager – Hermes Property Unit Trust, Hermes Investment Management Limited, Lloyds Chambers, 1 Portsoken Street, London E1 8HZ, not later than 48 hours before the time appointed for holding the meeting.

Notice of Annual General Meeting

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Distribution Analysis

Net income is distributed quarterly on 15 February, 15 May, 15 August and 15 November for the periods ended 25 December, 25 March, 24 June and 29 September respectively, or the business day prior to those dates. Income accrues monthly to unit holders to each registration date (usually 26th of each month). Distributions are made net of income tax and management expenses. The Trust Manager has no ability to defer/suspend contributions.

Gross distribution per unitAs at 25 March

Source: Hermes Real Estate Investment Management.

0p

5p

10p

15p

20p

25p24.3 23.6 23.7 23.3

20.8

24.4

201620152014201320122011

Yield on offer price at opening of yearAs at 25 March

Source: Hermes Real Estate Investment Management.

0%

1%

2%

3%

4%

5%

6%

7%

5.0 5.0 5.0

3.7 3.6

20162015201420132012

Quarterly distributionQuarter to

24 Jun 2015 £000

Quarter to 29 Sep 2015

£000

Quarter to 25 Dec 2015

£000

Quarter to 25 Mar 2016

£000

Total

£000

Net distribution 10,090 13,590 13,587 14,519 51,786

The gross yield on net asset value at 25 March 2016 was 3.8%. The yield on offer price at 25 March 2016 was 3.6%.

Distribution per unitQuarter to

24 Jun 2015 pence

Quarter to 29 Sep 2015

pence

Quarter to 25 Dec 2015

pence

Quarter to 25 Mar 2016

pence

Total

pence

Net distribution 4.936 6.527 6.396 6.5302 24.389

Date paid 14 Aug 15 13 Nov 15 15 Feb 16 13 May 16

The Trust’s portfolio turnover ratio was 9.14% (25 March 2015: 1.07%). The total expense ratios are calculated in accordance with AREF principles, which are available from www.aref.org.uk. Fund management fees include fees paid to the Trust Manager. Total fees payable to the Real Estate Investment Manager in a calendar year are capped at 0.70% of the December net asset value as described in note 14. Property expenses include service charge shortfalls and other property expenses. Fund operating expenses represent management expenses and valuation fees. These figures do not agree to note 3 and 4 of the financial statements because all expenses are included for the properties held in Joint Ventures for the purpose of calculating the TER. The performance fees as a percentage of average net asset value for the year can exceed 0.40% because they are calculated, and the fee cap is applied based on a net asset value at the end of a calendar year as described in note 14 to the financial statements whereas the Trust’s year end is 25 March. All the costs above are borne from the Fund and paid from income, with the exception of performance fees which is paid from capital. The Trust retains no commission and service charge rebates. The total expense ratios have been calculated consistently with prior years.

Total expense ratios 25 March 2016 25 March 2015

Cost duringperiod £000

% of averageNAV p.a.

Cost duringperiod £000

% of averageNAV p.a.

Fund Management Fees 4,976 0.41% 4,164 0.41%Fund Operating Expenses 1,021 0.08% 886 0.09%Total Expense Ratio 5,997 0.49% 5,050 0.50%Property Expense Ratio 7,214 0.59% 5,900 0.58%Real Estate Expense Ratio 13,211 1.08% 10,950 1.08%Transaction Costs 2,516 N/A 3,593 N/APerformance Fees 4,627 0.38% 4,686 0.46%


Unit Holder Information

The proportion of total number of units in issue Unit Prices

During the year 18,231,194 units were created.

The fund’s bid and offer prices and the NAV have been determined in accordance with AREF’s Fund Pricing Recommendations (August 2014). The fund is priced at the ‘Standard NAV’ for all investors.

Distribution Per UnitNet Asset Value Per Unit

0

1

2

3

4

5

6

20162015201420132012

£4.50 £4.44£4.80

£5.49

£5.97

£

0p

5p

10p

15p

20p

25p

Gross yield on closing NAV (%)

Distribution, pence per unit (gross of tax, net of expenses)

20162015201420132012

23.6 23.7 23.3

5.3 5.3 5.0

20.8

24.4

3.8 3.8

Bid Offer Price Variation NAV and total number of units as at 25 March (million)

0

1

2

3

4

5

6

7

20162015201420132012

£4.75£4.36

£4.71£4.38

£5.03

£4.38

£5.76

£4.77

£6.34£5.90

Lowest cancellation priceHighest issue price

£

0

300

600

900

1200

1500

20162015201420132012

No. of unitsNAV

790

176

785

177

903

188

1,100

204

1,300

223

Ownership Number of unit holders

Total Holding (%)

< 3% 109 55.6%3% – 10% 10 44.4%10% – 20% 0 0.0%> 20% 0 0.0%Total 119 100.0%

Number of unit holders

Total Holding (%)

Internal investors 2 1.3%External investors 117 98.7%Total 119 100%Largest investor 1 7.1%Ownership held by top 5 investors 5 25.8%

MonthOffer

(£)Bid(£)

March 16 6.338 5.898February 16 6.279 5.896January 16 6.256 5.885December 15 6.233 5.854November 15 6.152 5.778October 15 6.121 5.749September 15 6.080 5.712August 15 5.998 5.636July 15 5.947 5.580June 15 5.906 5.549May 15 5.836 5.496April 15 5.793 5.456

INV

ESTOR IN

FORM

ATION


The Trust Manager of Hermes Property Unit Trust, Hermes Alternative Investment Management Limited (HAIML) is authorised by the FCA as an AIFM and appointed as such for the Trust and for nine other AIFs with total Assets under Management of £1,754 million.

The FCA’s general guidance on the AFIM Remuneration Code (SYSC 198) was published in January 2014. Under this Code, the Remuneration Committee of Hermes Fund Managers Limited (Hermes) in its oversight of HAIML must make relevant remuneration disclosures no later than six months following the end of the financial year, splitting remuneration into fixed and variable remuneration for all employees and Code staff. Code staff consists of Senior Management, who are members of the Trust Manager’s Board and Other Code Staff who are employees performing a significant influence function, other senior managers and heads of control functions.

The Remuneration Committee has established a Remuneration Policy and its purpose is to ensure that the remuneration of employees is consistent with

and promotes sound and effective risk management and does not encourage risk-taking which is inconsistent with the risk profiles, rules or instruments of incorporation of Hermes or the Funds that it manages. The Remuneration Committee approves the list of AIFM Code staff on an annual basis and all AIFM Code Staff are notified of their status and the implications of this.

All staff are employed by Hermes Fund Managers Limited and provide services to all group companies. The Trust Manager itself does not pay any remuneration to the staff providing these services.

The table below provides an overview of the aggregate total remuneration paid by Hermes to all employees that provide services to HAIML and for the Code Staff although these employees may also provide services for other group companies. The figures have been prorated against the assets under management of the Trust Manager relative to the total Hermes assets under management. All information below is for the year ended 31 December 2015.

Alternative Investment Fund Managers Directive (AIFMD) – Remuneration disclosure

Headcount Total Remuneration

(£’000s)

Hermes employees providing services to HAIML in respect of all AIFs 300 1,999

of which

Fixed remuneration 1,371

Variable remuneration 628

Hermes Code Staff providing services to HAIML in respect of all AIFs 31 1,177

of which

Senior Management 5 324

Other Code Staff 26 853


Further Information

For more information about the Trust go to www.hput.co.uk or contact:

Mark MillerHead of UK and MENA InstitutionalTel: +44 (0)20 7680 2205Email: [email protected]

Hermes Property Unit TrustLloyds Chambers1 Portsoken StreetLondon E1 8HZTel: (020) 7702 0888Fax: (020) 7702 9452

www.hput.co.uk

CM154851

Cert no. SA-COC-001662Certified ISO 14001Environmental Management

hermes property unit trust

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