BUSINESS REVIEW

INTRODUCTION
The Group’s business is divided into two operating divisions: investment properties and other investments.

The investment property division is sub-divided for management purposes between the United Kingdom, France, Germany and Sweden. Other investments comprise investments in corporate bonds, in property groups Catena AB and Bulgarian Land Development plc, and in website media company Wyatt Media Group AB and other small corporate investments. At 31 December 2009, the investment property portfolio was valued at £813.0 million, and the other investments had a book value of £114.8 million.

INVESTMENT PROPERTY
OVERVIEW At 31 December 2009, the investment property portfolio was valued at £813.0 million, a fall in the year of 4.3%, of which 3.7% was due to the strength of sterling against assets held in euros and Swedish kronor. In local currency, the UK portfolio rose in value by 7.5%, France fell by 6.2%, Germany by 5.7% and Sweden by 2.0%. The property investment markets did not provide many opportunities to invest at value in the year, but towards the end of December we acquired Frères Peugeot in Paris for £29.2 million. Disposals in the year were restricted to 2 Deanery Street, London for £2.2 million. At 31 December 2009, the weighted average lease length across the Group was 8.5 years.

UNITED KINGDOM At 31 December 2009, the UK accounted for 42.7% of the investment portfolio at a value of £346.8 million, 7.5% higher than twelve months earlier on a like-for-like basis. By contrast, Investment Property Databank recorded a fall in office values across the UK of 5.9% in the year. Our valuation gain reflected a fall in yields for long-term, secure income caused by an excess of demand from investors over the available supply. The UK portfolio has a strong tenant profile with over 50% by rental value let to government tenants, and longevity of income with a weighted average lease term of over 10 years. During the year, 2 Deanery Street, a Grade II listed building extending to 197 sq m of office accommodation, was sold with vacant possession for £2.2 million, generating a profit of £0.3 million over its 2008 valuation and representing the final disposal of properties considered to offer limited future prospects for growth. At 31 December 2009, the UK portfolio comprised 26 properties with an aggregate lettable area of 116,700 sq m.

We saw few opportunities for acquisitions offering good long-term value, with pricing generally reflecting excessive demand from overseas buyers and institutions. Nevertheless, we remain vigilant for opportunistic acquisitions. As a long-term holder of properties we have continued to carry out renovation and improvement works to a number of buildings in the UK portfolio, comprising £1.3 million in aggregate in the year, and including works at Chancel House and the installation of a new substation and refurbishment works at Cambridge House. At Westminster Tower, the electrical supply to each of the floors was replaced whilst the building remained fully occupied. At Great West House, a further floor was refurbished for the letting to Medical Professional Personnel.

Within the context of an economy in recession, the UK vacancy rate remained low at 4.5% by rental income compared to 4.4% in December 2008.

Despite the difficult market conditions, lettings were achieved at Great West House to Medical Professional Personnel and National Aviation Company of India, for 473 sq m and 299 sq m respectively, and an existing tenant at Great West House, Global Refund, acquired further space. At Quayside, 147 sq m was let to Knowledge to Action and at Ingram House 178 sq m was contracted with Ash Associates Communications. Further lettings were achieved at Spring Gardens Court, 16 Tinworth Street, 2/10 Tinworth Street and 107 Wandsworth Road.

Significant rental increases were achieved on the rent reviews at CI Tower: the annual rent from Hays Specialist Recruitment rose by 15%, and rent from Lafarge Cement UK increased by the same degree. Further rent reviews were settled at Spring Gardens, Westminster Tower and Cambridge House.

Through our close relationships with tenants we have again achieved excellent levels of debt recovery with no tenant company failures to report across the UK portfolio during the year. On average we received 94% of rent and service charge within 14 days of the due dates.

In the medium term, we plan to capitalise on the improvement of the Vauxhall area, following the recent substantial residential development of St George’s Wharf, the relocation of the New Covent Garden Market, and the announcement of the new location of the United States embassy which is to open in 2016. We are pursuing development options on two sites in Vauxhall which are important projects in an improving area offering strong potential for adding value to substantial sites.

FRANCE At the end of 2009, the French portfolio was valued at £222.8 million, or 27.4% of the total CLS portfolio, and had fallen by 6.2% in the year in local currency on a like-for-like basis. This compares favourably to a 2009 average fall of 16% in the French market.

Throughout 2009 we were prepared to wait for the right deal. Having appraised many opportunities in the year, on 29 December we acquired 7 rue Eugène et Armand Peugeot in Rueil-Malmaison for £29.2 million. This was a 7,350 sq m multi-let office building to the west of Paris yielding 8.3% and providing a return on equity of 16.1%. There were no disposals from the French portfolio in the year, which at the year end comprised 25 properties of 85,800 sq m with 180 tenants.Most tenancies were of the traditional French 3:6:9 year duration, and the weighted average lease length at 31 December 2009 was 5.9 years.

The French portfolio suffered no major tenancy changes in the year, but 7,200 sq m of space was relet and 8,700 sq m renewed, resulting in a year end vacancy rate of 4.2% by rental value. Among the deals closed in the year were two lettings to existing tenants in Lyon: 3,909 sq m let to Deloitte in Park Avenue; and 1,050 sq m to Deloitte’s parent, Inuem, at Front de Parc. In Paris, at Le Quatuor, Montrouge, Pôle Emploi took 999 sq m, and in 96 Rue Nationale, Lille, Medef signed a lease renewal and extension on 936 sq m. Renewals and lease extensions were also completed in Paris with Micro Application on 1,315 sq m in 20/22 Rue des Petits Hôtels, with Citadines on 1,264 sq m in 120 Rue Jean Jaurès, with Camfil on 1,228 sq m in Le Debussy, and with Cesap on 606 sq m in new nine year leases.

£2.3 million was incurred in 2009 maintaining the fabric of the portfolio, in particular in Paris at Le Debussy, la Garenne-Colombes with the renovation of common parts and the replacement of the heating and cooling system at the building. Other renovation work took place in Lyon at Rhône Alpes, and in Paris at Le Quatuor, Montrouge, 95/97 Bis Rue de Bellevue, Boulogne, and 120 Rue Jean-Jaures, Levallois Perret, and in Luxembourg.

The total French investment market turnover in 2009 was €8 billion, down from €12.5 billion in 2008 and €27 billion in 2007, and the letting market was 25% down on 2008 at 1.8 million sq m. We expect the French property market to recover slowly in 2010 in line with the French economy, but with well-located assets performing the better.

GERMANY The German portfolio, 23.6% of the total portfolio, was valued at £192.1 million at 31 December 2009, a fall of 5.7% in local currency on a like-for-like basis, caused by a marginal increase in yield of typically 0.125 to 0.25%. There were no purchases or sales in the year. During 2009 capital expenditure in Germany comprised £17.7 million in total. The second and third phases of the Landshut development, of 7,032 sq m in aggregate, were completed on time and on budget. The entire scheme was pre-let to E.ON Bayern AG for 15 years with no breaks, and added €957,000 per annum to the rent roll. In addition, the 23,800 sq m redevelopment of the Rathaus Center in Bochum was completed and handed over to the City in December 2009 under a 30 year pre-letting to the local municipality at €2,285,000 per annum.

At 31 December 2009, the German portfolio comprised 16 properties with 140,400 sq m of lettable space. During the year tenants vacated 9,611 sq m, and lettings were achieved on 5,021 sq m, resulting in an increase in our void rate to 5.8% by rental value, well below the national rate. Notable amongst the lettings, at Frohbösestrasse 12 in Hamburg, laboratory equipment manufacturer Scope Life Sciences leased 1,595 sqm, and also in Hamburg three tenants took 1,100 sq m in aggregate at Jarrestrasse 8/10. At 31 December 2009 the portfolio housed 80 tenants on a weighted average lease term of 9.3 years.

Germany’s GDP fell by 5.1% in 2009, the largest decrease in 50 years; an increase of 1.5% is expected in 2010. It is within this context that activity in the German commercial investment property market fell to €10.3 billion in 2009, down from €19.6 billion in 2008 and €75.0 billion in 2007. The market was dominated by open-ended funds looking for safe core investments, in which there was a small fall in yields which is expected to continue in 2010. We were prepared not to enter the investment market in 2009 except for the right opportunity, and we will continue to be circumspect in 2010.

The office letting market was depressed in 2009, with an overall fall in activity of 28% against the previous year, which in some cities such as Munich and Düsseldorf reached around 40%. Letting activity is unlikely to increase in 2010, but there remains very limited development activity to bring furthersupply to the market. The national average vacancy rate increased from 8.9% in 2008 to 9.9% in 2009, and is expected to increase in 2010. Our void rate of only 5.8% is a creditable result in the prevailing economic climate.

SWEDEN Our Swedish portfolio comprises adjacent buildings located in Vänersborg, near Gothenburg, which we treat collectively as one asset of 45,500 sq m called Vänerparken. At 31 December 2009 it was valued at £51.3 million, reflecting a fall of 2.0% on a like-for-like basis, and representing 6.3% of the Group portfolio.

Sincemid-2008, the local university has vacated approximately 12,500 sq m and has been replaced as a tenant by the local municipality. The City of Vänersborg has leased the entire space for 20 years, with 10 years term certain. Should the local authority exercise its break in 2019 it would be subject to a break cost of one year’s rent. We now have a secure income stream of 97% of our total Swedish income from governmental tenants until mid-2015, and subject to annual indexation.

With the new letting to the City of Vänersborg, the vacancy rate at Vänerparken has fallen to 1.9% by rental value.

Investment market activity in Sweden was not immune from global sentiment, and fell in 2009 by 75% against the year before.

OTHER INVESTMENTS
Other investments at 31 December 2009 comprised investments in corporate bonds, in property groups Catena AB and Bulgarian Land Development Plc, and in website media company Wyatt Media Group AB and other small corporate investments, and represented a book value of £114.8 million in aggregate.

The corporate bond portfolio was acquired as part of the Group’s long term investment strategy in parallel with the ownership of long-term investment properties and had a value of £70.0 million at the year end against an historical cost of £58.4 million. The valuation uplift, together with interest income from the portfolio and gains on disposals, produced a total return on capital employed in the year of 54.2%.

Catena AB is a Swedish listed property investment company with a Scandinavian property portfolio valued at approximately one-quarter the size of that of CLS. During the year, the Group increased its interest in the issued share capital of Catena marginally to 29.8%, taking the aggregate cost to £28.6 million.

Bulgarian Land Development Plc is an AIM-listed developer of predominantly residential buildings in Bulgaria. CLS owns 47.7% of the company, acquired at a cost of £13.4 million.

RESULTS FOR THE YEAR
CHANGES IN PRESENTATION In the year ended 31 December 2009, a number of International Financial Reporting Standards have been applied for the first time, as explained in Note 2 to the financial statements, although none has materially affected the results for the year. In applying IFRS8 – Operating Segments this year for the first time we are also required under the newly issued IAS 1 (revised) Presentation of financial statements, to provide three balance sheets instead of the usual two and several pages of accompanying notes, even though in applying IFRS8 the balance sheets are unaffected. Also under IAS 1 (revised) this year a Statement of Comprehensive Income is presented for the first time, comprising the traditional Income Statement and other reserve movements.

HEADLINES Profit after tax attributable to the owners of the Company of £17.5 million (2008: loss of £78.1 million) generated basic earnings per share of 36.4 pence (2008: loss per share of 120.6 pence). After excluding the effect of deferred tax and the movement on the revaluation of investment properties, adjusted earnings per share were 48.2 pence (2008: loss per share of 65.6 pence). Gross property assets at 31 December 2009 rose to £813.0 million (2008: £798.8 million), net assets per share were 643.3 pence (2008: 548.4 pence) and adjusted net assets per share, which exclude deferred tax, were 18.6% higher than the previous year at 767.5 pence (2008: 647.2 pence).
Approximately 40% of the Group’s business is conducted in the reporting currency of sterling, and 8% is in Swedish kronor, the exchange rate for which remained largely unchanged against sterling between 2008 and 2009. However, half of the Group’s business is conducted in euros, the average rate of which strengthened by around 10% against sterling in 2009 compared to the previous year, adding to the profits reported in the Statement of Comprehensive Income. Towards the end of 2008 the euro strengthened significantly, reaching almost parity at the year end, but by 31 December 2009 sterling had strengthened by 7.8%, reducing the relative value of eurobased net assets. So, perversely, when compared to the previous year the Statement of Comprehensive Income benefited from the euro’s strength in 2009, but the Balance Sheet at 31 December 2009 suffered from its weakness.

STATEMENT OF COMPREHENSIVE INCOME Rental income for 2009 was £60.6 million, 3.9% lower than in 2008. Rents in the UK were £25.0 million, 41% of the total Group, and £1.2 million lower than 2008, virtually entirely due to disposals made in 2008. At £4.9 million, rents in Sweden were in line with last year. In Germany and France, a full year of loss of rent from disposals made in 2008 reduced rental income by £6.4 million in 2009, whilst rents from completed developments and termination payments on expiries added £2.1 million. Underlying rental income from the remaining portfolios in Germany and France rose by 1.0% in local currency but translated to a 13.1% rise due to the strength of the euro.

Following the rationalisation of the property portfolio, we embarked upon a process to address the cost base of the Group, slimming down the organisation and reducing administration costs from £19.0 million in 2007 (excluding £8.7 million relating to the investment in London Bridge Quarter which was sold at the end of that year), to £16.1 million in 2008, and £12.2 million in 2009.

The net deficit on revaluation of investment properties at 31 December 2009 was £6.7 million (2008: deficit of £103.3 million). The uplift in the UK of £24.1 million reflected a 7.5% underlying gain. In Germany and France, the underlying deficit in local currency of around 6% was doubled by the relative strength of sterling at the year end, causing a deficit of £13.5 million and £15.9 million, respectively. The deficit on revaluation of investment properties is excluded in arriving at adjusted earnings per share.

The impairment of intangible fixed assets and goodwill of £22.0 million significantly reduced adjusted earnings per share in 2008. There was no such impairment in 2009.

Net finance costs in 2009 were £25.5 million (2008: £43.0 million). Within this number, interest payable of £28.5 million (2008: £42.6 million) was lower than the previous year due to the reduction in loans which accompanied the disposals in 2008, and also due to the decision to reduce exposure to fixed rate interest rate swaps in favour of interest rate cap contracts, which enabled the Group to benefit from the prevailing low interest rate environment. The fall in interest income to £6.4 million (2008: £8.7 million) was largely due to cash balances being reduced by the £48.0 million distributed through the tender offer buy-back in January 2009. Foreign exchange variances created a loss of £9.7 million (2008: gain of £11.9 million), and the effect of marking derivatives to market at the year end produced a net gain of £6.3 million (2008: loss of £21.0 million).

Within the Other Investments division, in addition to the return of 54.2% from corporate bonds, Wyatt Media Group contributed £0.1 million (2008: loss of £2.8 million) to operating profit on turnover of £3.6 million (2008: £3.6 million), and the Group’s share of Catena AB’s profit after tax was £3.0 million. Bulgarian Land Development plc contributed a loss after tax of £3.3 million, which was partially offset by negative goodwill of £2.8 million occasioned when the Group bought a further 11.9% of the shares in BLD at a price below that company’s net asset value.

Once again this year the current tax charge was significantly below the weighted average rate of the countries in which we do business. Our French operation was the only part of the Group which paid tax. Elsewhere in the Group, through judicious planning, tax losses absorbed taxable profits made in the year. Future profits will erode such tax losses and, thereby, the Group’s ability to mitigate future tax liabilities. The tax charge also contains a deferred tax credit of £1.0 million (2008: tax credit of £67.7 million), which typically largely contains an adjustment required under IFRS for the potential tax occasioned by valuation movements on investment properties. In practice this tax is unlikely to be paid, so deferred tax is excluded from the calculations of adjusted earnings per share and adjusted net asset value.

ADJUSTED NET ASSET VALUE Adjusted net assets fell by 7.7% to £368.6 million (2008: £399.6 million), but adjusted net assets per share rose because the number of shares in issue was reduced by 2 in 9, or 22%, through the tender offer buy-back.

At 31 December 2009, adjusted net assets per share, which exclude deferred tax, were 767.5 pence (2008: 647.2 pence), a rise of 18.6%. On 7 January 2009, a tender offer of 2 in 9 shares in issue took place at 350 pence per share, which had the effect of increasing adjusted net assets per share to 732.0 pence. Profit after tax added a further 34.3 pence, and fair value movements contributed 28.2 pence. Against this, exchange rate variances reduced adjusted net assets per share by 27.0 pence.

CASH FLOW, NET DEBT AND GEARING At 31 December 2009, the Group’s cash balances of £70.3 million were £125.0 million lower than twelve months previously, mainly due to the distribution of £48.0 million by way of the tender offer buy-back in January, property acquisitions and other capital expenditure of £52.0 million, and the net investment in corporate bonds of £45.9 million.

During the year gross debt reduced from £601.7 million to £592.8 million. £19.2 million was raised to finance the acquisition of Frères Peugeot in Paris, £21.1 million to finance developments in Germany, and £29.4 million for sundry working capital requirements. £57.4 million was repaid during the normal course of business, and the effect of translating euro-denominated loans into sterling at an exchange rate 7.8% different from twelve months earlier reduced the sterling value of overseas loans by £21.1 million.

Adjusted net gearing, which excludes the effect of deferred tax, was 101.7% at 31 December 2008, but rose to a pro forma 129.2% with the tender offer buy-back on 7 January. At 31 December 2009 it was 141.7%, and the weighted average loan-to-value on borrowings against properties was 66.9%. Adjusted solidity was 36.4% (2008: 37.6%).

During the year a number of fixed interest rate swap contracts were cancelled in favour of interest rate caps to take advantage of the prevailing low interest rate environment. This had the effect of reducing the weighted average cost of debt to 4.0% (2008: 5.8%), and increasing the proportion of floating rate loans to 50% of total borrowings (2008: 42.5%). In 2009 recurring interest cover rose to a comfortable 2.1 times (2008: 1.1 times).

FINANCING STRATEGY The Group’s strategy is to hold its investments predominantly in single-purpose vehicles financed primarily by nonrecourse bank debt in the currency used to purchase the asset. In this way credit and liquidity risk can most easily be managed, around 75% of the Group’s exposure to foreign currency is naturally hedged, and the most efficient use can be made of the Group’s assets. Bank debt ordinarily attracts covenants on loan-to-value and on interest and debt service cover. Following the significant fall in property values at 31 December 2008, actual and potential covenant breaches on loans with a value of £176.4 million were resolved through the part-repayment of loans or the placing of cash on deposit using less than £15 million in aggregate. None of the Group’s debt was in breach of covenants at 31 December 2009; potential breaches could be rectified on the part-repayment of £1.9 million of principal.

To the extent that Group borrowings are not at fixed rates, the Group’s exposure to interest rate risk is mitigated by the use of financial derivatives, particularly interest rate swaps and caps.

SHARE CAPITAL At 1 January 2009, there were 66,745,471 shares in issue, of which 5,000,000 were held as Treasury shares. On 7 January, under the tender offer buy-back, 13,721,215 shares were cancelled in exchange for £48.0 million distributed to shareholders. There were no other changes to share capital in the year, and at 31 December 2009 48,024,256 shares were listed on the London Stock Exchange, and 5,000,000 shares remained in Treasury.

The Directors intend to put to a general meeting of the Company in April 2010 a proposal to issue a tender offer to buy back 1 in 42 shares at 525 pence per share. If approved by shareholders this could lead to the purchase and cancellation of 1,143,434 shares, a distribution to shareholders of £6.0 million, and 46,880,822 shares remaining, excluding Treasury shares.

TOTAL RETURNS TO SHAREHOLDERS
In addition to the distribution associated with the tender offer buy-back in January 2009, shareholders benefited from a rise in the share price in the year from 305 pence on 31 December 2008 to 498.75 pence on 31 December 2009. Accordingly, the total shareholder return in 2009 was 52.7%.

Since the Company listed on the London Stock Exchange, it has outperformed the FTSE Real Estate and FTSE All Share indices, as set out in the graph on the left. The graph includes dividend payments made by other companies; CLS has made no dividend payments to shareholders since 1998, but instead has made capital distributions through tender offer buy-backs, none of which has been accounted for in the graph.

KEY PERFORMANCE INDICATORS
Our performance against our key performance indicators is set out on page 2.